D076 - Questions
A company's officers and board of directors are selling their stocks in the firm at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is occurring in this situation? Conflict between work and personal affairs Pursuing individual interest over client interests Agency problem due to conflicting interests Maximizing shareholder value
Agency problem due to conflicting interests Correct! Accounting manipulation by management in pursuit of higher stock-related compensation is an example of an agency problem.
How can agency costs be mitigated? Creating a corporate hierarchy of several managers Aligning managers' interests with shareholders' interests Separating owners from management so their interests do not conflict Releasing managers who do not attempt to maximize immediate shareholder value
Aligning managers' interests with shareholders' interests Correct! This is most commonly done by compensating management with shares of ownership in the company.
What does the term legal describe? An action that conforms to accepted standards of conduct that guide a person's behavior. An idea or thing used as a measure, norm, or model in comparative evaluations. An action that is in accordance with the laws and rules set by an authority. An action that reflects one's beliefs about right and wrong, good and bad, or just and unjust.
An action that is in accordance with the laws and rules set by an authority. Correct! Legal means to follow the laws and rules set by an authority.
What characterizes an ethical action? An ethical action will achieve the best outcome for the decision maker. An ethical action takes into account other individuals' values over the decision maker's own. An ethical action is based on accepted standards of conduct. An ethical action is based on what is right or wrong, whether or not society agrees.
An ethical action is based on accepted standards of conduct. Correct! An ethical action conforms to accepted standards of conduct.
What should be the main question a firm asks when considering any investment decision? Will this investment add value to the firm? Do the benefits of this investment outweigh the costs? What is the best investment in the stock market? Will this investment help the company reduce costs?
Do the benefits of this investment outweigh the costs? Correct! For any investment, you should expect to receive a benefit worth at least as much as the initial cost.
Which term refers to something that conforms with accepted standards of conduct that guide a person's behavior? Standard Moral Legal Ethical
Ethical Correct! Ethical refers to the accepted standards of conduct that guide a person's behavior
How can agency problems be reduced through corporate control? Executive compensation Accounting manipulations Acquisition of a foreign subsidiary Setting strict goals
Executive compensation Correct! By compensating the management team with stocks and stock options, management may be willing to take on riskier projects. This creates more value for the owners because riskier projects will increase the value of financial securities.
Which professional works with individuals to help them achieve their financial goals? Financial planner Commercial banker Corporate financial analyst Private equity manager
Financial planner Correct! Professional financial planners work with individuals to help them achieve their financial goals.
You want to buy a house, so you obtain a mortgage for which you can afford the monthly payments. What process have you engaged in as part of your financial decision-making? Investing Analyzing data Financing Assessing
Financing Correct! Part of the personal finance process is figuring out how to finance your goals in a way that is within your means.
Omar is about to purchase a new car for $30,000. He knows he wants to buy the car, but he is still trying to decide how to pay for it. He has barely over $30,000 in his bank account. He can either take out an auto loan from a bank or use a mix of cash and an auto loan. In this scenario, what is Omar doing? Investing to achieve a goal Assessing a financial goal Budgeting Financing a goal
Financing a goal Correct! He has already made a decision to purchase the car and is now deciding on financing options.
About a year ago, the short-term Treasury bill had 1.54% interest and the long-term Treasury note had 2.54% interest. This week, the 1-year Treasury bill has an interest rate of 3.13%, while the 10-year Treasury note has an interest rate of 2.28%. What does this information indicate about the future economy? It may indicate a decreasing unemployment rate along with higher wages. It may reflect an expectation that the economy will grow in the future along with higher inflation. It may indicate an economic downturn. It may indicate that the economy is in a steady state.
It may indicate an economic downturn. Correct! Since the long-term Treasury interest rate is lower than the short-term rate, it has an inverted yield curve, which may indicate an economic downturn.
