Finance for Business Study Guide
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Course Introduction
Finance for Business is designed to introduce students to the fundamental principles and practices of financial management within a business context. The course explores essential topics such as financial statement analysis, budgeting, investment appraisal, risk assessment, and sources of finance. Students will learn how to apply financial tools and techniques to make informed business decisions, evaluate financial performance, and plan for future growth. Emphasis is placed on understanding the role of finance in strategic planning and the impact of financial decisions on organizational objectives.
Recommended Textbook Investments An Introduction 9th Edition by Herbert B. Mayo
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Page 2
Chapter 1: An Introduction to Investments
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Sample Questions
Q1) Risk
A) depends solely on price fluctuations
B) should be maximized to increase returns
C) is reduced through specialization
D) refers to the uncertainty of returns
Answer: D
Q2) Many investments have common characteristics including 1)existence of secondary markets
2)risk
3)potential for capital gains
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Answer: D
Q3) Investors must bear the systematic risk associated with fluctuating securities prices.
A)True
B)False
Answer: True
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Page 3
Chapter 2: The Creation of Financial Assets
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Sample Questions
Q1) Commercial paper is
A) a short-term unsecured debt of a corporation
B) a short-term secured debt of a corporation
C) a long-term unsecured debt of a corporation
D) a long-term secured debt of a corporation
Answer: A
Q2) Commercial banks offer money market accounts to compete with money market mutual funds.
A)True
B)False Answer: True
Q3) The primary role of organized security exchanges is to raise capital (money)for firms.
A)True
B)False Answer: False
Q4) A "lock-up" refers to a security transaction with an assured profit.
A)True
B)False
Answer: False
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Chapter 3: Securities Markets
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Sample Questions
Q1) Stockbrokers set bid and ask prices.
A)True
B)False
Answer: False
Q2) If the quote on stock is reduced,that implies
1)supply exceeded demand
2)demand exceeded supply
3)the price was too high
4)the price was too low
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
Answer: A
Q3) Securities must be paid for by the settlement date.
A)True
B)False
Answer: True
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Page 5
Chapter 4: The Time Value of Money
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Sample Questions
Q1) A series of equal payments is called an annuity.
A)True
B)False
Q2) A firm currently earns $1.00 per share.A financial analyst believes that earnings will grow annually at the rate of 10 percent for five years and then decline to 5 percent.What are the expected earnings after ten years?
Q3) The concept of the time value of money is a means to bring together the present and the future.
A)True
B)False
Q4) If you open an IRA and invest $2,000 a year (at the end of the year),how much will be in the account after twenty-five years if the funds earn 10 percent annually? How much would be in the account if payments were made at the beginning of the year?
Q5) Which is the largest if interest rates are 7 percent?
A) $100 compounded for three years
B) the future value of a $100 annuity for three years
C) the present value of $100 after three years
D) the present value of a $100 annuity
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Chapter 5: The Tax Environment
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Sample Questions
Q1) A tax-deferred annuity avoids taxes when the proceeds are distributed to the owner.
A)True
B)False
Q2) The traditional IRA is
A) a tax-deferred retirement account for individuals not covered by a corporate pension plan
B) a taxable retirement account for individuals not covered by a corporate pension plan
C) a means to generate tax-free income
D) a means to increase current income
Q3) A 401(k)plan is a
A) tax-deferred retirement plan
B) savings plan for the retired
C) plan to increase current tax-exempt income
D) dividend or interest enhancement plan
Q4) Bob owns Stock A that paid $350 in dividends sold Stock B for a long-term capital gain of $1,200
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Chapter 6: Risk and Portfolio Management
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Sample Questions
Q1) The "efficient frontier" relates all the combinations of risk and return that represent the same level of satisfaction.
A)True
B)False
Q2) In a world of certainty,there would be no risk.
