Finance Fundamentals

If Little Ltd has current assets of $200,000 and current liabilities of $120,000, then it can be inferred that: a. Little Ltd is suffering from liquidity problems. b. $80,000 of current assets have been financed with long-term funds. c. net working capital is inadequate. d. $120,000 of current assets have been financed with short-term funds. e. B and D only.

- $80,000 of current assets have been financed with long-term funds - $120,000 of current assets have been financed with short-term funds. (b&d)

A budget is:

- A forecast of expected future income and expenses - Assists in the planning and control of financial management - Can be used by both individuals and organisations

The tax consequences of the sale of a long-term asset for a price grater than its book value (adjusted tax value) but less than its original cost are:

- A gain on sale and tax to pay

What best describes the differences between accountants and financial managers?

- Accountants record the company's past and current information whereas financial managers use this information to consider the company's future operations. - Financial managers use information relating to the economy and financial markets whereas accountants record company information to compile financial statements.

Four techniques of investment evaluation that are most commonly used in capital budgeting are:

- Accounting return on investment - Payback period - Net present value - Internal rate of return

Forecast cash flow statements:

- Actual figurers may deviate from those expected - Large discrepancies between actual and forecast balances may signal possible problems - The statements should be periodically updated and extended - They give an indication of the firms liquidity and solvency

Forecasting cash flow statements:

- Actual figures may deviate from those expected - Large discrepancies between actual and forecast balances my single possible problems - The statements should be periodically updated and extended - They give an indication of the firms liquidity and solvency

Financial intermediaries:

- Are financial bodies who issue financial assets. - Are used by corporations to issue financial assets on their behalf. - Aid the flow of funds between investors and borrowers.

Real estate markets are considered to be imperfect because: a. Buyers and sellers are not always well informed b. Each property is relatively unique c. There is imperfect competition for any one property d. All of a, b, and c e. Some buildings are not readily reproduced

- Buyers and sellers are not always well informed - Each property is relatively unique - There is imperfect competition for any one property a,b,c

Money markets (true statements)

- Companies invest excess funds in the money market to have sufficient liquidity to meet their obligations. - Most money market instruments do not pay interest. Instead the investor pays less for the security than it is worth when it matures. - Large banks participate in the money markets by selling negotiable Certificates of Deposits.

Treatment of depreciation for long-term investment evaluation:

- Depreciation is excluded from the cash flows, is calculated in order to correctly calculate income tax

A market system:

- Efficiently utilises scarce resources - Encourages responsible behaviour by individuals - Permits an optimal economic solution to resource allocation

The shape of the yield curves can be explained by:

- Expected inflation - Liquidity preferences - Supply and demand pressures

Which of the following statement is/are accurate? a. Finance concentrates on future company operations. b. Finance uses an accrual method of recording data. c. Finance emphasizes the management of cash flows. d. A and B only e. A and C only.

- Finance concentrates on future company operations - Finance emphasizes the management of cash flows

Money market securities:

- Generally have interest rates lower than those of the capital markets - Have maturities up to one year - Are usually sold in large denominations

The financial system and the financial markets are responsible for:

- Implementation of monetary policy - Payment services - Liquidity - Facilitating the flow of savings

A budget....

- Is a forecast of expected future incomes and expenses - Assists in the planning and control of financial management - Can be used by both individuals and organisations

Cost of capital:

- It incorporates the cost of raising and using finance - It represents the rate of return required by the firms investors - It is the return that the firm must in order to maintain the firms value - It is incorporated into the required returns set by management to evaluate proposed investments

cost of capital to a firm

- It incorporates the cost of raising and using finance. - It represents the rate of return required by the firm's investors. - It is the return that a firm must earn in order to maintain the firm's value. - It is incorporated into the required returns set by management to evaluate proposed investments. NOT It is a short-term concept, suitable for evaluating short-term profit performance.

Net present value is a superior technique of investment appraisal because:

- It is consistent with the goal of owner wealth maximisation - The internal rate of return (IRR)may not give the best decision when projects are mutually exclusive - The IRR many not give the best decision when capital is rationed

Ownership of a share of common stock of a company implies:

- Residual claim of the assets and proceeds of the firm - A claim on the value of the firm after other claimants have been satisfied - An ownership interest in a company

Reserve bank:

- Supervises banks - Provides stability to the financial system - It implements monetary policy - It requires major banks to hold settlement accounts with it

Real risk-free rate of interest:

- The compensation an investor should receive for forgoing the purchase of goods and services - Is affected by the economic events that are occurring within the country - Will fall if the long-run economic growth is low

In early banking when paper money issued by bankers became commonly accepted by the public what occurred?

