Corporate Finance
Exam Review
Course Introduction
Corporate Finance explores the fundamental principles and analytical tools used to make sound financial decisions within corporations. The course covers topics such as capital budgeting, capital structure, risk management, valuation of assets and firms, working capital management, and financing strategies. Students will learn how companies raise and allocate financial resources, assess investment opportunities, measure and manage financial risk, and understand the impact of financial policies on firm value. Through case studies and real-world applications, participants will develop the skills necessary to interpret financial information and contribute to effective corporate financial management.
Recommended Textbook
Financial Markets and Institutions 12th Edition by Jeff Madura
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26 Chapters
1664 Verified Questions
1664 Flashcards
Source URL: https://quizplus.com/study-set/219
Page 2
Chapter 1: Role of Financial Markets and Institutions
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93 Verified Questions
93 Flashcards
Source URL: https://quizplus.com/quiz/3240
Sample Questions
Q1) If security prices fully reflect all available information, the markets for these securities are
A) efficient.
B) primary.
C) overvalued.
D) undervalued.
Answer: A
Q2) Which of the following is an example of an asymmetric information problem?
A) A corporation releases toxic wastes into a river.
B) A corporation relocates to Ireland to take advantage of lower corporate tax rates.
C) A stock analyst rates a stock higher than it deserves because the securities firm she works for wants to obtain business from the corporation that issued the stock.
D) A corporation manipulates its financial information to avoid disclosing a large loss from its operations in China.
Answer: D
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Chapter 2: Determination of Interest Rates
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67 Verified Questions
67 Flashcards
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Sample Questions
Q1) Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to______ and should place ____ pressure on U.S. interest rates.
A) decrease; upward
B) decrease; downward
C) increase; downward
D) increase; upward
Answer: A
Q2) The Fisher effect states that the
A) nominal interest rate equals the expected inflation rate plus the real rate of interest. B) nominal interest rate equals the real rate of interest minus the expected inflation rate.
C) real rate of interest equals the nominal interest rate plus the expected inflation rate.
D) expected inflation rate equals the nominal interest rate plus the real rate of interest.
Answer: A
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4
Chapter 3: Structure of Interest Rates
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Sample Questions
Q1) An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?
A) 7.7 percent
B) 15.71 percent
C) 130 percent
D) 11.00 percent
E) none of the above
Answer: B
Q2) A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of
A) 7.0 percent.
B) 10.8 percent.
C) 20.0 percent.
D) none of the above
Answer: A
Q3) Treasury securities are exempt from federal and state income taxes.
A)True
B)False
Answer: False
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Chapter 4: Functions of the Fed
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57 Flashcards
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Sample Questions
Q1) To increase the money supply, the Fed may increase the reserve requirement ratio.
A)True
B)False
Q2) To decrease the money supply, the Fed could the reserve requirement ratio.
A) increase
B) stabilize
C) reduce
D) eliminate
Q3) Credit may be used for any purpose and is available only to depository institutions that meet specific requirements for financial soundness.
A) Primary
B) Secondary
C) Tertiary
D) None of the above
Q4) The Board of Governors is composed of
A) seven members appointed by the President of the United States.
B) the 12 presidents of Fed district banks.
C) the Federal Open Market Committee, plus the Federal Advisory Council.
D) the Federal Open Market Committee, plus the President of the United States.
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Chapter 5: Monetary Policy
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55 Verified Questions
55 Flashcards
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Sample Questions
Q1) The Fed is more likely to use a stimulative policy during a strong-dollar period.
A)True
B)False
Q2) A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions.
A) leading
B) coincident
C) lagging
D) none of the above
Q3) Economists who work at the Fed recognize that a stimulative monetary policy will not always reduce a high unemployment rate and could even ignite inflation.
A)True
B)False
Q4) The relationship between the interest rate on loanable funds and the level of business investment is positive.
A)True
B)False
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Chapter 6: Money Markets
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71 Flashcards
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Sample Questions
Q1) T-bills and commercial paper are sold
A) with a stated coupon rate.
B) at a discount from par value.
C) at a premium about par value.
D) A and C
E) none of the above
Q2) Treasury bills
A) have a maturity of up to five years.
B) have an active secondary market.
C) are commonly sold at par value.
D) commonly offer coupon payments.
