Fin301 Exam 1 Part 1

1.

1 point

As you decrease a portfolio's diversification in an asset class, the riskiness of the portfolio:

Increases

Decreases, then increases

Decreases

Fluctuates with the beta

Stays the same

2.

1 point

Which of the following concerning the relationship between risk and return is correct?

Riskier investments tend to have higher returns

Investors do not need to be compensated for taking on risk

Safer investments provide the highest returns

Risk and return are not related

Investors generally demand higher return for lower risk investments

3.

1 point

Which of the following is a principle held by Gordon Gekko:

Management should not have a stake in the company

Making money for the shareholders is not essential

The maximization of shareholder value doesn’t matter

Managerial efficiency is not important

Management must be accountable to the shareholders

4.

1 point

Calculate the stock return from the following information:
Beginning Price: $120.00
Price 1 Year Later: $180.00
Annual dividend: $15.00

12.5%

8.3%

41.7%

50.0%

62.5%

5.

1 point

The time value of money implies that:

A dollar today is worth MORE than a dollar tomorrow

The value of money does not change over time

Investors are indifferent to receiving a dollar today vs. a dollar in the future

A dollar today is worth LESS than a dollar tomorrow

The value of a dollar tomorrow depends on many things, but time is not one of them

6.

1 point

Which of the following is a common element of financial crises?

Strong growth in the US economy

Trade deficit

Democratic President

Occurs only once every 30 years

Excessive investment in an asset class

7.

1 point

Which of the following is true about creating shareholder value?

Paying dividends to shareholders is a form of agency costs

Danny Devito in ‘Other People’s Money’ promotes the Stakeholder Approach

Activist investors such as Carl Icahn attempt to force companies to create shareholder value

The pricing efficiency of the markets is not an issue if managers are to pursue shareholder value creation

The interests of stakeholders can be ignored in pursuing the creation of shareholder value

8.

1 point

Which of the following is an element of good management according to Gordon Gekko?

Managers should not think about increasing the stock price

Shareholder value should be ignored

Management is not accountable to shareholders

Managerial efficiency is not important

Management should have a stake in the company

9.

1 point

Which of the following is an “enemy” of your investment plan?

Strong company earnings

Corporate governance

Strong market fundamentals

Taxes

Dividend payouts

10.

1 point

Which activity is most likely to increase shareholder value?

Minimizing the amount of projects the company spends money on

Maximizing the cost of capital

Using only equity to finance the company’s acquisitions

Maximizing the amount of corporate assets

Allocating capital to investments with the highest risk-adjusted return

11.

1 point

Which of the following is an example of a capital structure decision?

Determining the mixture of long-term debt and equity used to finance the company’s operations

Determining how much cash a company should keep on hand

Determining which investment project offers the best return for the company

Determining how much in dividends to pay out per quarter

Day-to-day management of accounts receivable

12.

1 point

Which of the following is an example of an external control mechanism used to ensure that management acts in shareholder interests?

Audited Financial Statements

Shareholder Activism

Stock Ownership Interests

Board of Directors

Stock-Based Compensation

13.

1 point

The last 10 year returns of Stock A and Stock B have a mean of 20% each and standard deviation of 80% and 30% respectively. Assuming all other criteria for choosing a stock are similar for A and B, a risk averse investor would prefer investing in

Insufficient information

Stock B

Stock A

Gets confused and stop investing once for all

Indifferent to both

14.

1 point

Which of the following does Warren Buffet believe is necessary for investment in a company:

Generators of cash flow

Prefers to buy and sell shares quickly

Management that acts without owner interests

Enjoys investing in high-tech companies

Low barriers to entry

15.

1 point

Which of the following is part of the controller's function?

Managing short and long term capital requirements

Determining the feasibility of various projects

Financial planning

Working capital management

Preparing financial statements and reports

16.

1 point

Jennifer is selling her iPhone which is worth $500 to Dave. Dave suggests the following options. The most financially valuable option for Jennifer is

Any of the above

Cash payments of $50 per month, for 10 months from the sale

Immediate cash payment of $500

None of the above

Cash payment of $500, a year after the Sale

17.

1 point

Which of the following is an example of the agency problem?

