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FISV 2010 Finance - 2014Spring Term Exam 1




Question;1. What are the three fundamental decisions financial management team isconcerned with, and how do they affect the firm?s balance sheet?Name: _______________________________Date: ________________22. Explain why profit maximization is not the best goal for a company. What is anappropriate goal?3. What are the two basic sources of funds for all businesses?Name: _______________________________Date: ________________34. 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?Name: _______________________________Date: ________________46. 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 canagency conflicts be reduced in a corporation?Name: _______________________________Date: ________________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 ofbusiness organization? How can this disadvantage be avoided?5Name: _______________________________Date: ________________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 majorcomponent of the financial system?6Name: _______________________________Date: ________________12. What is the main difference between money market and capital markets?13. What is the primary market? What does IPO stand for?7Name: _______________________________Date: ________________14. What is the difference between savers-lenders and borrower-spenders?15. What does a competitive financial system imply about interest rates?8Name: _______________________________Date: ________________16. What is the real rate of interest, and how is it determined?17. How does the nominal rate of interest vary over time?9Name: _______________________________Date: ________________1018. 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 thecontract is expected to be 4.25 percent. What is the total amount you will haveto pay her back in a year? What percentage of the interest payment is theresult of the real rate of interest?Show calculationsAnswer: Total amount to pay back _____________________________Name: _______________________________Date: ________________11Answer: Percentage of interest of interest payment resulting from Real Rate: ________19. Your parents have given you $1,000 a year before your graduation so that youcan take a trip when you graduate. You wisely decide to invest the money in abank CD that pays 6.75 percent interest. You know that the trip costs $1,025right now and that the inflation for the year is predicted to be 4 percent. Willyou have enough money in a year to purchase the trip?Show calculationsAnswer: YES or NO _________20. If the nominal rate of interest is 7.5 percent and the real rate is 4 percent, whatis the expected inflation premium?Show calculationsAnswer: Inflation premium _________Name: _______________________________Date


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