FIN 306 Final Actual Exam Questions with
Correct Answers & Explanations | Graded A+
Study Guide.
Section 1: Foundations and Agency Theory
Q1
Which of the following best describes the primary goal of financial management
A) Maximize revenue
B) Minimize costs
C) Maximize shareholder wealth
D) Maximize market share
Answer C
The primary goal of financial management is to maximize the current market
value of existing owners' equity (stock) This considers both risk and return
over time unlike profit maximization which can be short sighted and ignores
timing and risk
Q2
The agency problem in a corporation arises primarily due to the separation of
A) Debt and equity
B) Short term and long term assets
C) Ownership and control
D) Risk and return
Answer C
The agency problem occurs when managers (agents) pursue their own interests such as
perks empire building or risk avoidance at the expense of shareholders (principals) who
own the firm but hire managers to control it This conflict of interest is inherent in the
corporate form of organization
Q3
Which of the following is most consistent with shareholder wealth maximization
A) Maximizing the firm's market share
B) Maximizing the firm's accounting profits
,C) Maximizing the firm's stock price
D) Minimizing the firm's costs
Answer C
Maximizing the stock price directly reflects increasing shareholder wealth Stock price
incorporates all available information about future cash flows risk and timing Accounting
profits and market share may not align with long term value creation
Q4
In the agency problem who is the agent
A) The banker
B) The manager
C) The supplier
D) The shareholder
Answer B
The manager acts as the agent hired by shareholders (principals) to run the company on
their behalf The agent has decision making authority but may have different incentives
than the principals
Q5
When addressing agency problems in the firm which is more effective
A) High salary only
B) Stock ownership
C) High salary is better than stock ownership
D) Stock ownership and performance based compensation
Answer D
Stock ownership aligns manager interests with shareholder interests by making managers
owners Performance based compensation ties rewards to value creation Stock ownership is
better than high salary alone for reducing agency problems
Q6
Where does the equity claim appear on a balance sheet
A) Bottom left
B) Bottom right
C) Top left
D) Top right
Answer B
On a balance sheet assets are on the left side and liabilities plus equity are on the right
,side Equity appears at the bottom right section below liabilities following the accounting
equation Assets = Liabilities + Equity
Section 2: Financial Statements and Ratios
Q7
On a balance sheet Assets = Liabilities + Equity
A) True
B) False
Answer A
This is the fundamental accounting equation It must always balance and forms the
foundation of double entry bookkeeping
Q8
Where do a company's bonds appear on its balance sheet
A) Short term assets
B) Liabilities
C) Equity
D) Operations
Answer B
Bonds represent debt obligations of the company and are recorded as liabilities on the
balance sheet Long term debt is classified as a non current liability
Q9
Where does Accounts Receivable appear on a firm's financial statements
A) Asset
B) Liability
C) Equity
D) Expense
Answer A
Accounts receivable represents money owed to the company by customers for goods or
services already delivered It is recorded as a current asset on the balance sheet
Q10
Where does Inventory appear on a firm's financial statements
, A) Asset
B) Liability
C) Equity
D) Revenue
Answer A
Inventory is goods held for sale to customers It is classified as a current asset on the
balance sheet
Q11
Define Net Working Capital (NWC) as (Accounts Receivable + Inventory) minus
Accounts Payable If this number is positive we can think of NWC as
A) A liability
B) An expense
C) An asset
D) Equity
Answer C
Positive net working capital indicates the company has more current assets (excluding
cash) than current liabilities This represents a net investment in operations that must be
funded
Q12
What is the price earnings ratio if a stock trades
at 40pershareandEPSis 40pershareandEPSis2.50
A) 0.0625
B) 16.0
C) 0.40
D) 100.0
Answer B
*P/E ratio equals stock price divided by earnings per
share 40.00dividedby40.00dividedby2.50 equals 16.0 Investors are
paying 16forevery16forevery1 of current earnings This ratio reflects market
expectations about future growth prospects and risk*
Section 3: Stocks and Bonds
Correct Answers & Explanations | Graded A+
Study Guide.
