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Feb 20, 2024





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1 Exam 1 Version A (Chapter 1 – 8 questions; Chapter 5 –12 questions; Chapter 6 – 8 questions) Chapter 1 Review - (19 questions in this document) 1) Which of the following is an example of agency cost? A) costs incurred for setting up an agency B) failure to make an investment that would make shareholders wealthier C) payment of income tax D) payment of interest 2) Financial managers evaluating decision alternatives or potential actions must consider ________. A) only risk B) only return C) either risk or return D) risk, return, and the impact on share price 3. The primary goal of financial management is most associated with increasing the: A) dollar amount of each sale. B) traffic flow within the firm's stores. C) the fixed costs while lowering the variable costs. D) firm's liquidity. E) market value of the firm. 4. Which one of the following is most apt to align management's priorities with shareholders' interests? A) Holding corporate and shareholder meetings at high-end resort-type locations preferred by managers B) Compensating managers with shares of stock that must be held for a minimum of three years C) Paying a special management bonus on every fifth year of employment D) Increasing the number of paid holidays that long-term employees are entitled to receive E) Allowing employees to retire early with full retirement benefits 5) A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below. Based on the wealth maximization goal, the financial manager would choose ________. A) Asset 1 B) Asset 2 C) Asset 3 D) Asset 4 6) Which of the following is true of stakeholders? A) They are the owners of a firm. B) They are groups to whom a firm has financial obligations. C) They are groups having a direct economic link to a firm. D) They include only the bondholders, common stockholders, and preferred stockholders.
2 7) Which of the following is true regarding cash flow? A) Profits do not necessarily result in cash flows available to the stockholders. B) It is guaranteed that the board of directors will increase dividends when net cash flows increase. C) A firm's income statement will never show a positive profit when its cash outflows exceed its cash inflows. D) An increase in revenue will always result in an increase in cash flow. 8) Which of the following is true of cash flows and risk? A) Lower cash flow and lower risk result in an increase in share price. B) Higher cash flow and lower risk result in an increase in share price. C) Higher cash flow and higher risk result in an increase in share price. D) Lower cash flow and higher risk result in an increase in share price. 9) The primary goal of a financial manager should be ________. A) minimizing risk B) maximizing profit of firm C) maximizing wealth of shareholders D) minimizing return 10) Corporate owners earn a return ________. A) by realizing gains through increases in share price and interest earnings B) by realizing gains through increases in share price and cash dividends C) through capital appreciation and retained earnings D) through interest earnings and earnings per share 11) The wealth of the owners of a corporation is represented by ________. A) profits B) earnings per share C) share value D) cash flow 12) Wealth maximization as the goal of a firm implies enhancing the wealth of ________. A) the auditors B) the creditors C) the federal reserve D) the firm's stockholders 13) Which of the following is NOT a reason that a firm that maximizes profits may fail to maximize shareholder wealth. A) The timing of profits matters. Shareholders might prefer lower profits that arrive sooner. B) Risk matters. Shareholders are risk averse, so they prefer less risky investments that generate lower profits. C) Shareholder wealth depends on cash flow which is not the same as profit. D) If a firm maximizes profits by engaging in unethical business practices, it's stock price may be adversely affected. 14) ________ pool investment capital, make risky investment decisions, and manage risky investments on behalf of investors who would otherwise not be able to do so own their own. A) Firms B) Stockholders C) Stakeholders D) Regulators
3 15) Finance is ________. A) the system of verifying, analyzing, and recording business transactions B) the science of the production, distribution, and consumption of goods and services C) the science and art of how individuals and businesses raise, allocate, and invest money D) the art of merchandising products and services 16) In a recent quarter, Amazon and Clorox reported nearly identical earnings per share, but the stock price of Amazon was more than six times higher than the Clorox stock price. The most likely explanation for that difference is that ________. A) Clorox is bad for the environment B) Amazon is a riskier company C) investors see better long-term prospects for Amazon D) Amazon has more shares of stock outstanding 17) An objection to managing a firm on behalf of stakeholders rather than shareholders is that ________. A) stakeholders have no economic interest in the firm B) stakeholders have an interest only in short-term outcomes C) there is no clear way to satisfy all stakeholders whose economic interests may be at odds with each other D) the goal of managing on behalf of stakeholders is too narrow 18) Cash flows and risk are the key determinants in share price. Increased cash flow results in ________, other things remaining the same. A) a lower share price B) a higher share price C) an unchanged share price D) an undetermined share price 19) ________ decisions focus on how a company will spend its financial resources on long-term projects that ultimately determine whether the firm successfully creates value for its owners. A) Investment B) Financing C) Working capital D) Risk management Chapter 5 – Time Value Review (25 questions/problems in this document) 1) You invest a certain amount of money today. The process of determining how much money that investment will produce in the future is called ________. A) discounting B) compounding C) present value D) annuitizing the cash flow 2) The future value of a dollar ________ as the interest rate increases and ________ the longer the money remains invested. A) decreases; decreases B) decreases; increases C) increases; increases D) increases; decreases
4 3) Which of the following is not a term that might be used interchangeably with the term discount rate? A) inflation rate B) required return C) opportunity cost D) cost of capital 4) Which of the following is true of annuities? A) An ordinary annuity is an equal payment paid or received at the beginning of each period. B) An annuity due is a payment paid or received at the beginning of each period that increases by an equal amount each period. C) An annuity due is an equal stream of cash flows that is paid or received at the beginning of each period. D) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period. 5) In comparing an ordinary annuity and an annuity due, which of the following is true? A) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity. B) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due. C) The present value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due. D) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due. 6) Philip and Megan have just purchased a condominium for $70,000. Since the condo is very small, they hope to move into a single-family house in 5 years. How much will their condo be worth in 5 years if inflation is expected to be 8 percent? A) $105,376 B) $102,853 C) $103,422 D) $97,687 7) Emily will receive $12,000 per year for the next 10 years as royalty for her work on a finance book. What is the present value of her royalty income if the opportunity cost is 12 percent? Assume that payments come at the end of each year. A) $65,855 B) $67,803 C) $210,585 D) $235,939 8) Janice would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000, and she has 5 years to accumulate this money. How much must Janice deposit at the end of each year for the next 5 years to accumulate enough money to send her parents on the cruise? Assume that she can earn 10% on the money she saves and invests. A) $1,862 B) $2,457 C) $3,000 D) $2,234 9) Daniel borrows $50,000 at 10 percent and must repay the loan by making four , equal end-of-year payments. The actual end-of-year loan payment is ________. A) $10,774 B) $12,500 C) $14,340 D) $15,773 10) How much money would you have to deposit today to create an income stream that pays $10,000 one year from today and continues to make annual payments forever, with payments after the first $10,000 growing at 4% per year? Assume money that you invest today to fund this income stream earns a 7% rate of return. A) $142,857 B) $250,000 C) $1,250,000 D) $333,333
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