Objective type questions on Financial strategies.

1. Which of the following statements is CORRECT?

A. Corporations generally face fewer regulations than sole proprietorships.

B. Corporate shareholders are exposed to unlimited liability.

C. It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.

D. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.

E. There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small

2. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

A. Maximize its expected total corporate income.

B. Maximize its expected EPS.

C. Minimize the chances of losses.

D. Maximize the stock price per share over the long run, which is the stock's intrinsic value.

E. Maximize the stock price on a specific target date

3. Which of the following actions would tend to reduce conflicts of interest between stockholders and bondholders?

A. Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).

B. Compensating managers with more stock options and less cash income.

C. The passage of laws that make it harder for hostile takeovers to succeed.

D. A government regulation that banned the use of convertible bonds.

E. Have the firm use only long-term debt, e.g., debt that matures in 30 years or more rather than in less than one year.

4. Which of the following statements is CORRECT?

A. Compensating managers with stock options will do nothing to help eliminate potential conflicts between stockholders and managers.

B. Restrictions can be included in credit agreements, but these restrictions will do nothing to protect bondholders from conflicts of interest between them and the firm's managers and stockholders.

C. The threat of takeovers reduces conflict of interest problems, but only between bondholders and stockholders.

D. Compensating managers with stock options can help reduce conflicts of interest between stockholders and managers, but if the options are all exercisable on a specific date in the near future, this can motivate managers to deceive stockholders.

E. Conflicts would not exist if the lead agency, the Security and Exchange Commission, were abolished.

5. If it were evaluated with an interest rate of 0%, a 10-year regular annuity would have a present value of $3,755.50. If the future (compounded) value of this annuity, evaluated at Year 10, is $5,440.22, what effective annual interest rate must the analyst be using to find the future value?

A. 7%

B. 8%

C. 9%

D. 10%

E. 11%

6. You are analyzing the value of an investment by calculating the present value of its expected cash flows. Which of the following would cause the investment to look better?

A. The discount rate decreases.

B. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.

C. The discount rate increases.

D. The riskiness of the project's cash flows increases.

E. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

7. Which of the following statements is CORRECT?

A. Four key financial statements are the balance sheet, the income statement, the statement of cash flows, and the statement of retained earnings.

B. The balance sheet gives us a picture of the firm's financial situation over a period of time.

C. The income statement gives us a snapshot of what is happening at a point in time.

D. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.

E. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year

8. Which of the following statements is CORRECT?

A. The balance sheet for a given year, say 2005, is designed to give us an idea of what happened to the firm during that year.

B. The balance sheet for a given year, say 2005, tells us how much money the company earned during that year.

C. The difference between the total assets reported on the balance sheet and the debts reported on the statement tells us the current market value of the stockholders equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).

D. For most companies, the market value of the stock differs from the book value of the stock as reported on the balance sheet.

E. A typical industrial company's balance sheet lists the firm's longest lived assets first, then goes on down to the assets that will be converted to cash