Finance Exam #1 Practice
Sonia takes a mortgage loan from a bank to purchase property
Financial asset markets
A small startup firm has each of the partners contribute $50,000 in capital to help the company make payroll for the next three months.
Direct Transfers
Steve's grandfather loans him $30,000 to start a small coffee shop in the East Village in Manhattan.
Direct Transfers
Paradigm Media is a company run by a group of new media professionals. The owners of the company do not have any personal liability and file taxes based on individual income.
LLC/LLP
Krit Corp. is a US manufacturing company based in the Midwest. As an investor, Wilson bought 175 shares of stock in Krit Corp. The stock price of Krit Corp. is currently trading at $30.00 per share. Wilson's total wealth in Krit Corp. is:
$5,250.00
WAC Inc. is going public and issuing 500,000 shares of common stock. The capital raised in the IPO will fund the company's proposed expansion. A Dutch auction is used to allocate shares in the WAC IPO. The following table shows the number of shares requested by potential investors in each row. Bids Number of Shares Requested Price per Share Bidder # 1 50,000 $57 Bidder # 2 100,000 $55 Bidder # 3 150,000 $53 Bidder # 4 200,000 $51 Bidder # 5 250,000 $49 Bidder # 6 300,000 $47 What should be the firm's IPO offer price?
$51
The owners of a corporation are the___________________. The primary goal of the corporate management team is to ___________ the shareholders' wealth by ______________the _____________________over the long run.
1.) shareholders of the company 2.) maximize 3.) maximizing 4.) company's stock price
Which of the following characteristics accurately describes the stock market?
An active market that determines the price of a firm's shares
Issued by corporations, these unsecured debt instruments are used to fund corporate short-term financing requirements. If issued by a financially strong company, they have less risk.
Commercial paper
Issued by corporations, these financial instruments give their holders a class ownership in a company. They are considered the most risky but provide higher expected returns.
Common stocks
If the stock price of Krit Corp. decreases in the next two years, Wilson's wealth in Krit Corp. will _______________________ .
Decrease
Abbey allocates 80% of her portfolio for investments in short-term US Treasury bills.
Money markets
You need gasoline now, so you drive to the gas station and purchase 10 gallons of gasoline.
Spot markets
Current market prices reflect all information contained in past price movements.
Weak form efficiency
An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.'s stock should be $37.32 per share, but Mandalays Inc.'s stock is trading at $45.59 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently: a.) in equilibrium b.) undervalued c.) overvalued
c.) overvalued
The process in which derivatives are used to reduce risk exposure is called_______________.
hedging
Smith Enterprises recently was profiled on a financial information website and touted as a "hot" growth stock. You acquired the stock quote shown here from that website. Smith Enterprises (NASDAQ: SME) Last Trade: 51.63 Day's Range: 47.22 - 51.96 Trade Time: 4:00 PM ET 52wk Range: 25.48 - 60.71 One-Day Stock Return: 12.26% Volume: 1,419,317 Prev. Close: 45.99 Avg. Vol. (3m): 629,072 Open: 47.25 Market Cap: 1.63B Bid: N/A P/E (ttm): 23.05 Ask: N/A EPS (ttm): 1y Target Est: 55.40 Div. & Yield: 0.20 (0.40%) The last trade time is shown to be at 4:00 PM Eastern Time. The abbreviation "ttm" stands for "trailing twelve months," and the number shown reflects data from the previous 12 months. The abbreviation "3m" reflects data from the previous 3 months. What exchange does Smith Enterprises trade on? What is Smith's earnings per share (EPS) for the trailing 12 months? How much did the price increase today over yesterday's closing price? How heavy was the trading of Smith's stock today relative to the normal level of trading?
1.) NASDAQ 2.) $2.24 3.) $5.64 4.) Relatively heavy trading
David, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Alexis, is willing to sell 1,500 shares of the same stock. Unfortunately, David and Alexis don't know one another and must complete their transactions using the stock exchange's market-making dealer. XYZ's market maker is willing to sell her shares for $27.80 per share and purchase additional shares for $26.50 per share. Select the most appropriate values in the following table: Bid price: Ask price: Bid-ask spread: If the market maker is willing to purchase the entire block of 1,500 shares from Alexis and, from that block, resell 1,000 shares to David, then the market maker's net profit from David's transaction—excluding any inventory effects—will be ___________________.
