Managerial Finance Midterm

During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related toI) manipulation of financial data to misrepresent the actual condition of the firm.II) misleading and overly optimistic research reports produced by analysts.III) allocating IPOs to executives as a quid pro quo for personal favors. IV) greenmail. A) II, III, and IV B) I, II, and IV C) II and IV D) I, III, and IV E) I, II, and III

E) I, II, and III I, II, and III are all mentioned as causes of recent scandals. Professor Cursio adds: "greenmail" is a threat to take over a company unless the threatener is given money to go away. This term was popular in the late 1980s. I don't recall it being scandalous, although you may consider it unethical to give in to demands for special treatment.

Which of the following portfolio construction methods starts with asset allocation? A) Top-down B) Bottom-up C) Middle-out D) Buy and hold E) Asset allocation

A) Top-down Bottom-up refers to using security analysis to find securities that are attractively priced.

The ________ refers to the potential conflict between management and shareholders. A) agency problem B) diversification problem C) liquidity problem D) solvency problem E) regulatory problem

A) agency problem The agency problem describes potential conflict between management and shareholders. Shareholders would like the management they hire to act in shareholders' best interests, but management may act in its own best interest. The other problems are those of firm management only.

The value of a derivative security ________ A) depends on the value of the related security. B) is unable to be calculated. C) is unrelated to the value of the related security. D) has been enhanced due to the recent misuse and negative publicity regarding these instruments. E) is worthless today.

A) depends on the value of the related security. Of the factors cited above, only the value of the related security affects the value of the derivative and/or is a true statement.

New issues of securities are sold in the ________ market(s). A) primary B) secondary C) over-the-counter D) primary and secondary

A) primary New issues of securities are sold in the primary market. Professor Cursio adds: new issues means there is no previous owner, the company creates the issue. Therefore the company is involved in the transaction and the company gets the money.

Which of the following portfolio construction methods starts with security analysis? A) Top-down B) Bottom-up C) Middle-out D) Buy and hold E) Asset allocation

B) Bottom-up Bottom-up refers to using security analysis to find securities that are attractively priced. Top-down refers to using asset allocation as a starting point.

Which of the following is true about mortgage-backed securities?I) They aggregate individual home mortgages into homogeneous pools.II) The purchaser receives monthly interest and principal payments received from payments made on the pool.III) The banks that originated the mortgages maintain ownership of them.IV) The banks that originated the mortgages may continue to service them. A) II, III, and IV B) I, II, and IV C) II and IV D) I, III, and IV E) I, II, III, and IV

B) I, II, and IV III is not correct because the bank no longer owns the mortgage investments.

________ specialize in helping companies raise capital by selling securities. A) Commercial bankers B) Investment bankers C) Investment issuers D) Credit raters

B) Investment bankers An important role of investment banking is to act as middlemen in helping firms place new issues in the market.

A fixed-income security pays ________ A) a fixed level of income for the life of the owner. B) a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security. C) a variable level of income for owners on a fixed income. D) a fixed or variable income stream at the option of the owner.

B) a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security. A fixed-income security pays a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

The material wealth of a society is a function of ________ A) all financial assets. B) all real assets. C) all financial and real assets. D) all physical assets.

B) all real assets. The material wealth of a society is a function of all real assets. Financial assets are just traded (i.e. bought and sold) from one party to another.

In 2016, ________ was(were) the least significant liability(ies) of U.S. nonfinancial businesses in terms of total value. A) bonds and mortgages B) bank loans C) inventories D) trade debt E) marketable securities

B) bank loans See Table 1.4. Professor Cursio adds: large companies can borrow directly from investors rather than borrow from banks. These borrowings are called bonds.

Financial assets ________ A) directly contribute to the country's productive capacity. B) indirectly contribute to the country's productive capacity. C) contribute to the country's productive capacity, both directly and indirectly. D) do not contribute to the country's productive capacity, either directly or indirectly. E) are of no value to anyone.

B) indirectly contribute to the country's productive capacity. Financial assets indirectly contribute to the country's productive capacity because these assets permit individuals to invest in firms and governments. This in turn allows firms and governments to increase productive capacity. Professor Cursio adds/simplifies: financial assets own real assets which contribute to the economy. This is a bit of an oversimplification because some financial assets own other financial assets, which then in turn own real assets.