- The drawing of gold from bankers' vaults reduced. - Banks were able to issue paper money loans instead of gold loans so gold holdings stabilised. - Since gold holdings stabilised, bankers could afford to hold a lower reserve ratio of gold/deposits. - Bank runs and bank defaults emerged as a problem.

debt and equity characteristics:

- They both involve a claim on the issuer's assets. - They both can be long-term instruments. - They both enable a company to raise funds.

Externalities:

- Undesirable outcomes from production & exchange of goods

Property markets are generally considered to be an imperfect market and therefore less efficient due to:

- Very low liquidity - Relatively few buyers and sellers with infrequent transactions - Complexity and heterogeneity of property assets - High transaction costs

Difference between accountants and financial managers:

- accountants record the company's past and current information whereas financial managers use this information to consider the company's future operations. - financial managers use information relating to the economy and financial markets whereas accountants record company information to compile financial statements. NOT - accountants use company cash flows whereas financial managers concentrate on the company's profits or losses.

The present and future values of a payment are linked together by:

- amount of payment - interest rate - time interval

The risk-return trade-off _____________________. a. assumes higher return for higher levels of risk b. considers the relationship between risk and return c. assumes that investors are rational d. All of the above. e. B and C only.

- assumes higher return for higher levels of risk - considers the relationship between risk and return - assumes that investors are rational (all of the above)

Managers who fail to act in a manner consistent with the wealth maximisation objective may: be rewarded with higher salaries. b. be fired. c. cause the company share price to rise. d. expose the company to a take-over bid. e. Both B and D.

- cause the company share price to rise. - expose the company to a take-over bid.

Individuals, sole proprietors and unlimited liability partnerships differ from companies because they:

- decide and manage their financial decisions themselves. - are responsible for the level of borrowing they undertake. - act in their own best interests and have a finite lifetime.

Qualitative factors to be considered as part of the capital budgeting process may include:

- dependence on suppliers - the effect on competitors - The reliability of supply of raw materials - non-quantifiable environmental effects NOT: - Incremental operating cash flows

Quantitative factors that may affect the decision to accept or reject a proposed long-term investment include:

- effect of competition - Distribution issues - The firms ability to better serve their customers - Environmental effects

Financial assets:

- enable the transfer of funds from those with excess funds to those deficient in funds. - are intangible, paper assets that are held for the returns they promise - are securities issued by a corporation or economic unit for purchase by another individual or corporate investor.

The shape of the yield curve can be explained by:

- expected inflation. - liquidity preferences. - supply and demand pressures.

By providing financial intermediation, the financial system:

- individual borrowers do not have to seek out individual savers in order to borrow.

Factors that impact upon the operation of the capital markets include:

- interest rates. - shape of the yield curve. - the maturity of the liability. - the participants.

The real rate of interest __________ a. is affected by the number of investment opportunities in the economy. b. includes a premium for expected inflation. c. equates to the pure time value of money. d. All of the above. e. A and C only.

- is affected by the number of investment opportunities in the economy - equates to the pure time value of money (a & c only)

The real risk-free rate of interest:

- is the compensation an investor should receive for foregoing the purchase of goods and services. - is affected by the economic events that are occurring within the country. - will fall if long-run economic growth is low.

In order to develop financial forecasts for the firm it is necessary to:

- know the current level and past growth of sales in the industry - know the market share the business expects to achieve NOT - know the previous sales levels and past market share of the firm

Efficient cash management refers to:

- knowledge of the effect of foreign exchange movements. - managing cash flows in order to achieve the company's financial goals. - preparing forecasted income and expenditure budgets to ensure sufficient cash is available when required.

The __________ the standard deviation, the ___________ the investment.

- larger, riskier

Major difference between Government Bonds and Treasury bills lies in their:

- liquidity risk - original time to maturity. - method of paying interest. - bid/ask spread.

Objective of financial management:

- maximise shareholder wealth - Maximise current value per share of the existing shares - Maximise the market value of the owners equity - maximise the value of the firm NOT: - minimise the risk of the firm

Successful firms may be able to obtain bank or financial institution financing by:

- pledging their accounts receivable. - offering finished goods inventory as collateral for a short-term loan. - factoring their accounts receivable - invoice discounting

Financial forecasting and planning includes: a. preparing cash flow forecasts. b. preparing forecast financial statements. c. analysis of historical investments. d. A and B. e. A, B and C. Incorrect

- preparing cash flow forecasts. - preparing forecast financial statements.