Bid price: $26.50 Ask price: $27.80 Bid-ask spread: $1.30 ($27.80 - $26.50) $1,300.00 ($1.30 * 1,000)
Adam works for an investment bank and makes decisions about the sale of new common stock by ABCL Inc.
Capital Markets
Issued by money-centered financial firms, these short- or medium-term insured debt instruments pay higher interest than a regular savings account. They are low-risk instruments and have low returns.
Certificates of deposit
William, the chief executive officer (CEO) of ABC Corp., must make decisions that help achieve the primary goal of the corporation: maximize shareholders' wealth.
Corporate Finance
Issued by corporations, these instruments can have maturities from 1-40 years. The risk depends on the financial strength of the issuing corporation.
Corporate bonds
Rock Inc. is a mineral mining company. The CEO of Rock Inc. recently died. The news led to a short-term decline in the company's stock price, but it bounced back after the company announced its quarterly earnings.
Corporation
True or False: The efficient markets hypothesis holds only if all investors are rational.
False
With the use of advanced investment techniques, these largely unregulated portfolios are invested in securities. The investment objective is to offset potential losses by investing in counterbalancing securities. They are open to only a select class of investors.
Hedge funds
Citibank issues a loan to Jennifer for the expansion of her flower delivery business.
Indirect Transfers through Financial Intermediaries
W2 Corp. needs capital to finance a new product line. It borrows money in the form of long-term bonds underwritten by an investment bank.
Indirect Transfers through Investment Banks
They underwrite, distribute, and design investment securities for corporations to help them raise capital.
Investment banks
As a technical trader, you will be analyzing investor psychology and making investment decisions based on how investors behave during certain situations.
Investments
These financial instruments are contractual agreements that give one party a long-term agreement to use an asset by providing regular payments.
Leases
Vision Tech is a software company based out of San Francisco. Its stockholders are mostly institutional investors and there is relatively little individual ownership. If these institutions dilute their positions and sell off their stake in Vision Tech's stock to several individual investors, would direct shareholder intervention be more or less likely to motivate the firm's management?
Less likely
Vision Tech's stock price is currently trading at $41 per share. The consensus among analysts is that the intrinsic value of Vision Tech's stock is $33 per share. Is Vision Tech more or less likely to receive a hostile takeover bid? Less likely
Less likely
These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated.
Money market mutual funds
Jacob owns Jacob's Tantalizing Tees, a T-shirt shop in a small college town in Virginia. With a staff of three part-time employees, Jacob operates the business in accordance with his personal goals, dreams, and capabilities. Does Jacob have an agency conflict to deal with?
No; as both the owner and operator of Jacob's Tantalizing Tees, Jacob has not created the necessary agency relationship through which an agency conflict can exist.
When the demand for an initial public offering (IPO) of securities exceeds the number of securities issued, the offering is deemed to be:
Oversubscribed
Rafael and his friend Shirley run a carpet cleaning business. They distribute the profits proportionately and file their individual taxes.
Partnership
Which of the following actions will help ease agency conflicts and better align managers' objectives with the firm's shareholder wealth?
Pay the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth.
They are established by an employer to facilitate and organize employee retirement funds. They are asset pools that invest in securities that have a potential to give stable returns.
Pension funds
Vezio Corp. decides to sell shares worth $15 million directly to a small group of US institutional investors.
Private markets
Both the CEO and the CFO are required to certify the accuracy of information contained in financial statements, reports, press releases, and any other form of public announcement made by a company. This requirement was instituted in 2002 as a part of the________________.
Sarbanes-Oxley Act .
Andrew is self-employed and reports all of his income and expenses in his personal income tax return.
Sole Proprietorship
Issued by nonfederal government entities, these financial instruments are debt securities that fund their capital expenditures. They are exempt from most taxes imposed in the area where the securities are issued.
State and local government bonds
In a dealer market, some dealers hold a certain inventory of specific securities and create a liquid market by purchasing and selling their inventories. These dealers make a market and are thus called market makers. Agents in the market bring investors to the dealers through a network of terminals and electronic systems. Where do dealer profits come from in a dealer market?
