Exam (elaborations)
MOS 1023: Final exam questions and correct answers
- Course
- Institution
MOS 1023: Final exam questions and correct answers
[Show more]
Content preview
MOS 1023: Final exam questions andcorrect answers
Finance - correct answer ✔✔The science or study of the management of funds. Number one job is to
maximize the return of the investments
The goal of the firm - correct answer ✔✔To create value for the firm's shareholders by maximizing the
price of the existing common stock.
Influence of financial decisions - correct answer ✔✔Good financial decisions will help increase stock
price and poor financial decisions will lead to a decline in stock price
The role of management - correct answer ✔✔Management serves as an arbitrator and moderator
between conflicting interest groups or stakeholders and objectives
Contractual claims - correct answer ✔✔What creditors, managers, employees and customers hold
against the company (have rights to certain amounts of assets)
Residual claims - correct answer ✔✔What shareholders have against the company that entitles them to
what's left over after the contractual claims have been paid
Three basic issues of finance - correct answer ✔✔1. What long-term investments should the firm
undertake? (Capital budgeting decision)
2. How should the firm raise money to fund these investments? (Capital structure decision)
3. How to manage cash flows arising from day-to-day operations (Operating decision)
Functions of a financial manager - correct answer ✔✔1a. Raising funds (financial markets --> financial
managers --> operations)
1b. Obligations: stocks, debts, securities (financial manager --> financial markets)
2. Investments (financial markets --> financial manager --> operations)
,3. Cash from operational activities (operations --> financial manager)
4. Reinvesting (financial manager --> financial markets)
5. Dividends or interest payments (financial manager --> financial markets)
Principles of finance - correct answer ✔✔1. Cash flow is what matters
2. Money has a time value
3. Risk requires a reward
4. Market prices are generally right
5. Conflicts of interest cause agency problems
6. Ethics and trust in business
Cash flow is what matters - correct answer ✔✔Accounting profits are not equal to cash flows. It is
possible for a firm to generate it but not report accounting profits in the books because it drives the
value of a business, not the profits. Must determine additional when making financial decisions.
Money has a time value - correct answer ✔✔A dollar received today is worth more than a dollar
received in the future since we can earn interest on money received today (better to receive money
sooner rather than later)
Risk requires a reward - correct answer ✔✔Rational investors would choose a riskier investment if it has
the potential for a higher reward
Market prices are generally right - correct answer ✔✔Information efficient markets provide liquidity and
fair prices. When new information becomes available, prices quickly change to reflect that information
Conflicts of interest cause agency problems - correct answer ✔✔The separation of management and the
ownership of the firm creates an agency problem. Managers may seek to emphasize the size of the firm
sales, while owners seek to make the most money they can (dispersed ownership)
Ethics and trust in business - correct answer ✔✔Sound, ethical standards are important for business and
personal success. Unethical decisions can destroy shareholder wealth
, Dispersed ownership - correct answer ✔✔For public companies, the ownership is widely spread out
Proxy - correct answer ✔✔The only right you have as a shareholder is to vote for the board of directors
and the number of votes you get depends on the number of shares you owe. One way to mitigate the
agency problem
Corporate governance functions - correct answer ✔✔1. Oversight: board of directors to oversee
management
2. Managerial: run company
3. Compliance: laws, regulations and standards
4. Internal audit: assurance and consulting activity
5. Advisory: advice
6. External audit: lend credibility
7. Monitoring: elect or remove directors and management
Diversification of investments - correct answer ✔✔All investment risk is not the same. Some risk can be
removed or diversified by investing in several different securities. Two types, firm specific and market.
Computation of present value - correct answer ✔✔An investment can be viewed in two ways; present
value and future value (P = Fn/(1 + r)^n)
To determine net present value - correct answer ✔✔1. Calculate the present value of cash inflows
2. Calculate the present value of cash outflows
3. Subtract the present value of the outflows from the present value of the inflows
Typical cash outflows - correct answer ✔✔Initial investment (cash needed to purchase asset).
Incremental operating costs. Repairs and maintenance of new equipment. Additional investment in
inventory
Typical cash inflows - correct answer ✔✔Incremental revenues. Reduction of operating costs. Salvage
value
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller BravelRadon. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $17.99. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
62890 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now