Finance 3000 Chapter 1&2
Approximately what percentage of U.S. corporate equities are held by households?
40%
Which one of these assists in shifting an individual's consumption forward in time?
A bank line of credit
Which one of the following is a financial asset?
A corporate bond
Which one of these is not considered to be a security?
A mortgage loan issued and held by a bank
Which of the following is a real asset?
A patent
Which one of the following is a real asset?
A patent
Which one of the following forms of compensation is most apt to align the interests of managers and shareholders?
A salary that is paid partly in the form of the company's shares
In which of the following organizations would agency problems be least likely to occur?
A sole proprietorship
Which of the following financial assets is least likely to have an active secondary market?
Bank loans made to smaller firms
Which one of the following is the biggest provider of payment mechanisms?
Banks
Which of these duties are responsibilities of the corporate treasurer?
Cash management and banking relationships
Which one of these is a money market security?
Commercial paper
Which of the following groups is least likely to be considered a stakeholder of the firm?
Competitors
Which of the following actions does not help reduce risk?
Converting your money market account to a mutual fund account
Which one of the following would be considered a capital budgeting decision?
Deciding to expand into a new line of products, at a cost of $5 million
Which one of these is a capital budgeting decision?
Deciding whether to buy a new machine or repair the old machine
Which one of these best defines the objective of a well-functioning financial market?
Establishing accurate security prices
Which of the following is least likely to represent an agency problem?
Executive incentive compensation plans
A major disadvantage of partnerships is that they have double taxation of profits.
False
Almost all foreign exchange trading occurs on the floors of the FOREX exchanges in New York and London.
False
Boards of directors are generally appointed by the firm's senior officers.
False
Capital budgeting decisions are used to determine how to raise the cash necessary for investments
False
During the Financial Crisis of 2007-2009, the U.S. government bailed out all firms in danger of failing.
False
Financing for private companies must flow through financial intermediaries such as mutual funds.
False
Financing for public corporations must flow through financial markets.
False
For corporate bonds, the higher the credit quality of an issuer, the higher the interest rate.
False
General partners have limited personal liability for business debts in a limited partnership.
False
Hedge fund managers, unlike mutual fund managers, do not receive fund-performance-related fees.
False
Households hold directly three quarters of U.S. corporate equities.
False
If a project's value is less than its required investment, then the project is financially attractive.
False
In the United States, banks are the most important source of long-term financing for corporations.
False
Like public companies, private companies can also use their stock price as a measure of performance.
False
Maximizing profits is the same as maximizing the value of the firm
False
Once Apple Computer had become a public company, it was able to raise financing from venture capital companies
False
One root of the financial crisis of 2007-2009 was the strict money policies promoted by the U.S. Federal Reserve and other central banks after the technology bubble burst (i.e., money was relatively expensive during this time).
False
Only small companies can go through financial markets to obtain financing.
False
Only the IPOs for large corporations are sold in primary markets.
False
Shareholders welcome higher short-term profits even when they damage long-term profits.
False
Sole proprietorships face the same agency problems as those associated with corporations.
False
The Dodd-Frank financial reform law in 2010 granted shareholders a binding vote on executive compensation.
False
The cost of capital is the interest rate paid on a loan from a bank or some other financial institution
False
The effects of the financial crisis of 2007-2009 were confined to the U.S. and domestic companies.
False
The liability of sole proprietors is limited to the amount of their investment in the company.
False
The market for derivatives is also a source of financing for corporations.
False
The primary goal of any company should be to maximize current period profits
False
The separation of ownership and management is one distinctive feature of both corporations and sole proprietors.
False
Which of the following statements best distinguishes the difference between real and financial assets?
Financial assets represent claims to income that is generated by real assets.
Which one of these statements is correct?
Financial managers have a fiduciary duty to stockholders.
Which one of the following would correctly differentiate general partners from limited partners in a limited partnership?