Q3) A private investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,800. If she holds the Treasury bill to maturity, her annualized yield is ____ percent.
A) 3.96
B) 4.54
C) 1.5
D) 4.09
E) none of the above
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Chapter 7: Bond Markets
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Sample Questions
Q1) The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit.
A) 50
B) 70
C) 10
D) 5
Q2) Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment only and a security representing interest payments only.
A)True
B)False
Q3) The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more.
A)True
B)False
Q4) Many bonds are listed on the New York Stock Exchange (NYSE).
A)True
B)False
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Page 9
Chapter 8: Bond Valuation and Risk
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80 Verified Questions
80 Flashcards
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Sample Questions
Q1) If the coupon rate ____ the required rate of return, the price of a bond ____ par value.
A) equals; equals B) exceeds; is less than C) is less than; is greater than
D) B and C
E) none of the above
Q2) Stephanie would like to purchase a bond that has a par value of $1,000, pays $100 at the end of each year in coupon payments, and has three years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 12 percent, how much will Stephanie pay for the bond?
A) $1,000.00
B) $951.97
C) $856.80
D) none of the above
Q3) Bond price elasticity is the percentage change in bond prices divided by the percentage change in the required rate of return.
A)True
B)False
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Page 10
Chapter 9: Mortgage Markets
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63 Flashcards
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Sample Questions
Q1) "Securitization" refers to the private insurance of conventional mortgages.
A)True
B)False
Q2) An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes the mortgageprice to decrease.
A)True
B)False
Q3) Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages.
A)True
B)False
Q4) Financial institutions may sell credit default swaps on mortgages if they expect defaults on many mortgages.
A)True B)False
Q5) Non-U.S. financial institutions never hold mortgages on U.S. property.
A)True
B)False
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Chapter 10: Stock Offerings and Investor Monitoring
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Sample Questions
Q1) In addition to the Nasdaq market, the OTC market has another segment known as "pink sheets," where smaller stocks are traded.
A)True
B)False
Q2) Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price.
A) overvalued
B) fixed
C) appropriate
D) undervalued
Q3) Which of the following is not true regarding overallotment options?
A) Overallotment options are rarely used in IPOs today.
B) An overallotment option allows the lead underwriter to allocate an additional 15 percent of the shares of a firm engaging in an IPO.
C) The option allows the lead underwriter to purchase additional shares at the offer price.
D) The lead underwriter may use the shares from an overallotment option to help stabilize the stock price in the days after the IPO.
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12
Chapter 11: Stock Valuation and Risk
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86 Verified Questions
86 Flashcards
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Sample Questions
Q1) The value-at-risk method is intended to warn investors about the potential maximum loss that could occur.
A)True
B)False
Q2) If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock'sreturns will be within ____ percentage points of the expected outcome.
A) 68; 4
B) 68; 8
C) 95; 8
D) 95; 6
E) none of the above
Q3) The expected acquisition of a firm typically results in ____ in the target's stock price.
A) an increase
B) a decrease
C) no change
D) none of the above
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13
Chapter 12: Market Microstructure and Strategies
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65 Flashcards
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Sample Questions
Q1) The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock's value without receiving a margin call.
A)True
B)False
Q2) The risk of a short sale is that the stock price
A) may decrease over time.
B) will remain the same.
C) may increase over time.
D) none of the above
Q3) A criticism of dark pools is that they:
A) reduce transparency.
B) are more expensive than the public stock exchanges.
C) are not accessible to institutional investors.
D) cannot be used to trade large blocks of stock.
Q4) The ____ the trading volume of a stock, the ____ the spread.
A) higher; wider
B) higher; narrower
C) lower; narrower
D) none of the above
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Chapter 13: Financial Futures Markets
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) According to the text, using a futures contract on one financial instrument to hedge a position in a different financial instrument is known as
A) cross-hedging.
B) ratio hedging.
C) basis hedging.
D) liquid hedging.
Q2) Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund
A) liquidates its stocks whenever it expects a market downturn.
B) maintains a constant buy position in stock index futures.
C) maintains a constant sell position in stock index futures.
D) none of the above
Q3) Trading restrictions imposed on specific stocks or stock indexes are referred to as A) index busters.
B) index options.
C) circuit breakers.
D) protective covenants.
