Financial Institutions and Markets
Textbook Exam Questions
Course Introduction
This course provides a comprehensive overview of the structure, functions, and roles of financial institutions and markets within the global economy. Students will explore the various types of financial institutions, including banks, insurance companies, mutual funds, and non-bank financial intermediaries, and their significance in channeling funds from savers to borrowers. The course covers key concepts such as risk management, financial intermediation, interest rate determination, and regulatory frameworks. Additionally, it examines the operation of money and capital markets, securities trading, and recent developments in fintech and global financial systems, equipping students with a solid foundation for understanding modern financial environments.
Recommended Textbook
Foundations of Financial Management 15th Edition by Stanley B. Block
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Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) Risk management will be an important factor over the next decade.
A)True
B)False Answer: True
Q2) A corporation must have more than 75 stockholders to qualify for Subchapter S designation.
A)True
B)False Answer: False
Q3) The internationalization of the financial markets has
A)allowed firms such as McDonald's to raise capital around the world.
B)raised the cost of capital.
C)forced companies to price everything in U.S.dollars.
D)All of the options
Answer: A
Q4) There are some serious problems with the financial goal of maximizing the earnings of the firm.
A)True
B)False Answer: True
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Chapter 2: Review of Accounting
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Sample Questions
Q1) A cash flow statement is considered correct if the net cash flow ties to the ending cash balance.
A)True
B)False
Answer: False
Q2) Book value per share is of greater concern to the financial manager than market value per share.
A)True
B)False
Answer: False
Q3) ElectroWizard Company produces a popular video game called Destructo, which sells for $65. Last year ElectroWizard sold 100,000 Destructo games, each of which costs $10 to produce. ElectroWizard incurred selling and administrative expenses of $200,000 and a depreciation expense of $100,000. In addition, ElectroWizard has a $1,000,000 loan outstanding at 8%. Their tax rate is 40%. There are 400,000 common shares outstanding. Prepare an income statement for ElectroWizard in good form (include EPS).
Answer: 11ea72a1_8c2c_35af_9d1a_8146d16c89c1_TB1702_00
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Page 4
Chapter 3: Financial Analysis
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Sample Questions
Q1) ABC Co. has an average collection period of 90 days. Total credit sales for the year were $6,000,000. What is the balance in accounts receivable at year-end?
A)$150,000
B)$2,250,000
C)$1,500,000
D)$40,000
Answer: C
Q2) The most rigorous test of a firm's ability to pay its short-term obligations is its A)current ratio.
B)quick ratio.
C)debt-to-assets ratio.
D)times-interest-earned ratio.
Answer: B
Q3) In analyzing ratios, the age of the firm's assets need not be considered.
A)True
B)False
Answer: False
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5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) Profit is generally adequate to finance significant growth.
A)True
B)False
Q2) XYZ Co. has forecasted June sales of 400 units and July sales of 700 units. The company maintains ending inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's required production?
A)750 units
B)0 units
C)775 units
D)425 units
Q3) As the dividend payout ratio declines, more external funds are required.
A)True
B)False
Q4) Compared to a firm operating at 100% of capacity, firms that are operating at less than full capacity will require greater new external funds when sales increase.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Heister Corporation produces class rings to sell to college and high school students. These rings sell for $75 each, and cost $30 each to produce. Heister has fixed costs of $45,000.
a) Calculate Heister's break-even point.
b) How much profit (loss) will Heister have if it sells 800 rings? 6,000 rings?
c) Heister's president, J. R. D'Angelo, expects an annual profit of $200,000. How many rings must be sold to attain this profit?
Q2) Degree of combined leverage considers the impact of a change in volume on the change in operating income.
A)True
B)False
Q3) Cash break-even analysis eliminates the depreciation expense and other non-cash charges from fixed costs.
A)True
B)False
Q4) Firms with cyclical sales should employ a high degree of leverage.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) The more short-term financing there is relative to long-term financing, the riskier the financial structure.
A)True
B)False
Q2) Short-term interest rates are generally lower than long-term interest rates.
A)True
B)False
Q3) Samuelson will produce 20,000 units in January using level production. If each unit costs $500 to manufacture, what is the dollar value of ending inventory in January if beginning inventory is 10,000 units and January sales are 15,000?
A)Less than $5,000,000
B)Between $5,000,000 and $10,000,000
C)Greater than $10,000,000
D)There will be a shortage.
Q4) In periods of tight money, long-term rates are typically higher than short-term rates.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) It is less expensive to clear a check through the Federal Reserve System than to process an automatic fund transfer through an automated clearinghouse.
A)True
B)False
Q2) Tanner Co. is a highly successful supplier of leather to manufacturers of leather goods. Tanner is considering expanding into the U.S. luxury auto seat market. It is estimated that although selling leather to U.S. auto manufacturers will bring additional annual sales of $1,000,000, a high 15% of those accounts will be uncollectible. The cost of conditioning and selling the leather is 70% of sales. Tanner's tax rate is 30%.
a) Calculate Tanner's incremental net income on the new sales.
b) Assume Tanner has a receivables turnover of 4. Calculate Tanner's incremental accounts receivable investment and after-tax return on that investment.
c) Tanner's minimum required ROI is 15%. Should Tanner expand into the auto market?
