Financial Markets and Institutions
Exam Practice Tests
Course Introduction
This course offers a comprehensive overview of the structure, functions, and roles of financial markets and institutions within the economy. Students will explore various types of financial markets including money, capital, derivatives, and foreign exchange markets and examine the operations and significance of key financial institutions such as commercial banks, investment banks, insurance companies, and regulatory bodies. The course also covers topics related to risk management, interest rate determination, the impact of monetary policy, and the regulatory environment. By understanding the interplay between financial markets and institutions, students will gain valuable insights into how funds are allocated, how financial stability is maintained, and how economic growth is facilitated.
Recommended Textbook
Essentials of Corporate Finance 2nd Australia Edition by Stephen Ross
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) The person responsible for managing a firm's cash flow,credits and CAPEX (capital expenditure)is called:
A)a broker
B)a stakeholder
C)a chief accountant
D)a controller
E)a treasurer
Answer: E
Q2) The goal of a financial manager should be:-
A)to maximise next year's profit
B)to minimise next year's cost
C)to maximise the value of the existing owners' equity
D)to take no risks with shareholders' investments
E)None of these are appropriate goals
Answer: C
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) Caldweiler & Co.owes a total of $21 684 in taxes for this year.The taxable income is $71
509.If the firm earns $100 more in income,it will owe an additional $36 in taxes.What is the average tax rate on income of $71 609?
A)28.00 per cent
B)30.33 per cent
C)33.33 per cent
D)34.00 per cent
E)36.00 per cent
Answer: B
Q2) The accounting statement which measures the revenues,expenses,and net income of a firm over a period of time is called the:
A)statement of cash flows
B)income statement
C)AAS statement
D)balance sheet
E)net working capital schedule
Answer: B
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Chapter 3: Working With Financial Statements
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Q1) Manly Manufacturers Pty Ltd has a profit margin of 7.5 per cent and a dividend payout ratio of 30 per cent.What is the retention ratio?
A)10.66 per cent
B)27.33 per cent
C)54.60 per cent
D)70.00 per cent
E)78.20 per cent
Answer: D
Q2) A firm has sales of $428 000 for the year.The profit margin is 3.4 per cent and the retention ratio is 60 per cent.What is the common-size percentage for the dividends paid?
A)0.99 per cent
B)1.18 per cent
C)1.21 per cent
D)1.36 per cent
E)1.42 per cent
Answer: D
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Page 5
Chapter 4: Introduction to Valuation: the Time Value of Money
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Q1) You want to invest an amount of money today and receive back twice that amount in the future.You expect to earn 8 per cent interest.Approximately how long must you wait for your investment to double in value?
A)6 years
B)7 years
C)8 years
D)9 years
E)10 years
Q2) The valuation calculating the present value of a future cash flow to determine its value today is called __________ valuation.
A)complex
B)current
C)discounted cash flow
D)future cash flow
E)compound cash flow
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Chapter 5: Discounted Cash Flow Valuation
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Q1) How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25 000 a year for 30 years? She expects to earn an average rate of return of 6 per cent.
A)$324 642.24
B)$331 288.67
C)$333 333.33
D)$340 025.00
E)$344 120.78
Q2) A credit card has an APR of 18 per cent and charges interest monthly.The effective annual rate on this account will:
A)be less than 18 per cent
B)be less than or equal to 18 per cent
C)equal 18 per cent
D)be greater than or equal to 18 per cent
E)be greater than 18 per cent
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Chapter 6: Interest Rates and Bond Valuation
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Q1) When you refer to a bond's coupon,you are referring to which one of the following?
A)difference between the bid and the ask price
B)principal amount of the bond
C)annual interest divided by the current bond price
D)annual interest payment
E)difference between the purchase price and the face value
Q2) Zero-coupon bonds:
A)create a tax deduction for the issuer only at maturity
B)create annual taxable income to individual bondholders
C)are only issued by the Australian Government
D)are issued at a premium
E)are valued using simple interest
Q3) The portion of a bond's yield that compensates investors for the possibility that the bond's interest or principal might not be paid is called the:
A)interest rate risk premium
B)yield to maturity
C)missed coupon rate
D)default risk premium
E)liquidity premium
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8
Chapter 7: Equity Markets and Stock Valuation
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Q1) The Pancake House pays a constant annual dividend of $1.25 per share.How much are you willing to pay for one share if you require a 15 per cent rate of return?