The bid-ask spread
A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $4.50, but insiders know that, with this new drug, earnings will increase and drive the EPS to $5.00. What will happen when the company releases its next earnings report?
The stock price will increase and settle at a new equilibrium level.
A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $5.00, and insiders agree with analyst expectations. They too expect that, with this new drug, earnings will drive the EPS to $5.00. What will happen when the company releases its next earnings report?
The stock price will not change, because the market already incorporated that information in the stock price when the announcement about FDA approval was made.
A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $4.50, but insiders know that, with this new drug, earnings will increase and drive the EPS to $5.00. What will happen when the company releases its next earnings report?
There will be some volatility in the stock price when the earnings report is released, but it is difficult to determine the impact on the stock price. However, the prices will eventually adjust to the news announcement.
True or False: A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conflicts.
True
Backed by the U.S. government, these financial instruments are short-term debt obligations with a maturity of less than one year. They are considered risk-free investments.
U.S. Treasury bills
Backed by the U.S. government, these financial instruments are fixed-rate debt securities with a maturity of more than one year. They are considered default free but are subject to interest rate risk.
U.S. Treasury notes and bonds
Executive compensation packages often tie performance to bonus and incentive awards, supplemental retirement packages, perquisites, and severance pay, in order to encourage the management team to align their performance with organizational goals. Which of the following compensation proposals is most likely to be in the best interest of the company's shareholders? a.) A base salary of $500,000 plus a stock option package for 250,000 shares, with 20% of shares maturing at the end of each of the next five years b.) A base salary of $500,000 plus perquisites worth $250,000 c.) A base salary of $500,000 plus a stock option package for 250,000 shares that mature in six months
a.) A base salary of $500,000 plus a stock option package for 250,000 shares, with 20% of shares maturing at the end of each of the next five years
The CFO is not responsible for which of the following departments? Check all that apply. a.) Administration b.) Human resources c.) Credit d.) Legal issues e.) Investor relations
a.) Administration b.) Human resources
Which of the following instruments are traded in the capital markets? Check all that apply. a.) Corporate bonds b.) Long-term bank loans c.) Preferred stocks d.) Certificates of deposit e.) Commercial paper
a.) Corporate bonds b.) Long-term bank loans c.) Preferred stocks
Different forms of businesses have different characteristics. Which of the following characteristics would apply to a limited liability company and a limited liability partnership? Check all that apply. a.) Owners have limited liability and right to vote b.) Have corporate ownership structure c.) LLPs are not suitable for professional firms such as accounting, law, and architecture d.) Taxed as a partnership e.) Owned by single individual f.) Limited financial liability
a.) Owners have limited liability and right to vote b.) Have corporate ownership structure d.) Taxed as a partnership f.) Limited financial liability
The intrinsic value of a company's stock, also known as its fundamental value, refers to the stock's "true" value based on accurate risk and return data. The value perceived by stock market investors determines the market price of a stock. A stock trading at a price below its intrinsic value is considered to be undervalued. A stock trading at a price above its intrinsic value is considered to be overvalued. Which of the following statements best describes a marginal investor? a.) A marginal investor thinks that the firm's stock at the current price is a good deal, and she would buy more stock if she had more money to invest. b.) A marginal investor would buy more stock if the price fell slightly, would sell stock if the price rose slightly, and would maintain her current holding unless something were to change. c.) A marginal investor thinks that the firm's stock is priced too high, and she would only buy more stock if the price dropped sharply.
b.) A marginal investor would buy more stock if the price fell slightly, would sell stock if the price rose slightly, and would maintain her current holding unless something were to change.
Which of the following are money market instruments? Check all that apply. a.) Preferred stocks b.) Commercial paper c.) Certificates of deposit d.) Corporate bonds e.) Long-term bank loans
b.) Commercial paper c.) Certificates of deposit
Companies that are owned by a group of investors, who could also be associated with the company's management, make initial public offerings. Such companies are referred to as ____________________.
closely held corporations
A financial instrument whose value is derived from the value of an underlying asset is called a ________________.
derivative
A bank purchased a credit default swap from another financial institution to protect itself against the default of one of its borrowers. In this example, the bank is
hedging
