Financial Markets and Institutions
Exam Questions
Course Introduction
This course offers a comprehensive exploration of financial markets and institutions, focusing on their roles within the global financial system. Students will examine the structure and function of various markets such as equity, debt, derivatives, and foreign exchange, and analyze the operations and regulatory environment of key financial institutions including banks, insurance companies, and investment firms. Emphasis is placed on how these entities facilitate capital flow, manage risk, influence economic stability, and respond to shifts in monetary policy. The course integrates theoretical concepts with real-world examples, preparing students to understand and critically evaluate financial systems and their impact on economic development.
Recommended Textbook
Financial Management Core Concepts 2nd Edition by Raymond Brooks
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Chapter 1: Financial Management
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Q1) The primary objective of the finance manager is to maximize the market value of equity of the company.
A)True
B)False
Answer: True
Q2) Managing the firm's short-term financing activities is known as ________.
A) capital budgeting
B) capital structure
C) accounts receivable management
D) working capital management
Answer: D
Q3) Which of the following can lead to increased expected cash flow over time to the firm?
A) Open and collaborative relations with the community
B) Qualified and motivated employees
C) Greater customer satisfaction
D) All of the above
Answer: D
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Chapter 2: Financial Statements
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Sample Questions
Q1) The purpose of studying financial statements is ________.
A) to mechanically build portfolio analysis
B) to understand those portions of the statements that have relevance for financial decision making
C) to primarily investigate all portions of the statements that have relevance for dividend policy
D) to mechanically learn how to read and understand footnotes
Answer: B
Q2) In the presentation of the income statement at yahoo.finance.com, you will find cost of revenue, not cost of goods sold, with depreciation expense included in cost of revenue.
A)True
B)False
Answer: True
Q3) Cash flow from assets equals cash flow to creditors plus cash flow to stockholders. A)True
B)False
Answer: True
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Chapter 3: The Time Value of Money Part 1
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Sample Questions
Q1) Gasoline cost $.10 per gallon in 1930. Over the next 60 years, the price rose at an average rate of 4.42% per year. Based on this information, what was the average price of a gallon of gas in 1990?
A) $1.34 per gallon
B) $1.53 per gallon
C) $2.65 per gallon
D) $2.75 per gallon
Answer: A
Q2) The Rule of 72 can be used to quickly estimate interest rates necessary to double your money in a given time period without the use of a spreadsheet or calculator. However, the rule does NOT work for estimating growth rates.
A)True
B)False
Answer: False
Q3) Consider the TVM equation: A decrease in the interest rate will decrease the future value, other things remaining equal.
A)True
B)False
Answer: True
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Chapter 4: The Time Value of Money Part 2
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Q1) The first interest payment on a 5-year, 8%, $100,000, fully-amortized loan with annual payments will be less than the last interest payment.
A)True
B)False
Q2) Solving for an unknown interest rate for annuity cash flows is an iterative (or trial-and-error) process.
A)True B)False
Q3) You estimate that the little drive-through coffee kiosk you own will generate ordinary annuity after-tax cash flows of $150,000 per year for the next ten years. If you discount these cash flows at an annual rate of 14%, what is the present value of your expected cash flows?
A) $782,417.35
B) $891,955.78
C) $1,500,000
D) $2,900,594.27
Q4) A British consol bond can be considered a type of perpetuity.
A)True B)False
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Chapter 5: Interest Rates
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Sample Questions
Q1) Most consumer loans payments are monthly.
A)True
B)False
Q2) Which of the statements below is FALSE?
A) Inflation has averaged 4.05% over the past 50 years.
B) The real rate has average 1.18% over the past 50 years.
C) The default premium has averaged 7.05% over the past 50 years.
D) The maturity premium has averaged 1.28% (for twenty-year maturity differences) over the past 50 years.
Q3) If we want to get some idea about a default premium over time between two specific assets, we can compare the returns on short-term or medium-term bonds with those on large company stocks.
A)True
B)False
Q4) The borrowing rate for real estate is more than the borrowing rates for autos, boats, and VISA Reward credit cards.
A)True
B)False
Q5) Why are there different interest rates on loans and securities?
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Chapter 6: Bonds and Bond Valuation
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Q1) Describe the relationship between the yield to maturity and the coupon rate of a bond.
Q2) If the par value of a bond is equal to the bond price, then we know the yield to maturity is equal to the coupon rate.
A)True
B)False
Q3) Snake River Power Inc. has $1,000 par value, twenty-year, 6% annual coupon bonds, outstanding currently selling for $696.25. What is the yield to maturity on these bonds? Use a calculator for your answer.
Q4) ________ are always unsecured bonds.
A) Mortgage bonds
B) Debentures
C) Callable bonds
D) Junior debt bonds
Q5) An indenture is an unsecured bond, and most of the bonds sold today in the United States are of this type.