Q3) Minimizing cash balances can improve overall corporate profitability.
A)True
B)False
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Page 9
Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) A compensating balance will be lower in periods of tight money than in periods of credit easing.
A)True
B)False
Q2) Kenneth's Arrows and Bows borrow $15,000 for one year at 8% interest. What is the effective rate of interest if the loan is discounted?
A)Less than 8.5%
B)More than 8.5% but less than 9.5%
C)More than 9.5% but less than 10.5%
D)More than 10.5%
Q3) Trade credit is usually extended for periods of one year or more.
A)True
B)False
Q4) The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) If an individual's cost of capital were 6%, the person would prefer to receive $110 at the end of one year rather than $100 right now.
PV = FV × PV<sub>IF</sub> (App. B: 6%, 1 period)
= $110 × 0.943 = $104
A)True
B)False
Q2) In determining the future value of an ordinary annuity, the final payment is not compounded at all.
A)True
B)False
Q3) Sponge Bob will receive a payment of $5,000 per year for seven years beginning three years from today. At a discount rate of 9%, what is the present value of this deferred annuity?
Q4) The farther into the future any given amount is received, the larger its present value. Time amplifies the growth of money. Consequently, to achieve a certain future value, more time means that you can start with less.
A)True
B)False
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) An increase in yield to maturity would be associated with an increase in the price of a bond.
Since the interest rates on a bond are fixed, an increase in yields available on similar bonds means that this bond is less desirable, and would lower its price.
A)True
B)False
Q2) As a bond approaches its maturity date, its price approaches
A)the price of comparable bonds.
B)U.S.Treasury bond prices.
C)the par value.
D)the par adjusted for yield to maturity.
Q3) A 20-year bond pays 6% on a face value of $1,000. If similar bonds are currently yielding 5%, what is the market value of the bond? Use annual analysis.
A)Over $1,100
B)Under $1,000
C)Under $900
D)Not enough information is given to tell.
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Chapter 11: Cost of Capital
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Sample Questions
Q1) The use of the weighted average cost of capital assumes that the firm is in its optimum capital structure range and the cost of each component stays constant over the range of financing.
A)True
B)False
Q2) Debreu Beverages has an optimal capital structure that is 70% common equity, 20% debt, and 10% preferred stock. Debreu's pretax cost of equity is 9%. Its pretax cost of preferred equity is 7%, and its pretax cost of debt is also 5%. If the corporate tax rate is 35%, what is the weighed average cost of capital?
A)Between 7% and 8%
B)Between 8% and 9%
C)Between 9% and 10%
D)Between 10% and 12%
Q3) Lewis, Schultz, and Nobel Development Corp. has an after-tax cost of debt of 4.5%.
With a tax rate of 30%, what is the yield on the debt?
A)4.41%
B)9.0%
C)1.89%
D)6.43%
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) It is the difference in the reinvestment assumptions that can be significant in determining when to use the net present value or internal rate of return methods.
A)True
B)False
Q2) An appropriate capital budgeting process requires that the following steps be taken in which order?
a. Collection of data
b.Reevaluation and adjustment
c. Evaluation and decision making
d. Search for and discovery of investment opportunities
A)d, a, c, b
B)d, a, b, c
C)d, b, a, c
D)b, d, a, c
Q3) The payback method considers all cash inflows. The payback method does not consider any cash flows that occur after the point of payback has been reached.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) A "what if" simulation using a computer helps to
A)reduce the risk associated with a particular investment.
B)determine the effects of changes in certain variables.
C)increase the accuracy of the inputs.
D)More than one of the options.
Q2) The concept of being risk-averse means
A)for a given situation investors would prefer relative certainty to uncertainty.
B)investors would usually prefer investments with high standard deviations and a greater opportunity for gain.
C)that the greater the risk, the higher the expected return must be.
D)that for a given situation, investors would prefer relative certainty to uncertainty, and the greater the risk, the higher the expected return must be.
Q3) Golden Corporation is considering the purchase of new equipment costing $77,000. The expected life of the equipment is 10 years. The potential increase in annual net income from the new equipment for the next 10 years depends on the state of the economy as follows.
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Chapter 14: Capital Markets
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Sample Questions
Q1) Companies list their stock around the globe to
A)capitalize on the inefficiency inherent in foreign markets.
B)increase liquidity for their stockholders.
C)provide opportunities for the sale of new stock in foreign countries.
D)increase liquidity for their stockholders and provide opportunities for the sale of new stock in foreign countries.
Q2) Global capital markets are influenced by
A)interest rates.
B)investor confidence.
C)relative economic growth.
D)All of these options
Q3) Which of the following is an internal source of funds?
A)Cash flow from depreciation (tax shield)
B)Net loss
C)Repurchase of debt securities
D)Bank loan
Q4) A key influence in recent years has been the growth in market value of futures exchanges.
A)True
B)False
Page 16
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Chapter 15: Investment Banking: Public and Private Placement
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Sample Questions
Q1) Investment banking has changed from a very competitive price-sensitive environment to one where relationships determine who gets the business. Competitive forces have increased, and have indeed become international in scope.