Five years ago, Ahmed decided he was going to save up to purchase a car with cash. The car he wants is priced at $15,000. He saved $245 a month in an account that gave him enough interest to have $15,000 in five years. Today, he pulled out $15,000 from his account to buy the car, but the price of the car is now $16,562. Which component of the required rate of return did Ahmed forget to consider? Inflation Risk Opportunity cost Interest rate
Inflation Correct! The price of the car simply went up by $1,562 due to inflation.
What does the risk-free rate indicate? Risk Opportunity cost and risk Inflation and risk Inflation and opportunity cost
Inflation and opportunity cost Correct! The risk-free rate includes inflation and opportunity cost.
What is the term for the percentage of the principal that a lender charges a borrower for the use of assets? Compound interest Simple interest Inflation rate Interest rate
Interest rate Correct! This is the definition of interest rate.
What is a reasonable alternative to keeping an emergency stash of cash? Investing the money in a nicer car Investing in a savings account Investing in high-risk growth stocks Investing in long-term bonds
Investing in a savings account Correct! Investing in a readily withdrawable account that still earns some interest is a value-preserving alternative.
A large corporation is looking to merge with another large corporation. Which financial institution can help them do this? Central bank Pension fund Investment bank Private equity institution
Investment bank Correct! Investment banks facilitate complex financial deals, like mergers.
Which type of financial institution is a mutual fund? Contractual institution Federal institution Investment institution Depository institution
Investment institution Correct! Investment institutions provide individuals and firms access to financial markets.
Which type of financial institution provides individuals and firms access to financial markets? Depository institutions Investment institutions Credit institutions Contractual savings institutions
Investment institutions Correct! Investment institutions provide both individuals and firms access to financial markets.
What area of finance involves deciding which assets to invest in to create wealth in the future? Investments Investment banking Financial institutions Organizational finance
Investments Correct! Investments are an area of finance that involves deciding which assets to invest in to create wealth in the future.
Which subspecialty of finance primarily involves deciding which assets will create more wealth and earn positive returns? Accounting Investments. Capital structure Financial institutions
Investments Correct! Investments is the area of finance that seeks to create wealth in the future by deciding where to allocate money.
Which area of finance involves deciding which assets to invest in to create wealth in the future? Financial institutions Financial management Asset pricing Investments
Investments Correct! This area involves deciding which assets to invest in to create wealth in the future.
What is the main purpose of charging interest? It allows financial analysts to accurately calculate the time value of money when evaluating a project. It funds private banking institutions. It is what makes trading assets such as vehicles and land possible. It allows borrowers to pay to use the assets of another entity to accomplish their own goals.
It allows borrowers to pay to use the assets of another entity to accomplish their own goals. Correct! Because the funds do not belong to borrowers, they must pay to use them. This payment is the interest rate.
Why is understanding the definition of finance important in managing personal finances? It helps individuals understand legal issues related to finance. It helps individuals compare the costs and benefits of an action to determine whether to take that action. It helps individuals act ethically with regard to finances. It allows individuals to find an investment with the highest return possible.
It helps individuals compare the costs and benefits of an action to determine whether to take that action. Correct! Any financial decision should make sense in terms of its costs and benefits.
What are the effects of attempting to maximize shareholder value for a business in an unethical way? It often leads to employing more workers and boosting the economy. It often gives the business an opportunity to improve its branding and reputation. It often leads to decreased shareholder value for the business. It often decreases vulnerability to long and expensive litigations.
It often leads to decreased shareholder value for the business. Correct! Unethical behavior can lead to very costly results.
Unemployment rate is which type of economic indicator? Lagging Leading Coincident Concurrent
Lagging Correct! Lagging indicators change after the economy changes.
Which type of economic indicator is the consumer price index? Coincident indicator Lagging indicator Leading indicator Forecasting indicator
Lagging indicator Correct! CPI usually changes after the economy as a whole changes.
Yield curve is which type of economic indicator? Coincident Concurrent Leading Lagging
Leading Correct. Leading indicators change before the economy changes.
Which type of error would result in a set repercussion or penalty given by the government? Moral Spiritual Legal Ethical
Legal Correct! A legal error would result in a predetermined penalty by the government.