A)True
B)False
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Chapter 7: Stocks and Stock Valuation
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Sample Questions
Q1) If we assume that a company will be in business forever and that it pays dividends, then we have an annuity dividend stream.
A)True
B)False
Q2) Jayhawk Corp. is selling for $30 a share. In looking at the stream of dividends over the past ten years, you find out that the first dividend was $1.00 and the last dividend was $2.00. What is its growth rate? What is its expected return?
Q3) The NYSE uses a designated-order turnaround computer system (SuperDOT) that matches buyers and sellers so that trades can be executed within seconds, with buyers and sellers getting the best available price.
A)True
B)False
Q4) A typical practice of many companies is to distribute part of the earnings to shareholders through ________.
A) quarterly stock splits
B) quarterly cash dividends
C) semiannual cash dividends
D) annual stock dividends
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Chapter 8: Risk and Return
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Q1) Even if there is certainty of future payoffs, there can still be risk.
A)True
B)False
Q2) Your investment advisor informs you that you do not need to pay a fee for his services. Instead, he invests your money for one month and keeps all of the proceeds before investing it for you. If your advisor makes and keeps a 2% return on your investment, what is his EAR if the earnings rate could be extrapolated for one year?
A) 2.00%
B) 24.00%
C) 26.82%
D) 126.82%
Q3) The practice of not putting all of your eggs in one basket is an illustration of
A) variance
B) diversification
C) portion control
D) expected return
Q4) Explain how the statistical concepts of mean and standard deviation apply to the financial ideas of risk and return.
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Chapter 9: Capital Budgeting Decision Models
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Sample Questions
Q1) Consider the following tem-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows each year for years 1 through 10 are $200,000 per year. What is the payback period without discounting cash flows?
A) 10 years
B) 5 years
C) 2.5 years
D) 0.5 years
Q2) The hurdle rate should be set so that it reflects the proper risk level for the project. If we have to choose between two projects with similar risk and therefore similar hurdle rates, we would select the project that ________.
A) has a higher internal rate of return
B) has a lower internal rate of return
C) has a hurdle rate that is consistent with the payback period method
D) has a hurdle rate that is consistent with the discounted payback period model
Q3) Name and describe three key observations that we can make about the capital budgeting decision.
Q4) Describe three of the six decision models used in capital budgeting decision-making and briefly evaluate their effectiveness.
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Chapter 10: Cash Flow Estimation
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Sample Questions
Q1) ________ cash flow is the increase in cash generated by a new project above the current cash flow without the new project.
A) Future
B) Current
C) Discounted
D) Incremental
Q2) A gain on disposal is recognized when the selling price of the asset is ________ the book value.
A) greater than B) equal to
C) less than D) greater than or equal to
Q3) Whenever a new product competes against a company''s already existing products and reduces the sales of those products, ________ occur.
A) erosion costs
B) opportunity costs
C) sunk costs
D) working capital costs
Q4) Briefly describe straight-line depreciation.
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Chapter 11: The Cost of Capital
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Sample Questions
Q1) The following market information was gathered for the ACME corporation. The common stock is selling for $40.00 per share and there are 100,000 shares outstanding. Retained earnings equal $400,000, preferred stock has 1,000 shares outstanding selling at $120.00 per share, and 500 outstanding long-term bonds are selling for $1,035.00 each. For purposes of estimating the firm's WACC, what are the market value weights of long-term debt, preferred stock, and equity?
A) D/V = 11.16%, PS/V = 2.59%, and E/V = 86.25%
B) D/V = 10.27%, PS/V = 2.38%, and E/V = 87.34%
C) D/V = 10.78%, PS/V = 3.08%, and E/V = 86.14%
D) D/V = 33.33%, PS/V = 33.33%, and E/V = 33.33%
Q2) With an unlimited amount of funds, a firm could accept all positive NPV projects. However, with limited budgets, managers are forced to accept some positive NPV projects while rejecting others. What overall financial rule should managers follow when choosing the portfolio of projects to accept? Why?
Q3) When a company borrows from a bank or sells bonds, it is called equity financing. A)True B)False
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Chapter 12: Forecasting and Short-Term Financial Planning
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Q1) There are a variety of ways to produce pro formas, but they usually rely on two primary inputs. One of these primary inputs is ________.
A) the projected sales for the coming year
B) the projected sales for the past year
C) next year's financial statements
D) this year's financial statements
Q2) If the company has some fixed costs, as sales increase then a ________ of sales dollars flows to the bottom line if these costs are truly fixed and do not vary with production or sales.
A) lower percentage
B) higher percentage
C) equal percentage
D) much lower
Q3) In accounting, the recording of the cost of goods sold occurs at the time of the sale, but the cash flow may take place over an extended time period.
