Fin Mgmt - Topic 1 Review

Which of the following is an example of firm capital? Bank deposits Cash The firm's worth None of these choices

Cash

While competitive sales allow underwriters to submit bids to purchase bonds, negotiated sales do not. True/False

False

A Treasury bond is a debt instrument issued by corporations. True/False

False A Treasury bond is a debt instrument issued by governments.

A stock is a debt instrument issued by corporations. True/False

False A stock represents ownership in a company.

Dealer markets have a physical location. True/False

False Auction markets have a physical location. Dealer markets do not.

Banks make money when interest rates they charge to borrowers are less than interest rates they pay depositors. True/False

False Banks make money when interest rates they charge to borrowers are MORE than interest rates they pay depositors.

Efficient markets are those in which prices are volatile. True/False

False Efficient markets are those in which prices reflect all relevant information

Economics is a subfield of Finance. True/False

False Finance is a subfield of Economics.

Firms that are maximizing shareholder value will generally see stability in the firm's stock price. True/False

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

Firms with low unexpected earning usually exhibit large positive returns on the earnings announcement day. True/False

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

Efficient markets will often have mispriced securities. True/False

False Inefficient markets will often have mispriced securities.

Corporate finance is devoted to understanding various types of financial instruments. True/False

False Investments are devoted to understanding various types of financial instruments.

NASDAQ is an example of an auction market. True/False

False NASDAQ is an example of a dealer market.

Stocks that are listed on dealer markets generally have a single dealer for each stock. True/False

False Stocks that are listed on dealer markets generally have multiple dealers for each stock.

NASDAQ is the world's largest secondary financial market. True/False

False The NYSE is the world's largest secondary financial market.

The NYSE specialist will charge a higher price to sellers of the stock and a lower price to the buyer of the stock. True/False

False The NYSE specialist will charge a lower price to sellers of the stock and a higher price to the buyer of the stock.

A market order to sell a stock would execute at the current ask price. True/False

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. True/False

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

Inefficient markets are those in which prices will respond quickly to new information. True/False

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

Which of the following is not an example of firm capital? Cash Machinery Labor Financial markets

Financial markets

A bond is a debt instrument issued by corporations or governments. True/False

True

A bond is similar to a loan. True/False

True

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

True

A market order to buy a stock would execute at the current ask price. True/False

True

A syndicate is a group of investors that is temporarily formed to handle the issuance of new bonds. True/False

True

Agency costs are commonly mitigated by compensating management with company stock. True/False

True

Agency costs are costs that are incurred when management does not act in the best interest of shareholders. True/False

True

An IPO is where a company goes public or sells shares to the public for the first time. True/False

True

What are the two types of orders that are used by investors? Debit Orders and Equity Orders Market Orders and Timely Orders Market Orders and Limit Orders

Market Orders and Limit Orders

The goal of the firm is to ____________ shareholder value. Preserve Protect Maximize

Maximize

An IPO occurs on the primary market. True/False

True

An example of agency costs is a firm's decision to invest in a project because management enjoys working on the project. True/False

True

An example of agency costs is management spending company money on unprofitable goods and services. True/False

True

Auction markets have a physical location. True/False

True

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. True/False

True

Capital is defined as a financial asset. True/False

True

Companies can raise capital by issuing bonds or stocks. True/False

True

Companies should always maximize shareholder value. True/False

True

Corporate finance focuses on the decision making by the management of the firm. True/False

True

Firms that are maximizing shareholder value will generally see increases in the firm's stock prices. True/False

True

Firms try to mitigate agency costs by aligning managers' interests with shareholders' interests. True/False

True

Firms with high unexpected earnings usually exhibit large positive returns on the earnings announcement day. True/False

True

In an efficient market, new information will move prices almost immediately. True/False

True

In an inefficient market, prices will slowly respond to new information. True/False

True

Inefficient markets will often have mispriced securities. True/False

True

Markets are where prices are determined. True/False

True

NYSE daily trading volume has increased over the last 50 years. True/False

True

Primary financial markets are markets where issuers place new securities with investors. True/False

True

Some high frequency traders provide liquidity to the rest of the market. True/False

True

Stock represents ownership in a particular company. True/False

True

Stocks and bonds are two types of financial instruments. True/False

True

Syndicates are generally made up of investment banks and other institutional investors. True/False

True

The NYSE specialist has an objective to provide liquidity to the market. True/False

True

The New York Stock Exchange is an auction market. True/False

True

The bid-ask spread is compensation to the specialist for providing liquidity to the market. True/False

True

Without financial markets, exchange would become more costly. True/False

True

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?

.04 (56.75 - 56.71 = 0.04)

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

.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 prices at $109.54. If the stock does not pay a dividend, what is the percentage return for this stock?

.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 prices at $18.45. If the stock recently paid a $3.50 dividend, what is the percentage for this stock?

.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 prices at $22.08. If the stock recently paid a $4 dividend, what is the percentage return for this stock?

.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?

.40 (215.54 - 215.14 = 0.40)

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

negotiated sale

Market orders are _________ sensitive while limit orders are _________ sensitive. time, perception market, price time, price

time, price

Privately-held companies and publicly traded companies will always maximize shareholder value in the same way. True/False

False

Secondary markets are where securities are initially offered to the public. True/False

False

Much of the trading on the NYSE executes without a specialist (i.e. market maker). True/False

False

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

2.42 47.42 - 45 = 2.42

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

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 prices at $109.54. If the stock does not pay a dividend, what is the dollar return for this stock?

8.10 109.54 - 101.44 = 8.10

What issue(s) are associated with the firm goal to maximize shareholder value? Agency costs and high profit returns The goal is unattainable Potential unethical behavior Agency costs and potential unethical behavior None of these choices

Agency costs and potential unethical behavior

Maximizing shareholder value ethically can improve society generally by: Employing additional workers. Creating growth and leading to increased production by other firms. Increasing the profitability of other firms because of increased consumption. All of these choices.

All of these choices

What are ways firms can maximize shareholder value? 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. All of these choices

All of these choices

Which of the following best explains the role of prices? Prices convey information Prices affect the distribution of income Prices affect incentives All of these choices

All of these choices

What are the two ways a syndicate can place a bond? Competitive sale or appreciative sale A public initial sale Competitive sale or negotiated sale Only negotiated sale

Competitive sale or negotiated sale

What are the three important areas of finance? Corporate Finance, Investments, and Banking/financial institutions Government Finance, WAAC, Ratios Neither of these

Corporate Finance, Investments, and Banking/financial institutions

Then dealers have to compete with one another, transaction costs will generally _______________. Remain constant Decrease Do nothing Increase

Decrease

Agency costs are commonly mitigated by increasing management compensation. True/False

False

An IPO is a seasoned equity offering. True/False

False

An example of agency costs is increased costs incurred because of higher levels of production. True/False

False

If providing liquidity becomes more risky, then dealers will ___________ the spread. Narrow the spread Increase the spread Decrease the spread None of these choices

Increase the spread

If the price of a particular stock begins to heavily fluctuate, then the specialist will ____________ the spread. Maintain the spread Increase the spread Reduce the spread None of these choices

Increase the spread

What is a way firms can maximize shareholder value? Provide raises to all employees to improve morale. Invest in new machinery that will be profitable. Invest capital into projects that will improve the visibility of the firm. Increase sales of products even if at a loss.

Invest in new machinery that will be profitable.

A stock is a share of _____________ in a particular company. Ownership Cash Debt

Ownership