Why is the required rate of return also known as the hurdle rate? The investors cannot invest their money elsewhere. It takes into account that the prices of goods and services will increase. It is the minimum rate that a firm must surpass to accept a project. Investors have to overcome a certain level of risk to invest.
It is the minimum rate that a firm must surpass to accept a project. Correct! When a financial manager decides whether to invest in a certain project, the projected return needs to meet the minimum rate of return, or else the firm must "hurdle" the rate in order to accept the project.
What would an inverted yield curve signal? It may indicate an economic downturn. It may indicate higher interest rates for long-term bonds. It may indicate that inflation is rising at an unsustainable rate. It may indicate that the unemployment rate is falling.
It may indicate an economic downturn. Correct! An inverted yield curve reflects the expectation that the economy will have low or negative growth in the future.
Which kind of projects are bondholders interested in? Safe projects with a higher chance of providing sufficient compensation Riskier projects that will provide higher returns Projects that allow the company the most freedom in how it spends money Riskier projects that will increase the value of the company's stocks and their own financial return
Safe projects with a higher chance of providing sufficient compensation Correct! Bondholders provide money for a company for a certain period of time and want companies to pay them back for their investment.
Endothon Company has decided to move its production from the United States to a foreign country. Which situation below would constitute an unethical action by the company? Saving money by paying inadequate wages to workers overseas Lowering costs while keeping prices the same for customers Telling current employees about the decision early on Monitoring public perception of the company
Saving money by paying inadequate wages to workers overseas Correct! Other countries may not have laws that protect workers, such as minimum wage laws.
In which financial market are securities such as stocks and bonds are traded after their initial issuance? Initial market Dealer market Secondary market Primary market
Secondary market Correct! Financial securities are first sold in the primary financial market and then traded among investors in the secondary financial market.
What is the name for the concept that a dollar today is worth more than a dollar in the future? Time value of money Ordinary annuity Perpetuity Cost of capital
Time value of money Correct! The time value of money is the concept that today's dollar is worth more than a dollar in the future.
What is the primary role of financial institutions? To conduct financial transactions such as investments, loans, and deposits To provide financial information to the stakeholders of a business To provide liquidity when trading financial assets To deal with financing, capital structuring, and investment decisions
To conduct financial transactions such as investments, loans, and deposits Correct! Financial institutions conduct transactions to circulate money.
Why might a manager manipulate accounting procedures? To restrict a firm from taking on risky projects To spend capital on wasteful projects To maximize shareholder wealth To make the company's performance look good
To make the company's performance look good Correct! A manager might manipulate accounting procedures to inflate the earnings of a company, which would optimize bonuses and stock-price-related benefits for management.
What is the inflation rate? The rate that is adjusted to remove the effects of increased prices of goods and services The rate at which the average price level of a basket of goods and services in an economy increases The rate of return that an investor will accept for investment The rate at which invested money grows for a certain period of time
The rate at which the average price level of a basket of goods and services in an economy increases Correct! The rate at which the average price level of a basket of goods and services in an economy increases is the inflation rate.
Which type of financial market is where securities such as stocks and bonds are traded after their initial issuance? The initial public offering The primary financial market The secondary financial market The dealer market
The secondary financial market Correct! Financial securities are first sold in the primary financial market and then traded among investors in the secondary financial market.
Why would a long-term investment require a higher rate of return? Regulations require a higher rate of return on long-term investments. Projects with longer lives always produce a very high return There is greater risk involved and a higher opportunity cost. There is less risk involved and a lower opportunity cost.
There is greater risk involved and a higher opportunity cost. Correct! There is greater risk because you cannot ensure the return of your investment for a longer period of time, and there is a higher opportunity cost because you cannot use that money for other things for a longer period of time.
In what way are coincident indicators useful? They help investors know which sectors of the economy to invest in. They are used to predict future economic trends so that recessions can be avoided. They are analyzed during economic shifts to provide information about the current state of the economy. They are useful in conjunction with GDP and personal income to predict the future health of the economy.
