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FINANCE EXAM 1 LIFA HUANG WITH COMPLETE SOLUTIONS -3
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FINANCE EXAM 1 LIFA HUANG WITH COMPLETE SOLUTIONS -3
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FINANCE EXAM 1 LIFA HUANG WITH COMPLETE SOLUTIONS #3What is the difference in perspective and emphasis between finance and accounting? -
correct answer Accountants generally use the accrual method of recording.
Financial managers focus more on cash flows for cash management.
In addition to ongoing involvement in financial analysis and planning, the financial
manager's primary activities are making _____ and _____ decisions. - correct answer
investment; financing
_____ decisions determine what types of assets the firm holds. - correct answer
Investment
_____ decisions determine how the firm raises money to pay for the assets in which it
invests. - correct answer Financing
The owner receives all the profits.
Sole Proprietorship, Partnership, or Corporation? - correct answer Sole Proprietorship
Unlimited liability; total wealth can be taken to satisfy debts
Sole Proprietorship, Partnership, or Corporation? - correct answer sole proprietorship
Unlimited liability; may have to cover debts of partners
Sole Proprietorship, Partnership, or Corporation? - correct answer partnership
Limited liability; cannot lose more than they invested
Sole Proprietorship, Partnership, or Corporation? - correct answer Corporation
Lacks continuity after owner dies
Sole Proprietorship, Partnership, or Corporation? - correct answer sole proprietorship
Difficult to liquidate or transfer ownership
Sole Proprietorship, Partnership, or Corporation? - correct answer partnership
Ownership is readily transferable
Sole Proprietorship, Partnership, or Corporation? - correct answer corporation
What is the Primary Goal of the Firm? - correct answer The primary goal of the firm is to
maximize the wealth of the stockholders (the company's owners).
Profit maximization may not lead to the highest possible share price for at least 3
reasons:
1. _____ is important ("liquidity preference")
2. _____ do not necessarily result in cash flows available to stockholders
3. _____ _____ fails to account for risk - correct answer 1. Timing is important—the
receipt of funds sooner rather than later is preferred (called "liquidity preference")
, 2. Profits do not necessarily result in cash flows available to stockholders
3. Profit maximization fails to account for risk
A company's Stakeholders - correct answer employees, customers, suppliers, creditors,
owners, and others who have a direct economic link to the firm
A firm with a stakeholder focus consciously avoids actions that would prove detrimental
to stakeholders. The goal is to _____ stakeholder well-being. - correct answer preserve
To enrich shareholders, managers must first satisfy the demands of other interest
groups (customers, employees, suppliers, etc).
True or False? - correct answer True
(A common misconception is that when firms strive to make their shareholders happy,
they do so at the expense of other constituencies.)
Decision rule for managers:
Only take actions that are expected to _____ the share price. - correct answer increase
Internal source of capital - correct answer retained earnings
Two external sources of capital - correct answer debt (bond) or equity (stocks)
"The pecking order theory"
Managers display this preference of sources to fund investment opportunities: - correct
answer retained earnings > debt > equity
_____ markets are the financial markets in which securities are initially issued; the only
market in which the issuer is directly involved in the transaction. - correct answer
Primary
_____ markets are financial markets in which preowned securities are traded - correct
answer Secondary
The _____ market is created by a financial relationship between suppliers and
demanders of _____-term funds. - correct answer money; short
Most money market transactions are made in - correct answer marketable securities
The _____ market is a market that enables suppliers and demanders of _____-term
funds to make transactions. - correct answer capital; long
US Treasury bills, commercial papers, certificates of deposit
Money Market or Capital Market? - correct answer Money Market
Bonds, common stock, preferred stock
Money Market or Capital Market? - correct answer Capital Market
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