C214 WGU Financial Management End of Section Questions

Secondary markets are where securities are initially offered to the public. t/f 1.11

F primary markets are where securities are initially offered to the public r

A Treasury bond is a debt instrument issued by corporations. t/f 1.2

F. A Treasury bond is a debt instrument issued by governments. (right answer)

A stock is a debt instrument issued by corporations. t/f 1.2

F. A stock represents ownership in a company (right answer)

Banks make money when interest rates they charge to borrowers are less than interest rates they pay depositors. (t/f) 1.1

F. Banks make money when interest rates they charge to borrowers are MORE than interest rates they pay depositors. (right answer)

Economics is a subfield of Finance (t/f) 1.1

F. Finance is a subfield of Economics. (right answer)

Corporate finance is devoted to understanding various types of financial instruments. (t/f) 1.1

F. Investments is devoted to understanding various types of financial instruments. (right answer)

What are ways firms can maximize shareholder value? 1.9

Hire new employees to improve production and the profitability., Invest in new research and development that will be profitable., Invest capital into projects that will improve the profitability of the firm.

Syndicates are generally made up of investment banks and other institutional investors. t/f 1.3

T Syndicates are generally made up of investment banks and other institutional investors.

The NYSE specialist has an objective to provide liquidity to the market. t/f 1.5

T The NYSE specialist has an objective to provide liquidity to the market.

The bid-ask spread is compensation to the specialist for providing liquidity to the market. t/f 1.5

T The bid-ask spread is compensation to the specialist for providing liquidity to the market.

A bond is a debt instrument issued by corporations or governments. t/f 1.2

T. A bond is a debt instrument issued by corporations or governments.

Capital is defined as a financial asset. (t/f) 1.1

T. Capital is defined as a financial asset.

Companies can raise capital by issuing bonds or stocks. t/f 1.2

T. Companies can raise capital by issuing bonds or stocks.

Corporate finance focuses on the decision making by the management of the firm. (t/f) 1.1

T. Corporate finance focuses on the decision making by the management of the firm.

Primary financial markets are markets where issuers place new securities with investors. t/f 1.3

T. Primary financial markets are markets where issuers place new securities with investors.

Stock represents ownership in a particular company. t/f 1.2

T. Stock represents ownership in a particular company.

Stocks and bonds are two types of financial instruments. t/f 1.1

T. Stocks and bonds are two types of financial instruments.

A syndicate is a group of investors that is temporarily formed to handle the issuance of new bonds. t/f 1.11

t A syndicate is a group of investors that is temporarily formed to handle the issuance of new bonds. r

Agency costs are commonly mitigated by compensating management with company stock. t/f 1.10

t Agency costs are commonly mitigated by compensating management with company stock. r

Agency costs are costs that are incurred when management does not act in the best interest of shareholders. t/f 1.10

t Agency costs are costs that are incurred when management does not act in the best interest of shareholders. r

An IPO is where a company goes public or sells shares to the public for the first time. t/f 1.11

t An IPO is where a company goes public or sells shares to the public for the first time. r

An example of agency costs is a firm's decision to invest in a project because management enjoys working on the project. t/f 1.10

t An example of agency costs is a firm's decision to invest in a project because management enjoys working on the project. r

An example of agency costs is management spending company money on unprofitable goods and services. t/f 1.10

t An example of agency costs is management spending company money on unprofitable goods and services. r

Companies should always maximize shareholder value. T/f 1.9

t Companies should always maximize shareholder value. r

Firms try to mitigate agency costs by aligning managers' interests with shareholders' interests. t/f 1.10

t Firms try to mitigate agency costs by aligning managers' interests with shareholders' interests. r

Firms with high unexpected earnings usually exhibit large positive returns on the earnings announcement day. t/f 1.8

t Firms with high unexpected earnings usually exhibit large positive returns on the earnings announcement day. r

In an efficient market, new information will move prices almost immediately. t/f 1.7

t In an efficient market, new information will move prices almost immediately. r

Because in an efficient market all available information is built into the price of a stock - investment patterns and trends to "get rich quickly" are not easily discernable and it is difficult to predict the price t/f 1.7

t In an efficient market, prices are not predictable. R

In an inefficient market, prices will slowly respond to new information. t/f 1.7

t In an inefficient market, prices will slowly respond to new information. r

Inefficient markets will often have mispriced securities. t/f 1.7

t Inefficient markets will often have mispriced securities. right

NYSE daily trading volume has increased over the last 50 years. t/f 1.11

t NYSE daily trading volume has increased over the last 50 years. r

Some high frequency traders provide liquidity to the rest of the market. t/f 1.11

t Some high frequency traders provide liquidity to the rest of the market. r

The New York Stock Exchange is an auction market. t/f 1.11

t The New York Stock Exchange is an auction market. r

The goal of the firm is to maximize shareholder value. t/f 1.9

t The goal of the firm is to maximize shareholder value. r

Without financial markets, exchange would become more costly. t/f 1.11

t Without financial markets, exchange would become more costly. r

An IPO occurs on the primary market. t/f 1.3

T An IPO occurs on the primary market.

