FINA 3313 EXAM DEMO

Which of the following was NOT identified by your authors as one of the three main areas of financial study?

a. Capital budgeting

b. Business finance

c. Investments

d. Financial markets and institutions

Capital budgeting

What is the process of determining which long-term or fixed assets to acquire in an effort to maximize shareholder value?

a. Capital budgeting

b. Financial markets and institutions

c. Business finance

d. Investments

Capital budgeting

Which of the following statements is false?

a. Financial planning is an important tool of for-profit organizations such as corporations and partnerships but is not important for not-for-profit enterprises such charitable organizations or governments.

b. Good financial planning considers past, present, and pro forma income statements.

c. Forecasting in the form of expected sales, cost of funds, and micro- and macroeconomic conditions are essential elements of financial planning.

d. Balance sheets are critical elements of the financial planning process and help demonstrate expected sources and uses of funds.

Financial planning is an important tool of for-profit organizations such as corporations and partnerships but is not important for not-for-profit enterprises such charitable organizations or governments.

The ________ market is the market for ________ securities, and the ________ is the market for ________ securities.

a. primary; used; secondary; new

b. primary; new; secondary; used

c. secondary; new; primary; new

d. secondary; used; primary; used

primary; new; secondary; used

________ own the securities that they buy or sell; when they engage in a financial transaction, they are trading from their own portfolio.

a. Dealers

b. Brokers

c. Advisers

d. Comptrollers

Dealers

________ act as facilitators in a market, and they bring together buyers and sellers for a transaction.

a. Advisers

b. Brokers

c. Dealers

d. Comptrollers

Brokers

________ is the market for short-term, low-risk, highly liquid, homogeneous securities.

a. The stock market

b. The capital market

c. The financial market

d. The money market

The money market

________ is a short-term, unsecured security issued by corporations and financial institutions to meet short-term financing needs such as inventory and receivables.

a. Commercial paper

b. A Treasury bill

c. A Treasury note

d. A negotiable certificate of deposit

Commercial paper

________ investments tend to have ________ risk and ________ expected returns.

a. Long-term; less; smaller

b. Long-term; greater; greater

c. Short-term; greater; smaller

d. Short-term; less; greater

Long-term; greater; greater

________ value is what a consumer pays for a product. ________ value is what a consumer is willing to pay for a product.

a. Economic; Market

b. Book; Market

c. Economic; Book

d. Market; Economic

Market; Economic

An important advantage of a sole proprietorship is that ________.

a. it is easier to raise capital under such a structure than under other organizational forms.

b. it allows for an unlimited life of the business

c. it is relatively easy to create

d. Both a and b are correct.

it is relatively easy to create

A shareholder is someone who ________.

a. sits on the audit committee of a firm

b. profits from the favorable results of a company

c. follows the company for an investment firm

d. is an ex-employee of a company

profits from the favorable results of a company

Effective corporate governance includes all of the following EXCEPT ________.

a. accountability

b. higher share price

c. objectivity

d. fairness

higher share price

A stakeholder is someone who ________.

a. is required to read a company's annual report

b. has a vested interest in a company's success

c. answers to a board of directors

d. is hired to do a specific job

has a vested interest in a company's success

An important component of a strong board of directors (BOD) is having members who are ________.

a. new to the industry and without preconceptions

b. able to write a strong corporate press release

c. former employees of the company

d. culturally diverse and experienced in the industry

culturally diverse and experienced in the industry

Which of the following is NOT a reason why a company needs good corporate governance?

a. to increase the company's overall accountability and prevent significant organizational problems

b. to avoid mismanagement of the company

c. to enable the company to raise capital more efficiently and mitigate financial and operational risk to stakeholders

d. to analyze the company's operations and systems of internal control in order to detect and prevent various forms of fraud and other accounting irregularities

to analyze the company's operations and systems of internal control in order to detect and prevent various forms of fraud and other accounting irregularities

Who ultimately runs the company operations for a large corporation?

a. external auditors

b. stakeholders

c. board of directors

d. shareholders

board of directors

One of the ways in which companies attempt to mitigate short-term managerial focus is by offering managers ________.

