Solution_Midterm1

Solution_Midterm1 - FINA 3001 Sec020 Fall 2010 1st Midterm...

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FINA 3001 Sec020 Fall 2010 1 st Midterm 100 points Name: _________________________ Student ID: _________ Multiple Choice (3 points each) Answer all 10 Multiple Choice Questions. 1. _B____ Which of the following is typically the major factor in limiting the growth of a sole proprietorship? A) It is extremely difficult to transfer control of such a firm to a new owner if the present owner dies or wishes to sell the firm. B) The amount of money that can be raised by the firm is limited by the fact that the single owner must make good all debts. C) The organization of such firms tends to become extremely complicated over time. 2. _B____ Which of the following is NOT a reason why financial managers must take great care when making investment decisions? A) These investment decisions determine whether the firm will add value for its owners. B) These investment decisions determine the corporations mix of debt and equity. C) These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits. 3. _A ___ Which of the following would be best considered to be a principal-agent problem in the behavior of the following financial managers? A) Bill chooses to pursue a risky investment for the company's funds, because his compensation will substantially rise if it succeeds. B) Sue instructs her staff to skip safety inspections in one of the company's factories, knowing that it will likely fail the inspection and incur significant costs to fix. C) Michael chooses to enhance his firm's reputation at some cost to its shareholders by sponsoring a team of athletes for the Special Olympics. 4. _C __ Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves? A) It is best for the control of the finances of a corporation to be in the hands of a disinterested third party. B) The interests of the various owners may conflict with each other. C) There are often many owners, and they can often change as they buy and sell stock. 5. _C __ A bank pays interest monthly with an APR of 9%. What is the corresponding EAR? A) 0.75% B) 9% C) 9.38%
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FINA 3001 Sec020 Fall 2010 1 st Midterm 100 points 6. __A __ Which of the following factors is likely NOT to decrease the (nominal) risk-free interest rate? A) People become less patient. B) Lower economic growth is expected. C) There is more uncertainty about the future growth of the economy. 7. __B__
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Solution_Midterm1 - FINA 3001 Sec020 Fall 2010 1st Midterm...

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