General partners have unlimited personal liability.
Which one of these statements correctly applies to a limited partnership?
General partners have unlimited personal liability.
Which one of these was a contributing factor to the need for many foreign banks to seek aid from their governments as a result of the financial crisis of 2007-2009?
Government actions to lower government debt
The financial crisis of 2007-2009 contributed to the largest sovereign default in history by which one of these countries?
Greece
Which of the following are both a financial intermediary and a financial institution?
Insurance companies
Which one of the following financial intermediaries has shown the greatest preference for investing in long-term financial assets?
Insurance companies
Which one of these may provide a financial return to some investors while not providing any financial return to other investors?
Insurance companies
In a firm having both a treasurer and a controller, which of the following would most likely be handled by the controller?
Internal auditing
How is the relationship between a bond's credit rating and its interest rate best defined?
Inverse relationship
Which of the following is not typically considered a function of financial intermediaries?
Investing in real assets
Which one of these enterprises generally acts as an underwriter for an initial public offering?
Investment bank
Which type of financial institution generally does not accept deposits but does underwrite stock offerings?
Investment bank
Which one of these is a disadvantage of the corporate form of business?
Legal requirements
During the Financial Crisis of 2007-2009, the U.S. government bailed out all of the following firms except:
Lehman Brothers.
Which one of these is generally a key difference between U.S. and foreign commercial banks?
Making equity investments in corporations
Which of the following appears to be the most appropriate goal for corporate management?
Maximizing market value of the company's shares.
A mother in a developing country wants to borrow the equivalent of $20 to enable her to start a small restaurant run by her family. Which type of financing is she looking to obtain?
Micro loan
Which of the following information is not provided by the financial markets?
Microsoft's earnings in 2013
Which one of the following statements more accurately describes the controller than the treasurer?
Monitors capital expenditures to make sure that they are not misappropriated
If Apple Computer Inc. is used as the model, then new firms should expect to raise capital in which one of these orders? Start with the first money raised.
Owners, suppliers, venture capitalists, public investors
Which one of the following funds provides a tax advantage to individual investors?
Pension funds
Which form of organization provides limited liability for the firm but yet allows the professionals working within that firm to be sued personally?
Professional corporation
Which of the following is a disadvantage to incorporating a business?
Profits taxed at the corporate level and the shareholder level
Which one of the following is least liquid?
Real estate
Which of the following functions does not require financial markets?
Retention of cash by corporations
Which one of these transports income forward in time?
Retirement savings
Which one of the following gives a corporation its permanence?
Separation of ownership and control
Which of the following is a capital budgeting decision?
Should the firm shut down an unprofitable factory?
Which one of these parties cannot invest in a hedge fund?
Small retail investors
Which one of these statements is correct?
Smart investment decisions create more value than smart financing decisions.
Who was responsible for the financial crisis of 2007-2009?
The U.S. Federal Reserve, the U.S. government, rating agencies, and bankers
Which one of these determines the minimum acceptable rate of return on a capital investment?
The alternative investment opportunities available to investors
A share of IBM stock is purchased by an individual investor for $75 and later sold to another investor for $125. Who profits from this sale?
The first investor
Which of the following is least likely to be discussed in the articles of incorporation?
The price range of the shares of stock
Which one of the following statements is not characteristic of mutual funds?
They are always considered to be financial institutions.
Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm?
Treasurer
A financial intermediary invests in financial assets rather than real assets.
True
A successful investment is one that increases the value of the firm.
True
A well-designed compensation package can help a firm achieve its goal of maximizing market value.
True
An IOU ("I owe you") from your brother-in-law is a financial asset.
True
An individual can save and invest in a corporation by lending money to it or by purchasing additional shares.
True
Established firms can create value by developing long-term relationships and maintaining a good reputation
True
Facebook's decision to spend $700 million to acquire Instagram is an investment decision
True
Financial analysts are involved in monitoring the risk associated with investment projects and financing decisions.