A)True
B)False
Q3) The efficient frontier in portfolio theory
A) indicates the highest return for a given risk
B) illustrates the optimal tradeoff between long- and short-term capital gains
C) quantifies systematic and unsystematic risk
D) identifies the optimal portfolio for the investor
Q4) Beta coefficients of 1.3 indicate
A) the stock has more unsystematic risk
B) the stock has less unsystematic risk
C) the stock is more volatile than the market
D) the stock is less volatile than the market
Q5) During a rising market,stocks with greater beta coefficients may be preferred.
A)True
B)False
8
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Chapter 7: Investment Companies: Mutual Funds
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Sample Questions
Q1) The income earned by a mutual fund is taxed through the stockholders' income tax returns.
A)True
B)False
Q2) An exit fee has the same impact of
A) a load fee of the same percentage
B) a 12b-1 fee with the same percentage
C) commissions paid by a mutual fund to buy securities
D) management fees
Q3) The loading fee charged by a mutual fund is paid when the shares are sold.
A)True
B)False
Q4) Mutual funds with beta coefficients greater than 1.0
A) have outperformed the market
B) have underperformed the market
C) have more systematic risk than the market
D) have less systematic risk than the market
Q5) The shares of no-load mutual funds sell for their net asset value.
A)True
B)False
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Chapter 8: Closed-End Investment Companies
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Sample Questions
Q1) If a closed-end investment company is selling for a discount
A) its price exceeds the net asset value
B) its price is less than the net asset value
C) dividend income exceeds capital gains
D) capital gains exceed dividend income
Q2) If a closed-end investment company specializes in the securities of one sector of the economy,systematic risk is reduced.
A)True
B)False
Q3) Asset allocation affects the investor's return by
A) altering the returns on individual assets
B) weighting the portfolio returns by the allocation
C) assuring diversification
D) increasing the investor's use of mutual funds
Q4) Distributions from a closed-end investment are subject to federal income taxation. A)True
B)False
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Chapter 9: The Valuation of Common Stock
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Sample Questions
Q1) The required rate of return includes the risk-free rate and a risk premium.
A)True
B)False
Q2) If a firm retains earnings,total equity increases.
A)True
B)False
Q3) Because capital gains are not taxed,most investors discourage the distribution of dividends.
A)True
B)False
Q4) Investing in stocks purchased by insiders may generate superior investment results,which is inconsistent with the strong form of the efficient market hypothesis.
A)True
B)False
Q5) Empirical evidence tends to support the weak and semi-strong forms of the efficient market hypothesis.
A)True B)False
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Chapter 10: Investment Returns and Aggregate Measures
of Stock Markets
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Sample Questions
Q1) Over time,holding period returns tend to overstate the true rate of return.
A)True
B)False
Q2) Bond averages that are expressed in percentages are not comparable to the S&P 500.
A)True
B)False
Q3) Studies of investment returns suggest that the stocks of small companies generate higher returns than the stocks of larger companies.
A)True
B)False
Q4) Studies of realized rates of return assume that investors do not reinvest dividend income.
A)True
B)False
Q5) The S&P 500 stock index is value-weighted.
A)True
B)False
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Chapter 11: Dividends: Past, present, and Future
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Sample Questions
Q1) Dividend increases usually occur prior to an increase in earnings.
A)True
B)False
Q2) Historical growth rates are useful for stock valuation only to the extent they help forecast the future growth in dividends.
A)True
B)False
Q3) The payout ratio is dividends divided by earnings.
A)True
B)False
Q4) The procedure for the distribution of dividends does not include
A) the ex-dividend date
B) the date of record
C) the settlement date
D) the date of announcement
Q5) Earnings retention facilitates the firm's growth in assets.
