FIN350 Ch 1-4 Exam 1

Mountain Corporation and Valley Corporation are identical in every way, except Mountain is located in a country whose leadership is on the verge of being ousted by a pro-democracy citizen uprising. Which firm will likely have less predictable cash flows in the coming year, and why?

Mountain, more country risk

Which of the following characteristics would differentiate a transnational corporation from a multinational corporation?

broad dispersion of ownership and a global management perspective

Which person in the financial market plays the role of "matchmaker" during a market transaction and bears no risk of ownership of securities?

broker

Which of the following best exemplifies foreign direct investment?

building a production facility outside the company's home country

Dominic is part of a firm researching the U.S. economy, with specific emphasis on the patterns of borrowing. Dominic's research has led to the knowledge that ___________ are the majority of borrowers, and the federal government is the second largest borrower.

businesses

Borrower-spenders in the financial system are most like which groups?

businesses, governments, households

market share

more concerned with capital budgeting

A potential investor is considering purchasing securities. As an individual investor, which will likely have greater influence on the investor's decision?

A potential investor is considering purchasing securities. As an individual investor, which will likely have greater influence on the investor's decision?

Which scenario would cause an increase in the real rate of interest in the United States?

A technology breakthrough

Sporting Corporation has hired an investment firm to conduct an IPO on its behalf. For the IPO to be considered successful, what is the needed result?

All of the common stock offered for the company is sold.

What is the major difference between an investment bank and a money center bank?

An investment bank helps companies sell new debt or equity whereas a money center bank offers traditional and investment services.

Apple Computer needs to raise money for an upcoming capital project. Which scenario resembles Apple borrowing the money from its investors?

Apple sells long-term bonds that will mature in 15 years.

How do capital budgeting and financing differ in a corporation?

Capital budgeting involves identifying the assets to buy, whereas financing involves determining how to pay for them.

Which term is another way to characterize a line of credit from a commercial bank?

Commitment

You are scheduled to participate in business contract negotiations in an emerging market country throughout the next several days. You are also scheduled to participate in various social and cultural activities each night during your overseas visit. You can expect to converse in __________ during the day and __________ at night.

English; the local language

Gemini Manufacturing and Capricorn Manufacturing are identical in nearly every way. The main distinction between the two firms is that Gemini's management spends very little time focusing on capital budgeting issues, whereas Capricorn's management spends countless hours contemplating such issues. This key difference suggests that

Gemini - central-planned econ Capricorn - mkt share

Which term denotes the main difference between the real and nominal rate of interest?

Inflation

A firm would most likely have an overarching goal of maximizing its market share if it were headquartered in which of the following countries?

Japan

Germany-based Kirschner Corporation and U.S.-based Johnson Corporation both manufacture high-tech medical imaging equipment. Last year, the two firms used nearly the same amount of raw materials, operated the same number of facilities, and made roughly the same amount of finished goods. Which of the following conclusions can be drawn?

Johnson probably has a higher debt-to-equity ratio, because American firms are less likely than German firms to focus on maximizing corporate wealth.

What is one main difference between exchange markets and over-the-counter markets?

Location

M2 money supply

M1 plus savings accounts, small time deposits, and retail money market mutual funds. Higher rate of return.

If the yield of a highly-marketable security were to decrease while the yield of a less-marketable security stayed the same, given that the difference in yields is greater than zero, what would be the effect on the marketability risk premium?

MRP should increase

Ginny is involved in the direct financing of borrower-spenders. If she is involved directly, she most probably is working at

NASDAQ

Blake McMasters is involved in the indirect financing of borrower-spenders. If he is involved indirectly, what company would he most probably be working at?

Northwood State Bank

What is the significance of working capital management for a company?

Proper management of current assets and liabilities helps to secure positive cash flows.

Which form of financial resource do most small businesses use from their banks?

Revolving credit line

If a Fortune 500 company wanted to sell an initial offering of $400 million in securities, which strategy would be best for them and why?

