Deck 1: Preliminary Concepts

Question 1

What is the market for corporate control?

A)The market for issuing and trading debt securities
B)The market for operational control over the firm's decisions
C)The market for issuing and trading equity securities
D)All of the above

Answer 1

The market for operational control over the firm's decisions

Question 2

The market section of the Australian Financial Review does not list:

A)The Buy/Sell quotes for shares
B)The weekly high/low share price
C)The last sale price of companies shares
D)Earnings per share (EPS)

Answer 2

The weekly high/low share price

Question 3

An asset has a market value of $105,and an intrinsic value of $100,and a present value of $113.What is the maximum amount you would want to pay now for the asset?

A)$100
B)$105
C)$113
D)Some other amount

Answer 3

$100

Question 4

What are the three main decisions corporate managers must make to realise the corporate objective?

A)Investment decision,financing decision,and dividend decision
B)Investment decision,wealth decision,and dividend decision
C)Wealth decision,financing decision,and dividend decision
D)Investment decision,financing decision,and wealth decision

Question 5

Who make the major decisions on how a company carries out its business?

A)The board of directors
B)Shareholders
C)The chief executive officer
D)Creditors

Question 6

Which of the following is not an element of the Australian capital market?

A)The ASX
B)The Commonwealth Government
C)News Corporation
D)The 'big four' banks

Question 7

Funds from the capital market flows to:

A)Investors and Corporations
B)Corporations and Real Assets
C)Investors and Real Assets
D)All of the above

Question 8

Suppose you purchase one ANZ share at $28.38 in the morning and then sell it again at $27.57 at the close of trading that day.What has been your rate of return over the holding period?

A)2.94%
B)- 2.94%
C)2.85%
D)- 2.85%

Question 9

Cash flows generated by the firm can be .

A)Reinvested within the corporation
B)Paid to shareholders
C)Paid to bondholders
D)All of the above

Question 10

What is the corporate objective?

A)To minimise shareholder wealth
B)To maximise shareholder wealth
C)To minimise capital
D)To maximise capital

Question 11

Which of these are cash flow/s that may emanate from shares?

A)Capital losses
B)Dividends
C)Capital gains
D)All of the above

Question 12

What is the total value of all shares on issue in the marketplace for a firm referred to as?

A)Rate of return
B)Net assets
C)Market capitalisation
D)Owners equity

Question 13

The principal- agent problem can arise because of a manager's concerns about all of the following except:

A)Company goals
B)Personal wealth
C)Job security
D)Company- provided benefits

Question 14

Capital budgeting is:

A)Buying real (productive)assets
B)Analysing potential projects' returns
C)Allocating cash flows generated by productive assets to shareholders,bondholders or reinvest in the business
D)All of the above

Question 15

An example of a cash flow stemming from bonds is:

A)The principal repayment on maturity
B)The bond premium payable
C)The discount to face value when issued
D)All of the above

Question 16

What is the name given to the problem arising due to the separation of control between shareholders and the equity they contribute?

A)The equity usage problem
B)The manager remuneration problem
C)The principal- agent problem
D)The owners' interests problem

Question 17

$95 invested today at a rate of 10% p.a.is worth how much in one year's time?

A)$104.50
B)$106.70
C)$105.60
D)$103.40

Question 18

Capital structure decisions involve interaction between .

A)Corporations and the capital market
B)Corporations and real assets
C)Investors and the capital market
D)Investors and real assets

Question 19

The manner in which funds raised in capital markets are to be employed in productive activities is the subject of the decision.

A)Financing
B)Investment
C)Gearing
D)Capital budgeting

Question 20

How does the dividend decision affect a firm's equity holders?

A)It may mean equity holders don't receive dividends every year.
B)It could alter the capital gains equity holders can expect.
C)It affects the form in which returns generated by the firm are passed on to equity holders.
D)All of the above

Question 21

The goal of the firm is to maximise profits.

Question 22

What are the choices that corporate managers must face when trying to achieve the corporate goal?

Question 23

To ensure optimal benefit to an economy,corporations should apply which of the following resources in the most efficient way possible?

A)Energy and time
B)Factories and machinery
C)Plant and equipment
D)Capital and labour

Question 24

An asset has a market value of $100,and intrinsic value of $105,and a present value of $113.What is the maximum amount you would want to pay now for the asset?