A)True
B)False
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Chapter 12: The Macroeconomic Environment for Investment Decisions
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Sample Questions
Q1) A federal government deficit may be financed by
1)the general public buying government bonds
2)commercial banks buying treasury bills
3)the Federal Reserve selling securities
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q2) The economic goals of the Federal Reserve include
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) The anticipation of inflation suggests that the investor should
A) buy bonds
B) anticipate higher interest rates
C) avoid real estate investments
D) sell stocks of gold companies
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Chapter 13: Analysis of Financial Statements
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Sample Questions
Q1) Activity ratios measure
A) how rapidly assets flow through the firm
B) how frequently the firm's stock is traded
C) how rapidly employees turn over
D) the profitableness of accounts receivable
Q2) If the ratio of debt to equity increases,the proportion of assets financed by debt is increased.
A)True
B)False
Q3) The quick ratio is a better measure of liquidity than the current ratio for manufacturers.
A)True
B)False
Q4) The return on equity
A) is the ratio of sales to equity
B) measures what the firm earns on assets
C) is the ratio of net income to total equity
D) measures what the firm earns on sales
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Page 15
Chapter 14: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) Behavioral finance suggests that investors may fail to sell losing positions if these investors feel the pain of regret.
A)True
B)False
Q2) Long dark candlesticks suggest
A) stock prices changed dramatically
B) stock prices rose
C) the daily price change was small
D) an investor should sell short
Q3) Which of the following is not used in technical analysis?
A) moving averages
B) bar graphs
C) point-and-figure charts
D) P/E ratios
Q4) Individuals who do the opposite of what investment analysts are suggesting are "contrarians."
A)True
B)False
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Page 16
Chapter 15: The Bond Market
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Sample Questions
Q1) The term of an extendible bond is known with certainty.
A)True
B)False
Q2) A call penalty protects the firm from early retirement of the bond.
A)True
B)False
Q3) If a bond has a call feature,it usually also has a call penalty,which must be paid to the bondholder in partial compensation for the early retirement of the bond.
A)True
B)False
Q4) Since bonds are legal obligations,there is little risk associated with purchasing these securities.
A)True
B)False
Q5) A negatively sloped yield curve occurs when short-term rates exceed long-term rates.
A)True B)False
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Chapter 16: The Valuation of Fixed-Income Securities
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Sample Questions
Q1) A bond is more likely to be called after interest rates have fallen.
A)True
B)False
Q2) In general firms prefer to issue bonds instead of preferred stock because
1)debt is less risky to the firm
2)dividends are not tax deductible
3)effective cost of debt is cheaper
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) If investors expect interest rates to decline,they should buy bonds.
A)True
B)False
Q4) If a $1,000 bond has a coupon of 8 percent and matures after eight years,the price of the bond will exceed $1,000 if interest rates are 9 percent.
A)True
B)False
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Chapter 17: Government Securities
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Sample Questions
Q1) If interest rates decline,the expected life of a Ginnie Mae bond is reduced.
A)True
B)False
Q2) A homeowner has been offered three alternative mortgage loans to finance the purchase of a $90,000 house.The interest rate on the first alternative is 10 percent for twenty-five years,and the loan requires a 20 percent down payment.The second mortgage loan is also for twenty-five years with an interest rate of 9 percent but requires a down payment of a third of the cost of the house.The third loan also requires a third down but is for 20 years at 8 percent.What are the annual mortgage payments required by each loan?
Q3) The interest earned on federal government's debt is exempt from state income taxation.
A)True
B)False
Q4) Yields on municipal bonds exceed yields on federal government bonds with the same term to maturity.
A)True
B)False
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19
Chapter 18: Convertible Bonds and Convertible Preferred Stock
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Sample Questions
Q1) When a convertible bond is called, 1)interest ceases to accrue
2)the bondholder receives the principal
3)the bondholder generally converts the bond
4)dividends are paid to the bondholder
A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4
Q2) If a convertible bond is called,the bondholder must convert the bond or lose the appreciation achieved by the stock.
A)True
B)False
Q3) A convertible bond may be converted at the firm's option into common stock. A)True
B)False
Q4) The premium paid over a convertible bond's value as debt tends to decline as the price of the stock rises.