They are analyzed during economic shifts to provide information about the current state of the economy. Correct! Coincident indicators help analysts see the big picture of economic trends.
How do insurance companies pay policyholders when a claim is made? They withdraw funds from policyholders' premium accounts. They use returns from stocks and bonds. They withdraw funds from their corporate savings account. They raise premiums for everyone who filed a claim during the year.
They use returns from stocks and bonds. Correct! Insurance companies invest the money that they earn from premiums into stocks and bonds, and then the returns are used to fill claims.
Maria and Mateo are setting financial goals. They decide that they need to save $200 each month to reach their goal of taking their children to visit their grandparents in Spain next summer. What is the objective of setting such a goal? To set priorities in personal finances To minimize personal expenses To make personal finances predictable To maximize individual utility
To maximize individual utility Correct! While everyone has different personal financial goals, the objectives of such goals is to maximize individual utility.
What is the main objective of personal financial goals? To maximize owner wealth To maximize individual utility To maximize stock investments To maximize charity donations
To maximize individual utility Correct! You set goals and act to increase your satisfaction or happiness by taking care of necessities and achieving priorities.
What is the primary goal of the financial manager of a firm? To minimize the asset holdings of the firm To maximize the manager's utility To maximize owner wealth To minimize the costs of the firm
To maximize owner wealth Correct! The financial manager should make decisions based on the primary goal of maximizing owner wealth.
What is the main goal of a firm? To circulate money in the economy To make decisions on how to finance projects To maximize owner wealth To make investment decisions
To maximize owner wealth Correct! The main goal of a firm is to maximize owner wealth, and the financial manager should make decisions based on this goal.
What is the primary aim of personal finance goals? To create more wealth and returns on investments To increase consumption of goods and services To maximize satisfaction from products purchased and services obtained To maximize shareholders' utility by increasing a firm's value
To maximize satisfaction from products purchased and services obtained Correct! The objective of personal financial goals is to maximize one's utility.
Which responsibility is a focus of the U.S. Securities and Exchange Commission? To protect investors To regulate inflation To provide liquidity To raise interest rates
To protect investors Correct! The responsibilities of SEC are to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
What are the purposes of financial markets? To affect the distribution of income for investors To maintain fair, orderly, and efficient markets To willingly take risk and capture returns To provide liquidity and determine prices
To provide liquidity and determine prices Correct! The purposes of financial markets are to provide liquidity and to determine prices.
The Federal Reserve sometimes adjusts the interest rate at which commercial banks can borrow from it. What is the purpose of adjusting the interest rate? To increase the size of the Federal Reserve To obtain a positive return for its private investors To regulate inflation and unemployment To reduce the amount of outstanding debt owed by U.S. citizens
To regulate inflation and unemployment Correct! Regulating inflation and unemployment is the main objective of the Federal Reserve and central banks, and it is accomplished by adjusting the interest rate.
Why is built-in inflation linked to adaptive expectations? Expectations of accidents or high demand cause expectations of price increases. Increased demand for goods and services becomes unbalanced with the supply of goods and services. Regulations set by the authorities build an expectation of price increases. Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher.
Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher. Correct! When the prices of goods and services go up, employees expect and even demand higher wages to maintain their living standard, which will lead to further increases in prices.
Hannah is the financial manager of a firm. A project that she has recommended has been approved and will cost $5 million. Since the company does not have enough cash on reserve, Hannah must figure out how to raise enough money to start the project. She can choose whether to issue new bonds, new stocks, a mortgage loan, or some combination of those options. What task is Hannah performing in this scenario? Managing financial investments Making an investment decision Managing working capital Making a financing decision
Making a financing decision Correct! Since the project has already been approved, Hannah is trying to find a way to finance the investment and considering its capital structure.
What are financial managers doing if they evaluate whether it is worth spending money on research and development for a new product? Implementing a financial policy Managing working capital Making a financing decision Making an investment decision
Making an investment decision Correct! The financial manager assesses the costs and benefits of potential investments in order to wisely use the investors' money.