A)$105
B)$113
C)$100
D)Some other amount

Question 25

The notion that $1 in the future is not the equivalent of $1 today is referred to as .

A)The rate of return
B)An opportunity cost
C)The intrinsic value
D)The time value of money

Question 26

Which of these is the financing decision?

A)The form in which returns generated by the firm are passed on to equity holders
B)The mix of funding obtained from capital markets,in terms of proportional holdings of equity and liabilities
C)The level of directors remuneration
D)The manner in which funds raised in the capital markets are employed in productive activities

Question 27

What are the major elements of the Australian capital market? What types of financing does each facilitate?

Question 28

In corporate finance we focus on which type of asset?

A)Sentimental
B)Nominal
C)Real
D)Financial

Question 29

Companies are owned by:

A)The chief executive officer
B)Shareholders
C)The board of directors
D)Creditors

Question 30

Which of these is the most effective way to encourage directors to make decisions that maximise the wealth of shareholders?

A)Make the directors shareholders in the firm.
B)Impose fines on directors who fail to met predetermined earnings performance levels.
C)Pay bonuses to the directors on the basis of the company's earnings performance.
D)Reduce the number of non- executive board members.

Question 31

In the formula FV = PV × (1 + r),what does r denote?

A)The opportunity cost
B)The hurdle rate
C)The discount rate
D)All of the above

Question 32

Firms should invest in projects that:

A)Earn the same return as the market return
B)Earn a lower return than the market return
C)Earn a higher return than the market return
D)A and B
E)A and C

Question 33

Which of the following does the ASIC not regulate?

A)Insurance issuers
B)Financial advisers
C)Australian financial markets
D)None of the above

Question 34

Explain why the existence of institutional investors may encourage management of a corporation to increase owner wealth?

Question 35

Which of the following is a key role of the Australian Securities and Investments Commission?

A)Policy advice to government
B)Prevent corporate crime
C)Protect investors
D)Both B and C

Question 36

Suppose you bought one NAB share for $28.38 on 1 July and then sold it for $27.57 on 1 August.On 25 July,you received a dividend of $1.47 on the share.What has been your rate of return over the holding period?

A)2.4%
B)8.0%
C)8.3%
D)2.3%

Question 37

In making investment decision,the potential return on possible projects is largely irrelevant and therefore not analysed.

Question 38

What is an opportunity cost?

A)The cash outlay you have already made for your previous investments
B)The future cash flow you would get from an investment under consideration
C)The future cash flow you would get from a foregone investment
D)The cash outlay you must make for an investment under consideration

Question 39

Which of these is the bid- ask spread?

A)Part of the cost of trading shares
B)The opportunity cost of selling shares
C)The difference between the best buy and the best sell quote
D)Both A and B
E)Both A and C

Question 40

The determinants of an asset's intrinsic value do not include:

A)The opportunity cost of capital
B)The future cash flow expected from the asset
C)The market price of the asset
D)None of the above

Question 41

When compared to Australian adult individuals,institutional investors rarely hold a significant portion of any one corporation.

Question 42

Individual companies will normally acquire funding through the sale of capital assets.

Question 43

Market capitalisation represents the market value of the firm.

Question 44

Fisher's Separation Theorem demonstrates how individuals can substitute present consumption for future consumption.

Question 45

The time value of money concept says that a dollar to be received in the future is worth more than a dollar received today.

Question 46

The objective of maximising the total value of a company's shares does not maximise shareholders' wealth.

Question 47

A financial asset is an asset that produces cash flows,or that you can sell to produce a cash flow in the future.

Question 48

The roles of the Australian Securities and Investments Commission (ASIC)are to prevent corporate crime and to protect investors.

Question 49

Investors make consumption and investment decisions.

Question 50

Shares and bonds both give their holder a proportional ownership in the firm that issues them.

Question 51

The capital market is where companies purchase and sell real (productive)assets.

Question 52

Corporate finance is concerned with making decisions about what investments a company should make,how these investments are financed and how company directors should be remunerated.

Question 53

An asset that sells for $105,has a required rate of return of 10% and produces a cash flow of $120 in one year's time is a worthwhile investment.