FISV 2010 Finance -2014 Spring Term Exam 1 – Chapters 1 & 2

FISV 2010 Finance -2014 Spring Term Exam 1 – Chapters 1 & 2

1. What are the three fundamental decisions financial management team is concerned with, and how do they affect the firm’s balance sheet?

2. Explain why profit maximization is not the best goal for a company. What is an appropriate goal?

3. What are the two basic sources of funds for all businesses?

4. What is the general decision rule for a firm considering undertaking a project? Give a real life example.

5. What is capital structure and why is it important to a company?

6. Who are the owners of a corporation and how is their ownership represented?

7. What is an agency relationship and what is an agency conflict? How can agency conflicts be reduced in a corporation?
8. What are the advantages and disadvantages of a sole proprietorship?

9. What is a partnership, and what is the biggest disadvantage of this form of business organization? How can this disadvantage be avoided?

10. How do large corporations adjust their liquidity in the money markets?

11. What is the role of the financial system, and what are the two major component of the financial system?

12. What is the main difference between money market and capital markets?

13. What is the primary market? What does IPO stand for?

14. What is the difference between savers-lenders and borrower-spenders?

15. What does a competitive financial system imply about interest rates?

16. What is the real rate of interest, and how is it determined?

17. How does the nominal rate of interest vary over time?

18. Imagine you borrow $500 from your roommate, agreeing to pay her back the $500 plus 7 percent interest in one year. Assume inflation over the life of the contract is expected to be 4.25 percent. What is the total amount you will have to pay her back in a year? What percentage of the interest payment is the result of the real rate of interest?

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19. Your parents have given you $1,000 a year before your graduation so that you can take a trip when you graduate. You wisely decide to invest the money in a bank CD that pays 6.75 percent interest. You know that the trip costs $1,025 right now and that the inflation for the year is predicted to be 4 percent. Will you have enough money in a year to purchase the trip?
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20. If the nominal rate of interest is 7.5 percent and the real rate is 4 percent, what is the expected inflation premium?
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