a. stock options

b. increased vacation time

c. comprehensive health insurance

d. increased paid sick leave

stock options

Which of the following is NOT one of the roles of an audit committee?

a. ensuring that appropriate resources are used in company operations

b. launching special investigations of employees, company practices, or procedures

c. reviewing the work of the internal audit

d. reviewing systems of internal control.

ensuring that appropriate resources are used in company operations

Which of the following is a major issue addressed in corporate governance?

a. ethics and its implementation

b. expanding operations internationally

c. improving profits for shareholders

d. improving banking relations

ethics and its implementation

Agency problems are essentially ________.

a. problems with the IRS

b. fraudulent business activities

c. conflicts of interest

d. nepotism

conflicts of interest

The term ESG, when used in the context of corporate governance, refers to which of the following?

a. earnings, shareholders, and governance

b. environmental, social, and governance

c. earnings, social, and general profit

d. environmental, social, and goals

environmental, social, and governance

Which of the following is the best method to ensure that shareholders are well informed of corporate policies and financial results?

a. self-evaluation and training for members of the board of directors

b. hiring a prestigious independent public accounting firm

c. conducting well-organized shareholder meetings and conference calls with the investment community

d. ensuring cultural diversity and public speaking eloquence of the senior management team

conducting well-organized shareholder meetings and conference calls with the investment community

Investor relations has substantially more ________.

a. personnel within a company dedicated to its function compared to other corporate departments

b. regulatory obligations than standard public relations because of government-mandated financial and legal requirements

c. documented historical cases of corporate failure than other managerial and financial disciplines

d. interpretations regarding its effective implementation and use than other managerial and financial disciplines

regulatory obligations than standard public relations because of government-mandated financial and legal requirements

An increase in the price of a basket of goods is known as ______.

a. a change in quantity demanded

b. falling GDP

c. inflation

d. rising GDP

inflation

To be considered unemployed, an individual must be ______.

a. out of work

b. actively seeking a job

c. able to work

d. All of the above

all of the above

When measuring GDP, purchases are divided into the four broad categories of ______.

a. interest rates, inflation, unemployment, and investment

b. consumer spending, investment, government spending, and net exports

c. demand, inflation, interest rates, and government spending

d. imports, exports, loanable funds, and government spending

consumer spending, investment, government spending, and net exports

A business cycle is measured from ______.

a. the time of the highest unemployment rate to the time of the lowest unemployment rate

b. one peak to the next trough

c. one trough to the next peak

d. one trough to the next trough

one trough to the next trough

The interest rate is the ______.

a. measure of economic activity

b. speed at which the money supply is increasing

c. rental cost of money

d. increase in the price of a market basket of goods

rental cost of money

If the nominal interest rate is 9% and the rate of inflation is 2%, the real rate of interest is approximately ______.

a. 29 %

b. 11%

c. 18%

d. 7%

7% (nominal interest rate-rate of inflation = 9%-2%=7%)

A foreign exchange rate is ______.

a. the amount of imports a country has relative to its exports

b. the price of one currency in terms of another currency

c. the rate of inflation in a foreign country

d. the rate of unemployment in one country compared to the rate in another country

the price of one currency in terms of another currency

The most basic type of financial transaction involves ________.

a. an amount of money that is not invested

b. a simple, one-time amount of cash that can be either a receipt or a payment

c. a series of equal installment amounts paid or received over a period of time

d. None of the above

a simple, one-time amount of cash that can be either a receipt or a payment

If a discount (or interest) rate has a positive value, then the future value of any amount deposited in an interest-bearing account will ________.

a. be greater than the present value

b. decline over time

c. be less than the present value

d. be equal to the present value

be greater than the present value

If the discount (or interest) rate used to calculate the present value of a future payment increases, the calculated present value will do which of the following?

a. Decrease

b. Remain the same

c. Increase as the period of time shortens

d. Increase

Decrease

The discount rate that is required to equate a future payment of $500 in three years to a present value of $400 is ________.

a. 7.7%

b. 8.8%

c. 4.7%

d. 6.5%

7.7%

If compounding periods increase in frequency and all else remains the same, the dollar values of any resulting future value calculations will ________.

