Test 1 Finance

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders? Select one: a. The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%. b. The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. c. The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. d. The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval. e. The firm's founder, who is also president and chairman of the board, sells 90% of her shares.

A

Which of the following statements is CORRECT? Select one: a. If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted. b. There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm. c. If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted. d. ​Ethics is not an important consideration in business and in business schools. e. Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business.

A

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders? Select one: a. Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock. b. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. c. Elect a board of directors that allows managers greater freedom of action. d. Decrease the use of restrictive covenants in bond agreements. e. Take actions that reduce the possibility of a hostile takeover.

B

Which of the following statements is CORRECT? Select one: a. Bond covenants are an effective way to resolve conflicts between shareholders and managers. b. One advantage to forming a corporation is that the owners of the firm have limited liability. c. Because of their simplified organization, it is easier for proprietors and partnerships to raise large amounts of outside capital than it is for corporations. d. Corporations face few regulations and more favorable tax treatment than do proprietorships and partnerships. e. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers.

B

Which of the following statements is CORRECT? Select one: a. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility. b. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person. c. By law in most states, the chairman of the board must also be the CEO. d. In most corporations, the CFO ranks above the CEO. e. The CFO generally reports to the firm's chief accounting officer, who is normally the controller.

B

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to Select one: a. Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value. b. Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth. c. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers. d. Maximize the firm's expected EPS, which must also maximize the firm's price per share. e. Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price.

C

Which of the following statements is CORRECT? Select one: a. A hostile takeover is the main method of transferring ownership interest in a corporation. b. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. c. A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers. d. Limited liability is an advantage of the corporate form of organization to its owners (stockholders), but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. e. Although the stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue the firm's managers if the firm defaults on its debt.

C

Which of the following statements is CORRECT? Select one: a. Corporations of all types are subject to the corporate income tax. b. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy. c. Proprietorships and partnerships generally have a tax advantage over corporations. d. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner. e. Proprietorships are subject to more regulations than corporations.

C

Which of the following statements is CORRECT? Select one: a. In general, it is more in bondholders' interests than stockholders' interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development. b. Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value. c. Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management. d. The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers. e. The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.

C

Which of the following statements is CORRECT? Select one: a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. c. Capital market instruments include both long-term debt and common stocks. d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors

C

Which of the following statements is CORRECT? Select one: a. The term "IPO" stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public. b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public. c. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay. d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed. e. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.

C

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers? Select one: a. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock. b. Beef up the restrictive covenants in the firm's debt agreements. c. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold. d. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. e. Pay managers large cash salaries and give them no stock options.

D

Which of the following statements is CORRECT? Select one: a. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. b. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business. c. Corporations face fewer regulations than proprietorships. d. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership. e. One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level.

D

Which of the following statements is CORRECT? Select one: a. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote." b. One of the advantages of the corporate form of organization is that it avoids double taxation. c. Corporations of all types are subject to the corporate income tax. d. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability. e. It is easier to transfer one's ownership interest in a partnership than in a corporation.

D

With which of the following statements would most people in business agree? Select one: a. It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. b. A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. c. "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees. d. Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation. e. Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.

D

Money markets are markets for Select one: a. Foreign currencies. b. Consumer automobile loans. c. Common stocks. d. Long-term bonds. e. Short-term debt securities such as Treasury bills and commercial paper.

E

More than one of the following statements is incorrect: Select one or more: a. Hedge funds are a type of private equity funds that invest in startup business. b. Mutual funds are SEC regulated, and thus investor's money is FDIC insured. c. When you buy shares of a mutual fund that holds IBM stock, you are also considered as IBM's stockholder. d. Pension funds are defined benefit that employers provide to their employees upon retirement. e. Private equity funds intend to hold their equity investment for a few years, while hedge funds intend to make quick profit.

E

New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $1,200,000 before taxes each year. The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation? Select one: a. $22,277 b. $32,885 c. $31,824 d. $32,620 e. $26,520

E

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to Select one: a. Maximize its expected EPS. b. Maximize the stock price on a specific target date. c. Minimize the chances of losses. d. Maximize its expected total corporate income. e. Maximize the stock price per share over the long run, which is the stock's intrinsic value.

E

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers? Select one: a. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period. b. A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock. c. Congress passes a law that severely restricts hostile takeovers. d. The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company. e. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.

E

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders? Select one: a. Abolishing the Security and Exchange Commission. b. Financing risky projects with additional debt. c. Compensating managers with stock options. d. The threat of hostile takeovers. e. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions.

E

Which of the following statements is CORRECT? Select one: a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. c. Hedge funds have more in common with investment banks than with any other type of financial institution. d. Hedge funds have more in common with commercial banks than with any other type of financial institution. e. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated" investors (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

E

Which of the following statements is CORRECT? Select one: a. The threat of takeover generally increases potential conflicts between stockholders and managers. b. One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure. c. Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. d. The creation of the Securities and Exchange Commission (SEC) has eliminated conflicts between managers and stockholders. e. The threat of takeovers tends to reduce potential conflicts between stockholders and managers.

