FNCE midterm
For the stock price to be a valid measure of the success of a firm's financial management, which of the following conditions must be in place? An efficient financial market. A competitive financial market. Smart investors A liquid financial market. A well-regulated financial market.
A competitive financial market.
Which is the best definition of a growing perpetuity? An annuity for which the cash flows occur at the beginning of the period. A constant stream of cash flows without end that is expected to rise indefinitely. A level stream of cash flows for a fixed period of time. The interest rate charged per period multiplied by the number of periods per year. An annuity in which the cash flows continue forever
A constant stream of cash flows without end that is expected to rise indefinitely.
A pure discount loan is one where the borrower receives money today and repays the loan with: Even monthly payments that fully amortize the principal balance. Equal monthly payments called annuity payments. Partial monthly payments followed by a balloon payment. Monthly interest only payments followed by a balloon payment. A single lump sum in the future.
A single lump sum in the future.
t/f The primary goal of a financial manager should be to maximize the value of shares issued to new investors in the corporation
f
t/f The stated rate of interest is the same as an effective annual rate.
f
According to the statement of financial position model of the firm, corporate finance can be thought of as an analysis of three primary subject areas. Which of the following correctly lists these areas? Capital budgeting, capital structure, capital spending. Capital budgeting, capital structure, net working capital. Capital structure, capital budgeting, security analysis. Capital structure, net working capital, capital rationing. Capital budgeting, capital spending, net working capita
Capital budgeting, capital structure, net working capital.
The best definition of financial engineering is: Creation of new securities or financial processes. A company that owns or finances income-producing real estate. A company that owns or finances engineering projects. The purchase or sale of securities whose value derives from the price of another, underlying, asset. Financial markets where long-term debt and equity securities are bought and sold.
Creation of new securities or financial processes.
t/f the future value of a single sum will increase more rapidly when the frequency of compounding decreases.
f
The principal amount on a coupon bond is called _______. Face value. Fair value. Present value. Base value. Discounted value.
face value
Which of the following is not a responsibility of a firm's financial manager?" Determining the firm's level of debt and equity. Determining the rate of interest that is appropriate for a firm's bonds. Determining the level of short-term debt a firm should borrow. Determining which projects a firm should undertake. Determining the products to sell.
Determining the products to sell.
T/F : Capital structure determines how much risk is associated with the future cash flows of a project
T
T/F Scandals such as Enron and Worldcom illustrate the negative aspect of short-term share value maximization.
T
in general partnership: Only the general partner is liable for the firm's debt. Each partner is personally responsible for all of the firm's debt. Each partner is liable only for the portion of the total debt he/she agreed in writing to pay. None of the partners are personally liable for the firm's debt. Each partner is responsible only for his/her portion of the firm's debt based on ownership percentage.
Each partner is personally responsible for all of the firm's debt.
t/f The future value of a single sum will increase more rapidly when the interest rate decreases
f
A pure discount loan is a(n): Loan that discounts the payments if you pay them in advance. Example of a present value problem. Loan that is interest-free. Loan that gives you a discount if you pay your payments on time. Loan that requires all principle to be paid at the time the loan is made.
Example of a present value problem.
T/F: Scandals such as Enron and Worldcom were not the result of unethical behaviour
F
The Treasurer: Has the responsibility for managing the cash for an organization. Reports directly to the Chief Executive Officer of a corporation. Must keep current on tax laws since he/she is responsible for managing the taxes for a firm. Must file quarterly financial statements in a timely manner. Is responsible for overseeing the data processing functions within a firm.
Has the responsibility for managing the cash for an organization
_________ gives rise to the spreads/profits made by banks on the difference between interest paid on deposits and interest earned on loans Indirect finance. Federal regulation. Interest surcharge. Direct finance. Bankers acceptance.
Indirect finance.
Which of the following is not an agency cost? Protecting management jobs which could effectively be eliminated. Low-interest loans to corporate executives. Paying more than the actual market value to purchase a competitor. Interest paid on long-term corporate borrowing. Flying an executive overseas without a genuine business purpose for doing so.
Interest paid on long-term corporate borrowing.
The best definition of derivative securities is: Investment products whose value derives from the price of another, underlying, asset. Creation of new securities or financial processes. A compensation package for managers that ties their salary to the firm's share price. An insurance policy that ensures underlying assets are secured. Financial markets where long-term debt and equity securities are bought and sold.
Investment products whose value derives from the price of another, underlying, asset.
The area of corporate finance concerned purchasing and selling stocks and bonds is called: Strategic finance. Investments. Municipal finance. International finance. Institutional finance.
