Week 1 : Introduction and Overview, Agency Relationship, Corporate Form of Business Organization, and Present Value - Quiz

1. Money markets are markets for ______. (Points : 7)

foreign stocks consumer automobile loans U.S. stocks short-term debt securities long-term bonds

2. Which of the following could explain why a business might choose to organize as a corporation rather than as a sole proprietorship or a partnership? (Points : 7)
A. Corporations generally face fewer regulations. B. Corporations generally face lower taxes. C. Corporations generally find it easier to raise capital. D. Corporations enjoy unlimited liability. E. Statements C and D are correct.

3. Which of the following statements is true? (Points : 7)

One of the benefits of incorporating your business is that you become entitiled to receive unlimited liability. Sole proprietorships are subject to more regulations than corporations. Sole proprietorships do not have to pay corporate tax. All of the above answers are correct. None of the above answers are correct.

4. While other things are held constant, which of the following actions would increase the amount of cash on a company's balance sheet? (Points : 7)
The company repurchases common stock. The company pays a dividend. The company issues new common stock. The company purchases a new piece of equipment. The company gives customers more time to pay their bills.

5. Kramer Corporation recently announced that its net income was lower than last year. However, analysts
estimate that the company's net cash flow increased. What factors could explain this discrepancy? A. The company's depreciation expense increased. B. The company's interest expense declined.

C. The company had an increase in its noncash revenues. D. Answers A and B are correct. E. Answers B and C are correct.

6. Which of the following statements is most correct? (Points : 7)

A. Actions that increase net income will always increase net cash flow. B. One way to increase EVA is to maintain the same operating income with less capital. C. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. D. Answers A and B are correct. E. Answers A and C are correct.

7. Which of the following statements is CORRECT? (Points : 7)

If expected inflation increases, interest rates are likely to increase. If individuals in general increase the percentage of their income that they save, interest rates are likely to increase. If companies have fewer good investment opportunities, interest rates are likely to increase. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills. 8. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to:? (Points : 7) Maximize the stock price per share over the long run, which is the stocks intrinsic value. Maximize the firm's expected EPS. Minimize the chances of losses. Maximize the firm's expected total income. Maximize the stock price on a specific target date.

9. Which of the following statements is CORRECT? (Points : 7)

The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses. MVA gives us an idea about how much value a firms management has added during the last year.

MVA stands for market value added, and it is defined as follows: MVA = (Shares outstanding)(Stock price) + Book value of common equity. EVA stands for economic value added, and it is defined as follows: EVA =

EBIT(1-T) (Investor-supplied op. capital) x (A-T cost of capital). EVA gives us an idea about how much value a firms management has added over the firms life. 10. Which of the following statements is CORRECT? (Points : 7) Operating cash flow (OCF) is defined as follows: OCF = EBIT(1-T) - Depreciation and Amortization. Changes in working capital have no effect on free cash flow. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 - T) + Depreciation and Amortization - Capital expenditures required to sustain operations - Required changes in net operating working capital. Free cash flow (FCF) is defined as follows: FCF = EBIT(1-T)+ Depreciation and Amortization + Capital expenditures. Operating cash flow is the same as free cash flow (FCF).