Introduction to Finance: Savings, Borrowers, and Stock Price

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Questions and Answers

What is the main goal of the firm according to the text?

  • Maximizing the price of existing common stock (correct)
  • Increasing the number of employees
  • Minimizing cash flows
  • Maximizing the number of shareholders

What role does management play in a firm according to the text?

  • Maximizing profits at all costs
  • Ignoring the interests of creditors
  • Serving as an arbitrator and moderator between stakeholders (correct)
  • Only listening to shareholders' demands

Which principle states that a dollar received today is worth more than a dollar received in the future?

  • Principle 3: Profits Drive Business Value
  • Principle 4: Accounting Profits Are Essential
  • Principle 1: Cash Flow Is What Matters
  • Principle 2: Money Has a Time Value (correct)

What are the three basic issues addressed by the study of finance in a business?

<p>Capital budgeting decision, capital structure decision, operating decision (C)</p> Signup and view all the answers

What is the main difference emphasized between accounting profits and cash flows in finance?

<p>Cash flows drive business value, not profits (B)</p> Signup and view all the answers

Who holds residual claims against a company according to the text?

<p>Shareholders (D)</p> Signup and view all the answers

What is the formula for calculating the future value of $1 in the first period with an 8% interest rate?

<p>$FV=1×(1+0.08)$ (D)</p> Signup and view all the answers

What does PV represent in the formula for calculating the future value?

<p>Present Value (D)</p> Signup and view all the answers

How is the future value of $1 calculated in the second period with an 8% interest rate?

<p>$FV=PV×(1+r)^2$ (A)</p> Signup and view all the answers

What is considered as a typical cash outflow in investment decisions according to the text?

<p>Repairs and Maintenance of new equipment (C)</p> Signup and view all the answers

What does the cost of capital represent for a firm?

<p>Minimum required rate of return (D)</p> Signup and view all the answers

What method uses incremental revenues and reduction of operating costs as inflows in investment analysis?

<p>Net Present Value Method (C)</p> Signup and view all the answers

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