Investments.
t/f The higher the discount rate, the higher the present value
f
An individual who places an order to buy 1000 shares of IBM stock: Has to be listed as a private dealer. Is involved in a private placement of securities. Must have hired a dealer to perform this transaction. Is most likely involved in an IPO. Is most likely participating in the secondary market.
Is most likely participating in the secondary market.
The goal of maximizing the market value of owners' equity, together with limited liability for a corporation's shareholders, imply that Managers must produce financial statements that truthfully reflect the firm's business operations. Managers are not liable for any illegal or unethical activities the company is engaged in. Managers have fiduciary duty to protect the interest of the firm's shareholders. Managers should identify investment opportunities that are valued in the free marketplace. Managers must be compensated with incentive pays (such as bonuses and stock options) in order to align their interests with those of the shareholders.
Managers should identify investment opportunities that are valued in the free marketplace.
Which one of the following will increase the future value of a stream of unequal payments for a ten year project? The rate of return is positive. Lowering the effective annual rate applicable to the project. Moving more of the cash inflows to the earlier years of the project. Increasing the initial cash outflow to start the project. Lowering the discount rate applicable to all ten years. Delaying some cash inflows from years 1 and 2 until year 9
Moving more of the cash inflows to the earlier years of the project.
Which of the following statements concerning NASDAQ is incorrect? NASDAQ stands for National Association of Securities Dealers Automated Quotations system. NASDAQ is an OTC market. Most smaller firms are listed on NASDAQ rather than on the NYSE. NASDAQ is an electronic market. NASDAQ is an auction market
NASDAQ is an auction market
What is not a working capital question that must be answered? To whom should credit be extended to? Length of credit terms to provide Should we sell on credit? Net present value (NPV) and internal rate of return (IRR) of a long-term project How much cash and inventory should be kept on hand?
Net present value (NPV) and internal rate of return (IRR) of a long-term project
Which of the following best defines working capital management? Planning and managing the firm's anticipated future projects. Planning and managing the firm's current assets and liabilities. Planning the firm's current and long-term liabilities. Planning the firm's current and long term assets. Planning and managing the firm's current and long-term assets and liabilities.
Planning and managing the firm's current assets and liabilities
Which of the following does not persuade managers to work in the best interest of the stockholders? Stock option plans. Threat of a company takeover. Purely cash compensation package. Compensation based on the value of the stock. Threat of a proxy fight
Purely cash compensation package.
In Canada, chartered banks are legally allowed to engage in all but which of the following activities through their branches? Help investors buy and sell securities. Make commercial loans. Sell life insurance. Manage RRSPs. Accept deposits.
Sell life insurance.
Which of the following statements concerning dealers is false? The OTC market is a dealer market. Dealers usually buy and sell only for themselves. Dealers accept the risks of owning shares of stock. The TSX and NYSE are dealer markets. Most debt securities trade in dealer markets.
The TSX and NYSE are dealer markets.
Which one of the following statements is correct concerning the listing of stock on an exchange? All exchanges have the same listing requirements. Listing requirements are established by the Ontario Securities Commission. The number of shareholders is NOT a listing consideration for a stock. The TSX has the most stringent listing requirements of any Canadian stock exchange. Any firm can list their stock on any exchange they desire.
The TSX has the most stringent listing requirements of any Canadian stock exchange.
Which of the following statements concerning auction markets is correct? All trades involve a dealer in an auction market. The TSX is an auction market. An auction market is called an over-the-counter market. A market where buyers specify the lowest price they are willing to pay and sellers indicate the highest price they are willing to accept. NASDAQ is an auction market
The TSX is an auction market
Double taxation refers to which of the following scenarios? The corporation pays taxes on its earnings, and shareholders pay taxes on dividends. The corporation pays taxes on revenues and expenses. Both bondholders and shareholders must pay taxes. The corporation pays taxes on earnings, and creditors pay taxes on interest received. The corporation pays taxes on revenues and earnings
The corporation pays taxes on its earnings, and shareholders pay taxes on dividends.
Which of the following is NOT a general criterion that must be met in order for a firm to be listed on the TSX? The firm must have a minimum number of shares outstanding. The firm must have a market value of at least $4 million. The firm must have a minimum number of directors. The firm must have a minimum amount of assets. The firm must have a minimum number of shareholders owning at least 300 shares.
The firm must have a minimum number of directors
Capital budgeting decisions depend on all but which of the following factors? The riskiness of future cash flows. The size the firm's future cash flows. The nature of the firm's business. The timing of cash inflows and outflows. The intent of the project manager.
The intent of the project manager.
The present value factor will decrease: The higher the present value. The slower the rate of growth. The higher the future value. The longer the period of time. The lower the interest rate
The longer the period of time.
