Fin 321 - Midterm 1 Exam Practice Questions With Correct Detailed Answers.
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Course
FIN.
Institution
FIN.
2 basic questions of corporate finance - correct answer 1) What long term investments should the firm choose?
2) How should the firm raise funds for the selected investments?
Primary goal of financial management of a corporation - correct answer ...
2 basic questions of corporate finance - correct answer 1) What long term
investments should the firm choose?
2) How should the firm raise funds for the selected investments?
Primary goal of financial management of a corporation - correct answer maximize
shareholder wealth; shareholders are the residual owners, so they are only entitled to leftovers. If
shareholders are winning (getting more in dividends) then that means everyone else must also be
winning
Potential conflicts between shareholders and managers - correct answer the agency
problem: conflict of interest between principal and agent
Tools to control conflicts - correct answer managerial compensation
Pro: corresponds directly to project's impact on the firm's value
Con: relies on an accurate estimation of the discount rate
IRR Rule - correct answer NPV = 0
accept if IRR>r
higher IRR is better
Pro: easy to understand and communicate
Con: may not exist, doesn't distinguish between investing and financing, issues with mutually exclusive
projects
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