Financial Markets and Institutions
Textbook Exam Questions
Course Introduction
This course provides a comprehensive overview of the structure and functioning of financial markets and institutions. Students will explore the mechanisms through which financial markets operate, the roles and types of financial institutions, and the impact they have on the economy. Key topics include money and capital markets, the valuation and trading of financial securities, regulation and supervision, risk management, and the influence of central banks and monetary policy. Through case studies and practical examples, students will develop an understanding of how financial markets respond to economic developments and the vital role institutions play in maintaining financial stability.
Recommended Textbook
Fundamentals of Corporate Finance 4th Edition Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Q1) Which of the following would be more typically the responsibility of a controller rather than a treasurer?
A) overseeing accounting and tax functions
B) capital budgeting
C) managing credit
D) making investment decisions
Answer: A
Q2) In which of the following ways is a limited liability company like a corporation?
A) It was created and developed first in the United States.
B) It can choose to be considered a partnership for tax purposes.
C) Its owners' liability is restricted to their investment.
D) It is directly managed by the owners.
Answer: C
Q3) Partnerships are the most common type of business firm in the world.
A)True
B)False
Answer: False
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?
A) $330,000
B) $660,000
C) $264,000
D) $462,000
Answer: A
Q2) Accounts payable is a ________.
A) long-term liability
B) current asset
C) long-term asset
D) current liability
Answer: D
Q3) Refer to the partial balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's market-to-book ratio?
Answer: Market-to-book = Market value of equity / Book value of equity Market-to-book = 8 million × $15 / $63.6 = 1.89
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Page 4
Chapter 3: Time Value of Money: an Introduction
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Q1) Why are arbitrage opportunities short-lived?
A) Federal regulations will kick in to restrict trade and effectively shut the opportunity down.
B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values.
C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.
D) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.
Answer: C
Q2) To compute the future value of a cash flow, you must ________.
A) discount it
B) compound it
C) double it
D) arbitrage it
Answer: B
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Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%. In terms of present value (PV), how much will Joe receive for selling the family business?
Q2) Assume that you are 30 years old today, and that you are planning on retirement at age 65. You expect your salary to be $40,000 one year from now and you also expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 10%. The future value (FV) at retirement (age 65) of your savings is closest to ________.
A) $722,766
B) $1,445,531
C) $1,011,872
D) $1,590,084
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Chapter 5: Interest Rates
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Q1) Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $282. Which of the following loans offers monthly payments closest to $282?
A) 7.8% APR for 36 months
B) 7.8% APR for 48 months
C) 7.8% APR for 60 months
D) 7.8% APR for 72 months
Q2) An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright?
A) Leasing costs $116 more than buying.
B) Leasing costs $174 more than buying.
C) Leasing costs $145 more than buying.
D) Leasing costs $289 more than buying.
Q3) How do we decide on opportunity cost when we have several opportunities that need to be foregone?
Q4) How are interest and return of principal handled in an amortizing loan payment?
Q5) Everything else remaining same, under what situation will APR and EAR be equal?
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Chapter 6: Bonds
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Q1) A risk-free, zero-coupon bond with a $5000 face value has 15 years to maturity. The bond currently trades at $3750. What is the yield to maturity of this bond?
A) 1.936%
B) 0.968%
C) 62.500%
D) 75.000%
Q2) Which of the following bonds is trading at a premium?
A) a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually
B) a ten-year bond with a $4,000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semiannually
C) a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semiannually
D) a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly
Q3) What care, if any, should be taken regarding the timing of the cash flows while drawing the timeline and associated cash flows of a coupon bond?
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Chapter 7: Stock Valuation
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Q1) Which of the following is a limitation of the dividend-discount model?
A) It cannot handle negative growth rates.
B) It requires accurate dividend forecasts, which is not possible.
C) It requires that the growth rate always be higher than the required rate of return, which is not realistic.
D) It does not consider past earnings and performance.
Q2) The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA). What is Logitech International SA (USA)'s ticker symbol?
A) LIS
B) LOGITECH
C) LOG
D) LOGI
Q3) A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction?
A) 3.48%
B) 8.70%
C) 13.91%
D) 17.39%
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Chapter 8: Investment Decision Rules
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Q1) The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero.
A)True
B)False
Q2) The owner of a number of gas stations is considering installing coffee machines in his gas stations. It will cost $260,000 to install the coffee machines, and they are expected to boost cash flows by $111,428 per year for their five-year working life. What must the cost of capital be if this investment has a profitability index of 1?
A) 1.17%
B) 2.34%
C) 4.69%
D) 5.86%
Q3) The Net Present Value rule implies that we should compare a project's net present value (NPV) to zero.
A)True
B)False
Q4) What are some potential problems in using internal rate of return (IRR) for mutually exclusive projects?
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) After research into where to place a new restaurant, Burger Billies, a small fast-food chain, plans to open a new store near a small college. The anticipated customer base is students attending the college. They learn that a major fast food chain will be opening a franchise within the college, which leads the owners of Burger Billies to revise their estimate of sales to one below the break-even point. Which of the following is most likely the best real option for Burger Billies to take with regard to the proposed restaurant site?