The best definition of agency problem is: Determining the optimal mix of internal and external board of directors. The possibility of conflicts between shareholders and management in a large corporation. The purchase or sale of securities whose value derives from the price of another, underlying, asset. Determining who should be the agent of corporate executives. The process of planning and managing a firm's long-term investments.
The possibility of conflicts between shareholders and management in a large corporation
Which one of the following statements is true concerning stock exchanges? The Toronto Stock Exchange is the largest exchange in the world. The Tokyo Stock Exchange is not a very actively traded upon exchange. NASDAQ listed stocks trade more actively than those listed on the NYSE. The OTC market is physically located in Toronto. The total value of NASDAQ listed stocks is less than the total value of NYSE listed stocks.
The total value of NASDAQ listed stocks is less than the total value of NYSE listed stocks.
Which of the following provides the best definition of underwriting? When an investment dealer or a group of investment dealers purchase the securities from a firm and market them to the public. The process of preparing shares to be traded on the OTC market. When shares are sold to the public for the first time. When shares are traded between investors at a price below its market value. Situation where an investment dealer or group of investment dealers sell securities at a price below or under its market value
When an investment dealer or a group of investment dealers purchase the securities from a firm and market them to the public
Which of the following are elements in financial management decision? Working capital management, dividend payment and capital budgeting. Working capital management and dividend payment. Capital structure and capital budgeting. Working capital management and capital budgeting. Working capital management, capital budgeting and capital structure.
Working capital management, capital budgeting and capital structure.
The rate that is computed by dividing the annual interest payment by the face value of a bond is called the: Yield to maturity. Market rate. Yield to call. Discount rate. Coupon rate.
coupon rate
t/f The interest rate expressed in terms of the interest payment made each period is called the compound interest rate:
f
In the money markets, _______ buys and sells securities for themselves. Brokers. Agents. Dealers. Day traders. Investment bankers.
dealers
t/ f When owners are managers (such as in a sole proprietorship), a firm will have agency costs
f
t/f An annuity stream where the payments occur forever is called an annuity due
f
t/f Capital structure determines the level of current assets that is required to maintain the firm's operational level
f
t/f Capital structure determines the level of current assets that is required to maintain the firm's operational level.
f
t/f Determining the mix of debt and equity maintained by a firm is the function of the board of directors
f
t/f Establishing the accounts receivable policies is a capital structure decision
f
t/f Monthly payments equal to 100% of the income earned by a restaurant fits the definition of a perpetuity
f
t/f Stakeholder theory suggests that employees, customers, suppliers, and various levels of government all have financial interests in the firm
f
t/f The Sarbanes-Oxley Act was intended to increase corporate social responsibility of publicly listed organizations.
f
What was the intent of the Sarbanes Oxley Act? It was intended to provide consumer protection on product quality. It was intended to protect employees through better corporate codes of conduct. It was intended to harmonize accounting standards in North America. It was intended to increase corporate social responsibility of publicly listed organizations. It was intended to protect investors from corporate abuses.
it was intended to protect investors from corporate abuses.
A(n) ______________ is a sale of securities which typically does not require registration with the OSC. Secondary market transaction. Over-the-counter transaction. Primary market transaction. Initial public offering. Private placement.
private placement
Which of the following groups is considered residual owners of a corporation? Shareholders. Debt holders. Suppliers. Employees. Government.
shareholder
T/F Lenders consider the limited liability feature as a disadvantage
t
t/f A capital expenditure project becomes desirable when the project is worth more to the firm than the cost to acquire it.
t
t/f A limited partner can lose his or her investment in the partnership.
t
t/f An annuity stream of cash flow payments is a set of level cash flows occurring each time period for a fixed length of time
t
t/f Capital structure determines how much debt the firm should have in relation to its level of equity.
t
t/f Corporate governance is best defined as rules for corporate organization and conduct
t
t/f Dealer markets in stocks and long-term debt are called over-the-counter (OTC) markets.
t
t/f Endowment fund providing equal annual payments from accrued earnings fit the definition of a perpetuity.
t
t/f Future value can be lower than present value
t
t/f Future value will be greater as compounding increases.
t
t/f The annual percentage rate (APR) is the interest rate charged per period multiplied by the number of periods per year
t
t/f The interest rate charged per period multiplied by the number of periods per year is called the annual percentage rate (APR).
t
t/f The larger the present value factor, the larger the present value.
t
t/f The size, timing and risk of cash flows are important when evaluating a capital budgeting decision.
t
t/f The treasurer's task is to oversee the cash and credit management functions, as well as the financial planning and capital expenditures of the firm
t
t/f Whether managers act in the best interest of shareholders depends on the manner in which managers are compensated and whether managers be replaced if they do not pursue shareholder goals
t