Management acts in the best interest of shareholders

Management invests in a project that serves the interests of shareholders

The management has stock options in the company, potentially providing large payouts if the company does well

Corporate Management invests in a negative ROI project because it will mean large bonuses and kickbacks for all senior executives

The objectives of shareholders and management are aligned

18.

1 point

Which of the following investments are the least risky?

International stocks

Corporate bonds

Large growth stocks

Mid-cap stocks

Small-cap stocks

19.

1 point

What is Berkshire Hathaway’s primary business?

Insurance

Semi-Conductors

Textiles

Investment Banks

Automobile

20.

1 point

Which activity is most likely to increase shareholder value?

Minimizing the company’s cost of capital

Investing in projects that are always the least risky

Maximizing the amount of corporate assets

Financing the company’s business with expensive debt

Minimizing the amount of projects the company spends money on

21.

1 point

The time value of money implies that:

A dollar today is worth the SAME as a dollar tomorrow

Investors are indifferent to receiving a dollar today vs. a dollar in the future

A dollar tomorrow is worth LESS than a dollar today

The value of money does not change over time

A dollar today is worth LESS than a dollar tomorrow

22.

1 point

According to Traditional Finance, which of the following statements are true?

Arbitrageurs will not correct the market

Markets are never efficient

Decisions are based on emotions and biases

There are flaws in utility functions

Prices reflect expected outcomes

23.

1 point

Which of the following is true about the Chief Financial Officer (CFO)?

The CFO is not responsible for risk management

The CFO takes a “hands off” approach to financial management

The CFO is solely responsible for Treasury operations

The Controller and Treasurer report to the CFO

The CFO is not expected to give advice on corporate strategy

24.

1 point

Which of the following is true about the Chief Financial Officer (CFO)?

The CFO oversees the financial activities of an organization

CFO is the head accountant for an organization

The CFO is prohibited from signing the Annual Report

The CFO reports to the head Controller

The CFO is expected to serve on the Board of Directors

25.

1 point

What is the return on a stock with the following information?
Beginning Price: $25
Ending Price: $30
Annual Dividend: $2

20.0%

16.7%

28.0%

12.0%

23.3%

26.

1 point

According to the Theory of Efficient Capital Markets:

Stock prices adjust to new information slowly over time

Stock prices are not affected by new information

Stock prices only react instantly to positive financial information

Investors can easily beat the market

Current stock prices reflect all publicly available information

27.

1 point

Calculate the stock return from the following information:
Beginning Price: $90.00
Ending Price: $50.00
Annual dividend: $25.00

-30.0%

-16.7%

-27.8%

-50.0%

-44.4%

28.

1 point

In the short term, stock prices are driven by:

Supply and demand

Long-term value of the company

Company cash flow

Leadership structure

Corporate earnings (fundamentals)

29.

1 point

What is working capital management?

Managing investments in property, plant, and equipment

Managing a firm’s short-term financial position

Identifying investments that will return more than the targeted ROI

Choosing the best option for financing an acquisition

Determining the optimal use of debt and equity for a firm

30.

1 point

According to the Theory of Efficient Capital Markets

Stock prices react positively to all new information

Stock prices take a long time to capture new information

Stock prices react instantaneously to new information

Stock prices do not reflect all publicly available information

Investors can easily predict exact stock prices

31.

1 point

Which of the following statements about Business Organizational Forms is true?

Corporations are easier to start than sole proprietorships

Owners of corporations have limited liability

Sole proprietorships are double taxed

It is easier for sole proprietorships to raise capital than corporations

Partnerships are easier to transfer than corporations

32.

1 point

The financial crisis of the late 2000s is proof of irrational investors supports which of the following theories?

Diversification reduces risk

Traditional Finance

Behavioral Finance

Risk Aversion

Efficient Markets

33.

1 point

As you increase a portfolio's diversification in an asset class, the riskiness of the portfolio:

Decreases

Increases

Fluctuates with the beta

Stays the same

Increases, then decreases

34.

1 point

Given the following information, a rational investor would most likely invest in which stock?
Stock A: Mean Return – 11%; Standard Deviation – 6%
Stock B: Mean Return – 11%; Standard Deviation – 12%

No difference because they have the same rate of return

Stock B because it is riskier than Stock A

Stock B because it is not as risky as Stock A

Stock A because it is not as risky as Stock B

Stock A because it is riskier than Stock B

35.