a. decrease

b. increase

c. None of the above

d. remain the same

increase

When solving bond problems relating to a bond that pays interest on a quarterly basis, the ________ before being applied.

a. quoted number of years until maturity should be divided by 4

b. quoted annual coupon payments should be divided by 4

c. quoted annual yield to maturity should be multiplied by 4

d. stated face value should be divided by 4

quoted annual coupon payments should be divided by 4

Which of the following is NOT an adjustment that must be made when interest is paid semiannually instead of annually?

a. Dividing the annual coupon payment by 2

b. Dividing the total number of years by 2

c. Dividing the annual yield to maturity by 2

d. Dividing the annual interest rate by 2

Dividing the total number of years by 2

Which of the following is NOT considered a factor that influences a bondholder's required rate of return?

a. Business risk

b. Other investments by the bondholder

c. Financial risk

d. Risk premium

Other investments by the bondholder

How might an investment in a bond fund be affected by a decline in interest rates?

a. The fund investment would not be affected.

b. The fund investment would likely increase in value.

c. The fund investment would likely decrease in value.

d. Coupon payments from bonds in the fund would decline.

The fund investment would likely increase in value.

Interest rates and bond prices ________.

a. are unrelated

b. are both economic factors set by central banks

c. have an inverse relationship

d. have a direct relationship

have an inverse relationship

The coupon rate of a bond is typically ________.

a. fixed at the time of bond issuance

b. subject to change based on the federal funds rate

c. zero in the case of zero-coupon bonds

d. Both A and C

Both A and C

A zero-coupon bond is a bond that ________.

a. has been rated below investment grade

b. has no periodic coupon payments

c. Both A and C

d. has no value

Has no periodic coupon payments

A bond that has a coupon rate less than prevailing interest rates will ________.

a. be overpriced

b. sell at par value

c. sell at a premium

d. sell at a discount

sell at a discount

A normal yield curve will ________.

a. slope downward as it moves along its x-axis (term).

b. fluctuate depending on the federal funds rate

c. slope upward as it moves along its x-axis (yield).

d. slope upward as it moves along its x-axis (term).

slope upward as it moves along its x-axis (term)

An inverted yield curve is an indication that ________.

a. short-term yields and interest rates are higher than long-term rates

b. the economy is in the process of a significant recovery

c. the yields to maturity on all bonds are less than market interest rates

d. long-term yields and interest rates are higher than short-term rates

short-term yields and interest rates are higher than long-term rates

Dividend yield is computed as the proportion of dividend per share to ________.

a. earnings per share

b. book value per share

c. market value per share

d. share price

share price

If an investor's required rate of return increases and all other characteristics of a stock remain the same, the value of the stock will ________.

a. decrease

b. remain the same

c. increase

d. None of the above

decrease

In which of the following ways does preferred stock differ from common stock?

a. In the event of corporate liquidation, preferred stockholders are paid last.

b. Preferred stock carries voting rights for its ownership.

c. Preferred stock may have a cumulative dividend feature.

d. Preferred stock must be purchased through a broker dealer.

Preferred stock may have a cumulative dividend feature.

The term efficient markets refers to the idea that ________.

a. publicly traded companies always file their financial reports on time

b. stocks trade with minimal costs and prices are current and fair to all traders

c. financial information on companies and their stock is only available to efficient traders

d. investors are able to identify underpriced stocks for purchase

stocks trade with minimal costs and prices are current and fair to all traders

Which of the following is a disadvantage of using the payback method?

a. It ignores the time value of money.

b. It only considers cash flows that occur after the project breaks even.

c. You must know the company's cost of raising funds to be able to use it.

d. It is difficult to calculate.

it ignores the time value of money

A company should accept a project if ________.

a. the NPV of the project is negative

b. the NPV of the project is positive

c. the IRR of the project is positive

d. the IRR of the project is negative

the NPV of the project is positive

The net present value of a project equals ________.

a. the present value of the cash inflows minus the future value of the cash outflows

b. the future value of the cash inflows minus the present value of the cash outflows

c. the future value of the cash inflows minus the future value of the cash outflows

d. the present value of the cash inflows minus the present value of the cash outflows

the present value of the cash inflows minus the present value of the cash outflows