True
Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce.
True
Financial markets and intermediaries allow investors and businesses to reduce and reallocate risk.
True
From June 2001 to June 2006, house prices in the United States rose sharply.
True
GlaxoSmithKline's spending of $6 billion in 2012 on research and development of new drugs is a capital budgeting decision but not a financing decision
True
Insurance companies provide a mechanism for individuals to pool their risks.
True
Making good investment and financing decisions is the chief task of the financial manager.
True
Previously issued securities are traded among investors in the secondary markets.
True
Real assets can be intangible assets
True
Smaller businesses are especially dependent upon internally generated funds.
True
The cost of capital is the minimum acceptable rate of return for capital investment.
True
The key to the banks' ability to make illiquid loans is their ability to pool liquid deposits from thousands of depositors.
True
The markets for long-term debt and equity are called capital markets.
True
The opportunity cost of capital is the expected rate of return that shareholders can obtain in the financial markets on investments with the same risk as the firm's capital investments.
True
The rates of return on investments outside the corporation set the minimum return for investment projects inside the corporation.
True
The reinvestment of cash back into the firm's operations is an example of a flow of savings to investment.
True
The separation of ownership and management is one distinctive feature of corporations.
True
The stocks of major corporations trade in many markets throughout the world on a continuous or near-continuous basis.
True
Volkswagen's issuance of a 2.5 billion euro convertible bond is a financing decision.
True
While control of large public companies in the United States is exercised through the board of directors and pressure from the stock market, in many other countries the stock market is less important and control shifts to major stockholders, typically banks and other companies
True
Which one of these correctly applies to mutual funds?
You can generally buy additional shares in the fund at any time
In the case of a limited liability partnership, ________ has/have limited liability.
all of the partners
Which of the following is not a function of financial markets?
allow individuals to purchase a range of goods online.
Which of these institutions are not major investors in U.S. equities?
banks
The short-term decisions of financial managers are comprised of:
both investment and financing decisions
A company can pay for its expansion in all the following ways except:
by purchasing bonds in the secondary market.
When managers' compensation plans are tied in a meaningful manner to the value of the firm, agency problems:
can be reduced.
A corporate director:
can be voted out of power by the shareholders.
Long-term financing decisions commonly occur in the:
capital markets.
Financial markets and intermediaries:
channel savings to real investment.
You can buy silver in the:
commodities markets.
In a large corporation, preparation of the firm's financial statements would most likely be conducted by the:
controller
A capital investment that generates a 10% rate of return is worthwhile if:
corporate bonds of similar risk offer 8% rates of return.
When the management of a business is conducted by individuals other than the owners, the business is most likely to be a:
corporation.
Which one of the following can best be characterized as an agency problem?
differing incentives between managers and owners.
Financial managers should only accept investment projects that
earn a higher rate of return than shareholders can get by investing on their own.
Agency problems can least be controlled by:
electing senior managers to the board of directors.
Commodity and derivative markets:
enable the financial manager to adjust a firm's exposure to various business risks.
Ethical decision making by management has a payoff for shareholders in terms of:
enhanced firm reputation value.
A firm decides to pay for a small investment project through a $1 million increase in short-term bank loans. This is best described as an example of a(n):
financing decision.
The cost of capital:
for risky investments is normally higher than the firm's borrowing rate.
Sole proprietorships resolve the issue of agency problems primarily by:
forcing owners to bear the full cost of their actions
A bond differs from a share of stock in that a bond:
has a maturity date.
One reason suggesting that banks may be better than individuals at matching lenders to borrowers is that banks:
have information to evaluate creditworthiness.
Investment banks like Morgan Stanley or Goldman Sachs:
help companies sell their securities to investors.
Corporate debt instruments are most commonly traded:
in the over-the-counter market.