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Chapter 14: Options Markets
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72 Verified Questions
72 Flashcards
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Sample Questions
Q1) When a stock index option is exercised, the cash payment is equal to a specified dollar amount
A) multiplied by the index level.
B) multiplied by the exercise price.
C) multiplied by the difference between the index level and the exercise price.
D) multiplied by the sum of the index level and the exercise price.
Q2) The premium on an existing call option should ____ when the underlying stock price decreases.
A) be negative
B) decline
C) increase
D) be unaffected
E) A and B
Q3) A call option is said to be at the money when the market price of the underlying security exceeds the exercise price.
A)True
B)False
Q4) American-style stock options can be exercised only just before expiration.
A)True
B)False
Page 16
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Chapter 15: Swap Markets
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59 Verified Questions
59 Flashcards
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Sample Questions
Q1) The typical purchaser of an interest rate cap is a financial institution that is ____ affected by ____ interest rates.
A) favorably; rising
B) favorably; falling
C) adversely; rising
D) adversely; falling
Q2) An interest rate collar involves the ____ of an interest rate cap and the simultaneous ____ of an interest rate floor.
A) sale; sale
B) sale; purchase
C) purchase; purchase
D) purchase; sale
Q3) A ____ swap involves the exchange of fixed-rate payments for floating-rate payments that are capped.
A) rate-capped
B) zero-coupon-for-floating
C) callable
D) putable
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17
Chapter 16: Foreign Exchange Derivative Markets
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59 Verified Questions
59 Flashcards
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Sample Questions
Q1) When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of
A) direct intervention.
B) indirect intervention.
C) a freely floating system.
D) a pegged system.
Q2) The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified pricewithin a given period.
A)True
B)False
Q3) If the spot rate ____ the exercise price, a currency ____ option will not be exercised.
A) remains below; call
B) remains below; put
C) remains above; call
D) A and B
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18
Chapter 17: Commercial Bank Operations
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61 Flashcards
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Sample Questions
Q1) Cash held ____ represents the major portion of a bank's required reserves.
A) at other commercial banks
B) in a bank's vault
C) on deposit at the federal funds window
D) on deposit with the Board of Governors
Q2) For any given bank, federal funds ____ represent a(n) ____.
A) purchased; asset
B) sold; liability
C) purchased; liability
D) A and B
Q3) Proprietary trading is generally less risky than a bank's lending operations.
A)True
B)False
Q4) The Federal Reserve provides loans to banks in order to
A) resolve permanent shortages of funds experienced by banks.
B) resolve temporary shortages of funds experienced by banks.
C) finance the shortages of funds of finance companies.
D) none of the above
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Page 19
Chapter 18: Bank Regulation
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Sample Questions
Q1) Regulators put much emphasis on a bank's sensitivity to interest rate movements, since many banks have liabilities that are repriced more frequently than their assets and are adversely affectedby rising interest rates.
A)True
B)False
Q2) During the credit crisis, all of the following occurred except:
A) some securities firms were allowed to become bank holding companies.
B) the Federal Reserve rescued American International Group, an insurance company.
C) the Treasury injected funds into financial institutions.
D) the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting Bear Stearns because Bear was a securities firm and not a commercial bank.
Q3) Banks commonly use depositor funds to invest in stocks.
A)True
B)False
Q4) Deposit insurance now covers all bank deposits without any limit.
A)True
B)False
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Chapter 19: Bank Management
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Sample Questions
Q1) During a period of rising interest rates, a bank's net interest margin will likely decline if it has a large amount of
A) rate-sensitive assets and no rate-sensitive liabilities.
B) rate-sensitive liabilities and no rate-sensitive assets.
C) loans to technology firms.
D) real estate loans.
Q2) If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's
A) credit risk would decrease.
B) credit risk would increase.
C) liquidity risk would increase.
D) liquidity risk would decrease.
E) B and C
Q3) If Bank A has a negative gap and Bank B has a positive gap, which of the following is true?
A) Bank A is more favorably affected by rising interest rates.
B) Bank B is more favorably affected by falling interest rates.
C) Bank A is adversely affected by falling interest rates.
D) none of the above
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Chapter 20: Bank Performance
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Sample Questions
Q1) Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control.