In 2016, ____________ were the most significant liability of U.S. households in terms of total value. A) credit cards B) mortgages C) bank loans D) student loans E) other forms of debt

B) mortgages See Table 1.1. Professor Cursio adds: This is true every year.

Asset allocation refers to ________ A) choosing which securities to hold based on their valuation. B) investing only in "safe" securities. C) the allocation of assets into broad asset classes. D) bottom-up analysis.

C) the allocation of assets into broad asset classes. Asset allocation refers to the allocation of assets into broad asset classes.

________ are financial assets. A) Bonds B) Machines C) Stocks D) Bonds and stocks E) Bonds, machines, and stocks

D) Bonds and stocks Machines are real assets; stocks and bonds are financial assets. The way I like to think about this is people would gladly sell financial assets to make a few dollars. Businesses do not normally sell their real assets because it it expensive or buy extra real assets just because it is cheap.

An example(s) of a derivative security is ________ A) a common share of Microsoft. B) a call option on Intel stock. C) a commodity futures contract. D) a call option on Intel stock and a commodity futures contract. E) a common share of Microsoft and a call option on Intel stock.

D) a call option on Intel stock and a commodity futures contract. The values of a call option on Intel stock and a commodity futures contract are derived from that of an underlying asset; the value of a common share of Microsoft is based on the value of the firm only.

A debt security pays ________ A) a fixed level of income for the life of the owner. B) a variable level of income for owners on a fixed income. C) a fixed or variable income stream at the option of the owner. D) a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

D) a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security. A debt security pays a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

The means by which individuals hold their claims on real assets in a well-developed economy are ________ A) investment assets. B) depository assets. C) derivative assets. D) financial assets. E) exchange-driven assets.

D) financial assets. Financial assets allocate the wealth of the economy. Example: it is easier for an individual to own shares of an auto company than to own an auto company directly.

Although derivatives can be used as speculative instruments, businesses most often use them to ________ A) attract customers. B) appease stockholders. C) offset debt. D) hedge risks. E) enhance their balance sheets.

D) hedge risks. Firms may use forward contracts and futures to protect against currency fluctuations or changes in commodity prices. Interest-rate options help companies control financing costs.

Theoretically, takeovers should result in ________ A) improved management. B) increased stock price. C) increased benefits to existing management of the taken-over firm. D) improved management and increased stock price. E) All of the options.

D) improved management and increased stock price. Theoretically, when firms are taken over, better managers come in and thus increase the price of the stock; existing management often must either leave the firm, be demoted, or suffer a loss of existing benefits. Professor Cursio adds: when existing management gets removed they are typically still fairly treated well. The phrase "golden parachute" comes to mind. But they are not treated as well as if the company was not taken over.

The Sarbanes-Oxley Act ________ A) requires corporations to have more independent directors. B) requires the firm's CFO to personally vouch for the firm's accounting statements. C) prohibits auditing firms from providing other services to clients. D) requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements. E) All of the above.

E) All of the above. The Sarbanes-Oxley Act does all of the above.

________ are examples of financial intermediaries A) Commercial banks B) Insurance companies C) Investment companies D) Credit unions E) All of the options

E) All of the options All are institutions that bring borrowers and lenders together.

Money market securities ________ A) are short term. B) are highly marketable. C) are generally very low risk. D) are highly marketable and are generally very low risk. E) All of the options.

E) All of the options.

[Professor Cursio adds: "Some"] Financial intermediaries exist because [Professor Cursio adds: "most"] small investors cannot efficiently ______ A) diversify their portfolios. B) assess credit risk of borrowers. C) advertise for needed investments. D) diversify their portfolios and assess credit risk of borrowers. E) All of the options.

E) All of the options. The individual investor cannot efficiently and effectively perform any of the tasks above without more time and knowledge than that available to most individual investors. Professor Cursio adds: the above statement is an overgeneralization. Most small investors pay someone else (stockbrokers, investment advisors) to help them, or outsource the process buy buying mutual funds. There's no reason why an individual investor cannot perform the above tasks, except it is probably not worth the time and trouble.

________ are real assets. A) Land B) Machines C) Stocks and bonds D) Knowledge E) Land, machines, and knowledge

E) Land, machines, and knowledge Real assets are used to create products that create wealth. Financial assets are hold hoping to make money. The way I like to think about this is people would gladly sell financial assets to make a few dollars. Businesses do not normally sell their real assets because it it expensive or buy extra real assets just because it is cheap.