Business Finance Practice Questions Exam 1
Study online at https://quizlet.com/_4d5yw8
1. Financial management deals with the
True
maintenance and creation of economic
val- ue or wealth.
T/F
2. The fundamental goal of a business is to
maximize the retained earnings False; maximize shareholde
available to the corporation's wealth
shareholders
T/F
3. It is important to evaluate a corporate
man- ager's financial decision by True
measuring the effect the decision
should have on the corporation's stock
price if everything else were held
constant. T/F
4. If two companies have the same net in-
come and the same level of risk, they False; many other factors:
must also have the same overall stock mkt, industry
stock price or the market is not in equilib- fac- tors, cash flows
rium.
T/F
5. Profits represent money that can be spent, False; cash flows are what
and as such, form the basis for matter
determining the value of
financial decisions.
T/F
6. Investors will be indifferent between two False; what about risk?
investments if both investments have
the same expected return.
T/F
7. The risk/return tradeoff implies that the False; risk-free rate (delaye
re- turn on a riskless asset must be zero. consumption)
T/F
1/
33
, Business Finance Practice Questions Exam 1
Study online at https://quizlet.com/_4d5yw8
8. The sole proprietorship has no legal True
busi- ness structure separate from its
owner. T/F
9. A general partnership, unlike a limited False; ALL partners are
part- nership, is an entity that legally FULLY RESPONSIBLE for
functions separate and liabilities
apart from its owners.
T/F
10. Suppose XYZ Corporation is traded on
the New York Stock Exchange. XYZ's C; even if announced
closing price on Monday when mkt closes
is $20 per share. After the market closes
on Monday, XYZ makes a surprise
announce- ment that it has
obtained a major new customer.
XYZ's stock will likely
A) open at $20 per share on Tuesday
and then increase as more investors
read the announcement in the
Wall Street Journal.
B) remain at $20 per share because in
effi- cient markets the price already
reflects all information.
C) open above $20 because the positive
news will result in a higher valuation
even though the stock has
not yet traded.
D) open below $20 because the surprise
announcement creates more uncertainty
11. The expected return on a riskless asset
is greater than zero due to
A
A) an expected return for delaying
con- sumption
B) an expected return for opportunity
2/
33
, Business Finance Practice Questions Exam 1
Study online at https://quizlet.com/_4d5yw8
costs.
C) an expected return for taxes.
D) irrational investors who believe risk
is always present.
12. Joe, a risk-averse investor, is trying to D
choose between investment A and
invest- ment B. If investment A is riskier
than in- vestment B and Joe selects
investment A anyway, then
A) the actual return for investment A will
be higher than the actual return for
invest- ment B.
B) the actual return for investment A will
be higher than the expected return for
invest- ment B.
C) the expected return for investment A
will be higher than the actual return for
invest- ment B.
D) the expected return for investment A
will be higher than the expected return
for investment B.
13. Profits are down so the controller
decides to change the corporation's B; it did not affect Cash
accounting policy relating to Flows
inventory costing. The change will
allow the corporation to report higher
income and higher assets,
although the physical inventory has not
changed. Which of the following state-
ments is MOST correct?
A) The stock price is likely to increase
be- cause income is higher.
B) The stock price is likely to be
unaffected because the stock market is
efficient.
C) The stock price is likely to decrease be-
3/
33
, Business Finance Practice Questions Exam 1
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cause reported inventory is higher.
D) If the stock price increases, the
stock market is efficient.
14. John invested $1,000 in a risky D; risk/return trade off
investment and Bill invested $1,000 in a works for expected
less risky in- vestment. One year returns, actual re- turns
later, Bill's investment is worth $1,030. are determined by other
Which of the following statements is factors
MOST correct?
A) If John's investment is worth less than
$1,030, then John was irrational to invest
in the risky project.
B) John's investment must be worth
more than $1,030 because of the risk-
return tradeoff, given that John's
investment was more risky.
C) If John's investment is worth more
than
$1,030, then Bill was irrational to invest in
the less risky
investment.
D) The worth of John's investment cannot
be determined with the information given.
15. The five basic principles of finance
include all of the following EXCEPT D
A) Cash flow is what matters.
B) Money has a time value.
C) Risk requires a reward.
D) Incremental profits determine value.
16. Joe is deciding whether or not to invest
$10,000 in a business that has pending C; A all partners fully
law- suits against it. If respon- sible for
Joe invests and the business loses the liabilities... B unlimited
law- suits, the most Joe can lose is liability... D no extra
liability
4/
33
Study online at https://quizlet.com/_4d5yw8
1. Financial management deals with the
True
maintenance and creation of economic
val- ue or wealth.