A)True
B)False
Q4) Describe some uses of excess cash.
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Chapter 13: Working Capital Management
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Q1) Of the following, which is NOT an accurate statement about the EOQ model?
A) The actual cost of the inventory item is ignored.
B) Costs are divided into two categories: the cost of ordering and the cost of storage.
C) EOQ is an attempt to determine the appropriate level of inventory.
D) The EOQ assumes the sales rate fluctuates with seasonal changes.
Q2) For positive interest rates, the EAR is greater than the APR when there are multiple compounding periods within the year.
A)True
B)False
Q3) A company's future cash inflow from the sale of its products or services are called accounts payable.
A)True
B)False
Q4) Electronic funds transfer (EFT) substantially reduces the collection float for businesses and the disbursement float for customers.
A)True
B)False
Q5) Explain why working capital is "recaptured" when a project draws to a close.
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Chapter 14: Financial Ratios and Firm Performance
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Q1) Benchmarking compares a company's current performance against its own previous performance or against that of its competitors.
A)True
B)False
Q2) To convert a balance sheet into a common-size balance sheet statement, we restate all the numbers as percentages of ________.
A) revenue
B) total assets
C) total owners' equity
D) total liabilities
Q3) Financial ratio analysis is designed to help the user to ask better questions rather than to provide answers to problems.
A)True
B)False
Q4) Which industry has the lowest average industry debt-to-equity ratio?
A) Auto
B) Retail
C) Oil and gas
D) Airlines
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Chapter 15: Raising Capital
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Q1) Syndicated loans are generally reserved for large and mature businesses, and are for the long term rather than the short term.
A)True
B)False
Q2) Your bank offers discount loans at a discount rate of 7.50%. If you borrowed $50,000 as a discount loan from the bank today at this rate (you receive less than the face value today and repay the face value in one year), how much money would you receive today? What is the EAR of this loan?
Q3) The public auction of bonds in the United States is regulated by the Federal Reserve System.
A)True
B)False
Q4) The venture capitalist's objective is to help small business owners qualify for loans when they may not be able to qualify through the normal lending policies of a commercial lender.
A)True B)False
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Chapter 16: Capital Structure
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Q1) Describe the Pecking Order Hypothesis.
Q2) Investors Al and Bea lend $100,000 to each new idea. Al's history is that he selects low-risk projects or ideas that hit 50% of the time. Bea's history is that she takes on high-risk projects that hit 20% of the time. What rate of return must each successful project pay Al and Bea for them to break even?
A) Al's rate is 200% and Bea's rate is 450%.
B) Al's rate is 100% and Bea's rate is 400%.
C) Al's rate is 200% and Bea's rate is 400%.
D) Al's rate is 450% and Bea's rate is 100%.
Q3) A simple way of stating the original M&M proposition 1 is that it doesn't matter how you slice the pie--the size of the pie is still the same.
A)True
B)False
Q4) The municipal bond market is open only to ________.
A) state government agencies
B) local government agencies
C) the federal government
D) Both A & B
Q5) Why is financial leverage attractive?
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Chapter 17: Dividends, Dividend Policy, and Stock Splits
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Q1) Which of the following dividends does not actually involve the distribution of money?
A) Special dividends
B) Liquidating dividends
C) Stock dividends
D) All of the dividends above involve the payment of cash to the stockholder.
Q2) John is in a high income-tax bracket and wishes to minimize current taxes payable. He also has a sizeable current income and prefers high growth rates to significant annual cash flow from his equity investments. Which of the following dividend polices would John most likely prefer if we assume that the dividend policy has no impact on the value of the firm and that the capital gains tax rate is lower than the ordinary tax rate?
A) High-dividend-payout policy
B) No-dividend-payout policy
C) Low-dividend-payout policy
D) John would be indifferent to all of the dividend policies.
Q3) An increase in dividends may signal poor performance in the future.
A)True
B)False
Q4) Identify and define three reasons for stock splits.
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Chapter 18: International Financial Management
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Q1) In regard to the cultural risks related to ownership structure, which of the statements below is FALSE?
A) Cultural norms work their way into laws and regulations so that the interests of the host country will take precedence over the interest of the foreign country, the original home of the business.
B) In order to start a business operation in a foreign country, it may be necessary to utilize a joint venture business form.
C) Today, there are practically no industries protected against foreign ownership in host countries.
D) The ownership structure of a business can be restricted once the business ventures overseas and faces the additional constraint of meeting ownership requirements of more than one government.
Q2) In terms of exchange rates, you can think of the denominator as what you want to buy and the numerator as ________.
A) the price in the foreign currency
B) the price in your currency
C) what you want to receive
D) None of these
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