Finance Exam 1

________ is concerned with design and delivery of advice and financial products to individuals, businesses, and governments. Financial services
Managerial finance ________. involves tasks such as budgeting, financial forecasting, cash management, and funds procurement
Finance is ________. the art and science of managing money
Which of the following is an area of career opportunities in financial services? personal financial planning
Which of the following is an area of career opportunities in managerial finance? capital expenditures management
Which of the following is a duty of a financial manager in a business firm? raising financial resources
A ________ is responsible for evaluating and recommending proposed long-term investments. capital expenditures manager
Which of the following legal forms of organization is most expensive to organize? corporations
Which of the following legal forms of organization has the ease of dissolution? sole proprietorships
Under which of the following legal forms of organization is ownership readily transferable? corporations
Which of the following forms of organizations is the easiest to form? sole proprietorships
A major weakness of a partnership is ________. the difficulty in liquidating or transferring ownership
Which of the following is a strength of a corporation? limited liability
Which of the following legal forms of organizations is characterized by unlimited liability? sole proprietorship
Which of the following is the purest and most basic form of corporate ownership? common stock
Which of the following is true of a partnership and a corporation? In a partnership, income is taxed at the corporate level; whereas, in a corporation, income is taxed twice.
Which of the following is true of sole proprietorships and corporations? In sole proprietorships, owners have unlimited liability; whereas, in corporations, owners have limited liability.
Corporate owners receive return ________. by realizing gains through increases in share price and cash dividends
The wealth of the owners of a corporation is represented by ________. share value
Wealth maximization as the goal of a firm implies enhancing the wealth of ________. the firm’s stockholders
The amount earned during the accounting period on each outstanding share of common stock is called ________. earnings per share
Which of the following is the best measure of profit maximization goal? earnings per share
Profit maximization as a goal is ideal because it directly considers ________. EPS and stock price.
Profit maximization as the goal of the firm is not ideal because ________. profit maximization does not consider risk
Which of the following is a measure of profit maximization to shareholders? earnings per share
The key variables in the owner wealth maximization process are ________. cash flows and risk
Cash flows and risk are the key determinants in share price. Increased cash flow results in ________, other things remaining the same. a higher share price
Cash flows and risk are the key determinants in share price. Increased risk, other things remaining the same, results in ________. a lower share price
Financial managers evaluating decision alternatives or potential actions must consider ________. risk, return, and the impact on share price
An ethics program is expected to have ________ impact on a firm’s share price. a positive
Which of the following is true of cash flows and risk? High cash flow and low risk result in an increase in share price.
As the risk of a stock investment increases, investors’ ________. required rate of return will increase
If the CEO of a company were to pass away, what do you think would happen to price of the stock? It would decrease because of the perceived increased risk due of lack of near-term leadership
Which of the following is true of a cash flow? Profits do not necessarily result in cash flows available to the stockholders.
A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below.Asset Year 1 Year 2 Year 31 $21000 $15,000 $6,0002 $9,000 $15,000 $21,0003 $3,000 $20,000 $19,0004 $6,000 $12,000 $12,000Based on the wealth maximization goal, the financial manager would choose ________. Asset 1
A financial manager must choose between three alternative investments. Each asset is expected to provide earnings over a three-year period as described below. Based on the wealth maximization goal, the financial manager would ________.Year Asset 1 Asset2 Asset 31 $21,000 $9,000 $15,0002 $17,000 $15,000 $15,0003 $7,000 $21,000 $15,000Total $45,000 $45,000 $45000 Choose asset 1
Which of the following is true of stakeholders? They are groups having a direct economic link to a firm.
