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Finance Managment

People who are “risk averse” usually don’t invest their money in anything.
Financial risk can be defined as the uncertainty around an expected outcome.
Even the desire for money exhibits a declining marginal utility
The correct way to find an average of a distribution of outcomes is to add up all the outcomes and divide by the number of outcomes.
The expected value of a distribution is also the weighted mean.
The risk of an investment is best measured by its expected return.
Standard variation equals the Square root of variance
In the normal distribution, approximately 68% (two-thirds) of the outcomes will fall within one standard deviation of the mean.
The correlation coefficient ranges from -1.0 to +1.0.
All else being equal, risk averse investors prefer wider, flatter distribution of returns around the mean.
If two assets are perfectly positively correlated, we can put them together into a portfolio and completely eliminate risk.
We would expect the correlation coefficient between the number of days of sunshine and umbrella sales to be positive.
) The idea of diversification is to maintain a level of return and decrease your risk.
We can obtain the maximum benefits of diversification by holding approximately 25-30 assets in a portfolio.
Beta measures the total risk of an investment.
False, Beta measures assets systematic risk relative to market portfolio
Unsystematic risk can be diversified away in a portfolio.
The Capital Asset Pricing Model is used to predict the required return on an investment.
The best definition of “risk” is
uncertainty about an outcome.
The “expected value” is
the weighted average and mean
The bell curve is a graphical representation of
the normal distribution.
A share of stock has an expected return of 12 percent and a standard deviation of 24 percent. Therefore, its coefficient of variation is
To be “diversified” means to hold
different assets to minimize risk.
If two assets have returns that move together perfectly, their correlation coefficient is
The best reason to hold the market portfolio is it
is the most efficient.
Beta is a measure of:
systematic risk.
If a stock has a beta greater than 1.0, then its expected return
is greater than the market portfolio.
The three major decisions in financial management involve investing, financing, and the payment of dividends.
Financial management cannot be related to other functional areas of management such as marketing.
The most common form of business organization in the United States is the sole proprietorship.
Common stock is a security that has the features of both debt and equity.
False, Its just equity
The goal of hospitality financial management is to maximize the wealth of the owners.
A good example of an agency relationship in a hotel is the relationship between a bartender and a server.
Maximizing revenue will always maximize the wealth of the owners.
Value is created if a project’s
incremental benefits exceed incremental costs
Which of the following is the disadvantage of the corporate form of organization?
the tax treatment of dividends
Which of the following makes preferred stock different from common stock?
Common stockholders can vote for the board of directors
The three factors that determine the value of future dividends are
size, timing, and risk.
The goal of wealth maximization for the owners makes sense for the firm because
if we have satisfied the owners, we have satisfied all other parties as well.
Agency problems arise because
people usually act in their own best interest
You are the owner of a Comfort Inn and would like to hire a new general manager. In terms of preventing possible agency problems, what should you include in your offer?
profit sharing
Financial management is the process of classifying financial information.
Financial management is the process of classifying financial information.
The shareholders of a corporation have unlimited liability
The balance sheet equation is: assets + liability = owners equity

it is assets = liability +owners equity

Shirking is considered an agency problem
A Subchapter S Corporation has double taxation.
With the sole proprietorship type of organization, it is easy to increase capital.
False, It is very hard
The income statement indicates firm performance between two balance sheet dates.
The uniform system of accounts helps managers organize the statement of cash flows.
The detail of a hotel income statement will vary depending on the needs of the user.
Cash is found in the owner’s equity account.
Assets are held by the firm to generate revenues and cash flows.
The statement of cash flows has three major components.
Operating investion and Financing activities
Liquidity ratios measure the amount of long-term debt held by the firm

Short term

Owners would like to have a higher current ratio than lenders
A current ratio of less than 1.0 for a hospitality company is always bad
Which of the following is a “snapshot” of the hospitality operation?
Balance sheet
Securities held by the firm for more than are year are classified as
Long term invenstments
For current liabilities, “current” means
payable within a year.
Assets relate to revenue as liabilities relate to
Over the long term, successful companies generate positive cash flows from
operating activities.
The impact of the Enron accounting scandal was
ncreased investor scrutiny regarding financial statements and the audit process.
Which of the following is a limitation of ratio analysis?
Ratios indicates there is a problems but it does not indicate what is the problem
The number of times interest earned is a
solvency ratio.
If current liabilities exceed current assets, then the:
current ratio will be less than one

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