Wealth maximisation is an appropriate goal of financial management because it considers:

- the time value of money. - the magnitude of cash flows. - risk.

The main purpose of a business plan is to provide information:

- to financiers - on the business's current and future operations. - on the industry, market, labour, SWOT analyses.

If the interest rate is zero, the future value interest factor (FVIFk,n) equals:

1.0

If you were offered different deposit rates from an insurance company, which method would you prefer? a. 7 percent interest compounded annually. b. 7 percent simple interest. c. 7 percent compounded daily. d. 7 percent compounded continuously. e. Any of these.

7 percent compounded continuously

Issuer of a bond is:

A borrower

The issuer of a share is:

A borrower

If a person A sells a 3-year government bond futures contract to a person B, in market terminology: a. A is the long and B is the short. b. A is the short and B is the long. c. A is the short and B is the dealer. d. A is the long and B is the broker. e. A is the broker and B is the short.

A is the short and B is the long

On a bank's balance sheet, a term deposit appears as:

A liability

Governments should promote an efficiently-run market system. Which of the following activities is least consistent with this statement? a. Maintain a legal system that enforces contracts. b. Maintain a defence system to protect the nation's borders. c. Create a climate which encourages individuals to engage in business. d. Act aggressively to ensure the national currency is strong relative to those of other nations. e. Provide public goods such as highways and parks which might not be adequately provided otherwise.

Act aggressively to ensure the national currency is strong relative to those of other nations (d)

Financial intermediaries: a. move funds directly between borrowers and lenders. b. usually provide lenders with higher returns than do financial markets. c. usually provide borrowers with higher returns than do financial markets. d. act as a third party by holding a portfolio of assets and issuing claims based on that portfolio to savers. e. issue claims on individual borrowers directly to savers.

Act as a third party by holding a portfolio of assets and issuing claims based on that portfolio to savers.

Which of the following are financial assets? A deposit at a bank. b. Government stock. c. Cash in the form of notes and coins. d. Shares in a company. e. All of the above.

All of the above

Marginal analysis is an economic concept used in financial decision making. It involves: a. analysing human behaviour in order to understand how financial managers make their investment and financing decisions. b. using modeling techniques on the company's cash flows in order to analyse fluctuations in income and expenditure. c. an analysis of marginal costs and marginal benefits in order to accept or reject a project. d. All of the above. e. B and C only.

An analysis of marginal costs and marginal benefits in order to accept or reject a project.

Which of the following statements about annuities is correct? a. An ordinary annuity is an equal payment paid at the beginning of each period. b. An ordinary annuity is an equal payment paid at the end of each period that increases by an equal amount. c. An annuity due is an equal payment paid at the beginning of each period. d. An annuity due is an equal payment paid at the end of each period. e. An annuity due is an equal payment paid at the end of each period that increases by an equal amount.

An annuity due is an equal payment paid at the beginning of each period

What are the two main roles that financial intermediaries take, and which one of these roles creates the most risk for the intermediary? a. Asset transformation and brokering, and asset transformation creates the most risk. b. Asset transformation and brokering, and brokering creates the most risk. c. Safe-keeping and clearing activities, and safe-keeping creates the most risk. d. Safe-keeping and clearing activities, and clearing creates the most risk.

Asset transformation and brokering, and asset transformation creates the most risk.

______________ is best described as the process of determining, evaluating and implanting long-term investment opportunities.

Capital budgetingF

That section of the market for financial securities which have original maturities of more than one year is called the:

Capital market

The _____________ is designed to finance long-term investments, making possible the construction of buildings and factories

Capital market

What is NOT an advantage associated with renting a house or apartment?

Changes can be made to the house and/ or garden to satisfy the tenants lifestyle.

Banks earn a profit by:

Charging savers and borrowers fees for reducing transactions costs

Increase in the money supply due to bank lending are known as:

Credit creation

Increases in the money supply due to bank lending are known as:

Credit creation

Net Working Capital =

Current assets - Current Liabilities

Which of the following statements is most correct concerning working capital and its management? a. The goal of working capital management is to maximise the firm's liquidity. Incorrect b. Working capital refers to long-term financing. c. Working capital typically has little effect on the profitability and risk of an organisation. d. Current assets may represent a large proportion of total assets. e. The higher the level of net working capital, the higher the risk.

