Primary operating goal of a publicly-owned firm

Problem 1. Money markets are markets for:

  • Foreign stocks.
  • Consumer automobile loans.
  • U.S. stocks.
  • Short-term debt securities.

Problem 2. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to:

  • Maximize the stock price per share over the long run, which is the stock?s intrinsic value.
  • Maximize the firm's expected EPS.
  • Minimize the chances of losses.
  • Maximize the firm's expected total income.

Problem 3. Which of the following statements is CORRECT?

  • Sole proprietorships and partnerships generally have a tax advantage over many
  • corporations, especially large ones.
  • Sole proprietorships are subject to more regulations than corporations.
  • In any type of partnership, every partner has the same rights, privileges, and liability
  • exposure as every other partner.
  • Corporations of all types are subject to the corporate income tax.

Problem 4. Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

  • Corporations generally find it relatively difficult to raise large amounts of capital.
  • Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.
  • Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.
  • Corporate investors are exposed to unlimited liability.

Problem 5. Which of the following statements is CORRECT?

  • If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
  • If you purchased 100 shares of Disney stock from your brother-in-law, this would be an example of a primary market transaction.
  • The IPO market is a subset of the secondary market.
  • As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

Problem 6. Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

  • $205.83
  • $216.67
  • $228.07
  • $240.08
  • $252.08

Problem 7. How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?

  • $1,067.95
  • $1,124.16
  • $1,183.33
  • $1,245.61
  • $1,311.17

Problem 8. Which of the following statements is CORRECT?

  • The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
  • If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
  • The cash flows for an annuity due must all occur at the ends of the periods.
  • The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

Problem 9. Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

  • The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
  • The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
  • The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
  • The periodic rate of interest is 3% and the effective rate of interest is 6%.
  • The periodic rate of interest is 6% and the effective rate of interest is also 6%.

Problem 10. A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

  • The annual payments would be larger if the interest rate were lower.
  • If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.
  • The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.
  • The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.
  • The proportion of interest versus principal repayment would be the same for each of the 7 payments.

Problem 11. Which of the following items is NOT included in current assets?

  • Accounts receivable.
  • Inventory.
  • Bonds.
  • Cash.

Problem 12. Which of the following items cannot be found on a firm's balance sheet under current liabilities?

  • Accounts payable.
  • Short-term notes payable to the bank.
  • Accrued wages.
  • Cost of goods sold.

Problem 13. Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

  • The company repurchases common stock.
  • The company pays a dividend.
  • The company issues new common stock.
  • The company gives customers more time to pay their bills.

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Finance Basics: Primary operating goal of a publicly-owned firm
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