FIN 305 Week 2 Exam Questions and Answers (Already solved 100%).

FIN305 – Week 2 Exam 1 Selected Questions & Highlighted Answers 1. Finance can be defined as: a. the system of debits and credits b. the science of the production, distribution, and consumption of wealth c. the art and science of managing money d. the art of merchandising products and services in a free market economy 2. Which legal form is least expensive to organize? a. Sole Proprietorships b. Partnerships c. Corporations d. ALL are equally expensive 3. The rate of interest that creates equilibrium between supply and demand for investment funds: a. nominal b. real c. risk-free d. inflationary 4. A graphic depiction of the term structure of interest rates is called: a. yield curve b. supply and demand functions c. risk/return profile d. aggregate demand curve 6. Generally, an increase in risk will result in: a. a lower required rate of return b. a higher required rate of return c. no change in the required rate of return d. an undetermined required rate of return 7. Under which form is ownership readily transferrable? a. sole proprietorship b. partnership c. corporation d. all of the above have equal transferability 8. The accountant's primary function is: a. evaluating the financial statements of a company b. making decisions based on the financial data c. collection and presentation of financial data d. planning cash flows 9. The wealth of the owners of a corporation is represented by: a. profits (net income or net profit) b. earnings per share of common stock c. share price d. cash flow 10. The true owners of a corporation are: a. board of directors b. chief executive officer c. stockholders d. stakeholders 12. Which form is characterized by limited liability? a. sole proprietorship b. partnership c. corporation d. professional partnership 13. Money market involves buying/selling of: a. stocks & bonds b. short-term funds c. funds that mature in up to 5 years d. US Government Securities (bills, notes and bonds) 14. All theories to explain yield curve shape EXCEPT: a. expectations hypothesis b. market segmentation theory c. liquidity preference theory d. security markets theory 15. Sale of $150,000 with cost $112,500. Not yet collected. Net profit & cash flow: a. $0 and $150,000 respectively b. $37,500 and ($150,000) c. $37,500 and ($112,500) d. $150,000 and $112,500 16. Typical required return on 3-month US Treasury Bill is: a. nominal b. real c. risk-free d. premium 17. Financial managers recognize revenue and expenses using: a. the accrual method b. actual inflows and outflows of cash c. law/system of supply and demand d. the revenue method 18. Primary goal of financial manager is: a. minimizing risk b. maximizing profit c. maximizing wealth d. minimizing return 19. Managing firm's assets includes all EXCEPT: a. inventory b. fixed assets c. accounts receivable d. notes payable 20. Buying McDonald's stock & a Big Mac: a. secondary and primary market transaction b. two primary market transactions c. two secondary market transactions d. really bad transactions! 21. Value maximization as firm goal: a. focuses on bondholders b. takes a long-run perspective c. focuses on quarterly changes in earnings d. is an accounting number 22. Least related to firm's stock valuation: a. amount of cash flow generated b. market share c. timing of cash flows d. amount of retained earnings 23. With respect to cash: a. less cash is better due to time value b. earns interest in short term only c. pay in future rather than now d. agree to pay now rather than wait 24. Junk bonds are: a. rated investment grade b. rated below investment grade c. very liquid d. low interest rate debt 25. Real rate = 3%, expected inflation = 3%, nominal = 6%: a. the real rate of interest is 3% Extra Credit Questions 27. Annual interest on 7% coupon, $1,000,000 par value bond: a. $700.00 b. $7,000.00 c. $70,000.00 d. Bonds do not pay interest 28. Common stock: a. is riskier than preferred stock b. less profitable than preferred stock c. does not pay dividends like preferred d. issued frequently 29. Federal Reserve open market operations: a. conducted by US Treasury b. increase or decrease the money supply c. refer to Fed discount rate changes d. regulated by Congress Problem 3 – Required Interest Rate on Acme CD Given: • Risk-Free Rate (3-month T-bill) = 2.25% • Risk Premium = 6% Calculation: R1=RF+risk R1=2.25+6= 8.25%