MOS 1023 Final Exam Practice Questions and Answers

MOS 1023 Final Exam Practice Questions and Answers What is finance? - ANSWER-the science or study of the management of funds The goal of the firm - ANSWER-create value for the firm's shareholders How does the firm achieve their main goal? - ANSWER-By maximizing the price of the existing common stock by making good financial decisions Contractual claims - ANSWER-entitled to what their entitled to, if they don't get it they can sue, Creditors, managers, employees and customers Residual claims - ANSWER-Claim is against whatever is left, after paying what people are contractually owed. This is what shareholders have. Management serves as a ____ and ____ between conflicting interest groups or stakeholders and objectives - ANSWER-arbitrator and moderator Three basic issues addressed by the study of finance - ANSWER-capital budgeting decision, capital structure decision, operating decision Capital budgeting decision - ANSWER-What long-term investments should the firm undertake? Ex. do we open a factory, expand into Europe, create a new product Capital structure decision - ANSWER-How should the firm raise money to fund these investments? Ex. issue more or less stocks, pay dividends, issue bonds, borrow from bank Copyright © KAYLIN 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH NOVEMBER, 2024 Copyright ©Stuvia International BV Page 2/15 Operating decision - ANSWER-How to manage cash flows arising from day-to-day operations? Ex. what to do with all money, how best to use extra cash for one day Cycle in the function of financial manager - ANSWER-1.a) raising funds financial markets -> financial manager 1.b) Obligations stock, debt, security financial manager -> financial markets 2. Investments financial manager-> operations (plant,equipment, projects) 3. Cash from operational activities operations ->financial manager 4. reinvesting financial manager-> financial manager 5. dividend or interest payment (instead of reinvesting) financial manager ->financial markets 6 principles of finance - ANSWER-cashflow is what matters, Money has time value, Risk requires reward, market prices are generally right, conflicts of interest cause agency problem, Ethics and trust in bussiness Principle 1: Cash flow is what matters - ANSWER-Finance only care about the cashflow Why? Because its pure. They can have profits but still go bankrupt. When businesses grow too fast, their income statements look good but they go bankrupt. vice versa, no profits but a lot of cash flow. Principle 2: Money has time value - ANSWER-A dollar received today is worth more than a dollar received in the future. Since we can earn interest on money received today, it is better to receive money sooner rather than later. Equation for finding the original value of a bond before the interest - ANSWER-P = Fn/(1+r)^n Copyright © KAYLIN 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH NOVEMBER, 2024 Copyright ©Stuvia International BV Page 3/15 The net present value Method: to determine net present value we.. 3 - ANSWER-calculate the present value of cash inflows, calculate the present value of cash outflows, subtract the present value of outflows from the present value of inflows If the net present value is positive then the project is.. - ANSWER-acceptable, since it promises a return greater than the required rate of return If the net present value is zero then the project is.. - ANSWER-acceptable, since it promises a return equal to the required rate of return If the net present value is negative then the project is.. - ANSWER-Not acceptable, since it promises a return less than the required rate of return. Typical cash outflows 4 - ANSWER--Initial Investment (cash need to purchase asset) -Incremental operating costs -Repairs and Maintenance of new equipment -Additional investment in inventory Typical cash inflows 3 - ANSWER--Incremental revenues -Reduction of operating costs -Salvage value Cost of capital - ANSWER-is the minimum required rate of return, the average rate of return the company must pay to its long-term creditors and stockholders for the use of their funds. Copyright © KAYLIN 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH NOVEMBER, 2024 Copyright ©Stuvia International BV Page 4/15 Ex. If a business accepts a project that is more risky than usual, they will increase the cost of capital, lets say coc is 8%, but trying to move to Europe with ppl we don't know. For those project we will need more than 8. Principle 3: Risk requires a reward - ANSWER-Rational investors would choose a riskier investment only if they feel the expected return is high enough to justify the greater risk Two types of risk - ANSWER-firm specific (unsystematic), market (systematic) Market (systematic) - ANSWER-Ex. Market is Canada and all businesses in it, anything that impact everyone is a market risk, like if Canada enter recession, inflation, taxes war. More risky