,1. Multiple Choice: What is the primary goal of financial
management?
a) Maximize current dividends per share
b) Maximize market share
c) Minimize operational costs
d) Maximize shareholder wealth
Correct Answer: d) Maximize shareholder wealth
Rationale: The primary goal is to maximize shareholder
wealth, as it reflects the overall value of the company in the
long term.
2. Fill-in-the-Blank: The __________ model is used to
determine the discount rate for an uncertain cash flow.
Correct Answer: Capital Asset Pricing Model (CAPM)
Rationale: CAPM is used to calculate the required return
on equity or the cost of equity.
3. True/False: The Efficient Market Hypothesis implies that
all stocks are priced accurately and reflect all available
information.
Correct Answer: True
Rationale: The Efficient Market Hypothesis posits that
stocks always trade at their fair value, making it impossible
for investors to either purchase undervalued stocks or sell
stocks for inflated prices.
, d) Stocks
Correct Answers: a) Options, c) Futures
Rationale: Options and futures are financial derivatives
because their value is derived from the value of an
underlying asset.
5. Multiple Choice: In the context of portfolio theory,
diversification is most effective when security returns are:
a) Positively correlated
b) Negatively correlated
c) Uncorrelated
d) Highly volatile
Correct Answer: b) Negatively correlated
Rationale: Diversification reduces risk most effectively
when security returns are negatively correlated, as the poor
performance of one security is offset by the good
performance of another.
6. Fill-in-the-Blank: The __________ is a measure of a
stock's volatility in relation to the overall market.
Correct Answer: Beta
Rationale: Beta is a measure of the volatility, or
systematic risk, of a security or portfolio in comparison to
the market as a whole.
7. True/False: A higher debt-to-equity ratio generally
indicates a lower risk for investors.
Correct Answer: False
Rationale: A higher debt-to-equity ratio indicates higher
leverage and typically signifies higher risk for investors as
the company has more debt relative to its equity.
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