A)$11.38
B)$7.86
C)$8.33
D)$11.04
E)$10.87
Q2) The market in which new securities are originally sold to investors is called the _____ market.
A)secondary
B)open
C)initial public
D)free
E)primary
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) The modified internal rate of return is specifically designed to address the problems associated with which one of the following?
A)mutually exclusive projects
B)unconventional cash flows
C)long-term projects
D)negative net present values
E)crossover points
Q2) Which one of the following is an indicator that an investment is acceptable?
A)a modified internal rate of return equal to zero
B)a profitability index of zero
C)an internal rate of return that exceeds the required return
D)a payback period that exceeds the required period
E)a negative average accounting return
Q3) A net present value of zero implies that an investment:
A)has an initial cost of zero
B)has cash inflows which have a zero present value
C)has no expected impact on shareholders
D)does not pay back its initial cash outlay
E)has a profitability index that is less than 1.0
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Chapter 9: Making Capital Investment Decisions
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Q1) Alfonso and Sons purchased a new grinding machine two years ago at a cost of $390 000.Last year,some revolutionary developments occurred making their machine virtually worthless as it cannot produce products which meet the higher quality standards of the newer machines.If Alfonso and Sons continue using their current machine they will lose all their customers.They have not found anyone willing to purchase the machine even at a deeply discounted price.The best description of this machine today is that it is a(n)_____ cost.
A)erosion
B)rationed
C)sunk
D)market
E)opportunity
Q2) Mark is analysing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value.What type of analysis is Mark conducting?
A)sensitivity analysis
B)erosion planning
C)scenario analysis
D)cost-benefit analysis
E)opportunity cost analysis
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Chapter 10: Some Lessons From Capital Market History
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Q1) Your portfolio has provided you with returns of 8.6 per cent,14.2 per cent,-3.7 per cent,and 11.4 per cent over the past four years,respectively.What is the geometric average return for this period?
A)7.25 per cent
B)7.40 per cent
C)7.57 per cent
D)7.63 per cent
E)7.78 per cent
Q2) Based on the following stock price data [in $] for Pi-Omega Corporation,calculate the standard deviation of returns on Pi-Omega.
A)0.0294
B)0.4436
C)0.7893
D)0.0462
E)0.0863
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Chapter 11: Risk and Return
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Q1) Portfolio diversification eliminates which one of the following?
A)unsystematic risk
B)reward for bearing risk
C)total investment risk
D)portfolio risk premium
E)market risk
Q2) Manly Manufacturing Pty Ltd stock has an expected return of 14.47 per cent.The risk-free rate is 3.8 per cent and the market risk premium is 8.6 per cent.What is the stock's beta?
A)1.21
B)1.28
C)1.24
D)1.32
E)1.19
Q3) The beta of a risk-free security is _____ and the beta of the overall market is:
A)1;0
B)infinite;1
C)1;1
D)0;0
E)0;1
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Chapter 12: Long-Term Financing
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Q1) When using the pure play approach,a firm is seeking a rate of return which:
A)will cause a project to have a positive net present value
B)is applicable to the risk level of the investment under consideration
C)is lower than its own cost of capital
D)matches the expected internal rate of return of the investment being considered
E)is based on book values rather than market values
Q2) Fancee Restaurant's cost of equity is 15.3 per cent and its after-tax cost of debt is 6.1 per cent.What is the firm's weighted average cost of capital if its debt-equity ratio is 0.58 and the tax rate is 30 per cent? Assume a classical tax system.
A)11.92 per cent
B)13.01 per cent
C)10.36 per cent
D)12.28 per cent
E)8.94 per cent
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Chapter 13: Leverage and Capital Structure
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Q1) Which one of the following will generally receive the highest priority in a bankruptcy liquidation,assuming the absolute priority rule is followed?
