FINC 318 EXAM 1 || Top Grade Assured.
Finance correct answers the system that includes the circulation of money, the granting of credit,
the making of investments, and the provision of banking facilities
Three Areas of Finance correct answers Financial management, capital markets, and Investments
Financial management correct answers also called corporate finance, focuses on decisions
relating to how much and what types of assets to acquire, how to raise the capital needed to
purchase assets, and how to run the firm so as to maximize its value.
Capital markets correct answers relate to the markets where interest rates, along with stock and
bond prices, are determined. Includes banks, investment banks, stockbrokers, mutual funds, and
insurance companies. EX. Managers at a bank need to decide on the interest rate that they must
charge for the loans that they make to their prime customers
Investments correct answers relate to decisions concerning stocks and bonds and include a
number of activities: security analysis, portfolio theory, and market analysis
security analysis correct answers deals with finding the proper values of individual securities
(stocks and bonds)
portfolio theory correct answers deals with the best way to structure portfolios, or "baskets", of
stock and bonds
Market analysis correct answers deals with the issue of whether stock and bond markets at any
given point are "too high", "too low", or "about right"
behavioral finance correct answers investor psychology is examined in an effort to determine
whether stock prices have been bid up to unreasonable lows in a fit of irrational pessimism
,Sarbanes-Oxley Act correct answers A law passed by Congress that requires the CEO and CFO
to certify that their firm's financial statements are accurate
Forms of Business Organization correct answers Proprietorship, partnership, corporation, limited
liability companies, and limited liability partnerships
Proprietorship correct answers An unincorporated business owned by one individual
Proprietorship Advantages correct answers They are easy and inexpensive to form, they are
subject to few government regulations, they are subject to lower income taxes than are
corporations
Proprietorship disadvantages correct answers Unlimited personal liability for the business' debts,
the life of the business is limited to the life of the individual who created it, and difficult to
obtain large sums of capital.
Partnership correct answers An unincorporated business owned by two or more persons
Corporation correct answers A legal entity created by a state, separate and distinct from its
owners and managers, having unlimited life, easy transferability of ownership, and limited
liability
S Corporations correct answers A special designation that allows small business that meet
qualifications to be taxed as if they were a proprietorship or a partnership rather than a
corporation
Limited Liability Company (LLC) correct answers A popular type of organization that is a hybrid
between a partnership and a corporation
, Limited Liability Partnership (LLP) correct answers Similar to an LLC, but used for professional
firms in the fields of accounting, law, and architecture. It provides personal asset protection from
business debts and liabilities but is taxed as a partnership
Advantages to Corporations correct answers Limited liability reduces the risks borne by
investors, ability to attract capital easily and have opportunities to grow, ability to transfer stock
(because it is seen as more liquid).
Intrinsic value correct answers An estimate of a stock's "true" value based on accurate risk and
return data. The value can be estimated, but not measured precisely
market price correct answers The stock value based on perceived but possibly incorrect
information as seen by the marginal investor
marginal investor correct answers An investor whose views determine the actual stock price
equilibrium correct answers The situation in which the actual market price equals the intrinsic
value, so investors are indifferent between buying and selling a stock
Management's goal correct answers should be to take actions designated to maximize the firm's
intrinsic value, not its current market price
Corporate Governance correct answers Establishment of rules and practices by Board of
Directors to ensure that managers act in shareholders' interests while balancing the needs of other
constituencies.
Executive compensation plans to motivate managers to act in their stockholders' best interests
correct answers Reasonable compensation packages, firing of managers who don't perform well,
and the threat of hostile takeovers
Finance correct answers the system that includes the circulation of money, the granting of credit,
the making of investments, and the provision of banking facilities
Three Areas of Finance correct answers Financial management, capital markets, and Investments
Financial management correct answers also called corporate finance, focuses on decisions
relating to how much and what types of assets to acquire, how to raise the capital needed to
purchase assets, and how to run the firm so as to maximize its value.
Capital markets correct answers relate to the markets where interest rates, along with stock and
bond prices, are determined. Includes banks, investment banks, stockbrokers, mutual funds, and
insurance companies. EX. Managers at a bank need to decide on the interest rate that they must
charge for the loans that they make to their prime customers
Investments correct answers relate to decisions concerning stocks and bonds and include a
number of activities: security analysis, portfolio theory, and market analysis
security analysis correct answers deals with finding the proper values of individual securities
(stocks and bonds)
portfolio theory correct answers deals with the best way to structure portfolios, or "baskets", of
stock and bonds
Market analysis correct answers deals with the issue of whether stock and bond markets at any
given point are "too high", "too low", or "about right"
behavioral finance correct answers investor psychology is examined in an effort to determine
whether stock prices have been bid up to unreasonable lows in a fit of irrational pessimism
,Sarbanes-Oxley Act correct answers A law passed by Congress that requires the CEO and CFO
to certify that their firm's financial statements are accurate
Forms of Business Organization correct answers Proprietorship, partnership, corporation, limited
liability companies, and limited liability partnerships
Proprietorship correct answers An unincorporated business owned by one individual
Proprietorship Advantages correct answers They are easy and inexpensive to form, they are
subject to few government regulations, they are subject to lower income taxes than are
corporations
Proprietorship disadvantages correct answers Unlimited personal liability for the business' debts,
the life of the business is limited to the life of the individual who created it, and difficult to
obtain large sums of capital.
Partnership correct answers An unincorporated business owned by two or more persons
Corporation correct answers A legal entity created by a state, separate and distinct from its
owners and managers, having unlimited life, easy transferability of ownership, and limited
liability
S Corporations correct answers A special designation that allows small business that meet
qualifications to be taxed as if they were a proprietorship or a partnership rather than a
corporation
Limited Liability Company (LLC) correct answers A popular type of organization that is a hybrid
between a partnership and a corporation
, Limited Liability Partnership (LLP) correct answers Similar to an LLC, but used for professional
firms in the fields of accounting, law, and architecture. It provides personal asset protection from
business debts and liabilities but is taxed as a partnership
Advantages to Corporations correct answers Limited liability reduces the risks borne by
investors, ability to attract capital easily and have opportunities to grow, ability to transfer stock
(because it is seen as more liquid).
Intrinsic value correct answers An estimate of a stock's "true" value based on accurate risk and
return data. The value can be estimated, but not measured precisely
market price correct answers The stock value based on perceived but possibly incorrect
information as seen by the marginal investor
marginal investor correct answers An investor whose views determine the actual stock price
equilibrium correct answers The situation in which the actual market price equals the intrinsic
value, so investors are indifferent between buying and selling a stock
Management's goal correct answers should be to take actions designated to maximize the firm's
intrinsic value, not its current market price
Corporate Governance correct answers Establishment of rules and practices by Board of
Directors to ensure that managers act in shareholders' interests while balancing the needs of other
constituencies.
Executive compensation plans to motivate managers to act in their stockholders' best interests
correct answers Reasonable compensation packages, firing of managers who don't perform well,
and the threat of hostile takeovers
