FINANCIAL MANAGEMENT THEORY
EXAM 1 QUESTIONS AND ANSWERS
100% CORRECT!!
, *Chapter 1* What is finance in a nutshell? - ANSWER Broadly speaking, finance deals a
lot with the future outcomes of a business decision.
These future outcomes affect the decisions you make.
Ex. Starting a business.
The future revenues are uncertain.
*Chapter 1* Why does Finance prefer to use cash flow? - ANSWER Finance prefers to
use cash flows instead of accounting profit because accounting profit may not always
equate to cash.
*Chapter 1* What are investment decisions concerned with? - ANSWER Investment
decisions are concerned with gain in wealth but also avoidance of loss in wealth.
*Chapter 1* What are the three main topics in Finance? - ANSWER They are:
-financial markets and institutions
-investments
-corporate finance
*Chapter 1* What is the goal of the corporation? - ANSWER The goal of the corporation
is to create wealth for its shareholders.
*Chapter 1*Suppose 100,000 shares were issued initially to the shareholders at a price
of $1 per share, what is the book value/par value? - ANSWER The book value/par value
is 100,000. Also called the paid-up capital.
*Chapter 1* How do you calculate market value of a firm? - ANSWER Market value of
firm=number of shares issued * stock price
*Chapter 1* Who are the principles and agents in a corporate firm? - ANSWER The
principles are the shareholders and the managers are the agents in the firm.
*Chapter 1*What is an agency problem? - ANSWER The possibility of conflict of interest
between the principles and agents in running the company.
*Chapter 2* Do you include assets under a leasing agreement? - ANSWER No. You
don't own the asset but you would include the asset if it was under an installment plan.
EXAM 1 QUESTIONS AND ANSWERS
100% CORRECT!!
, *Chapter 1* What is finance in a nutshell? - ANSWER Broadly speaking, finance deals a
lot with the future outcomes of a business decision.
These future outcomes affect the decisions you make.
Ex. Starting a business.
The future revenues are uncertain.
*Chapter 1* Why does Finance prefer to use cash flow? - ANSWER Finance prefers to
use cash flows instead of accounting profit because accounting profit may not always
equate to cash.
*Chapter 1* What are investment decisions concerned with? - ANSWER Investment
decisions are concerned with gain in wealth but also avoidance of loss in wealth.
*Chapter 1* What are the three main topics in Finance? - ANSWER They are:
-financial markets and institutions
-investments
-corporate finance
*Chapter 1* What is the goal of the corporation? - ANSWER The goal of the corporation
is to create wealth for its shareholders.
*Chapter 1*Suppose 100,000 shares were issued initially to the shareholders at a price
of $1 per share, what is the book value/par value? - ANSWER The book value/par value
is 100,000. Also called the paid-up capital.
*Chapter 1* How do you calculate market value of a firm? - ANSWER Market value of
firm=number of shares issued * stock price
*Chapter 1* Who are the principles and agents in a corporate firm? - ANSWER The
principles are the shareholders and the managers are the agents in the firm.
*Chapter 1*What is an agency problem? - ANSWER The possibility of conflict of interest
between the principles and agents in running the company.
*Chapter 2* Do you include assets under a leasing agreement? - ANSWER No. You
don't own the asset but you would include the asset if it was under an installment plan.
