FIN 3302 – Exam I Review Fall 2017
Goal of the firm
Principles of finance
Forms of organization
Simple vs. compound interest
FV and PV of lump sum
FV and PV of annuity
Expected return/standard deviation
Total risk vs. systematic vs. unsystematic risk
2 of 3
1) Which of the following goals of the firm are synonymous (equivalent) to the maximization of
A) profit maximization
B) risk minimization
C) maximization of the total market value of the firm’s common stock
D) none of the above
2) You inherit $300,000 from your parents and want to use the money to supplement your
retirement. You receive the money on your 65th birthday, the day you retire. You want to
withdraw equal amounts at the end of each of the next 20 years. What constant amount can you
withdraw each year and have nothing remaining at the end of 20 years if you are earning 7%
interest per year?
3) The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation
has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of
27%. The required return on Howard Corporation stock is
4) Today is your 21st birthday and your bank account balance is $25,000. Your account is
earning 6.5% interest compounded monthly. How much will be in the account on your 50th
5) All of the following statements about agency problems are true except:
A) Agency problems interfere with the goal of maximizing shareholder value.
B) Agency costs are paid by the managers who do not act in the shareholders’ best
C) Agency problems result from the separation of management and the ownership of a
D) The root cause of agency problems is conflicts of interest.
3 of 3
6) Which of the following conclusions would be true if you earn a higher rate of return on your
A) The greater the present value would be for any lump sum you would receive in the
B) The lower the present value would be for any lump sum you would receive in the
C) Your rate of return would not have any effect on the present value of any sum to be
received in the future.
D) The greater the present value would be for any annuity you would receive in the
7) Investment A has an expected return of 14% with a standard deviation of 4%, while
investment B has an expected return of 20% with a standard deviation of 9%. Therefore,
A) a risk averse investor will definitely select investment A because the standard
deviation is lower.
B) a rational investor will pick investment B because the return adjusted for risk (20% –
9%) is higher than the return adjusted for risk for investment A ($14% – 4%).
C) it is irrational for a risk-averse investor to select investment B because its standard
deviation is more than twice as big as investment A’s, but the return is not twice as big.
D) rational investors could pick either A or B, depending on their level of risk aversion.
8) Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/15. He sold the shares on
12/31/15 for $3.45. Robotics stock has a beta of 1.9, the risk-free rate of return is 4%, and the
market risk premium is 9%. Joe’s holding period return is:
1. C 2. B 3. D 4. C 5. B 6. B 7. D 8. A