Auction markets have a physical location. t/f 1.4

T Auction markets have a physical location. (right)

When dealers have to compete with one another, transaction costs will generally ___________. 1.4

decrease1.4

Agency costs are commonly mitigated by increasing management compensation. t/f 1.10

f Agency costs are NOT commonly mitigated by increasing management compensation. r

An example of agency costs is increased costs incurred because of higher levels of production. t/f 1.10

f An example of agency costs is not increased costs incurred because of higher levels of production. r

Efficient markets are those in which prices are volatile. t/f 1.7

f Efficient markets are those in which prices reflect all relevant information. right

Firms that are maximizing shareholder value will generally see stability in the firm's stock price. t/f 1.9

f Firms that are maximizing shareholder value will generally see increases in the firm's stock price.

Inefficient markets are those in which prices will respond quickly to new information. t/f 1.7

f Inefficient markets are those in which prices will respond slowly to information. right

Much of the trading on the NYSE executes without a specialist (i.e. a market maker). t/f 1.11

f The NYSE has a single individual with the title of specialist, who provides liquidity. 1.11 (1.5) r

The income statement is the most easily interpreted of the basic financial statements. t/f 2.4

f The income statement is usually regarded as the most difficult to analyze and interpret. r

Firms with low unexpected earnings usually exhibit large positive returns on the earnings announcement day. t/f 1.8

f. Firms with low unexpected earnings usually exhibit large negative returns on the earnings announcement day. r

An IPO is a seasoned equity offering. t/f 1.3

false. IPO is new equity offering (right answer)

Statement of cashflows indirect method. video scf 0707

-current assets-operating act -long term assets-investing act (depreciation change in operating act) EQUALS -current liabilities-operating act -long term liability-financing act -stockholders equity-financing act (income in RE go to operating act and dividend go to financing act)

The ask price of stock A is $56.75 while the bid price for stock A is $56.71. What is the bid ask spread? 1.5

.04 56.75-56.71 = 0.04

Suppose you bought a stock for $45 one year ago. Today the stock is currently priced at $47.42. If the stock does not pay a dividend, what is the percentage return for this stock? 1.8

.0538 (47.42-45)/45 = 0.0538 or 5.38%

Suppose you bought a stock for $101.44 one year ago. Today the stock is currently priced at $109.54. If the stock does not pay a dividend, what is the percentage return for this stock? 1.8

.0799 (109.54-101.44)/101.44 = 0.0799 or 7.99%

Suppose you bought a stock for $19.84 one year ago. Today the stock is currently priced at $18.45. The stock recently paid a $3.50 dividend, what is the percentage return for this stock? 1.8

.1064 (18.45-19.84+3.50)/19.84 = 0.1064 or 10.64%

Suppose you bought a stock for $22.10 one year ago. Today the stock is currently priced at $22.08. The stock recently paid a $4 dividend, what is the percentage return for this stock? 1.8

.1801 (22.08-22.10 + 4)/22.10 = 0.1801 or 18.01%

The ask price of stock A is $215.54 while the bid price for stock A is $215.14. What is the bid ask spread? 1.5

.40 215.54-215.14 = 0.40

Suppose you bought a stock for $45 one year ago. Today the stock is currently priced at $47.42. If the stock does not pay a dividend, what is the dollar return for this stock? 1.8

2.42 47.42-45 = 2.42

Suppose you bought a stock for $22.10 one year ago. Today the stock is currently priced at $22.08. The stock recently paid a $4 dividend, what is the dollar return for this stock? 1.8

3.98 22.08-22.10 + 4 = 3.98

Suppose you bought a stock for $101.44 one year ago. Today the stock is currently priced at $109.54. If the stock does not pay a dividend, what is the dollar return for this stock? 1.8

8.10 109.54-101.44 = 8.10

What issue(s) are associated with the firm goal to maximize shareholder value? 1.10

Agency costs and potential unethical behavior

Which of the following is an example of firm capital? 1.1

Cash

Which of the following are examples of firm capital? 1.1

Cash, Labor, Machinery

What are the two ways a syndicate can place a bond? 1.3

Competitive sale or negotiated sale

On the income statement, Cost of Goods Sold includes: 2.5

Direct materials and direct labor associated with production

What are the three important areas of finance discussed in this section?1.1

Corporate Finance, Investments, and Banking/financial institutions

Maximizing shareholder value ethically can improve society generally by: 1.10

Employing additional workers, Creating growth and leading to increased production by other firms, Increasing the profitability of other firms because of increased consumption

The basic equation for the balance sheet is: 2.6

Equity = Assets - Liabilities The equation is usually introduced as Assets = Liabilities + Equity. Commonly, we solve for Equity as is the case for this questions (E=A-L).