E

Which of the following statements is CORRECT? Select one: a. ​If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction. b. ​If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. c. ​The NYSE is an example of an over-the-counter market. d. ​Only institutions, and not individuals, can engage in derivative market transactions. e. ​As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

E

A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors. Select one: True False

a

A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock. Select one: True False

a

Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value. Select one: True False

a

FinTech refers to a business that uses technology to enhance automation or fully automate financial services, including payment, money management, fund raising, investing, trading and infrastructure such as record keeping and verification. Select one: True False

a

Financial institutions are more diversified today than they were in the past, when federal laws kept investment banks, commercial banks, insurance companies, and similar organizations quite separate. Today the larger financial services corporations offer a variety of services, ranging from checking accounts, to insurance, to underwriting securities, to stock brokerage. Select one: True False

a

Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions. Select one: True False

a

If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the NASDAQ Index. Select one: True False

a

Private markets are those like unlisted stocks and hedge funds, where transactions are made between a small members of investors, while public markets are those like the NASDAQ, where anyone can make transactions. Select one: True False

a

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts. Select one: True False

a

Starting to invest early for retirement increases the benefits of compound interest. Select one: True False

a

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date. Select one: True False

a

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is closely held. Select one: True False

a

Which of the following statements about market efficiency is incorrect? Select one: a. If the Efficient Market Hypothesis holds, the prices of stocks are close to their intrinsic values. Therefore, investors can pick any stock and will not lose money. b. If markets are weakly efficient, technical analysis won't be consistently useful c. If markets are semi-strong efficient, investors will be better off buying low-fee market index funds than high-fee actively managed mutual funds d. If markets are only weakly efficient, analyzing corporate financial reports may help you get insight and develop useful investment strategies.

a

Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value. Select one: True False

b

Primary markets are large and important, while secondary markets are smaller and less important. Select one: True False

b

Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.) Select one: True False

b

The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant. Select one: True False

b

Which of the following is an example of financial asset? Select one: a. Software b. Lease c. Land d. Building e. A patent on a drug

b

Which of the following statements is CORRECT? Select one: a. When JP Morgan is hired as an underwriter, the investment bank will issue its own security to raise the capital, then use the money to purchase its client's stock. b. The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market. c. Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks. d. Money markets are markets for long-term debt and common stocks. e. A liquid security is a security whose value is derived from the price of some other "underlying" asset.

b

Which of the following statements is NOT CORRECT? Select one: a. When a corporation's shares are owned by a few individuals, we say that the firm is "closely, or privately, held." b. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. c. The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC. d. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public, or an IPO," and the market for such stock is called the new issue or IPO market. e. It is possible for a firm to go public and yet not raise any additional new capital for the firm itself.

b

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment? Select one: The discount rate decreases. The discount rate increases. The riskiness of the investment's cash flows decreases. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.

b

Which of the following about behavioral finance critic of efficient market hypothesis is incorrect? Select one: a. People view potential losses and gains asymmetrically. So investors often hold onto losing stocks for too long, causing losses to mount. b. Stocks can be overpriced for prolonged period because it is hard for the correct few to work against a large wrong crowd. c. None is incorrect. d. No consistently useful investment strategies to be found doesn't prove that markets are efficient. e. Investors may become overconfident by previous success and then overbuild their position.

c

The objectives of market regulations do not include ______________ Select one: a. Investors have equal access to information b. To reduce settlement risk in financial transaction c. To maintain a fair and orderly market d. To ensure profit for investors e. To reduce frauds of listed companies

d

Which of the following statements are correct? I. Futures are standardized contracts traded on exchanges to buy/sell specific assets at a specified price at a certain future date. II. An oil refining firm buying crude oil futures to lock in the cost of crude oil is an act called arbitrage. III. Dealers buy from investors at the bid price and attempt to sell at the higher asking price to make profit. IV. ECN is fully automatic computerized system that allows investors to trade securities electronically without human intervention. Select one: a. All of them b. II, III, IV c. I, II, III d. I, III, IV

d

Which of the following statements is CORRECT? Select one: a. The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year. b. Capital market transactions involve only preferred stock or common stock. c. If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding. d. Businesses use assets to make products and services to generate income, and financial assets define how the income is distributed among investors. e. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.

d

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT? Select one: a. The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. b. The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. c. The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. d. The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD. e. If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

d

Which of the following statements is incorrect? Select one: a. Small companies can save the cost of financing by using funding portals to raise equity capital. b. Funding portals need to register with SEC. c. Funding portals are internet-based crowdfunding sites. d. Public traded companies cannot sell stocks on funding portals. e. Small companies can "go public" cheaply by offering to sell stock on the funding portal

e