Financial Management Principles and Applications 8th Edition By Sheridan Titman test bank

Pessimistic prediction
$ 0
$500

Expected outcome
$ 500
$500

Optimistic prediction
$1000
$500

 Investors will prefer project X because it potentially offers a higher profit.
 Investors will reject both projects because the profit is too low.
 Investors will prefer project Y because the expected return is the same as for project X but the outcome is certain.
 Since projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.
Answer: C
Difficulty: Moderate
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: C
Consider the timing of the profits of the following certain investment projects:
                           
 
Profit

 
L
S

Year 1
$0
$3000

Year 2
$3000
 

 Project S is preferred to project L.
 Project L is preferred to project S.
 Projects S and L are equally desirable.
 A goal of profit maximisation would favour project S only.
Difficulty: Moderate
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: A
In finance, we assume that investors are generally [blank].
 tolerant of risk
 averse to risk
 expecting risk
 natural risk-takers
Difficulty: Basic
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: B
Consider cash flows for projects X and Y such as:
 
Project X
Project Y

Year 1
$3000
$0

Year 2
$0
$3000

A rational person would prefer receiving cash flows sooner because [blank].
 the money can be reinvested
 the money is nice to have around
 the investor may be tired of a particular investment
 the investor is indifferent to either proposal
Difficulty: Moderate
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: A
Which of the following should be considered when assessing the financial impact of business decisions?
 The amount of projected earnings
 The risk-return trade-off
 The timing of projected earnings—that is, when they are expected to occur
 All of the above
Difficulty: Basic
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: D
Which of the following is most likely to motivate executives to maximise shareholder wealth?
 Tying bonuses to cost reductions and meeting budget goals
 Offering them relatively high salaries
 Tying annual bonuses to increases in annual profits
 Compensating them with stock options that can only be exercised after five years
Difficulty: Basic
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: D
If one security has a greater risk than another security, investors will most likely require a [blank] rate of return for the investment that has the [blank] risk.
 lower; greater
 higher; lower
 higher; greater
 lower; lesser
Difficulty: Moderate
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: C
 How could you compensate an investor for taking on a significant amount of risk?
 Increase the expected rate of return
 Raise more debt capital
 Offer stock at a higher price
 Increase sales
Difficulty: Moderate
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: A
If an investor had a choice of receiving $1000 today, or $1000 in five years, which would the average investor prefer?
 $1000 in five years because they are not good at saving money