Sell the securities in the financial markets, because markets facilitate the direct selling of securities to investors.

Which potential investment possesses the least amount of interest rate risk for a novice investor?

Treasury Bills

Which scenario best exemplifies debt financing for a corporation?

a company that pays periodic interest payments on a prior contractual obligation

In the mid-1980s, the southeast Asian nation of Vietnam began to switch away from a completely centrally planned economy toward a more socialist-oriented market economy. Which of the following long-term changes would you most expect to see in relation to this transition?

a decrease in Vietnam's rate of inflation

Of the following concepts and procedures, which can vary depending on political, legal, and cultural differences among nations

accounting standards

Carrollton Bank has recently raised its savings rates. Their senior managers have agreed that they should also lower their loan rates. What reaction would the other banks in their area have, and why?

adjust their rates, because of competition

Sporting Corporation has hired an investment firm to conduct an IPO on its behalf. For the IPO to be considered successful, what is the needed result?

all common stock offered for the company is sold

In the financial system for the economy, which entity gathers up money from people and distributes it to those in need?

banks

If the yield of a callable bond were to decrease while the yield of a noncallable bond stayed the same, assuming the difference between the two is positive, what should an investor expect the call interest premium to do?

call int premium should decrease

One benefit that companies obtain from conducting private placements with investors is that

cheaper and quicker

You run a midsize, rapidly growing business that has quality tangible collateral for a loan. You need to raise debt capital to fund the growth, and you are trying to decide whether to seek a bank term loan or attempt to sell debt in the public markets. The firm needs some money very quickly, and you do not want to make company information publicly available to your competitors. In this situation, you should probably

choose a bank term loan

Bobby Kingz is looking for a low-interest loan for a business venture in pressing vinyl records. The third bank he visits offers the lowest interest rate. What market force is responsible for this low rate?

competition

Which pair gives an example of real versus financial assets?

computers, stocks

M1 money supply

currency, traveler's checks, demand deposits, other checkable deposits

What is the tax consequence of a debt payment rather than an equity payment?

debt interest payment is tax deductible.

Which set of economic circumstances would lead an experienced investor to conclude that a recession is imminent?

decrease in inflation rate, downward sloping yield curve

Interest payments on debt can have what effect on a company's tax bill?

decrease the tax bill

Failure on the borrower's part to meet any condition of the debt or loan contract constitutes

default

U.S.-based Owens Minerals is opening its first mine in Kenya. The management team is concerned about differences in valuation of equity between Owens' Kenyan operations and its American operations. To ensure valuation calculations for the new mine are as accurate as possible, management should be sure to focus on

differences in market conditions between the United States and Kenya.

Compared to financial markets that are involved in direct financing of borrowers, ___________ are involved in indirect financing.

financial institutions

German firms are more likely to

focus on maximizing corporate wealth.

What are two common characteristics of multinational companies that differ from domestic companies?

foreign exchange risk and country risk

Which of the following will result in a decrease in residual cash flows?

higher tax rates

Dunn Pharmaceuticals is opening an office in Chennai, India. As Dunn's management makes financial projections for the new office, they begin to wonder how nominal interest rates in India vary from those in the United States. To better understand how and why these rates differ, Dunn's management should focus on

how inflation rates differ

Lender-savers

income > spending

France

increase corporate wealth

Canada

increase stock value

A company makes double in profit compared to the previous year. To avoid paying extra taxes, which type of payments would help bring down the tax bill for next year?

interest payments on a debt

Michael owns a new startup company that sells printer supplies. He needs to find ways to run the business efficiently to maximize profitability. What situation should he avoid the most with regards to the inventory in his business?

inventory levels that are too high

What is one of the differences between issuing debt and issuing stock that benefits a firm?

issuing debt is less expensive than issuing stock

centrally planned economy

less concerned with capital budgeting

A federal credit union is offering CDs at 3 percent rates, and 3-year auto loans at 6.5 percent. A local bank is offering savings accounts at 2 percent rates, and 5-years auto loans at 5.8 percent. A national bank is offering money market accounts at 4 percent rates, and home loans at 4.5 percent. A county bank is offering savings accounts at 2.5 percent, and home loan accounts at 3.2 percent. Which bank should you use if you are looking to buy a new car?