Which task does the financial manager of a firm perform that involves the issuance of new stocks and bonds? Managing working capital Deciding on accounting standards Making financing decisions Making investing decisions
Making financing decisions Correct! Once investment decisions are made, a financial manager considers different possibilities of financing sources for the investments. This may include issuing new stocks and bonds.
Which task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project? Making credit standard decisions Making financing decisions Making investment decisions Making inventory control decisions
Making financing decisions Correct! The manager is deciding where to get the funds to support a new project, which means the manager is making a financing decision.
Which task does a financial manager perform when assessing the costs and benefits of potential projects? Making investment decisions Managing working capital Implementing financial policies Making financing decisions
Making investment decisions Correct! Understanding how benefits weigh up against costs is the first priority before moving forward with financing and managerial decisions.
Which situation is an example of an agency problem? Managers follow their own interests instead of the owners' interest. Owners prevent managers from maximizing profits. A firm fails to maximize long-term investment. Managers do not agree with employees on material supply issues.
Managers follow their own interests instead of the owners' interest. Correct! An agency problem occurs when the agent (a manager) does not act in the best interest of the owners.
What kind of market primarily allows institutions to borrow and lend in the short term? Money market Futures and options markets Primary market Capital market
Money market Correct! Assets in money markets are typically highly liquid and intended for use within a year or less.
Which term reflects a person's beliefs about right and wrong, good and bad, or just and unjust? Moral Legal Ethical Standard
Moral Correct! Moral reflects one's beliefs about right and wrong, good and bad, or just and unjust.
What is the compensation for risk given to investors called? Opportunity cost Risk premium Real rate Risk-free rate
Risk premium Correct! Risk premium is the compensation that investors take for the risk they have to bear.
Which component of an interest rate is an indicator of inflation and opportunity cost? Growth rate Purchasing power Risk premium Risk-free rate
Risk-free rate Correct! The risk-free rate describes the rate of return on an investment with no risk, so it just measures inflation and opportunity cost.
You are calculating the present value of an annuity due of $5,000 a year for 20 years. The discount rate is 3%. What should be the "type" input variable of the PV function? 5000 20 0.03 1
1 Correct! The type is the cash flow type in the PV function. 1 = BEGIN, or an indication of an annuity due.
You are calculating the future value of an ordinary annuity. You are planning to save $1,000 a year for the next 10 years in an account that gives a 3% interest rate. You set up an Excel sheet as follows: What should you have in cell C7 in order to calculate the future value correctly and to make sure that any changes in inputs reflect automatically when you change any of the variables in cells C2:C6? =FV(C6,C5,C4,C3,C2) =FV(C2,C3,C4,0,0) =FV(0.03,10,-1000,0,0) =FV(C2,C3,C4,C5,C6)
=FV(C2,C3,C4,C5,C6) Correct! To find a future value, you need to use the FV function and reference cells in order of rate, nper, pmt, pv, and type to return a correct future value and reflect any changes you may make in the input.
You are considering purchasing a house for $250,000. You have two options to finance it. One is a 20-year mortgage with an interest rate of 3.5%, and the other is a 30-year mortgage with an interest rate of 3.5%. Which mortgage option requires you to pay more in total interest? A 30-year mortgage Both are the same A 20-year mortgage Cannot be determined
A 30-year mortgage Correct! Even though the interest rate is the same, the longer the loan is, the more interest you pay for the mortgage.
Which scenario is an example of an agency problem? The management team works overtime without pay to complete financial reports. The owners of the company offer shares of the company to management. An employee takes a potential client to dinner and pays for it using the company credit card. A manager purchases a company car and allocates it as a company expense.
A manager purchases a company car and allocates it as a company expense. Correct! This is a luxury that does not improve shareholder value and costs the company money.
What are the main services offered by financial institutions? Deciding which assets to invest in to create wealth in the future Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions Soliciting charitable donations and then managing the distribution of these funds Evaluating sources of funding for a business project, the capital structure of a firm, or actions managers could take to increase the value of the firm
Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions Correct! Financial institutions such as banks, insurance companies, and mutual fund companies provide these services.
