COB 300 FINANCE- FINAL EXAM
QUESTIONS WITH VERIFIED ANSWERS
Financial Leverage - Answer-the extent to which fixed-income securities are used in a
firm's capital structure
Unlevered Beta - Answer-the firms beta coefficient if it has no debt
Trade-Off Theory - Answer-the capital structure theory that states that firms trade off the
tax benefits of debt financing against problems caused by potential bankruptcy
Symmetric Information - Answer-The situation where investors and managers have
identical information about firms' prospects
Asymmetric Information - Answer-the situation where investors and managers have
identical information about firms prospects than do investors
Signal - Answer-an action taken by management that provides clues to investors about
how management views the firms prospects
Pecking Order - Answer-the sequence in which firms prefer to raise capital: first
spontaneous credit, then retained earnings, then other debt, and finally new common
stock
Objective of financial management - Answer-maximize owners wealth
Disadvantage of a proprietorship - Answer-proprietor is exposed to unlimited liability
Adding a covenant to bond agreements.... - Answer-reduces conflict between
stockholders and bondholders
Most business are conducted in - Answer-corporations
4 Basic Financial Statements - Answer-the balance sheet, the income statement,
statement of cash flows, statement of stockholders equity
What is finance and why should everyone understand basic financial concepts? -
Answer-Finance is decisions about money
What event of the 20th century caused the most significant change in financial
regulation in the nation's history? - Answer-The great depression
What is value? How do you maximize it? - Answer-value is the worth of the future cash
flows, stated in current dollars that an asset is expected to generate during its life.
, To maximize value, various strategies and techniques are utilized to increase the
marker value of a firms assets, debt and equity
Which form of business offers the lowest owner liability and maximum ability to raise
funds? - Answer-A Corporation
What is the most important thing finance analyzes? - Answer-cash flows
What is the risk reward relationship? - Answer-the greater the risk, the greater the
expected return
Variance, standard deviation and beta are all measures of volatility, and this volatility is
commonly referred to as..... - Answer-Risk
What is the process used to minimize risk in a portfolio? - Answer-Diversification
What is the formula for the expected return of a portfolio? - Answer-Summation of the
weight of the portfolio times the return on that portfolio
What is the formula for correlation coefficient? - Answer-COVxy / standard deviation of x
X standard deviation of y
What is capital structure? - Answer-Mix of debt, common equity and preferred equity
that is used to finance a firm's assets
Relationship between operating earnings and fixed costs is called..... - Answer-Degree
of operating leverage
The firms optimal capital structure is the point where.... - Answer-value of the firm is
maximized(highest stock price) and WACC is minimized
What type of financial assets dominate the Global Capital Markets? - Answer-Debt
What is the name of the following formula and what does it do?
z= 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 +.000X5 - Answer-Altman Z-score
the score predicts bankruptcy probability of companies
What are the three main types of business organizations? Advantages and
disadvantages? - Answer-Proprietorship-
easy to start, subject to few regulations, taxed as an individual, BUT limited to life of
owner, unlimited personal liability, difficult to sell ownership interest
Partnership-
easy to form, subject to few regulations, taxed like 2 individuals BUT unlimited liability,
partnership dissolves when one dies or wishes to sell, difficult to transfer ownership
Corporation-
QUESTIONS WITH VERIFIED ANSWERS
Financial Leverage - Answer-the extent to which fixed-income securities are used in a
firm's capital structure
Unlevered Beta - Answer-the firms beta coefficient if it has no debt
Trade-Off Theory - Answer-the capital structure theory that states that firms trade off the
tax benefits of debt financing against problems caused by potential bankruptcy
Symmetric Information - Answer-The situation where investors and managers have
identical information about firms' prospects
Asymmetric Information - Answer-the situation where investors and managers have
identical information about firms prospects than do investors
Signal - Answer-an action taken by management that provides clues to investors about
how management views the firms prospects
Pecking Order - Answer-the sequence in which firms prefer to raise capital: first
spontaneous credit, then retained earnings, then other debt, and finally new common
stock
Objective of financial management - Answer-maximize owners wealth
Disadvantage of a proprietorship - Answer-proprietor is exposed to unlimited liability
Adding a covenant to bond agreements.... - Answer-reduces conflict between
stockholders and bondholders
Most business are conducted in - Answer-corporations
4 Basic Financial Statements - Answer-the balance sheet, the income statement,
statement of cash flows, statement of stockholders equity
What is finance and why should everyone understand basic financial concepts? -
Answer-Finance is decisions about money
What event of the 20th century caused the most significant change in financial
regulation in the nation's history? - Answer-The great depression
What is value? How do you maximize it? - Answer-value is the worth of the future cash
flows, stated in current dollars that an asset is expected to generate during its life.
, To maximize value, various strategies and techniques are utilized to increase the
marker value of a firms assets, debt and equity
Which form of business offers the lowest owner liability and maximum ability to raise
funds? - Answer-A Corporation
What is the most important thing finance analyzes? - Answer-cash flows
What is the risk reward relationship? - Answer-the greater the risk, the greater the
expected return
Variance, standard deviation and beta are all measures of volatility, and this volatility is
commonly referred to as..... - Answer-Risk
What is the process used to minimize risk in a portfolio? - Answer-Diversification
What is the formula for the expected return of a portfolio? - Answer-Summation of the
weight of the portfolio times the return on that portfolio
What is the formula for correlation coefficient? - Answer-COVxy / standard deviation of x
X standard deviation of y
What is capital structure? - Answer-Mix of debt, common equity and preferred equity
that is used to finance a firm's assets
Relationship between operating earnings and fixed costs is called..... - Answer-Degree
of operating leverage
The firms optimal capital structure is the point where.... - Answer-value of the firm is
maximized(highest stock price) and WACC is minimized
What type of financial assets dominate the Global Capital Markets? - Answer-Debt
What is the name of the following formula and what does it do?
z= 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 +.000X5 - Answer-Altman Z-score
the score predicts bankruptcy probability of companies
What are the three main types of business organizations? Advantages and
disadvantages? - Answer-Proprietorship-
easy to start, subject to few regulations, taxed as an individual, BUT limited to life of
owner, unlimited personal liability, difficult to sell ownership interest
Partnership-
easy to form, subject to few regulations, taxed like 2 individuals BUT unlimited liability,
partnership dissolves when one dies or wishes to sell, difficult to transfer ownership
Corporation-
