Business Finance Practice Questions Exam 1 With Verified Solutions.
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Course
Business finance
Institution
Business Finance
Financial management deals with the maintenance and creation of economic value or wealth.
T/F - Answer True
The fundamental goal of a business is to maximize the retained earnings available to the corporation's
shareholders
T/F - Answer False; maximize shareholder wealth
It is import...
Business Finance Practice Questions
Exam 1 With Verified Solutions.
Financial management deals with the maintenance and creation of economic value or wealth.
T/F - Answer True
The fundamental goal of a business is to maximize the retained earnings available to the corporation's
shareholders
T/F - Answer False; maximize shareholder wealth
It is important to evaluate a corporate manager's financial decision by measuring the effect the decision
should have on the corporation's stock price if everything else were held constant.
T/F - Answer True
If two companies have the same net income and the same level of risk, they must also have the same
stock price or the market is not in equilibrium.
T/F - Answer False; many other factors: overall stock mkt, industry factors, cash flows
Profits represent money that can be spent, and as such, form the basis for determining the value of
financial decisions.
T/F - Answer False; cash flows are what matter
Investors will be indifferent between two investments if both investments have the same expected
return.
T/F - Answer False; what about risk?
The risk/return tradeoff implies that the return on a riskless asset must be zero.
,The sole proprietorship has no legal business structure separate from its owner.
T/F - Answer True
A general partnership, unlike a limited partnership, is an entity that legally functions separate and
apart from its owners.
T/F - Answer False; ALL partners are FULLY RESPONSIBLE for liabilities
Suppose XYZ Corporation is traded on the New York Stock Exchange. XYZ's closing price on Monday
is $20 per share. After the market closes on Monday, XYZ makes a surprise announcement that it has
obtained a major new customer. XYZ's stock will likely
A) open at $20 per share on Tuesday and then increase as more investors read the announcement in the
Wall Street Journal.
B) remain at $20 per share because in efficient markets the price already reflects all information.
C) open above $20 because the positive news will result in a higher valuation even though the stock has
not yet traded.
D) open below $20 because the surprise announcement creates more uncertainty - Answer C; even if
announced when mkt closes
The expected return on a riskless asset is greater than zero due to
A) an expected return for delaying consumption
B) an expected return for opportunity costs.
C) an expected return for taxes.
D) irrational investors who believe risk is always present. - Answer A
Joe, a risk-averse investor, is trying to choose between investment A and investment B. If investment A is
riskier than investment B and Joe selects investment A anyway, then
, A) the actual return for investment A will be higher than the actual return for investment B.
B) the actual return for investment A will be higher than the expected return for investment B.
C) the expected return for investment A will be higher than the actual return for investment B.
D) the expected return for investment A will be higher than the expected return for investment B. -
Answer D
Profits are down so the controller decides to change the corporation's accounting policy relating to
inventory costing. The change will allow the corporation to report higher income and higher assets,
although the physical inventory has not changed. Which of the following statements is MOST correct?
A) The stock price is likely to increase because income is higher.
B) The stock price is likely to be unaffected because the stock market is efficient.
C) The stock price is likely to decrease because reported inventory is higher.
D) If the stock price increases, the stock market is efficient. - Answer B; it did not affect Cash Flows
John invested $1,000 in a risky investment and Bill invested $1,000 in a less risky investment. One year
later, Bill's investment is worth $1,030. Which of the following statements is MOST correct?
A) If John's investment is worth less than $1,030, then John was irrational to invest in the risky project.
B) John's investment must be worth more than $1,030 because of the risk-return tradeoff, given that
John's
investment was more risky.
C) If John's investment is worth more than $1,030, then Bill was irrational to invest in the less risky
investment.
D) The worth of John's investment cannot be determined with the information given. - Answer D;
risk/return trade off works for expected returns, actual returns are determined by other factors
The five basic principles of finance include all of the following EXCEPT
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