FIN 340 Exam 1 ACTUAL UPDATED Exam
Questions and CORRECT Answers
Objective of the financial manager - CORRECT ANSWER - Execute a strategy that
maximizes the market value of the shareholders' claim
Financial manager tasks - CORRECT ANSWER - 1. Make investment decisions
2. Make financing decisions
3. Manage short-term cash needs
Agency problem - CORRECT ANSWER - When managers, despite being hired as the
agents of shareholders, put their self-interest ahead of the interests of those shareholders
Mitigating agency problems - CORRECT ANSWER - - incentive pay
- board of directors
- takeovers
- shareholder activism (proxy fights)
- legal protection of shareholders
Using Market Prices to determine cash values - CORRECT ANSWER - When a good
trades in a competitive market, it should be valued at its market price. Personal tastes or opinions
are irrelevant
Law of One Price - CORRECT ANSWER - If equivalent goods trade simultaneously in
different competitive markets, then they must trade for the same price in both markets
Net Present Value (NPV) - CORRECT ANSWER - Difference between the present value
of its benefits and the present value of its costs
= PV (Benefits) - PV (Costs)
, NPV Decision Rule - CORRECT ANSWER - Take the alternative with the highest NPV
Interest rate factor - CORRECT ANSWER - (1 + r)
3 Rules of Time Travel - CORRECT ANSWER - 1. Only values at the same point in time
can be compared or combines
2. To move a cash flow forward in time, you must compound it
3. To move a cash flow backward in time, you must discount it
Perpetuites - CORRECT ANSWER - =C/r
Assumptions - CORRECT ANSWER - Perpetuity and annuity formulas assume the first
cash flow occurs one year from now
Growing Perpetuities - CORRECT ANSWER - =C/r-g (assuming g<r)
Discount rate - CORRECT ANSWER - Rate to discount a cash flow to determine its value
at an earlier time
Effective Annual Rate (EAR) - CORRECT ANSWER - Indicates the total amount of
interest that will be earned at the end of one year
Annual Percentage rate (APR) - CORRECT ANSWER - amount of simple interest earned
in one year
APR itself cannot be used as a discount rate - CORRECT ANSWER -
Questions and CORRECT Answers
Objective of the financial manager - CORRECT ANSWER - Execute a strategy that
maximizes the market value of the shareholders' claim
Financial manager tasks - CORRECT ANSWER - 1. Make investment decisions
2. Make financing decisions
3. Manage short-term cash needs
Agency problem - CORRECT ANSWER - When managers, despite being hired as the
agents of shareholders, put their self-interest ahead of the interests of those shareholders
Mitigating agency problems - CORRECT ANSWER - - incentive pay
- board of directors
- takeovers
- shareholder activism (proxy fights)
- legal protection of shareholders
Using Market Prices to determine cash values - CORRECT ANSWER - When a good
trades in a competitive market, it should be valued at its market price. Personal tastes or opinions
are irrelevant
Law of One Price - CORRECT ANSWER - If equivalent goods trade simultaneously in
different competitive markets, then they must trade for the same price in both markets
Net Present Value (NPV) - CORRECT ANSWER - Difference between the present value
of its benefits and the present value of its costs
= PV (Benefits) - PV (Costs)
, NPV Decision Rule - CORRECT ANSWER - Take the alternative with the highest NPV
Interest rate factor - CORRECT ANSWER - (1 + r)
3 Rules of Time Travel - CORRECT ANSWER - 1. Only values at the same point in time
can be compared or combines
2. To move a cash flow forward in time, you must compound it
3. To move a cash flow backward in time, you must discount it
Perpetuites - CORRECT ANSWER - =C/r
Assumptions - CORRECT ANSWER - Perpetuity and annuity formulas assume the first
cash flow occurs one year from now
Growing Perpetuities - CORRECT ANSWER - =C/r-g (assuming g<r)
Discount rate - CORRECT ANSWER - Rate to discount a cash flow to determine its value
at an earlier time
Effective Annual Rate (EAR) - CORRECT ANSWER - Indicates the total amount of
interest that will be earned at the end of one year
Annual Percentage rate (APR) - CORRECT ANSWER - amount of simple interest earned
in one year
APR itself cannot be used as a discount rate - CORRECT ANSWER -
