BCOR 2204 Finance Quiz 1 (correct answers)
Question: What is the objective of finance?
Correct answer: Maximize profit
Question: What is finance?
Correct answer: The science (accounting) and the art (tradeoff
and risk) of valuing and managing money
Question: What does the NPV model consist of?
Correct answer: PV, FV, PMT, N, and I
Question: What is intrinsic value?
Correct answer: The value of any security is the market value
Question: What is expected value?
Correct answer: Future cash flows
Question: What are careers in finance characterized by?
Correct answer: Wall Street professions are all about
intermediation
Question: What does the balance sheet represent?
Correct answer: Investment and finance decisions
Question: What is the goal of the firm?
Correct answer: Maximize shareholder wealth
Question: Why may profit maximization not lead to the
highest possible share price?
Correct answer: 1. Timing 2. Profits do not necessarily result
in cash flows available 3. Profit maximization fails to account for risk
Question: What is corporate governance?
Correct answer: The rules, processes, and laws by which
companies are operated, controlled, and regulated
Question: What is a principal-agent relationship?
Correct answer: An arrangement in which an agent acts on
behalf of a principal
Question: What are agency problems?
Correct answer: Arise when managers place personal goals
ahead of the goals of shareholders
Question: What are agency costs?
Correct answer: Arise from agency problems that are borne
by shareholders and represent a loss of shareholder wealth
Question: What must management compensation plans
ensure?
Correct answer: Managers' interests are aligned with
shareholders
Question: What are two ways to ensure managers' interests
are aligned with shareholders?
Correct answer: 1. Incentive plans 2. Performance plans
Question: What are incentive plans?
Correct answer: Management compensation plans that tie
management compensation to share price (e.g., granting of stock options)
Question: What are performance plans?
Correct answer: Tie management compensation to measures
such as EPS or growth in EPS (e.g., performance shares and/or cash bonuses)
Question: What is the result of implementing a proactive
ethics program?
Correct answer: Increase in share price
Question: What is the DuPont model?
Correct answer: ROE
Question: What is the purpose of financial statement analysis?
Correct answer: To help a manager understand what is
happening in a company