local, lowest loan rate

Fillmore Incorporated is thinking about opening an overseas office in the Middle East, but it is concerned about political instability in the region. To get the highest possible return on investment for its future Middle East office, Fillmore should be sure to locate the facility in a nation that presents

low country risk

For a given change in interest rates, how are the prices of lower-coupon bonds affected compared to the prices of higher-coupon bonds?

lower coupons change more than higher coupon

Bank term loan rates must cover the bank's cost of funds, the default risk of the borrower, and the Treasury yield spread. Similar privately issued debt bought by non-bank institutions may have a lower interest rate than a bank term loan because

many institutional buyers are less regulated than banks and have a lower cost of funds.

Acme Construction Company has just announced a merger with one of its major competitors. The price of its stock has jumped two percent in the last few days after the news of the merger. This is an example of which concept about the securities market?

market informational efficiency

High transaction costs in the market such as broker commissions fall under which area of concern for companies?

market operational efficiency

Japan

maximize global market share

A firm that is headquartered in Japan would most likely have an overarching goal of

maximizing the percentage of customers who purchase its products or services.

When moving from a real domestic investment to a real international investment, we would expect that __________ would be largely unchanged, while __________ would be different.

net present value and time value of money concepts; financial statement analysis and business risk

When financial managers increase debt for a firm while keeping the costs of debt down, they are primarily looking to

optimize the capital structure.

A startup firm has residual cash flows and needs to decide what to do with the funds. Which solution would be a viable option for dealing with the residual cash flow?

pay cash to investors

A commodities trader has decided to hold the price at which he buys titanium, but wishes to increase his spread; how will he accomplish this?

raise the price he sells titanium

Compared to financial institutions that derive their profits from investing in financial assets, most normal corporations derive their profits from

real assets

Three local banks offer differing savings and loans rates. Bank of Tennessee offers a savings account with a 2.5 percent yield and loan rates of 7 percent; Bank of Memphis offers savings at 2 percent and loans at 6 percent; and the Bank of Shelby County offers savings of 3 percent and loan rates of 6.5 percent. Which bank should an individual choose who wants to deposit $20,000, and why?

shelby, highest savings rate

Culture

socially transmitted behavior patterns, beliefs, and attitudes.

Borrow-spenders

spending > income

The difference between the lending and borrowing rates

spread

When comparing the process of origination in corporate finance to selling a house, it would be most similar to

staging the house

Which scenario would cause an increase in the real rate of interest in the United States?

technology breakthrough

The relation between yield to maturity and term to maturity is known as the

term structure of interest rates

Petrol Corporation has domestic operations in the United Kingdom and overseas operations in Egypt and Sudan. When Petrol's domestic and international operations are compared,

the UK operations likely have more accurate projected financial statements sheets due to lower levels of country risk.

globalization

the removal of barriers to free trade and the integration of national economies.

Underearth Industries is a major miner and processor of iron ore and other minerals. Although the firm is headquartered in Melbourne, Australia, it also has extensive operations in Pakistan. When Underearth's domestic and international operations are compared,

they likely reflect similar use of NPV analysis, although cash flows for the firm's Australian operations are less likely to be affected by country risk.

Of the following concepts and procedures, which is unaffected by political, legal, and cultural differences among nations?

time value of money

Productive asset balance

total -inventory - cash - supplies = PAB

In a centrally planned economy, resources are allocated, produced, and distributed

under government direction

What kind of bias does the interest rate risk premium add to the slope of the yield curve?

upward

Margaret, a novice investor, views the price history of Diversified Company as the basis for whether to purchase the stock. Which form of the efficient market hypothesis is she adhering to?

weak-form

Reinvesting residual cash back into a firm works best for what type of firms?

young firms that need to grow