Module 1

Question 1

The firm can be thought of as a ______________ of policies.

Answer 1

nexus

Question 2

The firm exists to create value for _____________________.

Answer 2

stakeholders

Question 3

An advantage of organizing a firm as a corporation is that taxes are paid at the shareholder level.

Answer 3

False

Question 4

Profit maximization may not lead to the highest possible share price for at least three reasons They are,

Answer 4

profits not always available to shareholders, timing, risk

Question 5

Suppose a project under consideration will earn returns equal to current investments but its expected returns are less certain (i.e., riskier). Financial managers would accept this project for investment.

Answer 5

false

Question 6

What are the advantages of the corporate form of business organization?

Answer 6

ease of raising additional funds, easy transfer of ownership, limited liability, perpetual life

Question 7

Limited liability means that owners of a business are not personally liable for all of its debts – owners can only lose the lessor of the value of their investment or $100,000.

Answer 7

false

Question 8

Shareholders get any assets or cash flows of the corporation that remain after all other debts have been paid.

Answer 8

true

Question 9

We can think of equity as a degree of ownership in any asset after subtracting all debts associated with that asset. Shareholder equity is calculated as Total Assets minus Total Liabilities

Answer 9

assets

Question 10

By law, the board of directors makes decisions as as fiduciary on behalf of company executives.

Answer 10

false

Question 11

The board makes decisions concerning the hiring and firing of personnel, dividend policies and payouts, and executive compensation.

Answer 11

true

Question 12

The separation of ownership (shareholders) and control (managers) in larger corporations with many shareholders can lead to conflicts of interest between managers and owners.

Answer 12

true

Question 13

The CEO of Audi was arrested in connection with the investigation Audi cheated on emissions tests. After viewing the three videos, what would you tell your daughter?

Answer 13

conflicts of interest can lead managers to act in ways that can destroy shareholder value

Question 14

Amazon and Walmart are examples of corporations because

Answer 14

they are controlled by managers acting as agents for shareholders who have limited liability

Question 15

The goal of maximizing shareholder wealth can be expressed in several equivalent ways (select all correct answers)

Answer 15

maximizing the market capitalization of the firm, long-term value of stock, shareholder returns

Question 16

Profit maximization may not lead to the highest possible share price because (check all correct)

Answer 16

Profit maximization fails to account for risk – extremely profitable opportunities may be too risky, Timing is important—the receipt of funds sooner rather than later is preferred. Time is money! , Profits do not necessarily result in cash flows available to stockholders. There is a difference in accounting values and cash flows.

Question 17

Shareholders are also known as the residual owners of the firm’s cash flows - they only get paid after other stakeholders are content.

Answer 17

false

Question 18

Once a firm decides to accept a project, then the financial manager must decide where to get the money to pay for the project.

Funding for a project can be simplified from

Answer 18

equity, debt

Question 19

The difference between … and … is referred to as Net Working Capital

Answer 19

short term assets/short-term liabilities

Question 20

BNSF projects must be expected to earn at least what rate of return to be funded (implemented)?

Answer 20

9%

Question 21

The shadow banking system refers to ______________________ involved in facilitating the creation of credit, that is lending, much like traditional banks but are not subject to regulatory oversight.

Answer 21

financial intermediaries

Question 22

From investors’ perspectives, the role of capital markets is to be an efficient market that allocates funds to their most productive uses.

Answer 22

true