Which of the following is an example of a firm’s stakeholder? media
Which of the following is considered as a violation of business ethics? earnings management
Which of the following is one of the positive benefits of an effective ethics program? reduce potential litigation and judgment costs
The implementation of a pro-active ethics program is expected to result in ________. a positive corporate image and increased respect, a reduction in risk, and enhanced cash flow resulting in an increase in share price
An effective ethics program ________. can enhance a corporation’s value
Corporate ethics policies typically apply to ________ in dealing with ________. employee actions; all corporate constituents
An accountant’s primary function is ________. the collection and presentation of financial data
A treasurer is commonly responsible for handling ________. investing surplus funds
A controller is commonly responsible for ________. financial accounting
A ________ is responsible for a firm’s financial activities such as financial planning and fund raising, making capital expenditure decisions, and managing cash, credit, the pension fund, and foreign exchange. treasurer
A ________ is responsible for the firm’s accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting. controller
Which of the following is true of accrual basis accounting? Expenses are recognized when they are incurred.
Which of the following is true of cash basis accounting? Revenue is recognized when a customer pays cash.
A financial manager is interested in the cash inflows and outflows of a firm, rather than the accounting data, in order to ________. maintain an optimum solvency level
Which of the following is the responsibility of a finance manager? analyzing the capital needs of the firm
Economic theories that a financial manager must ensure for efficient business operations, include ________. supply-and-demand analysis
The primary economic principle used in managerial finance is ________. marginal cost-benefit analysis
Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandise during the year, it is yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are ________. $3,000 and -$7,000, respectively
A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandise purchased during the year at a total cost of $112,500. Although the firm paid in full for the merchandise during the year, it is yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are ________. $37,500 and -$112,500, respectively
________ is one of the primary responsibilities of a financial manager. Analyzing budget and performance reports
By concentrating on cash flows within a firm, the financial manager should be able to ________. avoid insolvency
Marginal analysis states that financial decisions should be made and actions should be taken only when ________. added benefits exceed added costs
A firm has just ended its calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it is yet to collect at year end from the customer. The possible problem this firm may face is ________. lack of cash flow
Which of the following line items in a balance sheet is considered the most for making a financing decision? long-term liabilities
Investment decisions generally refer to the items that appear on the ________. left-hand side of the balance sheet, and financing decisions relate to the items on the right-hand side
Which of the following is one of the key activities of a financial manager? making financing decisions
The primary activity of a financial manager is ________. making an investment decision
Which of the following activities of a finance manager determines the types of assets the firm holds? investment decisions
While making financing decisions, a financial manager should ________. determine the appropriate mix of short-term and long-term financing
An investment decision taken by a financial manager will consider ________. funds used to purchase land
While managing a firm’s assets, a financial manager should include ________. cash
Which of the following activities of a finance manager determines how the firm raises money to pay for the assets in which it invests? financing decisions
A financial manager’s investment decisions determine ________. both the mix and the type of assets found on the firm’s balance sheet
In planning and managing the requirements of a firm, the financial manager is concerned with ________ the mix and type of assets, the type of financing utilized, and analysis in order to monitor the financial condition
A financial manager’s financing decisions determine ________. the most appropriate mix of short-term and long-term financing
The board of directors is typically responsible for ________. approving strategic goals and plans
The Sarbanes-Oxley Act of 2002 was passed in response to ________. false disclosures in financial reporting
The Sarbanes-Oxley Act of 2002 resulted in ________. tightened audit regulations and controls
The true owner(s) of the corporation is (are) the ________. stockholders
The ________ has/have the ultimate responsibility in guiding corporate affairs and carrying out policies. board of directors
The responsibility for managing day-to-day operations and carrying out corporate policies belongs to the ________. chief executive officer
In a corporation, the board of directors are elected by the ________. stockholders