T/F
2. The fundamental goal of a business is to
maximize the retained earnings False; maximize shareholde
available to the corporation's wealth
shareholders
T/F
3. It is important to evaluate a corporate
man- ager's financial decision by True
measuring the effect the decision
should have on the corporation's stock
price if everything else were held
constant. T/F
4. If two companies have the same net in-
come and the same level of risk, they False; many other factors:
must also have the same overall stock mkt, industry
stock price or the market is not in equilib- fac- tors, cash flows
rium.
T/F
5. Profits represent money that can be spent, False; cash flows are what
and as such, form the basis for matter
determining the value of
financial decisions.
T/F
6. Investors will be indifferent between two False; what about risk?
investments if both investments have
the same expected return.
T/F
7. The risk/return tradeoff implies that the False; risk-free rate (delaye
re- turn on a riskless asset must be zero. consumption)
T/F
1/
33
, Business Finance Practice Questions Exam 1
Study online at https://quizlet.com/_4d5yw8
8. The sole proprietorship has no legal True
busi- ness structure separate from its
owner. T/F
9. A general partnership, unlike a limited False; ALL partners are
part- nership, is an entity that legally FULLY RESPONSIBLE for
functions separate and liabilities
apart from its owners.
T/F
10. Suppose XYZ Corporation is traded on
the New York Stock Exchange. XYZ's C; even if announced
closing price on Monday when mkt closes
is $20 per share. After the market closes
on Monday, XYZ makes a surprise
announce- ment that it has
obtained a major new customer.
XYZ's stock will likely
A) open at $20 per share on Tuesday
and then increase as more investors
read the announcement in the
Wall Street Journal.
B) remain at $20 per share because in
effi- cient markets the price already
reflects all information.
C) open above $20 because the positive
news will result in a higher valuation
even though the stock has
not yet traded.
D) open below $20 because the surprise
announcement creates more uncertainty
11. The expected return on a riskless asset
is greater than zero due to
A
A) an expected return for delaying
con- sumption
B) an expected return for opportunity
2/
33
, Business Finance Practice Questions Exam 1
Study online at https://quizlet.com/_4d5yw8
costs.
C) an expected return for taxes.
D) irrational investors who believe risk
is always present.
12. Joe, a risk-averse investor, is trying to D
choose between investment A and
invest- ment B. If investment A is riskier
than in- vestment B and Joe selects
investment A anyway, then
A) the actual return for investment A will
be higher than the actual return for
invest- ment B.
B) the actual return for investment A will
be higher than the expected return for
invest- ment B.
C) the expected return for investment A
will be higher than the actual return for
invest- ment B.
D) the expected return for investment A
will be higher than the expected return
for investment B.
13. Profits are down so the controller
decides to change the corporation's B; it did not affect Cash
accounting policy relating to Flows
inventory costing. The change will
allow the corporation to report higher
income and higher assets,
although the physical inventory has not
changed. Which of the following state-
ments is MOST correct?
A) The stock price is likely to increase
be- cause income is higher.
B) The stock price is likely to be
unaffected because the stock market is
efficient.
C) The stock price is likely to decrease be-
3/
33
, Business Finance Practice Questions Exam 1
Study online at https://quizlet.com/_4d5yw8
cause reported inventory is higher.
D) If the stock price increases, the
stock market is efficient.
14. John invested $1,000 in a risky D; risk/return trade off
investment and Bill invested $1,000 in a works for expected
less risky in- vestment. One year returns, actual re- turns
later, Bill's investment is worth $1,030. are determined by other
Which of the following statements is factors
MOST correct?
A) If John's investment is worth less than
$1,030, then John was irrational to invest
in the risky project.
B) John's investment must be worth
more than $1,030 because of the risk-
return tradeoff, given that John's
investment was more risky.
C) If John's investment is worth more
than
$1,030, then Bill was irrational to invest in
the less risky
investment.
D) The worth of John's investment cannot
be determined with the information given.
15. The five basic principles of finance
include all of the following EXCEPT D
A) Cash flow is what matters.
B) Money has a time value.
C) Risk requires a reward.
D) Incremental profits determine value.
16. Joe is deciding whether or not to invest
$10,000 in a business that has pending C; A all partners fully
law- suits against it. If respon- sible for
Joe invests and the business loses the liabilities... B unlimited
law- suits, the most Joe can lose is liability... D no extra
liability
4/
33