Current assets may represent a large proportion of total assets

Which of the following statements concerning the treatment of depreciation for a long-term investment evaluation is most correct? a. Depreciation is included as it is a relevant cash flow. b. Deprecation is not calculated as it is a non-cash item. c. Depreciation is included in order to recognise the consumption of the asset over its useful life. d. Depreciation is calculated as it is an incremental cash flow. e. Depreciation is excluded from the cash flows, but it is calculated in order to correctly calculate income tax.

Depreciation is excluded from the cash flows, but it is calculated in order to correctly calculate income tax

Consider the five foundations of the market system. In the following situation, which of the market foundations would be most clearly relevant in explaining this occurrence if it were reported in the New Zealand Business Review? "Glaxo (a drug manufacturer) announced this morning that their scientists have developed a cure for all types of cancer. In response, the price of Glaxo shares traded on the London Stock Exchange had increased 30% by today's market close." a. Efficient markets. b. Incentives-based prices. c. Existence of private wealth. d. Unlimited role of government. e. Freedom of choice.

Efficient markets

Equity finance is ______ than debt, as owners require a _________ rate of return to compensate them for the ________ of the investment.

Equity finance is more expensive than debt, as owners require a higher rate of return to compensate them for the higher risk of the investment

What is the highest form of land ownership in New Zealand?

Freehold

A contract calling for the delivery of some commodity at a specified later date at a price established at the time of contract is a ____________ contract.

Futures

The more frequent the compounding the: a. greater the present value. b. greater the amount deposited. Incorrect c. greater the effective interest rate. d. None of the above. e. All of the above.

Greater the effective interest rate

Corporations:

Have limited liability and as such the maximum amount of money its owners can lose are the funds they have invested in the company.

Which of the following is NOT a feature of a perfectly competitive market - knowledgeable buyers and sellers - a homogenous and divisible commodity - competitive, arm's length bidding process - high transaction costs - zero information costs

High transaction costs

Internal rate of return (IRR) decision criterion for whether to accept of reject a project can be stated as:

If IRR ≥ cost of capital, accept the project. Otherwise reject.

Which of the following statements is correct? a. If interest rates rise, floating rate mortgage payments fall. b. If interest rates fall, floating rate mortgage payments decline. Correct c. If interest rates fall, fixed rate mortgage payments decline. d. All of the above. e. B and C only.

If interest rates fall, floating rate mortgage payments decline

The net present value decision criterion for whether to accept or reject a project can be stated as:

If net present value > 0, accept the project. Otherwise reject.

A decrease in current assets will normally:

Increase the firm's overall rate of return, and increase the risk of financial distress.

Financial intermediaries are specialists in the use of: a. commercial paper. b. traded financial assets. c. direct finance. d. information. e. downside potential.

Information

The biggest unknown variable that should be taken into consideration when buying a house is:

Interest rate charges

A business plan: a. is required by those who provide funds to the firm. b. contains a SWALK analysis of the industry, business, market and labour force. c. once it has been developed and the necessary capital for the firm has been raised, is of no further use. d. All of the above. e. A and C only.

Is required by those who provide funds to the firm.

Which of the following statements concerning the New Zealand dividend imputation tax system is true? It results in equity earnings being taxed twice: once when profits are earned and again when dividends are paid to shareholders. b. It leads to a strong bias in favour of debt finance. c. Shareholders do not report dividends received as income on their personal tax returns. d. It reduces the relative tax advantage of financing with debt compared with equity sources. Feedback

It reduces the relative tax advantage of financing with debt compared with equity sources

A market in which an asset can be sold easily for a price that approximates its true value is known as a(n) ______________ market.

Liquid

Which of the following will suffer the greatest loss in value from rising interest rates? a. Promissory notes. b. Certificates of deposit. c. 90-day bank bills. d. Short-term government bonds. e. Long-term government bonds.

Long term government bonds

The best strategy for an investor who believes that interest rates will fall dramatically in the near future would be to buy:

Long-term government bonds

The internal rate of return of a property investment:

Makes the net present value equal to zero

Which of the following observations is INCORRECT regarding efficient markets? a. Equilibrium prices occur when the forces of demand and supply equate. b. For a market to be efficient there should be many individuals and firms able to participate. c. Market prices change primarily in an erratic and volatile manner in response to factors that are not part of the market system. d. Participants are able to freely enter and exit the market. e. Prices in the long run should be stable as market forces tend to continually move them back to their equilibrium level.

Market prices change primarily in an erratic and volatile manner in response to factors that are not part of the market system (c)

What is the objective of financial management?

Maximise shareholder wealth

Stakeholders as a group: a. may include investors, suppliers, regulators and the public. b. are not constrained by business activities. c. are not protected by the New Zealand laws and regulations. d. All of the above. e. A and C only.

