Fin_ance Fundamentals - MBA (B) Name: _ _!

_ _~_i____
K....::..
.
Quiz# I_-Fall 2021 (Nov 4, 2021) ID#: _ _ _ _ __
T otal Points: IO

Select the sino/e

b
hest answer and md,cate
• . • with
your choice · a fl.!£..!I.·
· l
I.
An agency problem can be alleviated:
a. when a firm is a sole proprietorship. . .
b. by compensating managers in such a way that acting in the best interest of shareholders is also m the be st
interest of managers. ·U __,, £
C. by asking managers to take on more risk than they are comfortable taking. 2,..... _B
d. all of the above 3 . . -- Pt
© both a and b above ..:.,..;..---
2.
Y_,, 6
Which one of the following is a capital budgeting decision? 5: __. tr
J\ determining how much debt should be borrowed from a particular lender B
l..'.7' a retailer decidi_ng whether to open a new store or not <& :::--
c. deciding when to repay a long-term debt 1 ----C
u
d.
e.
determining how much inventory to keep on hand
determining how much money should be kept in the bank checking account 9
15
;:g
3. ~ich of the following statements is true? I 1> _,,. B
(1/ Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially
large ones. /
b. Passive investment approach attempts to outperform the market (index) through timing or selecting
undervalued securities. Y---
C. "crowding out" refers to the phenomenon of government spending more than its revenues. \J.
d. More than one of the statements are true

4. Which of the following statements is false?

a. The Principal-Agent Problem arises because managers generally have little incentive to work in the
interest of shareholders when this means working against their own self-interest.
et:) Dealer bid prices exceed ask prices. X
c. If you buy shares of Coca-Cola on the primary market, Coca-Cola receives the money because the
company has issued new shares.
d. More than one of the statements are false

5. Which of the following statements is false?

0 It is generally easier to transfer one's ownership interest in a partnership than in a corporation. X
b. Money markets are markets for debt securities with original maturity of one year or less. y /
C. Rights offerings are often used when an already Hstedcompanyraises new equity ~
d. More than one of the statements are false

6. Which of the following statements is true?

a. Warren Buffett believes that markets are ge~~rally efficient (i.e., market price= Intrinsic value) and
search for undervalued securities is futile. l-
@ The pr?cess of planning an~ managing a firm's long-term investments is called capital budgeting.\/'
c. The pnmruy goal of financial management is to maintain steady growth in both sales and net earnings of
thefrrm. X
d. More than one of the statements are true
7. Which of the following statements is false? . th Pakistan Stock Exchange
a. A public limited company's share trade on organized exchanges_such as e
(PSX); whereas private companies shares do not trade on fina~cial mahrk~t\ t" the transaction is called
b. When stock in a closely held corporation is offered to the pu?hc for t e irs~e,
"going public," and the market for such stock is called the pnmary mar~et. fl t when the cash
Accounting profits and cash flows are generally the same since accounting profits re ec
flow is received. 'I--
d. More than one of the statements are false

Which of the following statements is false? . H h · "r1•sk 1so

· l at1on
· " 1· e
8. a. One of the advantages of a holding company structure such as Berksh 1_re at a war is ' · .,
obligations of one operating company do not spill over to other operating compame_s.
One of the principles of Warren Buffett is to diversity reasonably but don't overdo it.
b Dual class shares refer to the practice where a company stock is listed and traded on two stock exchanges
(V - domestic exchange and international exchange.
d. More than one of the statements are false

Which of the following statements is false?

9. ).\-\ V
The mixture of debt and equity used by a firm to finance its operations is called its capital structure.
(__'.';) Primary difference between a broker and a dealer is that a broker makes money out of bid and ask spread,
whereas a dealer works on commission. 'j- - -- - - - -
c. · A company's sale increased from 100 million to 200 million in 5 years which is equivalent to compound
annualized growth rate (CAGR) of 14.87%
d. More than one of the statements are false

10. Which of the following statements is false?

a. Intrinsic value of ~ k primarily depends on the cash flows, timing of the cash flows, and riskiness of
,,-:-) the cash flows.
Treasury stock refers to company shares that have been acquired by the government. X'.
c. In acco~~ing, emphasis is ~laced on net income as a measure-of performance. In Finance, the primary
emphasis 1s on cash flows since that is what investors use to value a firm.
d. More than one of the statements are false
tin~nce Fundamentals_ MBA (B)***
Name: _ _ K_8f~---
ID #: _ _ _ _ __
T u12# I_-Fal12021 (Nov4,2021)
otal Points: IO

Select the single best answer and indicate your choice with a circle.

