TIF_ch02 - Test Bank Chapter 2: The Financial Environment:...

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Test Bank Chapter 2: The Financial Environment: Concepts and Principles EFS I. True or False (Definitions and Concepts) T 1. Agency theory analyzes conflicts of interest and behavior in a principal-agent relationship. T 2. A principal-agent relationship is a relationship in which one person, an agent, makes decisions that affect another person, a principal. F 3. The difference between the value of one action and the value of the best alternative is called moral hazard. (FALSE: Should be opportunity cost instead of moral hazard.) T 4. Moral hazard refers to situations wherein the agent can take unseen actions for personal benefit even though such actions are costly to the principal. T 5. Most financial transactions are zero-sum games where anyone's gain is someone else's loss. F 6. Hubris implies that a decision to buy or sell an asset can imply information about the condition of the asset. (FALSE: Should be The Principle of Self-Interested Behavior instead of Hubris .) F 7. An opportunity cost occurs when misinformation can falsely exist. (FALSE: Should be adverse selection instead of opportunity cost.) T 8. Adverse selection can discourage people from offering to sell good-quality products. T 9. The Principle of Valuable Ideas states that extraordinary returns are achievable with new ideas. F 10. The Behavior Principle occurs when a "follower" receives the benefit of an expenditure made by a "leader" by imitating the leader's behavior. (FALSE: Should be free-rider problem instead of Behavior Principle.) F 11. The Principle of Valuable Ideas states that financial decisions are based on incremental benefits. (FALSE: Should be Principle of Incremental Benefits instead of Principle of Valuable Ideas.) F 12. A put option gives the owner the right to buy an asset at a specified price and date. (FALSE: Should be call option instead of put option.) T 13. The Principle of Diversification states that investors are better off by investing in different types of assets. T 14. Arbitrage refers to the act of buying and selling an asset simultaneously, where the sale price is greater than the purchase price, so that the difference produces a riskless profit.
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T 15. Bankers' acceptances are short-term loans made to importers and exporters to facilitate international trade. II. Multiple Choice (Definitions and Concepts) a 16. Refers to situations wherein the agent can take unseen actions for personal benefit even though such actions are costly to the principal. a. moral hazard b. zero-sum game c. adverse selection d. The Behavioral Principle d 17. Occurs when misinformation can falsely exist. a. The Principle of Valuable Ideas b. free-rider problem c. moral hazard d. adverse selection c 18. Occurs when a "follower" receives the benefit of an expenditure made by a "leader" by imitating the leader's behavior. a.
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This note was uploaded on 01/21/2011 for the course ACC 452 taught by Professor Mr.cula during the Spring '10 term at Abraham Baldwin Agricultural College.

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TIF_ch02 - Test Bank Chapter 2: The Financial Environment:...

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