Why does an increased demand for goods and services cause inflation? An increase in demand causes people to want less goods and services because of increased competition, which will result in a decrease in market price. An increase in demand often causes an insufficient supply in the market, which causes prices to go up until the demand is once again equal to the supply. An increase in demand results in better-quality goods, which means that they will be more expensive. An increase in demand causes a decrease in prices because suppliers are not willing to meet the increased demand.
An increase in demand often causes an insufficient supply in the market, which causes prices to go up until the demand is once again equal to the supply. Correct! An increase in demand results in an increase in prices, which is the definition of inflation.
What is a depository institution? An institution that accepts and pays interest on deposits of money, as well as extends loans An institution that has a goal to maximize owner or shareholder wealth An institution that provides individuals and firms access to financial markets
An institution that accepts and pays interest on deposits of money, as well as extends loans Correct! This is the definition of a depository institution. Examples include banks and credit unions.
What is the name for the interest rate expressed on an annual basis? Compound interest Real interest rate Annual percentage rate Simple interest
Annual percentage rate Correct! The APR is the annual interest rate that is charged for borrowing money or that is earned through investment, and it is calculated on an annual basis.
How is the interest rate expressed? As a dollar amount As a fractional probability As a percentage As a ratio
As a percentage Correct! Interest is the percentage of the principal that a lender receives or that a borrower pays to use the money.
Suppose Sophia is considering a new stock investment for her retirement account. This stock has significant risk, but is quite popular in the market. Inflation for the next few years is expected to be 2-3% per year, and the current U.S. Treasury rates are about 2%. How should she use this information to decide what type of return she can expect from the stock? Based on the risk level, she should be willing to accept a return from the stock less than the current U.S. Treasury rates. Based on the stock's popularity, she should not consider the opportunity costs of other assets' potential returns when setting the required rate. Based on the type of financial security, the company selling the stock should set the required return used to assess the stock. Based on the inflation rate, she should expect this stock to provide a return higher than this for the associated risk.
Based on the inflation rate, she should expect this stock to provide a return higher than this for the associated risk. Correct! Since the inflation of 2-3% will reduce any nominal returns she receives by this amount, she would want a higher return to accommodate for the opportunity costs and risks associated with the investment.
Why does the time value of money play an important role in financial decision-making? Because the time value of money helps you estimate the cost of capital of any project Because the time value of money helps you estimate cash flows received at different times so that you can sum up all the benefits and costs Because you do not need to consider inflation, opportunity cost, or risk for investments when using time value of money Because the benefits of investments received at different times are comparable only when you consider the time value of money
Because the benefits of investments received at different times are comparable only when you consider the time value of money Correct! With the time value of money, you can find today's value of future cash flows to compare the costs and benefits of different investments.
Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects? Bondholders are primarily interested in maintaining the company's current financial status. Bondholders are primarily interested in the company paying more dividends. Bondholders are primarily interested in maximizing shareholder wealth. Bondholders are primarily interested in making sure they will be paid back.
Bondholders are primarily interested in making sure they will be paid back. Correct! If a company takes on a riskier project, there is a higher probability of the project being unsuccessful, which means that the bondholders may put themselves at a higher risk of not receiving their loan back.
What tool can you use to understand your overall personal cash flows? Investing Budgeting Saving Setting financial goals
Budgeting Correct! Budgeting helps you to understand your income and expenses and to analyze your cash flows.
You just inherited $25,000 from a long-lost relative. You decide to put the money in a savings account for the time being. What would be considered an opportunity cost of putting the money in savings? The fees you must pay to your bank to hold the $25,000 Having access to the money should you have some sort of financial emergency Earning interest on the $25,000 you just put in savings Buying a brand new car worth $25,000
Buying a brand new car worth $25,000 Correct! Buying a new car would be considered an opportunity cost because it is something you are giving up by keeping the money in your savings account.