The IRR of a project is the discount rate that ________.

a. makes the NPV positive

b. equates the present value of cash outflows to the future value of the cash inflows

c. makes the NPV equal to zero

d. equates the present value of the cash inflows to the future value of the cash outflows

makes the NPV equal to zero

The IRR method assumes that ________.

a. cash flows are reinvested at the firm's cost of attracting funds when they are received

b. the NPV of a project is negative

c. cash flows are reinvested at the internal rate of return when they are received

d. cash flows of a project are never reinvested

cash flows are reinvested at the internal rate of return when they are received

The discounted payback period method ________.

a. discounts cash flows using the company's cost of funds to overcome a flaw of the payback period method

b. fails to consider the time value of money

c. is used to compare two projects that have different lives

d. provides an objective criterion for an accept-or-reject decision grounded in financial theory

discounts cash flows using the company's cost of funds to overcome a flaw of the payback period method

When a company can only fund some of its good projects, it should rank the projects by ________.

a. payback period

b. PI

c. NPV

d. IRR

PI, NPV (both correct)

If a company is considering two mutually exclusive projects, which of the following statements is true?

a. The IRR method should be used to compare the projects.

b. Doing one of the projects means the other project cannot be done.

c. The company does not need to compare the projects because it can choose to do both.

d. The company must do both projects if it chooses to do one of the projects.

Doing one of the projects means the other project cannot be done.

What is the main difference between real assets and financial assets?

a. real assets are tangible and financial assets are intangible

b. real assets have known values, while the values of financial assets are not known

c. real assets are intangible and financial assets are tangible

d. real assets have unknown values, while the values of financial assets are known

real assets are tangible and financial assets are intangible

entities that invest funds on behalf of others and change the nature of the transactions are called:

a. brokers

b. financial intermediaries

c. dealers

d. market intermediaries

financial intermediaries

which of the following is NOT a financial intermediary?

a. chartered banks

b. insurance companies

c. pension funds

d. mutual funds

mutual funds

financial markets are usually classified by the type and maturity of the financial assets traded. The two main classifications are as follows:

a. bond market and money market

b. money market and capital market

c. bond market and foreign-exchange market

d. commodity market and capital market

money market and capital market

which of the following is not a component of debt securities (unlike equity securities)?

a. maturity

b. repayment

c. dividends

d. interest payments

dividends

if the stock of a listed firm decreases by 50%, what does it mean to the shareholders?

a. their ownership of the firm will decrease by 50%

b. total value of their holdings decreases by 50%

c. the debt of the firm decreases by 50%

d. nothing

total value of their holdings decreases by 50%

if you are in a business that is faced with enormous risks of failure, which of the following would have the most risk exposure to you as an individual?

a. corporation

b. sole partnership

c. general partnership

d. sole proprietorship

sole proprietorship

a corporation's board of directors should first and foremost be accountable to which group?

a. politicians (law makers)

b. senior managers

c. shareholders

d. suppliers

shareholders

in reference to finance, how is wealth different from profits?

a. wealth is a personal issue, while profits are related to a business

b. profits include a deduction for expenses, and expenses are not relevant for wealth calculations

c. wealth reflects the value of all profits, both short- and long-term, while profits refer to economic profits only.

d. all of the above

wealth reflects the value of all profits, both short- and long-term, while profits refer to economic profits only

Which of the following illustrates an agency problem?

a. the advertising agency that a company uses produces top quality materials and charges a high price for its work

b. a not-for-profit environmental agency stages a protest. This results in negative attention to a company's manufacturing methods

c. a company's board, in wanting to protect board member compensation, agrees with everything company management suggests.

d. a hiring agency screens out potential applicants to a company's job posting.

a company's board, in wanting to protect board member compensation, agrees with everything company management suggests.

what does it mean to "go public"?

a. to sell goods and services to the public

b. to raise money by selling equity shares via the stock market

c. to borrow money by selling debt instruments via the debt market

d. to do business with government firms

to raise money by selling equity shares via the stock market

if interest rates fall, present values

a. increase

b. decrease

c. stay the same

d. cannot be determined; need compounding frequency

increase

which of the following statements is true?

