FIN 320 Exam 1 Questions with
Correct Answers
Primary goal of financial management - Correct Answers: -Maximize the current value per share of the
company's existing stock
-Maximize the marketing value of the existing owners' equity
Agency Conflict - Correct Answers: •Agency relationship
-Principal hires an agent to represent its interests
-Stockholders (principals) hire managers (agents) to run the company.
•Agency problem
-Conflict of interest between principal and agent
•Management goals and agency costs
Sarbanes Oxley Act (Sarbox 2002) - Correct Answers: -Driven by corporate scandals with companies like
Enron, Tyco, WorldCom and Adelphia
-Intended to strengthen protection against accounting fraud and financial malpractice
-Compliance is very costly. Firms driven to go public outside the U.S, go private (go dark)
Net Working Capital - Correct Answers: -Current Assets - Current Liabilities
-Usually positive for a healthy firm
Liquidity - Correct Answers: -Speed and ease of conversion to cash without a significant loss of value
-Valuable in avoiding financial distress
Cash flow to creditors (bondholders) - Correct Answers: interest paid - net new borrowing
Marginal vs. Average tax rates - Correct Answers: -Marginal - % tax paid on the next dollar earned
-Average - total taxes paid / taxable income
Correct Answers
Primary goal of financial management - Correct Answers: -Maximize the current value per share of the
company's existing stock
-Maximize the marketing value of the existing owners' equity
Agency Conflict - Correct Answers: •Agency relationship
-Principal hires an agent to represent its interests
-Stockholders (principals) hire managers (agents) to run the company.
•Agency problem
-Conflict of interest between principal and agent
•Management goals and agency costs
Sarbanes Oxley Act (Sarbox 2002) - Correct Answers: -Driven by corporate scandals with companies like
Enron, Tyco, WorldCom and Adelphia
-Intended to strengthen protection against accounting fraud and financial malpractice
-Compliance is very costly. Firms driven to go public outside the U.S, go private (go dark)
Net Working Capital - Correct Answers: -Current Assets - Current Liabilities
-Usually positive for a healthy firm
Liquidity - Correct Answers: -Speed and ease of conversion to cash without a significant loss of value
-Valuable in avoiding financial distress
Cash flow to creditors (bondholders) - Correct Answers: interest paid - net new borrowing
Marginal vs. Average tax rates - Correct Answers: -Marginal - % tax paid on the next dollar earned
-Average - total taxes paid / taxable income