Which of the following is an example of agency cost? failure of making the best investment decision
Which of the following is the best measure to ensure that management decisions are in the best interest of the stockholders? tie management compensation to the performance of the company’s common stock price
________ is one of the solution to the agency problem in publicly-held corporations. Stock options
Incentive plans usually tie management compensation to ________. share price
If managers are not owners of their company, then they are ________. agents
The conflict between the goals of a firm’s owners and the goals of its non-owner managers is ________. the agency problem
The agency problem may result from a manager’s concerns about ________. job security
Which of the following is an example of agency costs? monitoring expenditures cost
As a key participant in financial transactions, individuals are ________. net suppliers of funds because they save more money than they borrow
Government is typically a ________. net demander of funds because it borrows more than it saves
Government can obtain funds ________. by selling debt securities
Firms that require funds from external sources can obtain them ________. through financial institutions
Investment banks are institutions that ________. engage in trading and market making activities
Which of the following serves as an intermediary channeling the savings of individuals, businesses, and governments into loans and investments? financial institutions
Which of the following provides savers with a secure place to invest funds and offer both individuals and companies loans to finance investments? commercial banks
Which of the following assists companies in raising capital, advise firms on major transactions such as mergers or financial restructuring, and engage in trading and market making activities? investment banks
Most businesses raise money by selling their securities in a ________. public offering
Which of the following is a means of selling bonds or stocks to the public? public offering
Which of the following is a forum in which suppliers and demanders of funds can transact business directly? financial markets
The sale of a new security directly to an investor or a group of investors is called ________. a private placement
The ________ market is where securities are initially issued and the ________ market is where pre-owned securities (not new issues) are traded. primary; secondary
The over-the-counter (OTC) market is ________. a market where smaller, unlisted securities are traded
Which of the following is true of a primary market? It is the only market in which the issuer is directly involved in the transaction.
Which of the following is true of a secondary market? It is a market in which preowned securities are traded.
Which of the following is true of preferred stock? It has features of bonds and a common stock.
The key securities traded in the capital markets are ________. stocks and bonds
Which of the following is true of international equity markets? In the international equity market, corporations can sell blocks of shares to investors in a number of different countries simultaneously.
Which of the following is true of a dealer market? Buyers and sellers are never brought together directly
Which of the following is true of a securities exchange? It provides a marketplace in which firms can raise funds through the sale of new securities and purchasers can resell securities.
A market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses is called a(n) ________. efficient market
The ________ is created by a financial relationship between suppliers and demanders of short-term funds. money market
By definition, the money market involves the buying and selling of ________. short-term securities
Most money market transactions are made in ________. marketable securities
The ________ is created by a number of institutions and arrangements that allow the suppliers and demanders of long-term funds to make transactions. capital market
Long-term debt instruments used by both government and business are known as ________. bonds
Which of the following is an example of marketable securities? U.S.Treasury bills
In a ________ market, the buyer and seller are brought together to trade securities in an organization called ________. broker; securities market
In a ________ market, the buyer and seller are not brought together to trade securities directly but instead have their orders executed on the ________. dealer; over-the-counter market
An efficient market is one where ________. the price of a security is an unbiased estimate of its true value
The money market is a market ________. which brings together suppliers and demanders of short-term funds
Apex Inc. issues a bond of $1,000 which pays interest semiannually at a coupon interest rate of 8%. The maturity of the bond is 15 years. Where should this bond be traded? capital market
The process of pooling mortgages or other types of loans and selling the claims or securities against that pool in the secondary market is called ________. securitization
The primary risk of mortgage-backed securities is ________. that homeowners may not be able to, or choose not to, repay their loans
Which of the following is true of mortgage-backed securities? Mortgage-backed securities represent claims on the cash flows generated by a pool of homeloans.