I. Which of the following statement is false?

a. Two major styles of invesl!}lent are value and growth. Investors following value style typically look for
/4"; undervalued securities. /
Money markets are markets for common stocks and long-term debt. Y . .
c. Intrinsic value of a stock primarily depends on the cash flows, timing of the cash flows, and nskmess of

l
the cash flows.
d. More than one of the statements are false

2. Which of the following statements is false?

© Treasury stock refers to company shares that have been acquired by the government. x'
b. One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value. v
c. Dealer ask prices exceed bid prices. - -------- 1--- 8 I
d. More than one of the statements are false - A
3. Which of the following statements is false?
a.
3---
Sole proprietorships and partnerships generally have a tax advantage over many corporations, especiall>,1
_§__
e.
large ones. -
@ Warren Buffett believes that markets are generally efficient (i.e., market price= Intrinsic value) and 5 B I \
search for undervalued securities is futile. X -1)
c. Compensating managers in the form of stock option plan generally tend to align the interests of owner{;,-:;:;--
and managers. v 7 _, A
d. More than one of the statements are false g' _,,, A'

4. Which of the following statements is false?

a. Active investment approach attempts to outperform the market (index) through timing or selecting --
C
(f) undervalued securities. / l o _,,(...,
Primary difference between a broker and .a ~ealer is that a broker makes money out of bid and ask spread,
whereas a dealer works on commission. X
c. The primary function of the secondary market is to provide liquidity V
d. More than one of the statements are false

5. Which of the following statements is false?

~ l. The mixture of debt and equity used by a firm to finance its operations is called its capital structure. V
Dual class common shares refer to the practice where a company stock is listed and traded on two stock
exchanges - domestic exchange and international exchange. )(
c. An agency problem can be alleviated when a firm is a sole proprietorship. v
d. More than one of thesfiitements are false

6. Which of the following statements is false?

a. Accounting profits and cash flows are generally the same since accounting profits reflect when the cash
flow is received. X
b. A private limited company's share trade on organized exchanges such as the Pakistan Stock Exchange
(PSX); whereas public compani~s shares are owned by governments. \
c. A broker ~cts as an agent when 1t executes orders on behalf of its clients ( or principal) whereas a dealer
trades for its own account. ------- '

0 More than one of the statements are false

 \

· . her u coming trip to Miami for

You overhear
. y your kn manager saying that she plans
. to book an Ocean-view
. d room
th t onr manager
p •is trave 1·ng
I at the
7. a meet mg. ou ow that the interior rooms are much less expensive an a you
Company's expense. This use of additional funds comes about as a result of:
(f) agency problem.
b. an adverse selection problem.
c. a moral hazard.
d. accounting focus instead of economic reality focus

)Y?ich of
CY Athe following
stock statements
is said to is false?
be unde.-valued •
and presents a buy opportunity when its market price is greater th.an its
8.

b.
intrinsic value. X
The statement, "Be greedy when the market is fearful al!,P be fearful when the market is greedy"
represents the views of a contrarian value investor. . . .
c. Rights offerings allow the existing shareholders to maintain their proportionate ownership in a company·
d. More than one of the statements are false

9. Which of
a. theof
One following statements
the advantages of a is false? company structure such as Berkshire Hathaway is "risk isolation", i.e.,
holding
obligations of one operating company do not spill over to other operating
One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. v
Private debt refers to short term debt securities issued by companies )<
More than one of the statements are false -

I 0. Which of the following statements is true?

a. "crowding out" refers to the phenomenon of government spending more than its revenues. X .
1-., Most of the acquisitions of Warren Buffett for Berkshire Hathaway are a result of hostile takeover).
(V An individual's net worth= total assets - total liabilities
o. More than one of the statements are true