May include investors, suppliers, regulators and the public

Three strategies for managing the cash conversion cycle are:

Minimise the average age of inventory, minimise the average collection period and maximise the average payment period

Governments should promote an efficiently run market system. What answer is the most consistent with this statement? a. Provide education, set market prices, protect New Zealand firms, set tariff regulations, subsidise important industries, control exchange rates. b. Encourage private wealth creation, competition, provide information and require information disclosure, promote efficient markets, maintain and enforce a legal system. c. Encourage social wealth creation, redistribute wealth to the disadvantaged, set minimum wage legislation, promote producer boards, subsidise farmers. d. Encourage national/community wealth creation, limit monopoly, legislate to control market externalities, provide information and require information disclosure, maintain and enforce a legal system, control wages and prices.

Modern financial system b. Encourage private wealth creation, competition, provide information and require information disclosure, promote efficient markets, maintain and enforce a legal system.

Securities of the market for financial securities which have original maturities of less than 1 year:

Money market

The ____________ is designed for the making of short-term loans where individuals and institutions with temporary surpluses of funds meet borrowers who have temporary cash shortages.

Money market

What is an example of specific risk in property investment context? - Interest rates increases - Risk premiums on property as an asset class - Exchange rate fluctuations - Operating cost escalation on current gross leases

Operating cost escalation on current gross leases

Which of the following may be included in a forecast cash flow statement for the month of March? - Rent paid in March _ March depreciation expense - The closing March balance of accounts receivable - The closing March balance of accounts payable - All of the above

Rent paid in March

Long-term investment decisions, sensitivity analysis is used to:

Sensitivity analysis - used to predict outcomes - Assess the effect of a change in cash flows on the net present value and/ or internal rate of return - Determine those variables that will most significantly affect the success of the project NOT eliminate risk

The inventory management technique that seeks to determine the optimal order quantity that minimises total holding and ordering costs is: the ABC system. b. the EOQ model. c. the just-in-time system. d. the accounting system.

The EOQ model.

Solvency refers to:

The ability of a person or organisation to meet their financial commitments as they come due

Under the dividend imputation system: a. the double taxation of company profits at both the corporate and personal tax level is reduced. b. both the company and the shareholder pays tax on the company profits. c. only the shareholder pays tax on the company profits. d. neither the company nor the shareholder is required to pay tax. e. None of the above.

The double taxation of company profits at both the corporate and personal tax level is reduced

What was a major problem for the early financial intermediaries, the London goldsmiths?

The issue of receipts greater than the holdings of gold

In an efficient market: a. the market price of a financial security reflects the information associated with the company. b. the risk is not important, only profits are. c. all financial assets will have the same price. d. gains can be made that are not related to the risk or return of a security.

The market price of a financial security reflects the information associated with the company

Maturity risk refers to:

The mismatch of bank deposits and loans.

Th lessor is:

The owner of the property

The net present value measures:

The present dollar value added to the firm as a result of undertaking a project.

When borrowers raise funds in financial markets, they issue new securities in:

The primary market

The collection policy of a firm refers to:

The procedures adopted to collect accounts receivable

By using the weighted average cost of capital to discount the cash flows pertaining to a proposed long-term investment, we are making the assumption that:

The proportions of debt and equity used to finance the firm overall will not change as a result of undertaking the investment.

________ adjusts the discount rate in the denominator of the NPV equation to allow for the risk level of each project.

The risk-adjusted required return

A private placement is:

The sale of shares or debt only to selected investors.

When using the income (capitalisation) approach to property valuation, what is the impact on the valuation of a reduction in the capitalisation rate?

The valuation increases

Which of the following statements concerning financial leases is true? a. They tend to be short-term. b. They are usually cancellable. c. The title to the asset usually passes to the borrower automatically at the end of the lease. d. They are treated as debt financing arrangements for the purchase of an asset, for both income tax and financial reporting purposes.

They are treated as debt financing arrangements for the purchase of an asset, for both income tax and financial reporting purposes

financial leases:

They are treated as debt financing arrangements for the purchase of an asset, for both income tax and financial reporting purposes. NOT - They tend to be short-term. They are usually cancellable. - The title to the asset usually passes to the borrower automatically at the end of the lease.

Which of the following external events is lEASTF likely to have an impact on the financial decisions of a publicly-listed company? a. The government increases corporate income taxes. b. Two small insurance companies merge. c. The New Zealand and Sydney stock exchanges merge. d. New Zealand and Australia announce a common currency. e. The Reserve Bank tightens monetary conditions.