A)True
B)False
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Chapter 19: An Introduction to Options
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Sample Questions
Q1) A warrant is the option to buy one share of stock at $40.It expires after one year and currently sells for $10.The price of the stock is $32.What is the maximum possible profit if an investor buys one share of stock and shorts one warrant? What is the range of stock prices that yields a profit on this position?
Q2) The price of a call depends on the 1.strike price 2)price of the underlying stock
3)term (i.e.,life)of the call
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) The intrinsic value of an option to buy stock rises as
A) the strike price increases and the price of the stock declines
B) the strike price increases and the price of the stock rises
C) the strike price decreases and the price of the stock declines
D) the strike price decreases and the price of the stock rises
Q4) Calls are options to sell stock at a specified price within a specified time period.
A)True
B)False
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Chapter 20: Option Valuation and Strategies
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Q1) Since spreads involve buying or selling more than one option,commissions costs tend to increase.
A)True
B)False
Q2) According to the Black/Scholes option valuation model,the value of a call option rises as interest rates increase.
A)True
B)False
Q3) To acquire a straddle,the investor
A) buys stock and a call
B) buys two calls with different strike prices
C) buys a put and sells a call
D) buys a put and buys a call
Q4) The "collar strategy" is used to lock in profits from an increase in the price of a stock.
A)True
B)False
Q5) The investor owns 1,000 shares of stock but anticipates its price may decline.To reduce the risk of loss,how many call options must be sold if the hedge ratio is 0.7?
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Chapter 21: Commodity and Financial Futures
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Sample Questions
Q1) When an investor sells a contract and subsequently offsets (closes)the position,the individual experiences neither losses nor profits.
A)True
B)False
Q2) Margin is required only of those investors who take long positions in futures contracts.
A)True
B)False
Q3) Commodity contracts 1.are bought and sold through commodity exchanges
2)are considered to be speculative investments
3)permit investors to take either long or short positions
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q4) A position in a futures contract is canceled (offset)by entering into the opposite position.
A)True B)False
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Chapter 22: Investing in Foreign Securities
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Sample Questions
Q1) The shares of closed-end investment companies that invest in foreign securities may sell for a premium over their net asset values.
A)True
B)False
Q2) The devaluation (depreciation)of one currency implies the revaluation (appreciation)of other currencies.
A)True
B)False
Q3) If a nation exports more goods than it imports,it has a surplus in the current account.
A)True
B)False
Q4) Correlation coefficients relating U.S.stock markets and foreign stock markets
A) tend to be negative
B) diminish over time
C) are equal to beta coefficients relating U.S. and foreign markets
D) suggest possible diversification
Q5) If the price of the European euro is $1.36,how many euros are necessary to purchase $1.00?
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Chapter 23: Investing in Nonfinancial Assets: Collectibles, resources, and Real Estate
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Q1) Real estate investment trusts (REITs)are illustrative of a closed-end investment company.
A)True
B)False
Q2) One reason for investing in gold and collectibles is their possible impact on the diversification of the investor's portfolio.
A)True
B)False
Q3) If an investor expected the price of gold to fall,that individual should consider which of the following strategies? 1.sell a gold call
2)buy a gold call
3)sell a gold put
4)buy a gold put
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
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Chapter 24: Portfolio Planning and Management in an Efficient Market Context
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Q1) Which of the following is included in an individual's cash budget?
A) stock
B) social security payments
C) home mortgage owed
D) credit card balances
Q2) An individual's cash budget differs from a firm's income statement because
A) it includes common stocks the investor owns
B) it excludes retirement contributions
C) it determines the generation of cash
D) it is constructed for a moment in time
Q3) Investors seeking to avoid actively managing their portfolios will prefer which of the following assets?
A) common stock
B) index funds
C) financial futures
D) real estate
Q4) While the investor is able to reduce asset-specific risk,other sources of risk remain.
A)True
B)False
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