Which financial institution ensures that a nation's economy remains healthy by controlling the amount of money circulating in the economy? Credit union Mutual fund Commercial bank Central bank
Central bank Correct! Central banks control the supply of money in the economy.
Personal income is which type of economic indicator? Leading Lagging Unifying Coincident
Coincident Correct! Coincident indicators change as the economy changes.
What is the third step in finding a solution to an ethical dilemma? Move forward with the course of action you have chosen Consider alternative courses of action Identify and define the problem Consider all stakeholders involved
Consider all stakeholders involved Correct! First, you should identify and define the problem. Second, consider alternative courses of action. Third, consider all stakeholders involved.
What is the second step in finding a solution to an ethical dilemma? Consider alternative courses of action Identify and define the problem Consider the consequences that may come from the action Calculate the value added to the company
Consider alternative courses of action Correct! First, identify and define the problem. Then, consider alternative courses of action.
What type of financial institution is an insurance company? Contractual Depository Circulatory Investment
Contractual Correct! Insurance companies are contractual savings institutions.
Which area of finance deals with sources of funding and the capital structure of corporations and seeks to increase the value of a firm to its owners? Business finance Real estate Investments Financial institutions
Correct! Business finance is the area of finance that deals with uses and sources of funding to increase the value of the firm.
What is the primary difference between finance and accounting? Finance focuses on the future, while accounting is generally backward-looking. Accounting involves investing and forecasting, while finance summarizes a company's financial information. Finance provides financial data to decision makers, and accounting involves making decisions using that data. Accounting focuses on the future, while finance is generally backward-looking.
Correct! Finance is the management and allocation of capital with the objectives of investing, forecasting, budgeting, saving, lending, and borrowing.
If you invest $10,000 today and then $5,000 each year for the next 5 years into an investment with an interest rate of 4%, you can withdraw $39,248.14 in 5 years. What does $39,248.14 represent? Annuity Perpetuity Present value Future value
Future value Correct. Future value measures the worth of relative past cash flows. The $39,248.14 is relative future to other cash flows
Jack is a personal financial advisor. He is with a new client, and the client is asking him what he recommends for her portfolio. Jack knows that his firm's investment product performed well last year, but its performance changes from year to year—some years it is better than the market, and some years it is not. Also, the fee to invest in the product is higher than the fee to invest in a market index fund. If Jack sells his company's investment product, the customer's loyalty to the company is doubled. Which actions should Jack take? After introducing the product, show the client data about the index fund from only the years that the index fund did poorly. Introduce the company's product as the best choice available and offer to waive the fee to invest. Give the client a recommendation of the company's product, and only offer more information about other products if she asks for it. Give a personal recommendation of
Give a personal recommendation of the company's product while explaining its performance relative to the market over the past several years. Correct! Giving a recommendation to sell a product is fine, but you should never hide other information. Sharing information about index funds and comparing your product to others is a fair action to take for the client.
Lucas is a financial advisor working for Bullzai, Inc. He is faced with a dilemma. Bullzai has started changing its practices in order to increase profit. As a financial advisor, he is now supposed to suggest to clients to invest in portfolios that will not do as well as the portfolios that Bullzai is invested in. This is an accepted practice done by other businesses in the industry, and it complies with all standards set by the government. However, Lucas knows that this practice is not in his clients' best interest. What type of dilemma is Lucas facing? Moral Ethical Legal Technical
Moral Correct! This is not a legal issue because the new practice complies with the law, and it is not an ethical issue because it is a commonly accepted practice within the industry. It is a moral issue because it deals with Lucas's own sense of right and wrong.
Which Excel function should you use when you are finding a present value of uneven cash flows to find the PV in one step? NPV IRR FV PV
NPV Correct! You can use one NPV function to find the present value of uneven cash flows.
Which type of interest rate is the rate at which invested money grows for a certain period time? Nominal rate Risk-free rate Real rate Inflation rate
Nominal rate Correct! The nominal rate is the rate at which invested money grows for a certain period of time and is the interest rate most often used in your daily life.
