978-0133423822 chapter 1 Part 3

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3) In inance, we assume that investors are generally

A) neutral to risk.

B) averse to risk.

C) fond of risk.

D) none of the above.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: risk, return

Principles: Principle 2: There Is a Risk-Return Tradeof

4) Consider cash lows for Projects X and Y such as:

Project X Project Y

Year 1 $3000 $ 0

Year 2 $ 0 $3000

A rational person would prefer receiving cash lows sooner because

A) the money can be reinvested.

B) the money is nice to have around.

C) the investor may be tired of a particular investment.

D) the investor is indiferent to either proposal.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: time value of money

Principles: Principle 1: Money Has a Time Value

5) Which of the following should be considered when assessing the inancial impact of

business decisions?

A) The amount of projected earnings

B) The risk-return tradeof

C) The timing of projected earnings; i.e., when they are expected to occur

D) All of the above

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: risk, return

Principles: Principle 2: There Is a Risk-Return Tradeof

6) Which of the following is most likely to motivate executives to maximize shareholder

wealth?

A) Tying bonuses to cost reductions and meeting budget goals

B) Ofering them relatively high salaries

C) Tying annual bonuses to increases in annual proits

D) Compensating them with stock options that can only be exercised after ive years

Question Status: New question

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: agency

Principles: Principle 5: Individuals respond to incentives.

7) If one security has a greater risk than another security, how will investors respond?

A) They will require a lower rate of return for the investment that has greater risk.

B) They would be indiferent regarding their expectation of rates of return for either

investment.

C) They will require a higher rate of return for the investment that has greater risk.

D) None of the above.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: risk, return

Principles: Principle 2: There Is a Risk–Return Tradeof

8) How could you compensate an investor for taking on a signiicant amount of risk?

A) Increase the expected rate of return

B) Raise more debt capital

C) Ofer stock at a higher price

D) Increase sales

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: risk, return

Principles: Principle 2: There Is a Risk–Return Tradeof

9) If an investor had a choice of receiving $1,000 today, or $1,000 in ive years, which

would the average investor prefer?

A) $1,000 in ive years because they are not good at saving money.

B) $1,000 today because it will be worth more than $1,000 received in ive years.

C) $1,000 in ive years because it will be worth more than $1,000 received today.

D) Investors would be indiferent to when they would receive the $1,000.

E) None of the above.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: time value of money

Principles: Principle 1: Money Has a Time Value

10) Why do investors prefer receiving cash sooner rather than later, according to inance

theory?

A) Incremental proits are greater than accounting proits.

B) Money received earlier can be reinvested and returns can be increased.

C) Tax considerations are important when investing.

D) Diversiication leads to increased value.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: time value of money

Principles: Principle 1: Money Has a Time Value

11) Investors choose to invest in higher risk investments because these investments ofer

higher

A) expected returns.

B) inlation.

C) actual returns.

D) future consumption.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: risk, return

Principles: Principle 2: There Is a Risk–Return Tradeof

12) Foregoing the earning potential of a dollar today is referred to as the

A) time value of money.

B) opportunity cost concept.

C) risk/return tradeof.

D) creation of wealth.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: opportunity cost

Principles: Principle 1: Money Has a Time Value

13) In measuring value, the focus should be on

A) cash low.

B) accounting proits.

C) time value of money.

D) earnings per share.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: cash low

Principles: Principle 3: Cash Flows Are the Source of Value

14) Which of the following is a characteristic of an eicient market?

A) Small number of individuals

B) Opportunities exist for investors to proit from publicly available information.

C) Security prices relect fair value of the irm.

D) Immediate response occurs for new public information.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

15) Which of the following factors is most important in investment decisions?

A) The change in earnings before taxes.

B) The change in gross sales revenue.

C) The change in net income.

D) The change in after-tax cash low.

Question Status: New question

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: cash low

Principles: Principle 3: Cash Flows Are the Source of Value

16) Investors prefer $1 today versus $1 in the future due to

A) time value of money.

B) response to incentives.

C) the need for immediate gratiication.

D) A and B.

Question Status: Revised

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: time value of money

Principles: Principle 1: Money Has a Time Value

17) The price of Netlix stock dropped sharply after customers responded negatively to a

change in pricing policies. The change in stock price illustrates which principle?

A) Market prices relect information.

B) Individuals respond to incentives.

C) Cash lows are the source of value.

D) The time-value of money.

Question Status: New question

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

18) For the risk-return principle implies that the more risky a given course of action, the

higher the expected return must be.

Question Status: Revised

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: risk, return

Principles: Principle 2: There Is a Risk–Return Tradeof

19) The inancial manager should examine available risk-return trade-ofs and make his

decision based upon the greatest expected return.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: risk, return

Principles: Principle 2: There Is a Risk–Return Tradeof

20) Only a few inancial decisions involve some sort of risk-return tradeof.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: risk, return

Principles: Principle 2: There Is a Risk–Return Tradeof

21) In eicient markets, price adjustments to new information are gradual.

Question Status: Revised

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

22) Rewarding executives for increasing quarterly earnings will motivate them to act in the

long-term best interests of shareholders.

Question Status: New question

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: incentives

Principles: Principle 5: Individuals respond to incentives.

23) In an eicient market, prices will quickly adjust to new information.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

24) Briely discuss why inancial decision makers must focus on incremental cash lows

when evaluating new projects.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

25) Discuss the risk/return tradeof and how it relates to inance.

Question Status: Previous edition

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: risk, return

Principles: Principle 2: There Is a Risk–Return Tradeof

26) Why do you think many companies compensate executives with options based on long-

term increases in the value of the company‘s stock?

Question Status: New question

Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for

both businesses and individuals.

Keywords: incentives

Principles: Principle 5: Individuals respond to incentives.