FINMA

Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic
values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are
not possible.

False

A stock's market price would equal its intrinsic value if all investors had all the information that is
available about the stock. In this case the stock's market price would equal its intrinsic value.

True

If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary
market transaction.

False

If Apple Inc. issues additional shares of common stock through an investment banker, this would be a
primary market transaction.

True

Of the following, which is an example of a financial intermediary?

A) Commercial bank

B) Insurance company

C) Investment bank

D) All of the above are financial intermediaries.

D) All of the above

Sale of new common stock in the primary market is regulated by the ________, and sales of used
common on the secondary market is regulated by the ________.

B) SEC; SEC

Which of the following is NOT an example of an equity market transaction?

A) Mary sells her shares of Apple stock.

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B) Mark contacts his broker and requests a purchase of IBM bonds.

C) Sahid buys shares of a small company stock traded on the NASDAQ.

D) Microsoft repurchases 10,000 shares from its existing shareholders.

B) Mark contacts his broker and requests a purchase of IBM bonds.

Which of the following is an ADVANTAGE of a partnership?

A) Unlimited liability to at least some of the owners

B) The limited life of the business

C) The potential difficulty in transferring ownership

D) The commingling with the general partner's personal assets

E) All are disadvantages of a partnership.

E) All are disadvantages of a partnership.

In which of the following cases will the agency problem between shareholders and managers be the
greatest?

A) 100% of the common stock is owned by the founder of the company who decided to retire and hired
a manager to run his business for him.

B) The Johnson family owns 50% of the common stock of the company. The other 50% is owned by 5
mutual funds.

C) The common stock of the company is owned by many diverse shareholders, with no shareholder
owning more than 1% of the outstanding stock.

D) All top managers in the company own significant amounts of stock and stock options.

C) The common stock of the company is owned by many diverse shareholders, with no shareholder
owning more than 1% of the outstanding stock.
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The cash account is much like your individual checkbook, because it tells you how much money you
currently have for paying bills or spending on new items.

True

The income statement reports the performance of the firm over the past period. It summaries and
categorizes a company's revenues and expenses for that period.

True

The cash flow identity states that the cash flow from the left hand side of the balance sheet is equal to
the cash flow on the right hand side of the income statement.

False

Cash flow from assets is derived from ________.

A) cash flow from operating activities and cash flow from investing activities

B) cash flow from operating activities and cash flow from financing activities

C) cash flow from creditors and cash flow from investing activities

D) cash flow from financing activities and cash flow from investing activities

A) cash flow from operating activities and cash flow from investing activities

Understanding the sources and uses of cash in the recent past will enable a manager to ________ the
cash flow for a potential project of the firm.

A) determine with perfect precision

B) forecast with perfect precision

C) predict more accurately

D) know today

C) predict more accurately

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Consider the TVM equation: An increase in the present value will decrease the future value, other things
remaining equal.

False

Consider the TVM equation: A decrease in the interest rate will decrease the future value, other things
remaining equal.

True

Consider the TVM equation: The future value is always greater than the present value (Hint: interest can
be positive, zero or negative.

False

Which of the following actions will DECREASE the present value of an investment?

A) Decrease the interest rate.

B) Decrease the future value.

C) Decrease the amount of time.

D) All of the above will decrease the present value.

B) Decrease the future value.

You have a choice among three types of loan and wish to pay the LEAST total cash flows. An amortized
loan will result in fewer dollars paid out than a discount or an interest-only loan for the same amount,
positive interest rate, and time period.

True
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Given positive equal annual cash flows and a positive interest rate, the future value of an annuity will be
greater than the sum of the cash flows.

True

Present values and interest rates are inversely related. This means that if you deposit $1,000 into an
interest-earning account today, it will take longer to reach a future value of $5,000 at an interest rate of
6% than at a rate of 4%.

False

A stock's market price would equal its intrinsic value if all investors had all the information that is
available about the stock. In this case the stock's market price would equal its intrinsic value.

True

Which of the following is NOT an example of ordinary annuity cash flows?

A) Insurance payments due at the start of the period

B) Car loans due at the end of the period

C) Mortgage payments due at the end of the period

D) All of the examples above are ordinary annuity cash flows.

A) Insurance payments due at the start of the period