1 point

According to Behavioral Finance, which of the following statements are true?

Prices reflect emotions and biases

Prices reflect values

Markets are always efficient

Low risk equals high returns

Decisions are based on rational expectations

36.

1 point

Which of the following investments are the most risky?

Large-cap stocks

International stocks

Corporate bonds

Savings account

Treasury bonds

37.

1 point

Which of the following concerning the relationship between risk and return is correct?

Investors do not need to be compensated for taking on risk

Safer investments tend to have higher returns

Risk and return are directly related

Higher risk investments historically provided lower returns

Investors generally require a lower return as they take on more risk

38.

1 point

Which of the following would increase an investor’s real rate of return?

A significant drop in the inflation rate

Higher asset management fees paid by the investor to a mutual fund

Only buying low-risk investments, such as T-bills

The government raising the capital gains tax on investments

Brokerage firms increasing the commissions on executing a trade for an investor

39.

1 point

Which of the following is an example of the agency problem?

The objectives of shareholders and management are aligned

Management invests in a project that serves the interests of management more than shareholders

Management has stock options in the company, potentially providing large payouts if the company does well

Management allocates corporate resources in a way that increases the value of the company’s shares

Management pursues strategies that maximize shareholder value

40.

1 point

Which of the following is a common element of financial crises?

Trade deficit

Excessive exports

Increase in value of dollar

Easy financing

Strong growth in the US economy

41.

1 point

Which of the following is part of the treasurer's function?

Auditing the company's financials

Publishing financial statements

Making capital expenditures

Monitoring accounting systems

Filing the company's taxes

42.

1 point

In the long term, stock prices are driven by:

Supply and Demand

Dividends

Short-term value of the company

Corporate Earnings (fundamentals)

Technical Analysis

43.

1 point

Given the following information for Conwood Inc., compute its market capitalization:
Stock price: $50.00
Earnings per share: $7.50
Price/Earnings ratio: 19
Shares outstanding: 2.5 billion

$18.75 billion

$125.00 billion

$0.99 billion

$356.25 billion

$6.58 billion

44.

1 point

Which of the following is a characteristic of a sole proprietorship?

It is easier to raise money than it is for corporations

There is no legal distinction between the business and owner

It is the most complex form of business organization to start up

The liability of the owner is limited

The profits are double taxed

45.

1 point

Given the following information, a rational investor would most likely invest in which stock?
Stock A: Mean Return – 12%; Standard Deviation – 11%
Stock B: Mean Return – 12%; Standard Deviation – 9%

No difference because they have the same rate of return

Stock B because it is not as risky as Stock A

Stock B because it is riskier than Stock A

Stock A because it is riskier than Stock B

Stock A because it is not as risky as Stock B

46.

1 point

Which of the following is an example of an internal control mechanism used to ensure that management acts in shareholder interests?

Market for Corporate Control

Threat of Takeover by Private Equity Investors

Shareholder Activism

Audited Financial Statements

Managerial Labor Market

47.

1 point

Which of the following statements about Business Organizational Forms is true?

Transfer of ownership is more difficult for corporations than for sole proprietorships

Sole proprietorships have limited liability

Raising capital is easier for corporations than for sole proprietorships

Partnerships are double taxed

Corporations are less difficult to start than partnerships

48.

1 point

2. Given the following information for UST, compute its market capitalization:
Stock price: $12.50
Earnings per share: $6.25
Price/Earnings ratio: 15
Shares outstanding: 6 billion

$2.5 billion

$37.5 billion

$75.0 billion

$5.0 billion

$562.5 billion

49.

1 point

Which of the following is a characteristic of a partnership?

Partnerships are easier to set up than sole proprietorships

The profits are double taxed

Business partnerships are listed on the NYSE

It is more difficult for a partnership to raise capital compared to a corporation

The liability of the owners for the business' claims is limited

50.

1 point

Which of the following companies Warren Buffet would least prefer to invest in

PNC Financial services

Nestle

Exxon Mobil

Twitter, Inc.

None of the above