The overall goal of capital budgeting projects should be to:
increase the wealth of the firm's shareholders
Corporations that issue financial securities such as stock or debt obligations to the public do so primarily to
increase their access to funds.
U.S. bonds and other debt securities are mostly held by:
institutional investors.
Which of the following are major holders of corporate bonds?
insurance companies.
"Balanced" mutual funds:
invest in both stocks and bonds.
A financial institution:
is a kind of financial intermediary.
A firm's reputation:
is an important firm asset.
The opportunity cost of capital:
is the minimum acceptable rate of return on a project.
An example of a firm's financing decision would be
issuing 10-year versus 20-year bonds.
Firms can alter their capital structure by:
issuing stock to repay debt
One contributing factor to the 2007-2009 financial crisis was the structuring of mortgage loans with:
low initial payments, offset by significantly higher payments later
The primary goal of corporate management should be to:
maximize the shareholders' wealth
The best criterion for success in a capital budgeting decision would be to:
maximize the value added to the firm.
Short-term financing transactions commonly occur in the:
money markets.
When Patricia sells her General Motors common stock at the same time that Brian purchases the same amount of GM stock, GM receives:
nothing.
A corporation is considered to be closely held when:
only a few shareholders exist.
A corporate board of directors should provide support for the top management team:
only when the board approves of management's actions.
Foreign currencies are traded:
over the counter.
A block holder is commonly defined as an investor who:
owns 5 percent or more of a firm's outstanding shares.
"Double taxation" refers to:
paying taxes on profits at the corporate level and dividends at the personal level.
The legal "life" of a corporation is:
permanent, regardless of current ownership.
When corporations need to raise funds through stock issues, they rely on the:
primary market.
A financial analyst in a corporation may be involved with all of the following EXCEPT:
purchasing the firm's plant and equipment.
Excess cash held by a firm should be:
reinvested by the firm in projects offering rates of return higher than the cost of capital.
Ethical decision making in business:
requires adherence to implied rules as well as written rules.
Corporate financing comes ultimately from:
savings by households and foreign investors.
A primary market would be utilized when:
securities are initially issued.
A board of directors is elected as a representative of the corporation's:
shareholders
A manager's compensation plan that offers financial incentives for increases in quarterly profitability may create agency problems in that:
short-term, not long-term profits become the focus.
A firm with spare cash
should pay it out to shareholders unless the firm can earn a higher rate of return on the cash than the shareholders can earn by investing in the capital market.
Unlimited liability is faced by the owners of:
sole proprietorships and general partnerships.
Insurance companies primarily reduce an individual's risk by:
spreading that risk across many individuals.
Corporations are referred to as public companies when their:
stock is publicly traded.
A chief financial officer would typically
supervise both the treasurer and controller.
Corporate raiders will be looked upon most favorably if they:
take actions that increase current shareholder wealth.
Firms can often determine the price of any commodities they use in their production process by consulting the price quotes provided by:
the New York Mercantile Exchange.
When a corporation fails, the maximum that can be lost by an individual shareholder is:
the amount of their initial investment
Corporate managers are expected to make corporate decisions that are in the best interest of:
the corporation's shareholders.
Financing for public corporations flows through:
the financial markets, financial intermediaries, or both.
Liquidity is important to a mutual fund primarily because:
the fund's shareholders may want to redeem their shares at any time.
Insurance companies can usually cover the claims of policyholders because:
the incidence of claims normally averages out across all policyholders.
A common problem for closely held corporations is:
the lack of access to substantial amounts of capital.
The term "capital structure" refers to:
the mix of long-term debt and equity financing
In a partnership form of organization, income tax liability, if any, is incurred by:
the partners individually.
"Reinvestment" means:
the reinvestment of earnings into new projects.
One continuing problem with managerial incentive compensation plans is that
their effectiveness is difficult to evaluate.
The primary distinction between securities sold in the primary and secondary markets is:
whether the securities are new or already exist.
Short selling involves selling a security
you do not own.