Two small insurance companies merge.

The ___________ refers to the buying price and the selling price quoted in the foreign exchange or futures market.

Two-way price

Risk is measured by the:

Variance and standard deviation

When using the conventional NPV method we use the firms _______ to discount a projects relevant cash flows. Whereas for the equity residual NPV method we use the ______.

WACC, required rate of return

When using the conventional NPV method we use the firms ________ to discount a project's relevant cash flows, whereas for the equity residual NPV method we use the _______.

WACC, required rate of return

A market system is one where:

Winning means making the right choices and accepting incentives to undertake risky projects in order to generate larger profits for the company. NOT - Losers exit the market, and workers undertake projects that they know will succeed and generate profits for the company. - The allocation of scarce resources has been efficient and matches the needs of all consumers.

The internal rate of return is the discount rate that makes the NPV equal to ____.

Zero

Why are the better credit ranked companies like Fletchers and Telecom raising more money in their own name, with the help of investment bankers, rather than borrowing it directly from a bank? a. Because, by reducing the number of middle-men it often costs less to finance in this manner. b. Because, banks do not want to lend companies such as these money as they are too risky. c. Investors are increasingly more sophisticated and they feel they can safely invest their money directly in high ranked corporations instead of with the bank who pay lower returns. d. A. and C.

a & c - Because, by reducing the number of middle-men it often costs less to finance in this manner. - Investors are increasingly more sophisticated and they feel they can safely invest their money directly in high ranked corporations instead of with the bank who pay lower returns.

The issuer of a share is:

a borrower

For a large bank, a new loan is:

a liability

With respect to the financial evaluation of long-term investments, the ____________ is a measure of the profit from an investment as a percentage of the investment outlay.

accounting return on investment

Financial management can be described as the:

activities and decisions undertaken with regard to the financing and investment requirements of an organisation

Risk return line: a. always has a positive slope and commences above the origin. b. always has a positive slope and commences at the risk-free rate. c. shows the risk associated with an investment and the returns it should provide. d. All of the above. e. A and C only

always has a positive slope and commences above the origin always has a positive slope and commences at the risk-free rate shows the risk associated with an investment and the returns it should provide (all of the above)

Public offering:

an issue of securities by a company to a large number of investors

During the start-up and early growth stages of a firm's life cycle, banks and financial institutions are least likely to provide the firm with: a. short-term secured loan. b. a bank overdraft. c. an unsecured loan. d. an operating lease. e. a hire-purchase loan.

an unsecured loan

Direct, indirect and semi-direct finance are: a. types of financial systems b. methods of funds transfer c. internal financing methods d. secondary securities

b. methods of funds transfer

When deciding to buy property requiring a mortgage, the following additional expenses will be incurred:

bank fees, valuation fees, legal fees, property insurance

A major difference between shares and bonds is that:

bonds pay their owners interest while shares pay dividends

TRC is a manufacturing company selling high quality products, made with local ingredients, throughout New Zealand. As a prospective investor in TRC which of the following risks do you need to consider: a. business, financial and exchange rate risks. b. financial, liquidity and exchange rate risks. c. business, financial, and liquidity risks. d. business, financial and country risks. e. financial, exchange rate and country risks.

business, financial, and liquidity risks

Funds move from lenders to borrowers: a. right to buy the underlying asset at a fixed price. b. right to sell the underlying asset at a fixed price. c. right to buy a put option. d. obligation to buy the underlying asset at a fixed price. e. obligation to sell the underlying asset at a fixed price.

by indirect transfer through financial intermediaries

Liquid funds:

can be transferred to another person easily with little or no change in price

When __________, it is necessary to determine that combination of projects that maximises the aggregate net present value without exceeding the maximum available investment funding a. highly inflationary conditions prevail b. sensitivity analysis is undertaken c. capital rationing applies d. risk-adjusted required returns are calculated e. investment projects are mutually exclusive

capital rationing applies

Financial analyses emphasise cash flows rather than profits for all of the following reasons except: a. cash flows result in a better matching of revenues and costs. Correct b. cash flows can be objectively observed directly from banking records. c. the measurement of profits can vary depending upon accounting practices followed. d. owners returns are measured using cash flows. e. cash flows determine a firm's liquidity and solvency.

cash flows result in a better matching of revenues and costs

The total return from a share investment is a combination of:

change in share price and dividend

When evaluating projects using the NPV technique financing costs are:

considered in the discount rate

Expected inflation:

covers the increase in prices over the period of investment

Which of the following is NOT an example of an easement? a. property benefiting from stormwater pipes to provide drainage through another property. b. A property benefiting from sewer pipes to provide wastewater disposal through another property. c. Adjoining properties each benefiting from a party wall. d. A restriction that indicates there is uncertainty as to where the boundary lines are. e. All of the above are examples of easements.

d. A restriction that indicates there is uncertainty as to where the boundary lines are.