A) economic growth
B) the risk-free interest rate
C) industry conditions
D) management abilities
E) none of the above
Q2) Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A's return on assets is ____ than Bank B's. Bank A's return on equity is ____ than BankB's.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Q3) Net income measured as a percentage of assets is
A) return on equity (ROE).
B) return on liabilities (ROL).
C) return on investment (ROI).
D) return on assets (ROA).
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Page 22
Chapter 21: Thrift Operations
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Sample Questions
Q1) Which of the following is not an advantage of credit unions?
A) They can offer attractive rates to their member savers and borrowers because they are nonprofit and therefore are not taxed.
B) Their noninterest expenses are relatively low, because their labor, office, and furniture are often donated or provided at a very low cost through the affiliation of their members.
C) Their large membership allows them to effectively diversify geographically.
D) All of the above are advantages of credit unions.
Q2) Savings institutions do not really know the actual maturity of the mortgages they hold and cannot perfectly match the interest rate sensitivity of their assets and liabilities.
A)True
B)False
Q3) ____ do not represent an asset of credit unions.
A) Mortgage-backed securities
B) Home equity loans
C) Automobile loans
D) Stocks
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Chapter 22: Finance Company Operations
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Sample Questions
Q1) Finance companies are subject to
A) disclosure requirements and truth in lending rules.
B) ceiling interest rates on loans provided.
C) a maximum length on loan maturity.
D) regulations on intrastate business.
E) all of the above
Q2) Some finance companies offer credit card loans through a particular retailer.
A)True
B)False
Q3) Finance companies are not subject to state regulations on intrastate business.
A)True
B)False
Q4) The ________ is the federal agency responsible for regulating consumer finance products and services that may be offered by finance companies.
A) Consumer Financial Safety Commission
B) Securities and Exchange Commission
C) Consumer Financial Protection Bureau
D) Federal Trade Commission
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Page 24
Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) _______ are promoted strictly by the mutual fund of concern and do not involve a sales charge.
A) Closed-end funds
B) Load mutual funds
C) No-load mutual funds
D) Open-end mutual funds.
Q2) Money market fund assets include all of the following, except A) stocks.
B) repurchase agreements.
C) Treasury bills.
D) CDs.
Q3) Hedge funds try to obtain an information advantage by using expert networks, whereby they hire consultants with expertise in specific industries.
A)True
B)False
Q4) Equity REITs essentially represent fixed-income portfolios, so their market values are heavily influenced by interest rate movements.
A)True
B)False
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Chapter 24: Securities Operations
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Sample Questions
Q1) Even after new stock is issued, a securities firm may continue to provide advice on the timing, amount, and terms of future financing.
A)True
B)False
Q2) The ____ offers insurance on cash and securities deposited at brokerage firms.
A) Federal Reserve
B) New York Stock Exchange
C) Securities Investor Protection Corporation (SIPC)
D) Securities and Exchange Commission (SEC)
Q3) During the credit crisis, many commercial banks were forced to convert to securities firms.
A)True
B)False
Q4) Securities firms commonly engage in all of the following functions except
A) proprietary trading.
B) underwriting stock.
C) operating mutual funds.
D) providing brokerage services.
E) operating credit unions.
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Chapter 25: Insurance Operations
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Sample Questions
Q1) Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity.
A) less; less
B) more; more
C) less; more
D) none of the above
Q2) Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance.
A)True
B)False
Q3) Which type of life insurance policy specifically accommodates the needs of people who need more insurance now than later?
A) whole life
B) term
C) decreasing term
D) universal life
Q4) Group insurance policies are very popular for employers and employees.
A)True
B)False
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Chapter 26: Pension Fund Operations
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Sample Questions
Q1) A pension plan that provides benefits that are determined by the accumulated contributions and return on the fund's investment performance is called a ____ plan.
A) defined-benefit
B) defined-contribution
C) beneficiary
D) guarantor-insured
Q2) A pension fund manager might hedge against interest rate movements by selling bond futures contracts.
A)True
B)False
Q3) To reduce interest rate risk, pension fund managers can
A) shift from variable-rate to fixed-rate bonds.
B) increase the average maturity on fixed-rate bonds.
C) sell bond futures contracts.
D) reduce the investment in money market securities.
Q4) A defined-benefit plan provides benefits that are determined by the accumulated contributions and the fund's investment performance.
A)True
B)False
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