Nora is an investment manager, which means that she is paid to invest other people's money. To meet her goal for the month, she is seeking to invest money from clients in an investment that is risky but potentially has a higher return. What about this situation represents an ethical dilemma? Nora is considering investing in a risky asset just to meet her monthly goal. Nora is not explaining to her clients the riskiness of the specific investment. Nora is not currently meeting her goal for the month. Nora is uncertain about the outcome of the investment opportunity.
Nora is considering investing in a risky asset just to meet her monthly goal. Correct! Nora is caught between the obligation to meet her goal and the obligation to keep her clients' money safe. As an investment manager, she is obligated to do what is best for the client.
What is a component of the required rate of return? Opportunity cost Simple interest Hurdle rate Compound interest
Opportunity cost Correct! The required rate of return is composed of opportunity cost, risk, and inflation.
What is the name for a series of equal payments made at the end of consecutive periods over a fixed length of time? Perpetuity Annuity due Ordinary annuity Single sum
Ordinary annuity Correct! This is the definition of an ordinary annuity. The keys are "at the end of each period," "fixed period," and "equal payments."
You are calculating the lump sum of money needed now in order to withdraw $10,000 a year over the next 5 years from an account that earns a 3% interest rate. Which Excel function should you use? NPER function RATE function FV function PV function
PV function Correct! Since you are looking for a relative past value of future cash flows, you should use the PV function in Excel.
Which financial institution invests funds contributed by a company to provide retirement funds for the company's employees? Central bank Insurance Pension fund Mutual fund
Pension fund Correct! This is the role of pension funds.
Which type of financial institution deals mainly with providing for retirement through employers? Pension fund Investment bank Mutual fund Credit union
Pension fund Correct! Through employers, individuals can contribute to pension funds, which then invest their money in the market to provide retirement funds.
Which financial institution specializes in managing and administering retirement funds? Private equity Mutual funds Pension funds Investment banks
Pension funds Correct! Pension funds specialize in retirement funds.
What happens to prices in a market in which there is inflation? Prices fall. Prices remain the same. Prices rise. Prices fluctuate from day to day, sometimes increasing and sometimes decreasing.
Prices rise. Correct! Prices rise because of increase in demand, increase in cost of goods, and adaptive expectations.
In which type of market would a company issue bonds or stocks for the first time? Secondary market Primary market Money market Dealer market
Primary market Correct! This is the purpose of a primary market.
A local start-up company just hit its five-year anniversary and is planning an initial public offering sometime this year. In order to issue public stock, which market will the company use? Dealer market Primary market Secondary market
Primary market Correct! When a company issues stock for the first time to raise capital, shares must initially be sold through a primary market. Futures and options market
Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange? Private equity Corporate finance Insurance Financial planning
Private equity Correct! Private equity deals with investments in firms that are privately held and whose ownership is not yet bought or sold on any public stock exchange.
Which financial institution includes entities that receive money from institutional investors and wealthy individuals to buy troubled companies to improve them and earn returns by selling them or going public? Mutual fund Credit union Commercial bank Private equity
Private equity Correct! This is the role of a buyout private equity firm.
A company is trying to finance a project with a mortgage loan from a bank. The company's assessment of the project indicates that the company may experience several years of loss until the project becomes profitable. This means that the company might lose its ability to pay back the loan and the interest on the mortgage. What action might the bank take to protect its interest? Let the company manipulate accounting procedures. Set a strict covenant that the company cannot easily achieve. Push the company to pay dividends to the shareholders. Let the company take the mortgage loan because of its long partnership with the bank.
Set a strict covenant that the company cannot easily achieve. Correct! By setting a strict covenant, there is a risk that the company may not meet its obligation, which would deter the company from taking on risky projects.
What does the term ethical refer to? An idea or thing used as a measure, norm, or model in comparative evaluations Following the laws and rules set by an authority One's beliefs about right and wrong, good and bad, or just and unjust The accepted standards of conduct that guide a person's behavior
The accepted standards of conduct that guide a person's behavior Correct! Ethical refers to the accepted standards of conduct that guide a person's behavior.