Assuming sales remain constant, as the level of inventory decreases, then inventory holding costs ________ , financing costs ________, and profits ________

decrease; decrease; increase

A market in which there are high volumes of securities being bought and sold is called a:

deep market (high/large volume - deep ocean, large volume of water)

All of the following are included in a forecast cash flow statement except: a. cash sales. b. capital contributions from owners. c. GST received from sales. d. depreciation expense. e. loan repayments.

depreciation expense

Periodic payments to stockholders are known as: a. dividends b. interest c. coupons d. capital gains e. residuals

dividends

What statements indicate that real estate is NOT perfectly competitive: a. Pricing information is poor and not quickly disseminated b. Transaction costs are low c. Property is a heterogeneous product d. Property is a homogenous product e. Both A and C indicate that real estate is not a perfectly competitive market

e. a & c Property markets are imperfect: - Poor pricing information (not spread/ disseminated quickly) - Property is a heterogeneous product

The annually compounded rate of interest that is equivalent to an annual interest rate compounded more than once per year is known as the ____________ rate of interest. a. effective b. nominal c. stated d. annual e. None of these.

effective

The most appropriate net present value (NPV) technique to use for small businesses is the ____________. For large businesses, where the capital structure remains constant the most appropriate NPV technique is the ___________.

equity residual NPV or NPV(ER) - measures the return to equity owners only - small businesses & property evaluation (structure changes) - includes debt financing as part of relevant cash flows (or numerator) conventional NPV technique - Used for large businesses (capital structure doesn't change significantly) - WACC used to discount the relevant cash flows (or denomintor)

An issue of bonds in London, denominated in New Zealand dollars, by a New Zealand company is an example of a(n):

eurobond

Secondary market:

existing securities are bought and sold

Finance is concerned with the allocation of _____________ over time.

financial and real resources

A decrease in the percentage for bank reserves produces a(n) ____________ in the money __________.

increase; supply

Owners can encourage managers to act consistently with shareholder wealth maximisation by: a. rewarding managers on the basis of short-term profitability. Incorrect b. incurring agency costs. c. reducing managers' personal wealth. d. minimising managers' benefits and perks. e. rewarding managers for taking more risk.

incurring agency costs

The most common method for transferring funds between suppliers and users of funds has traditionally been through:

indirect transfers through financial intermediaries

When an investment only pays simple interest, this means: a. the future value of the investment will be small. b. the interest rate is lower than on similar investments. c. the earned interest is non taxable to the investor. d. interest is earned only on the original investment. e. interest is simply paid on the previously earned interest.

interest is earned only on the original investment

The role of banks in channeling money from savers to borrowers is known as ___________

intermediation

For long-term investment projects, the ___________ is normally considered to be the net cash outflow to be paid out at time zero in order to undertake the project.

investment outlay

Real rate of interest: a. is affected by the number of investment opportunities in the economy. b. includes a premium for expected inflation. c. equates to the pure time value of money. d. All of the above. e. A and C only.

is affected by the number of investment opportunities in the economy equates to the pure time value of money (a & c only)

A term deposit:

is an obligation issued by a depository institution

The annual accounting return on investment is deficient as a technique of investment evaluation for all of the following reasons, except: a. it ignores profits in excess of the optimal AROI. b. it fails to consider the time value of money. c. it uses accounting data, not cash flows. d. the criterion of a minimum required average AROI is arbitrary. e. it is not consistent with owner wealth maximisation.

it ignores profits in excess of the optimal AROI

The ______ the standard deviation, the ______ the investment.

larger, riskier

The best strategy for an investor who believes that interest rates will fall dramatically in the near future would be to buy: a. promissory notes. b. certificates of deposit. c. 90-day bank bills. d. short-term government bonds. e. long-term government bonds.

long-term government bonds

In an efficient market, one would expect to find: a. returns on securities having the same risk to differ. b. many buyers and sellers. c. few buyers and sellers. d. information possessed by individuals to differ.

many buyers and sellers

The risk that arises from banks making long-term loans and having short-term deposits is called:

maturity risk

Equity finance is _______ than debt, as the owners require a _______ rate of return to compensate them for the ________ of the investment.

more expensive, higher, higher risk

Government decision makers are generally concerned about the soundness of financial intermediaries as: a. problems experienced by intermediaries are always published in the media. b. most financial assets are held by intermediaries. c. governments borrow large amounts of money from banks. d. financial intermediaries are not well regulated but the financial markets are . e. financial intermediaries channel funds directly between borrowers and lenders.

most financial assets are held by intermediaries (b)

To accept a project with an NPV equal to zero would be:

neutral, as the project would satisfy shareholders' required returns without adding further value to the firm.