A)employee wages
B)bankruptcy administrative expenses
C)claims by unsecured creditors
D)contributions to employee superannuation plans
E)government tax claims
Q2) The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as:
A)homemade leverage
B)capital restructuring
C)M&M Proposition II
D)financial risk management
E)M&M Proposition I
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Chapter 14: Dividends and Dividend Policy
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Q1) The ex-dividend date is defined as _____ business days before the date of_____:
A)four;record
B)three;declaration
C)two;payment
D)three;payment
E)three;record
Q2) Research conducted on firms' dividend policies over time support which one of the following conclusions?
A)Firms commence paying dividends prior to doing any stock repurchases.
B)Dividends are currently paid by the vast majority of firms.
C)Managers tend to smooth dividends.
D)Aggregate dividends and stock repurchases have steadily declined in real terms.
E)Stock prices tend to increase whenever anticipated changes in dividends occur.
Q3) Which one of the following would tend to favour a low dividend payout?
A)high flotation cost for equity issues
B)higher tax rates on capital gains than on dividend income
C)endowment fund investors who cannot spend principal
D)elimination of the tax-deferral on capital gains
E)investors' desire for a high dividend yield
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Page 16
Chapter 15: Raising Capital
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Q1) The Bud Wise Co.needs to raise $125 million to expand their operations into Asia.The company will sell new shares via a general cash offering to raise the necessary funds.The underwriters charge a 7.5 per cent fee and the administrative costs are $600 000.How many shares of stock must be sold at the offer price of $31?
A)4 190 909 shares
B)4 380 122 shares
C)4 209 707 shares
D)4 359 198 shares
E)4 414 141 shares
Q2) Which one of the following is the most likely to be financed with venture capital?
A)building a new factory overseas to move production closer to existing foreign customers
B)building a prototype of a new invention
C)expanding a firm's existing production line
D)raising capital to purchase a competitor
E)raising equity to reduce the debt load of a firm
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Chapter 16: Short-Term Financial Planning
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Q1) Which one of the following is the length of time that a retailer owes its supplier for an inventory purchase?
A)inventory period
B)operating cycle
C)cash cycle
D)accounts payable period
E)accounts receivable period
Q2) Which one of the following statements is correct?
A)Firms should generally finance all of their assets with long-term debt.
B)A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.
C)Short-term borrowing is generally more expensive than long-term borrowing.
D)Long-term interest rates tend to be more volatile than short-term interest rates.
E)Firms that follow restrictive financial policies can generally avoid short-term debt financing.
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Chapter 17: Working Capital Management
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Q1) Which of the following are considered as money market securities in Australia?
I.bank-accepted bills
II.commercial bills
III.10 year government bonds
IV.treasury notes
V.a bank term loan
A)all of them
B)I,II and IV only
C)IV and V only
D)IV,V and VI only
E)I,II and V only
Q2) Which one of the following best defines the term 'collection policy'?
A)process of determining which customers will be granted credit
B)daily process of handling cash inflows and outflows of cash
C)set of guidelines used by a firm to determine the cost of offering credit to its customers
D)process of determining the probability customers will not pay
E)set of procedures a firm follows in collecting accounts receivable
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Chapter 18: International Aspects of Financial Management
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Q1) A vintage Parker,type 65,fountain pen from 1968,popular among collectors,costs 105 British pounds in the United Kingdom,while you can buy the identical pen for 229 Australian dollars in a shop in Melbourne.According to purchasing power parity,the AUD/GBP exchange rate is:
A)A$2.40/£1
B)A$2.18/£1
C)A$2.29/£1
D)A$1.05/£1
E)A$0.46/£1
Q2) Assume a canned soft drink costs $1 in the US and $1.30 in Canada.At the same time,the currency per US dollar is C$1.30.Which one of the following conditions exists in this situation?
A)interest rate parity
B)relative purchasing power parity
C)equal spot and forward rates
D)absolute purchasing power parity
E)translation exposure
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