Prelims Quiz 1

True/False Indicate whether the statement is true or false. ____ ____ ____ ____ ____ ____ ____ 1. In most corporations, the CFO ranks under the CEO. 2. The Chairman of the Board must also be the CEO. 3. Partnerships and proprietorships generally have a tax advantage over corporations. 4. An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships. 5. One advantage of the corporate form of organization is that it avoids double taxation. 6. It is generally harder to transfer one's ownership interest in a partnership than in a corporation. 7. If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses. 8. The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation. 9. One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests.

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____ 10. Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests. ____ 11. In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date. ____ 12. If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year. ____ 13. If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold. ____ 14. For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value. ____ 15. The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose, barring any new information coming out about the stock. ____ 16. If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.

____ 17. If someone deliberately understates costs and thereby increases profits, then this can cause the price of the stock to rise above its intrinsic value. The stock price will probably fall in the future. Also, those who participated in the fraud can be prosecuted, and the firm itself can be penalized. ____ 18. Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible. However, there can be conflicts between stockholders and bondholders. ____ 19. A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve the economy. However, hostile takeovers are controversial, and legislative actions have been taken to make them more difficult to undertake. ____ 20. One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected rate of inflation. If inflation is expected to be relatively high, then interest rates will tend to be relatively low, other things held constant. ____ 21. The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation. ____ 22. The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) weather conditions. ____ 23. The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) the skill level of the economy's labor force. ____ 24. If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term U.S. Treasury bond should be equal to the real risk-free rate, r*. ____ 25. If investors expect the rate of inflation to increase sharply in the future, then we should not be surprised to see an upward sloping yield curve. ____ 26. The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "interest rate price risk." ____ 27. If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future. ____ 28. An upward sloping yield curve is often call a "normal" yield curve, while a downward sloping yield curve is called "abnormal." ____ 29. Since yield curves are based on a real risk-free rate plus the expected rate of inflation, at any given time there can be only one yield curve, and it applies to both corporate and Treasury securities. ____ 30. Suppose the federal deficit increased sharply from one year to the next, and the Federal Reserve kept the money supply constant. Other things held constant, we would expect to see interest rates decline.

Prelims Quiz 1 Answer Section

TRUE/FALSE 1. ANS: T PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 2. ANS: F PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 3. ANS: T PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 4. ANS: F PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 5. ANS: F PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 6. ANS: T PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 7. ANS: F PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 8. ANS: T PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 9. ANS: F PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 10. ANS: T PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 11. ANS: F PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 12. ANS: F PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 13. ANS: F PTS: 1 DIF: MEDIUM NAT: Reflective thinking LOC: Students will acquire an understanding of stocks and bonds. 14. ANS: F PTS: 1 DIF: MEDIUM NAT: Reflective thinking LOC: Students will acquire an understanding of stocks and bonds. 15. ANS: T PTS: 1 DIF: MEDIUM NAT: Reflective thinking LOC: Students will acquire an understanding of stocks and bonds.

16. ANS: F PTS: 1 DIF: MEDIUM NAT: Ethical understanding and reasoning | Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 17. ANS: T PTS: 1 DIF: MEDIUM NAT: Ethical understanding and reasoning | Reflective thinking LOC: Students will acquire an understanding of stocks and bonds. 18. ANS: F PTS: 1 DIF: MEDIUM NAT: Ethical understanding and reasoning | Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 19. ANS: T PTS: 1 DIF: MEDIUM NAT: Reflective thinking LOC: Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise's organization, and as an analyst using public information. 20. ANS: F PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates. 21. ANS: T PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates. 22. ANS: F PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates. 23. ANS: F PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates. 24. ANS: T PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates. 25. ANS: T PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates. 26. ANS: T PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates. 27. ANS: T PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates. 28. ANS: T PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates. 29. ANS: F PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates. 30. ANS: F PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of financial markets, institutions, and interest rates.