The financial system:

operates via a set of markets

An example of a derivative financial instrument is a(n): a. company bond. b. floating rate mortgage. c. option contract on a 90-day bank bill. Correct d. preference share. e. convertible note.

option contract on a 90-day bank bill

An infinite stream of equal cash flows occurring at regular intervals is known as a(n) _________

perpetuity

The major sources of funds available during the GROWTH stage of the business life cycle are:

personal investment from owner, friends and relatives, venture capital, banks and finance companies, suppliers, retained earnings and private placements. NOT - public offerings

The returns from most ordinary returns are:

positively correlated with each other

Operating cash flow is calculated by taking __________ and __________ depreciation expense.

profit after taxes; adding

Regulatory compliance costs to be estimated as part of the financial evaluation of long-term investment projects may include all of the following except: a. project post-audit costs. b. the cost of an assessment of environmental impact. c. the cost of obtaining a resource consent. d. the cost of monitoring pollution effects. e. the financial impact of carbon credits.

project post-audit costs.

The _______ rate of interest considers the increase in prices between two periods without expected inflation. The _______ rate of interest includes a premium for expected inflation.

real, nominal Real = nominal - expected inflation

All of the following relate to the development of the modern financial system except: financial intermediation generally began with the London goldsmiths in the middle ages. b. paper receipts were accepted as a means of exchange by the London goldsmiths. c. central banks were established to lend to banks during a liquidity crisis. d. regulations were introduced by governments to reduce default risk. e. regulations were introduced by governments to guarantee consumers a reasonable rate of return on their money.

regulations were introduced by governments to guarantee consumers a reasonable rate of return on their money (e)

A call option gives the holder the:

right to buy the underlying asset at a fixed price

A put option gives the holder the:

right to sell the underlying asset at a fixed price

Derivative products are primarily for: a. arbitrage. b. risk management. c. speculation. d. calculus. e. spread Trading.

risk management

If managers do not act in a manner consistent with shareholders' interests, a likely consequence may be that:

shareholder wealth is diminished

The ___________ price is the price for immediate delivery of a good.

spot

Inventory management techniques include all of the following except: - the EOQ model. - the just-in-time system. - the equivalent annual annuity technique. - a computerised inventory control system.

the equivalent annual annuity technique

The decision to place funds in a security is made ex ante because:

the investor expects to be compensated for the time the funds are invested

Asset valuation - If all else is equal then...

the lower the uncertainty about the size of a future benefit, the higher the present value of the asset.

Capital budgeting can be described as: a. the process of determining, evaluating and implementing short-term cash flows. b. the process of determining, evaluating and implementing finance requirements. c. the process of determining, evaluating and implementing net working capital requirements. d. the process of determining, evaluating and implementing long-term investment opportunities.

the process of determining, evaluating and implementing long-term investment opportunities

It is through the financial markets that the ______________ through the buying and selling activities of market participants. a. risk of a company is set b. profits of a company are determined c. dividends of a company are set d. value of a proprietorship is set e. the value of a listed company is set

the value of a listed company is set

In the context of capital budgeting, risk is represented by: the variability of the initial outlay. b. the variability of the cash flows. c. the variability of the terminal value. d. the chance that the net present value will exceed zero. e. the chance that the internal rate of return will exceed the cost of capital.

the variability of the cash flows.

When establishing the financial forecasts for a new business it is important that: a. there is always sufficient cash on hand to pay the business's financial obligations. b. there is an additional source of short- and long-term funds available when required. c. the forecast financial statements show only positive net profits. d. initial funds raised by issuing shares or raising debt are sufficient to meet all financing requirements. e. None of the above.

there is an additional source of short- and long-term funds available when required

An annuity due resembles an ordinary annuity except in the _________

time of first payment

The amount of interest that will be offered to investors will depend on the investment's:

time to maturity, expected inflation, the risk premium

The three motives for firms to hold at least some cash balances are:

transactions, safety and speculative