FIN 306 TEST 1 QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026
Capital Budgeting - Answers The process of planning and managing a firm's long-term investments.
Capital Structure - Answers The mixture of debt and equity maintained by a firm
Working Capital - Answers A firm's short-term assets and liabilites
Sole Proprietorship - Answers A business owned by a single individual
Parternship - Answers A business formed by two or more individuals or entities
Corporation - Answers A business created as a distinct legal entity owned by one or more individuals
or entities
The goal of financial management is to - Answers maximize the current value per share of the existing
stock
Agency Problem - Answers The possibility of conflict of interest between the owners and
management of a firm
Agency Relationship - Answers The relationship between stockholders and management
Managerial Compensation - Answers Management will frequently have a significant economic
incentive to increase share value
1. usually tied to financial performance
2. relates to job prospects --> better performers get promoted
Stakeholder - Answers Someone other than a stockholder or creditor who potentially has a claim on
the cash flows of the firm
Primary Market - Answers In a primary market the corporation is the seller and the transaction raises
money for the corporation
1. public offerings--> involves selling securities to the general public
2. Private placement --> a negotiated sale involving a specific buyer.
Secondary Market - Answers Involves one owner or creditor selling to another
Dealer vs. auction markets - Answers Dealers buy and sell for themselves. Brokers and agents match
buyers and sellers.
OTC Markets - Answers dealer markets in stocks and long term debt. Most trading takes place this
way.
Balance Sheet - Answers Financial Statement showing a firms accounting value on a particular date
bonds and bondholders - Answers long term debt & long term creditors
Net Working Capital - Answers Current assets less current liabilities
Generally Accepted Accounting Principles - Answers The common set of standards and procedures by
which audited financial statements are prepared
Income Statement - Answers Financial Statement Summarizing a firm's performance over a period of
time
Noncash Items - Answers Expenses charged against revenues that do not directly affect cash flow,
such as depreciation
Earnings Management - Answers overstate or understate earnings at various times to smooth out
dips and surges
Average Tax Rate - Answers Total taxes paid divided by total taxable income
Marginal Tax Rate - Answers Amount of tax payable on the next dollar earned
Cash Flow From Assets - Answers The total of cash flow to creditors and cash flow to stockholders,
consisting of the following: operating cash flow, capital spending, and change in net working capital.
Operating Cash Flow - Answers Cash generated from a firm's normal business activities
Free Cash Flow - Answers Another name for cash flow from assets
Cash Flow to creditors - Answers A firm's interest payments to creditors less net new borrowings
Cash flow to stockholders - Answers Dividends paid out by a firm less net new equity raised
Common Size Statement - Answers A standardized financial statement presenting all items in
percentage terms. Balance sheet items are shown as a percentage of assets and income statement
items as a percentage of sales.
Financial Ratios - Answers Relationships determined from a firm's financial information and used for
comparison purposes
DuPoint Identity - Answers Popular expression breaking ROE into three parts: operating efficiency,
asset use efficiency, and financial leverage.
Internal growth rate - Answers The maximum possible growth rate for a firm that relies only on
internal financing.
Capital Budgeting - Answers The process of planning and managing a firm's long-term investments.
Capital Structure - Answers The mixture of debt and equity maintained by a firm
Working Capital - Answers A firm's short-term assets and liabilites
Sole Proprietorship - Answers A business owned by a single individual
Parternship - Answers A business formed by two or more individuals or entities
Corporation - Answers A business created as a distinct legal entity owned by one or more individuals
or entities
The goal of financial management is to - Answers maximize the current value per share of the existing
stock
Agency Problem - Answers The possibility of conflict of interest between the owners and
management of a firm
Agency Relationship - Answers The relationship between stockholders and management
Managerial Compensation - Answers Management will frequently have a significant economic
incentive to increase share value
1. usually tied to financial performance
2. relates to job prospects --> better performers get promoted
Stakeholder - Answers Someone other than a stockholder or creditor who potentially has a claim on
the cash flows of the firm
Primary Market - Answers In a primary market the corporation is the seller and the transaction raises
money for the corporation
1. public offerings--> involves selling securities to the general public
2. Private placement --> a negotiated sale involving a specific buyer.
Secondary Market - Answers Involves one owner or creditor selling to another
Dealer vs. auction markets - Answers Dealers buy and sell for themselves. Brokers and agents match
buyers and sellers.
OTC Markets - Answers dealer markets in stocks and long term debt. Most trading takes place this
way.
Balance Sheet - Answers Financial Statement showing a firms accounting value on a particular date
bonds and bondholders - Answers long term debt & long term creditors
Net Working Capital - Answers Current assets less current liabilities
Generally Accepted Accounting Principles - Answers The common set of standards and procedures by
which audited financial statements are prepared
Income Statement - Answers Financial Statement Summarizing a firm's performance over a period of
time
Noncash Items - Answers Expenses charged against revenues that do not directly affect cash flow,
such as depreciation
Earnings Management - Answers overstate or understate earnings at various times to smooth out
dips and surges
Average Tax Rate - Answers Total taxes paid divided by total taxable income
Marginal Tax Rate - Answers Amount of tax payable on the next dollar earned
Cash Flow From Assets - Answers The total of cash flow to creditors and cash flow to stockholders,
consisting of the following: operating cash flow, capital spending, and change in net working capital.
Operating Cash Flow - Answers Cash generated from a firm's normal business activities
Free Cash Flow - Answers Another name for cash flow from assets
Cash Flow to creditors - Answers A firm's interest payments to creditors less net new borrowings
Cash flow to stockholders - Answers Dividends paid out by a firm less net new equity raised
Common Size Statement - Answers A standardized financial statement presenting all items in
percentage terms. Balance sheet items are shown as a percentage of assets and income statement
items as a percentage of sales.
Financial Ratios - Answers Relationships determined from a firm's financial information and used for
comparison purposes
DuPoint Identity - Answers Popular expression breaking ROE into three parts: operating efficiency,
asset use efficiency, and financial leverage.
Internal growth rate - Answers The maximum possible growth rate for a firm that relies only on
internal financing.