a. the quoted price of a bond is the actual price an investor pays for the bond whenever the bond is sold at a date other than the date of a coupon payment

b. the quoted price of a bond is the actual price an investor pays for the bond when the bond is sold on the date of a coupon payment

c. a bond purchaser must pay the bond seller the cash price less the accrued on interest on the bond

d. the cash price plus the accrued interest on the bond is the quoted price of the bond

the quoted price of a bond is the actual price an investor pays for the bond when the bond is sold on the date of a coupon payment

Which of the following rated bonds has the least risk

a. AA

b. AAA

c. BB

d. A

AAA (the highest possible rating)

How might an investment in a bond fund be affected by a decline in interest rates?

a. the fund investment would not be affeted

b. the fund investment would likely decrease in value

c. the fund investment would likely increase in value

d. coupon payments from bonds in the fund would decline

the fund investment would likely increase in value

when making an investment choice between a stock and a bond, what is an advantage of the bond?

a. easier price discovery

b. better return

c. easier transaction execution

d. lower risk

lower risk

when a bond's coupon interest rate is greater than its yield to maturity, how will the bond sell?

a. at a premium

b. at a discount

c. at par value

d. cannot be determined

at a premium

what is the primary activity of bond-rating agencies?

a. drafting bond indentures

b. acting as paying agents for bond coupon payments

c. providing tax advice on municipal bonds

d. evaluating the financial strength of a bond issuance

evaluating the financial strength of a bond issuance

if an investor's required rate of return increases and all other characteristics of a stock remain the same, the value of the stock will ___________.

a. remain the same

b. increase

c. decrease

d. none of the above

decrease

many preferred stock issues are cumulative in nature. What does this mean?

a. the shares can be converted into common shares

b. dividends accumulate and are paid at the maturity of the preferred stock.

c. any dividends that are not paid in a particular period are carried over and paid in the next period

d. the shares accumulate voting rights based on how long they are held

any dividends that are not paid in a particular period are carried over and paid in the next period

for an investor, why are bonds attractive?

a. they can be purchased almost anywhere

b. they are not correlated with stock prices

c. they pay regular, predictable interest

d. their returns are normally higher than stock

they pay regular, predictable interest

if an investor's required rate of return decreases and all other characteristics of a stock remain the same, the value of the stock will__________.

a. increase

b. decrease

c. remain the same

d. none of the above

increase

which of the following increases the sensitivity of the bond prices?

a. increase in maturity

b. increase in coupon payment

c. decrease in maturity

d. decrease in yield to maturity

increase in maturity

debt ratings assigned by professional debt-rating services are a measure of the bond issuers'________.

a. foreign exchange rate risk

b. default risk

c. currency risk

d. interest rate risk

default risk

the value of a common share today depends on

a. the expected future common earnings per share

b. the number of authorized shares

c. the industry analysts

d. the expected future dividends and the discount rate

the expected future dividends and the discount rate

in the case of bankruptcy and liquidation of assets, what is the order of the claimants

a. debt holders, equity holders, preferred shareholders

b. debt holders, equity holders and preferred shareholders equally

c. equity holders, debt holders, preferred shareholders

d. debt holders, preferred shareholders, equity holders

debt holders, preferred shareholders, equity holders

Of the follwing, what are sources of uncertainty in the valuation of common equities?

a. discount rate only

b. cash flow size and timing only

c. cash flow size, timing, and risk-free rate

d. cash flow size, timing, and discount rate

cash flow size, timing, and risk-free rate

Bond X and Bond Y have the same face value and number of coupon payments; however, Bond X's coupon rate is 8.15 percent, while Bond Y's is 8.05 percent. If the prevailing market rate on similar bonds is 8.10 percent, then...

a. bond x would sell for a premium, while bond y would sell for a discount

b. bond y would sell for a premium, while bond x would sell at par value

c. bond y would sell for a premium, while bond x would sell for a discount

d. bond x would sell for a premium, while bond y would sell at par value

bond x would sell for a premium, while bond y would sell for a discount