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Introduction to Finance: Savings, Borrowers, and Stock Price

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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?

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

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

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

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

Shareholders (D) 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?

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

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

Present Value (D) Signup and view all the answers

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

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

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

Repairs and Maintenance of new equipment (C) Signup and view all the answers

What does the cost of capital represent for a firm?

Minimum required rate of return (D) Signup and view all the answers

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

Net Present Value Method (C) Signup and view all the answers