Corporate Finance Mid Term Practice

Value Maximization is a goal of the firm:

• Focuses on bondholders

• Takes a long-run perspective that focuses on the owner

• Focuses on quarterly changes in earnings

• Is an accounting number

A business manager is an agent to the owners (the principals) and has __________ to those principals

• no responsibility

• a fiduciary responsibility

• an obligation to the community only

• a legal obligation called " best practices "

The Sole Proprietor:

• no responsibility

• is liable for all obligation of the business equal to the amount of the investment in the firm

• has unlimited liability relating to the business

• has limited liability relating to injuries on the premises

Primary Market & Second Market

• The Primary Market is a market for the selling of new securities and investments. For example, Stocks that have not become public yet are in the primary market

• The Primary Market is a market for selling used securities and investments. For example, the stock exchange is a form of a primary market

• The Secondary Market is a market for the selling of new security and investments. For example, Stocks that have not become public yet are in the primary market

• The Secondary Market is a market for selling used securities and investments. For example, the stock exchange is a form of a secondary market.

________________ own the securities that they buy or sell; when they engage in a financial transaction, they are trading from their own portfolio

• Dealers

• Brokers

• Advisers

• Comptrollers

Which one of the following was not a contributory factor to the financial crisis of 2008 ?

• Over optimistic rating by the credit rating agencies

• Mortgage lending to high-risk homebuyers

• Creation of new financial securities

• High introductory interest rates on home mortgage

How are risk and return connected ? Is the relationship positively or negatively correlated (how does expected return change as risk changes ? )

• Negatively Correlated; the higher the risk, the lower the return

• Positively Correlated; the higher the risk, the higher the return

Double Taxation ( Press all that are true )

• A person who acts on behalf of another person or group

• a formal arrangement by two or more parties to manage and operate a business and shares it profits and liabilities equally

• A tax principle referring to income taxes paid twice on the same source of income

• It can occur when income is taxed at both the corporate level and personal level

One of the major effects of COVID ( and resulting government response) on our economy was that it forced the real rate of interest into negative territory. Why did this happen ? (Think about the relationship between the nominal and real rate )

• The nominal rate skyrocketed causing it to be larger than the nominal rate

• The expected inflation rate skyrocketed causing it to be larger than the nominal rate

• Formula: Nominal Interest Rate - Expected Interest Rate

The efficient market hypothesis states that ____________ is the main determinant of market prices

• The number of participants in a market

• Fundamental analysis

• The Level of information in the market

• Technical Analuysis