Section 1: Foundations and Agency Theory
Q1
Which of the following best describes the primary goal of financial management
A) Maximize revenue
B) Minimize costs
C) Maximize shareholder wealth
D) Maximize market share
Answer C
The primary goal of financial management is to maximize the current market
value of existing owners' equity (stock) This considers both risk and return
over time unlike profit maximization which can be short sighted and ignores
timing and risk
Q2
The agency problem in a corporation arises primarily due to the separation of
A) Debt and equity
B) Short term and long term assets
C) Ownership and control
D) Risk and return
Answer C
The agency problem occurs when managers (agents) pursue their own interests such as
perks empire building or risk avoidance at the expense of shareholders (principals) who
own the firm but hire managers to control it This conflict of interest is inherent in the
corporate form of organization
Q3
Which of the following is most consistent with shareholder wealth maximization
A) Maximizing the firm's market share
B) Maximizing the firm's accounting profits
,C) Maximizing the firm's stock price
D) Minimizing the firm's costs
Answer C
Maximizing the stock price directly reflects increasing shareholder wealth Stock price
incorporates all available information about future cash flows risk and timing Accounting
profits and market share may not align with long term value creation
Q4
In the agency problem who is the agent
A) The banker
B) The manager
C) The supplier
D) The shareholder
Answer B
The manager acts as the agent hired by shareholders (principals) to run the company on
their behalf The agent has decision making authority but may have different incentives
than the principals
Q5
When addressing agency problems in the firm which is more effective
A) High salary only
B) Stock ownership
C) High salary is better than stock ownership
D) Stock ownership and performance based compensation
Answer D
Stock ownership aligns manager interests with shareholder interests by making managers
owners Performance based compensation ties rewards to value creation Stock ownership is
better than high salary alone for reducing agency problems
Q6
Where does the equity claim appear on a balance sheet
A) Bottom left
B) Bottom right
C) Top left
D) Top right
Answer B
On a balance sheet assets are on the left side and liabilities plus equity are on the right
,side Equity appears at the bottom right section below liabilities following the accounting
equation Assets = Liabilities + Equity
Section 2: Financial Statements and Ratios
Q7
On a balance sheet Assets = Liabilities + Equity
A) True
B) False
Answer A
This is the fundamental accounting equation It must always balance and forms the
foundation of double entry bookkeeping
Q8
Where do a company's bonds appear on its balance sheet
A) Short term assets
B) Liabilities
C) Equity
D) Operations
Answer B
Bonds represent debt obligations of the company and are recorded as liabilities on the
balance sheet Long term debt is classified as a non current liability
Q9
Where does Accounts Receivable appear on a firm's financial statements
A) Asset
B) Liability
C) Equity
D) Expense
Answer A
Accounts receivable represents money owed to the company by customers for goods or
services already delivered It is recorded as a current asset on the balance sheet
Q10
Where does Inventory appear on a firm's financial statements
, A) Asset
B) Liability
C) Equity
D) Revenue
Answer A
Inventory is goods held for sale to customers It is classified as a current asset on the
balance sheet
Q11
Define Net Working Capital (NWC) as (Accounts Receivable + Inventory) minus
Accounts Payable If this number is positive we can think of NWC as
A) A liability
B) An expense
C) An asset
D) Equity
Answer C
Positive net working capital indicates the company has more current assets (excluding
cash) than current liabilities This represents a net investment in operations that must be
funded
Q12
What is the price earnings ratio if a stock trades
at 40pershareandEPSis 40pershareandEPSis2.50
A) 0.0625
B) 16.0
C) 0.40
D) 100.0
Answer B
*P/E ratio equals stock price divided by earnings per
share 40.00dividedby40.00dividedby2.50 equals 16.0 Investors are
paying 16forevery16forevery1 of current earnings This ratio reflects market
expectations about future growth prospects and risk*
Section 3: Stocks and Bonds
