Week 1 : Introduction and Overview, Agency Relationship, Corporate Form o !

usiness Organi"ation, and #resent $alue % &ui"

1' Money markets are markets for ______. (Points : 7)
foreign stocks consumer automobile loans U.S. stocks short-term debt securities long-term bonds

(' Which of the following could explain why a usiness might choose to organi!e as a corporation rather than as a sole proprietorship or a partnership" (Points : 7)
#. $orporations generally face fewer regulations. %. $orporations generally face lower taxes. $. $orporations generally find it easier to raise capital. &. $orporations en'oy unlimited lia ility. (. )tatements $ and & are correct.

)' Which of the following statements is true" (Points : 7)

*ne of the enefits of incorporating your usiness is that you ecome entitiled to recei+e unlimited lia ility. )ole proprietorships are su 'ect to more regulations than corporations. )ole proprietorships do not ha+e to pay corporate tax. #ll of the a o+e answers are correct. ,one of the a o+e answers are correct.

*' While other things are held constant- which of the following actions would increase the amount of cash on a company.s alance sheet" (Points : 7)
/he company repurchases common stock. /he company pays a di+idend. /he company issues new common stock. /he company purchases a new piece of e0uipment. /he company gi+es customers more time to pay their ills.

+' 1ramer $orporation recently announced that its net income was lower than last year. 2owe+er- analysts
estimate that the company.s net cash flow increased. What factors could explain this discrepancy" #. /he company.s depreciation expense increased. %. /he company.s interest expense declined.

$. /he company had an increase in its noncash re+enues. &. #nswers # and % are correct. (. #nswers % and $ are correct.

,' Which of the following statements is most correct" (Points : 7)

#. #ctions that increase net income will always increase net cash flow. %. *ne way to increase (3# is to maintain the same operating income with less capital. $. *ne draw ack of (3# as a performance measure is that it mistakenly assumes that e0uity capital is free. &. #nswers # and % are correct. (. #nswers # and $ are correct.

-' Which of the following statements is $*44($/" (Points : 7)

5f expected inflation increases- interest rates are likely to increase. 5f indi+iduals in general increase the percentage of their income that they sa+e- interest rates are likely to increase. 5f companies ha+e fewer good in+estment opportunities- interest rates are likely to increase. 5nterest rates on all de t securities tend to rise during recessions ecause recessions increase the possi ility of ankruptcy- hence the riskiness of all de t securities. 5nterest rates on long6term onds are more +olatile than rates on short6term de t securities like /6 ills. .' /he primary operating goal of a pu licly6owned firm interested in ser+ing its stockholders should e to:" (Points : 7) Maximi!e the stock price per share o+er the long run- which is the stock7s intrinsic +alue. Maximi!e the firm.s expected (P). Minimi!e the chances of losses. Maximi!e the firm.s expected total income. Maximi!e the stock price on a specific target date.

/' Which of the following statements is $*44($/" (Points : 7)

/he primary difference etween (3# and accounting net income is that when net income is calculated- a deduction is made to account for the cost of common e0uity- whereas (3# represents net income efore deducting the cost of the e0uity capital the firm uses. M3# gi+es us an idea a out how much +alue a firm7s management has added during the last year.

M3# stands for market +alue added- and it is defined as follows: M3# 8 ()hares outstanding)()tock price) 9 %ook +alue of common e0uity. (3# stands for economic +alue added- and it is defined as follows: (3# 8

(%5/(:6/) ; (5n+estor6supplied op. capital) x (#6/ cost of capital). (3# gi+es us an idea a out how much +alue a firm7s management has added o+er the firm7s life. 10' Which of the following statements is $*44($/" (Points : 7) *perating cash flow (*$<) is defined as follows: *$< 8 (%5/(:6/) 6 &epreciation and #morti!ation. $hanges in working capital ha+e no effect on free cash flow. <ree cash flow (<$<) is defined as follows: <$< 8 (%5/(: 6 /) 9 &epreciation and #morti!ation 6 $apital expenditures re0uired to sustain operations 6 4e0uired changes in net operating working capital. <ree cash flow (<$<) is defined as follows: <$< 8 (%5/(:6/)9 &epreciation and #morti!ation 9 $apital expenditures. *perating cash flow is the same as free cash flow (<$<).