A)True
B)False
Q2) Which investment bank underwrote the most common stock and bonds in 2012?
A)Merrill Lynch
B)J.P.Morgan
C)Deutsche Bank
D)Citigroup
Q3) The term "underwriter" is synonymous with risk-taker or risk-bearer.
A)True
B)False
Q4) Which of the following is an advantage to private bond placement over public offerings?
A)Higher interest costs
B)Greater flexibility in negotiating terms
C)Higher SEC registration fees
D)Lower interest costs
Page 17
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Bonds provide stable pricing because they offer a fixed coupon rate and maturity date unlike stocks.
The pricing of bonds fluctuates with changes in the current market, or "yield to maturity."
A)True
B)False
Q2) With regard to interest rates and bond prices, it can be said that
A)a 1% change in interest rates will cause a greater change in long-term bond prices than short-term prices.
B)a 1% change in interest rates will cause a greater change in short-term bond prices than long-term prices.
C)long-term rates are more volatile than short-term rates.
D)a decrease in interest rates will cause bond prices to fall.
Q3) Over the decades, the times interest earned ratio of the Standard & Poor's 500 corporations has held fairly steady.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Q1) The "convertible exchangeable" feature of preferred shares gives the holder the sole right to exchange their preferred stock for common stock.
A)True
B)False
Q2) To the security holder, preferred stock offers the highest risk and the lowest return.
A)True
B)False
Q3) The purpose of cumulative voting is
A)to maintain majority control of the board of directors.
B)to allow minority stockholders the possibility of a voice on the board of directors.
C)to obstruct unfriendly mergers and takeover efforts.
D)to prevent the dilution of common stock through preemptive rights offerings.
Q4) The difference between the rights-on and ex-rights price is equal to the subscription price divided by N, where N is the number of rights needed to purchase a new share of stock.
A)True
B)False
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19
Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) In Stage II of a firm's life cycle, expansion continues, but at a decreasing rate.
A)True
B)False
Q2) The stockholders' equity section of the balance sheet of the XYZ Corp. is as follows:
\[\begin{array} { l l }
\text { Common stock (\$6 par) } & \$ 24,000,000 \\
\text { Retained earnings } & \$ 125,000,000 \\
\text { Total } &\$ 149,000,000
\end{array}\] If the company now splits its stock 3-for-1, which of the following is correct?
A)The par value per share will remain at $6.
B)The market price per share will probably remain unchanged.
C)The book value per share will decline to $17.60.
D)The par value per share will decline to $2.00.
Q3) To receive a dividend on common stock, an investor must purchase the stock before the ex-dividend date.
A)True
B)False
Q4) The stockholders' equity portion of Brimstone Tire Company follows:
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Chapter 19: Convertibles, Warrants and Derivatives
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Sample Questions
Q1) On average, convertible bonds have call premiums of less than 10% at the time of issue.
A)True
B)False
Q2) A "put option" is the right to purchase securities at a predetermined price.
A)True
B)False
Q3) The XLarge Corporation has a convertible bond outstanding with a conversion price of $35 per share. The $1,000 par value bonds have a 6% annual coupon rate, paid semi-annually, and 20 years to maturity. The firm's common stock is currently selling for $44 per share and the convertible bonds are selling for $1,200.00.
a) Calculate the conversion ratio.
b) Calculate the conversion value.
c) If equivalent bonds are currently yielding 12% to maturity, what is the pure bond value of this bond?
d) How much downside protection does the pure bond value provide to an investor? Would this be an appropriate investment for a risk-averse investor?
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Chapter 20: External Growth Through Mergers
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Q1) The King Solomon Mining Company is contemplating a cash tender offer for the outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide $175,000 in after-tax cash flow (after-tax income plus depreciation) each year for the next 20 years. In addition, Roanoke has a $400,000 tax loss carryforward that King Solomon Mining can use over the next two years ($200,000 per year). If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%, what is the cash price it should be willing to pay to acquire Roanoke based solely on its cash-flow benefit over the next 20 years?
Q2) After a merger has been announced, subsequent cancellation generally causes the potential acquiree's stock to decline in value.
A)True
B)False
Q3) The potential of a tax loss carryforward has no effect when considering the acquisition of a company.
A)True
B)False
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Chapter 21: International Financial Management
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Q1) If a forward discount is prevalent in U.S. dollars to Swiss francs,
A)the forward rate is lower than the spot rate.
B)the forward rate is higher than the spot rate.
C)markets will expect the Swiss Franc to appreciate relative to the dollar.
D)the forward rate is lower than the spot rate and markets expect the Swiss franc to appreciate relative to the dollar.
Q2) When a bank issues a "letter of credit," the bank absorbs ALL of the credit risk to the exporter.
A)True
B)False
Q3) In recent years, fully owned foreign subsidiaries are experiencing increased political pressure from foreign governments.
A)True
B)False
Q4) Eurobond issues are sold simultaneously in several national capital markets, but denominated in a currency different from that of the nation in which the bonds are issued.
A)True
B)False
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