When home prices are falling, we would expect a(n) ________. high mortgage default rates
A crisis in the financial sector often spills over into other industries because when financial institutions ________ borrowing, activity in most other industries ________. contract; slows down
The Glass-Steagall Act ________. separated the activities of commercial and investment banks
The Federal Deposit Insurance Corporation (FDIC) ________. is an agency, created by the Glass-Steagall Act, that monitors banks on a regular basis to ensure that they were safe and sound
The Gramm-Leach-Bliley Act ________. allows business combinations between commercial banks, investment banks, and insurance companies
Which of the following acts regulates the secondary market? The Securities Exchange Act of 1934
Which of the following acts regulates the primary market in which securities are originally issued to the public? The Securities Act of 1933
The tax deductibility of various expenses such as general and administrative expenses ________. reduces their after-tax cost
Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is the average tax rate for Jennings, Inc.? 34 percent
The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is ________. 23 percent
If a corporation sells certain capital equipment for more than their initial purchase price, the difference between the sale price and the purchase price is called a(n) ________. capital gain
In general, most corporate capital gains are taxed at ________ tax rate. the regular corporate
Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other corporations. Congress did this to ________. eliminates most of the potential tax liability from the dividends received by the second and any subsequent corporations
Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 10 percent, or preferred stock at an annual cost of 7 percent. If the corporation has a 40 percent tax rate, the after-tax cost of each is ________. debt: $60,000; preferred stock: $70,000
Corporation A owns 15 percent of the stock of corporation B. Corporation B pays corporation A $100,000 in dividends in 2002. Corporation A must pay tax on ________. $ 30,000 of ordinary income
The dividend exclusion for corporations receiving dividends from another corporation has resulted in ________. stock investments being relatively more attractive relative to bond investments made by one corporation in another corporation
Which of the following is true? Corporations may pay taxes on only 30 percent of the dividends received from other corporations, depending on their percentage of ownership.
________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds. Real
Generally, an increase in risk will result in ________. a higher required return or interest rate
Nominal rate of interest is equal to ________. the risk-free rate plus a risk premium
The ________ rate is typically the nominal rate of interest on a three-month U.S. Treasury bill risk-free
Nico Nelson, a management trainee at a large New York-based bank, is trying to estimate the real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3 percent and has decided to use the consumer price index as a proxy for expected inflation. What is the estimated real rate of interest if the CPI is currently 2 percent? 1%
The inflation risk premium on a bond is 2 percent, the U.S. T-bill rate is 5 percent, the maturity risk premium on the bond is 3 percent, the default risk premium on the bond is 2 percent, and the liquidity risk premium on the bond is 1 percent. Calculate its nominal rate of return. 13%
Nico invested an amount a year ago and calculated his return on investment. He found that his purchasing power had increased by 15 percent as a result of his investment. If inflation during the year was 4 percent, then Nico’s ________. nominal return on investment is more than 15 percent
________ rate of interest is the actual rate charged by the supplier and paid by the demander of funds. Nominal
The ________ is the compound annual rate of interest earned on a debt security purchased on a given date and held to maturity. yield to maturity
A(n) ________ is a graphic depiction between the maturity and rate of return for bonds with similar risks. yield curve
A(n) ________ yield curve reflects higher expected future rates of interest. upward-sloping
A(n) ________ yield curve reflects lower expected future rates of interest. downward-sloping
The term structure of interest rates is the relationship between ________. the maturity and rate of return for bonds with similar level of risk
A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called ________. inverted yield curve
An upward-sloping yield curve that indicates cheaper short-term borrowing costs than long-term borrowing costs is called as ________. normal yield curve
A yield curve that reflects relatively similar borrowing costs for both short-term and long-term loans is called as ________. flat yield curve
The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is called ________. liquidity preference theory
The yield curve in an economic period where higher future inflation is expected would be ________. upward-sloping
The yield curve in an economic period where lower future inflation is expected would be ________. downward-sloping
Which of the following explains the general shape of the yield curve of a bond? Expectations theory
Assume the following returns and yields: U.S. T-bill = 8%, 5-year U.S. T-note = 7%, IBM common stock = 15%, IBM AAA Corporate Bond = 12% and 10-year U.S. T-bond = 6%. Based on this information, the shape of the yield curve is ________. downward sloping
________ mainly explains the tendency for the yield curve to be upward sloping. Liquidity preference theory
Which of the following affects the slope of yield curve? liquidity preferences
Which of the following is true of risk premium? The lower-rated corporate issues have a higher risk premium than that of the higher rated corporate issues.

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