FI 414 Exam 2 Questions and Answers | Latest Update | 2024/2025 | Already Passed
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FI 414
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FI 414
FI 414 Exam 2 Questions and Answers |
Latest Update | 2024/2025 | Already
Passed
What is the primary goal of financial management?
The primary goal is to maximize shareholder wealth.
How does diversification reduce risk in a portfolio?
Diversification reduces risk by spreading investm...
FI 414 Exam 2 Questions and Answers |
Latest Update | 2024/2025 | Already
Passed
What is the primary goal of financial management?
✔✔ The primary goal is to maximize shareholder wealth.
How does diversification reduce risk in a portfolio?
✔✔ Diversification reduces risk by spreading investments across different assets, lowering the
impact of individual asset performance.
What is the difference between systematic and unsystematic risk?
✔✔ Systematic risk affects the entire market, while unsystematic risk is specific to a single
company or industry.
What does the Capital Asset Pricing Model (CAPM) calculate?
✔✔ CAPM calculates the expected return of an asset based on its risk relative to the market.
How is the beta of a stock interpreted?
1
,✔✔ Beta measures the sensitivity of a stock’s returns to market movements. A beta greater than
1 indicates higher volatility than the market.
What is the relationship between risk and return?
✔✔ Higher risk is generally associated with higher potential returns, and lower risk with lower
potential returns.
Why do companies issue bonds?
✔✔ Companies issue bonds to raise capital for operations or expansion without diluting
ownership.
What is the difference between a coupon bond and a zero-coupon bond?
✔✔ A coupon bond pays periodic interest, while a zero-coupon bond pays no interest and is
issued at a discount to face value.
How is the yield to maturity (YTM) of a bond calculated?
✔✔ YTM is calculated by considering the bond's current price, face value, coupon payments,
and time to maturity.
2
,What does the efficient market hypothesis (EMH) suggest?
✔✔ EMH suggests that all available information is already reflected in asset prices, making it
impossible to consistently outperform the market.
What is the difference between primary and secondary markets?
✔✔ The primary market is where new securities are issued, while the secondary market is where
existing securities are traded.
How does a stock split affect the price and number of shares outstanding?
✔✔ A stock split increases the number of shares outstanding and reduces the price per share
without changing the company's market capitalization.
What is the significance of the time value of money in finance?
✔✔ The time value of money recognizes that a dollar today is worth more than a dollar in the
future due to its earning potential.
How is net present value (NPV) used in investment decision-making?
✔✔ NPV evaluates the profitability of an investment by calculating the difference between the
present value of cash inflows and outflows.
3
, What does the internal rate of return (IRR) represent in capital budgeting?
✔✔ IRR is the discount rate that makes the NPV of an investment equal to zero, indicating the
project's expected rate of return.
What is the difference between the payback period and discounted payback period?
✔✔ The payback period measures how long it takes to recover an investment, while the
discounted payback period accounts for the time value of money.
Why are dividends important to investors?
✔✔ Dividends provide a regular income stream to investors and signal a company’s financial
health and profitability.
What is the relationship between bond prices and interest rates?
✔✔ Bond prices and interest rates have an inverse relationship. When interest rates rise, bond
prices fall, and vice versa.
What factors influence the price of a stock?
4
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