Privately-held companies and publicly traded companies will always maximize shareholder value in the same way. t/f 1.9

F A privately held company—or a company with shares that are not available to the public—may define value differently compared to a publicly held company (or a company with shares that are available to the public) R

Dealer markets have a physical location. t/f 1.4

F Auction markets have a physical location. Dealer markets do not. (right)

Efficient markets will often have mispriced securities. t/f 1.7

F Markets that are efficient will have prices that fully reflect the available information about a specific security. Markets that are inefficient will have securities that are mispriced, or the security prices will not reflect all available information. right

Nasdaq is an example of an auction market. t/f 1.4

F Nasdaq is an example of a dealer market. (right)

Stocks that are listed on dealer markets generally have a single dealer for each stock. t/f 1.4

F Stocks that are listed on dealer markets generally have multiple dealers for each stock. (right)

NASDAQ is the world's largest secondary financial market. t/f 1.4

F The NYSE is the world's largest secondary financial market. (right)

The NYSE specialist will charge a higher price to sellers of the stock and a lower price to the buyer of the stock. t/f 1.5

F The NYSE specialist will charge a lower price to sellers of the stock and a higher price to the buyer of the stock. (right)

Cash accounting offers a superior method of analyzing a company. t/f 2.3

F While the cumbersome nature of accrual accounting may cause cash accounting to look attractive, the truth is that cash accounting is not a good way to track firm operations. The movement of cash in and out of the firm during a period can lead to a highly biased view of the firm. r

While competitive sales allow underwriters to submit bids to purchase bonds, negotiated sales do not. t/f 1.3

F negotiated and competitive sales both submit bids. negotiated sales more involved (right answer)

A market order to sell a stock would execute at the current ask price. t/f 1.6

False. The order would execute at the current bid price.

A limit order to buy a stock at $101.55 would execute at the current ask price. t/f 1.6

False. The order would execute when the ask price is at or below $101.55.

Which of the following is not an example of firm capital? 1.1

Financial markets

Revenues minus cost of goods sold is: 2.4

Gross Profit. Revenues - COGS = Gross Profit - Operating Expenses = EBIT/Operating Profit - Interest Expenses = EBT - Tax Expenses = Net Income/Earnings

Firms that are maximizing shareholder value will generally see increases in the firm's stock price. t/f 1.9

T Firms that are maximizing shareholder value will generally see increases in the firm's stock price.

The basic equation of an income statement is: 2.4

Income statement equation: Revenues - expenses = net income

If the price of a particular stock begins to heavily fluctuate, then the specialist will __________ the spread. 1.11

Increase the spread 1.11

What is a way firms can maximize shareholder value? 1.9

Invest in new machinery that will be profitable.

What are the two types of orders that are used by investors? 1.6

Market Orders and Limit Orders 1.6

Markets are where prices are determined. t/f 1.4

T Markets are where prices are determined.

Which of the following best explains the role of prices? 1.7

Prices convey information, Prices affect the distribution of income, Prices affect incentives

A bond is a debt instrument issued by corporations or governments. t/f 1.11

T A bond is a debt instrument issued by corporations or governments. r

Which of the following best describes the guiding principle for revenue recognition within accrual accounting system: 2.5

Revenue is reported when the earnings process is complete With accrual accounting, revenue is recognized when the earnings process is complete. Indicators that the earnings process is complete include the transfer of the risk of ownership and assurance of payment.

The goal of the firm is to maximize ___________ value. 1.9

Shareholder 1.9

A bond is similar to a loan. t/f 1.2

T A bond is similar to a loan.

A bond is similar to a loan. t/f 1.11

T A bond is similar to a loan. r

A limit order to buy a stock at $101.55 would execute when the ask price is at or below $101.55. t/f 1.6

T A limit order to buy a stock at $101.55 would execute when the ask price is at or below $101.55.

A market order to buy a stock would execute at the current ask price. t/f 1.6

T A market order to buy a stock would execute at the current ask price. 1.6

Thirty years ago, your firm purchased a parcel of land for $100,000. You still own the land. The current market price of the land is $1,000,000. Under accrual accounting, which of the following adjustment should be made to recognize the current value of the land? 2.6

There is no adjustment to be made. Solution: Under the historical cost principle, the book value of the land is not changed.

If providing liquidity becomes more risky, then dealers will __________ the spread. 1.11

increase the spread 1.11

Firms with low unexpected earnings usually exhibit large negative returns on the earnings announcement day. 1.9

maximize 1.9

Which type of bond placement - competitive sale or negotiated sale - requires a more thorough interview process? 1.11

negotiated sale 1.11

A stock is a share of ______________ in a particular company. 1.11

ownership 1.11

A stock is a share of ______________ in a particular company. 1.2

ownership 1.2

A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid 60 days. The expense associated with the product is $300,000, of which $100,000 has not been paid to your supplier. Under accrual based accounting system, you will most likely report: 2.5

revenues of $500,000 and expenses of $300,000. Solution: Under accrual accounting system, you record the revenues when the earnings process is complete and match the expense with the revenues. In this case, we delivered the product and have a contract for payment with a high-quality firm. Hence, the earnings process is complete (including reasonble assurance of payment) so the firm will recognize $500,000 in revenue. The matching principle requires expense recognition for revenues recognized. The fact that our firm hasn't paid the supplier doesn't impact the expenses incurred to generate the $500,000 in revenue. Hence, the firm will recognize $300,000 in expense associated with the sale.

Market orders are __________ sensitive while limit orders are _____________ sensitive. 1.6

time, price 1.6