A) option to delay
B) option to expand
C) option to abandon
D) option to switch
Q2) A firm is considering investing in a new machine that will cost $400,000 and will be depreciated straight-line over five years. If the firm's marginal tax rate is 39%, what is the annual depreciation tax shield of purchasing the machine?
A) $80,000
B) $31,200
C) $28,080
D) $156,000
Q3) How do we handle interest expense when making a capital budgeting decision?
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Chapter 10: Stock Valuation: a Second Look
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Q1) Gonzales Corporation generated free cash flow of $81 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 9%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected free cash flow in year 2?
A) $1429.79 million
B) $86.61 million
C) $1572.77 million
D) $96.24 million
Q2) Individual investors' tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as
A) the disposition effect
B) the investor attention hypothesis
C) the investor overconfidence hypothesis
D) the excessive trading costs hypothesis
Q3) Which is the best valuation technique when using comparables?
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Chapter 11: Risk and Return in Capital Markets
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Q1) Which of the following is NOT a systematic risk?
A) the risk that oil prices rise, increasing production costs
B) the risk that the economy slows, reducing demand for your firm's products
C) the risk that your new product will not receive regulatory approval
D) the risk that the Federal Reserve raises interest rates
Q2) A company's stock price dropped when it announced that its revenue had decreased because of the quality issues of its products. This is an example of
A) market risk
B) unsystematic risk
C) systematic risk
D) undiversifiable risk
Q3) Which of the following investments had the largest fluctuations overall return over the past eighty years?
A) small stocks
B) S&P 500
C) corporate bonds
D) Treasury bills
Q4) What is the diversification achieved by an investor if he invests in Exxon Mobil, Dell, and Bank of America?
13
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) Stocks have both diversifiable risk and undiversifiable risk, but only diversifiable risk is rewarded with higher expected returns.
A)True
B)False
Q2) A portfolio has 30% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 35% and 30%, respectively, and the correlation between IBM and MSFT is 0.5. What is the standard deviation of the portfolio?
A) 23.61%
B) 27.78%
C) 31.95%
D) 30.56%
Q3) If you build a large enough portfolio, you can diversify away all the risks of a portfolio. A)True B)False
Q4) How does the S&P 500 index rank in terms of number and market capitalization of U.S. public firms?
Q5) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 13: The Cost of Capital
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Q1) Assume General Motors has a weighted average cost of capital of 10%. GM is considering investing in a new plant that will save the company $30 million over each of the first two years, and then $15 million each year thereafter. If the investment is $150 million, what is the net present value (NPV) of the project?
A) $18.2 million
B) $20.8 million
C) $23.4 million
D) $26.0 million
Q2) Assume Bismuth Electronics has a book value of $6 billion of equity and a face value of $19.7 billion of debt. The market values of equity and debt are $2.5 billion and $18.5 billion. A Wall Street financial analyst determines values of equity and debt as $3 billion and $20 billion. Which of the following values should be used for calculating the firm's WACC?
A) $6 billion of equity and $19.7 billion of debt
B) $2.5 billion of equity and $20 billion of debt
C) $3 billion of equity and $19.9 billion of debt
D) $2.5 billion of equity and $18.5 billion of debt
Q3) Why do we use market values rather than book values in calculation of WACC?
Q4) Should a firm with high retained earnings have a lower cost of equity?
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Chapter 14: Raising Equity Capital
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Q1) Which of the following statements is NOT true regarding venture capitalists?
A) They can provide substantial capital for young companies.
B) Firms offer limited partners a number of advantages over investing directly in start-ups themselves as angel investors.
C) They use their control to protect their investments, so they may therefore perform a key nurturing and monitoring role for the firm.
D) They might invest for strategic objectives in addition to the desire for investment returns.
Q2) What are angel investors?
Q3) In its IPO, Jillian's Imprints, a small publishing house, offered stock at a price of $10.00 per share. The underwriters of this IPO had a spread of 6.5% per share. If 2 million shares were sold, what funds did Jillian's receive from the IPO?
A) $5.61 million
B) $18.70 million
C) $20.57 million
D) $22.44 million
Q4) What are some of the advantages of going public?
Q5) How do the transaction costs of IPO puzzle financial economists?
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Chapter 15: Debt Financing
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Q1) In terms of public offerings of bonds, what is a prospectus?
A) a list of the duties of a trust company representing the bondholders' interests
B) a memorandum that must be produced to describe the details of a bond offering
C) a formal contract that specifies a firm's obligations to the bondholders
D) a schedule of the fees charged by an underwriting company
Q2) A company issues a callable (at par) five-year, 7% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $110 per $100 of face value. What is the yield to worst of this bond when it is released?
A) 1.40%
B) -2.73%
C) 3.00%
D) 4.71%
Q3) What is a bond's seniority?
A) the bondholder's priority in claiming assets in the event of default
B) clauses restricting a company from issuing new debt
C) the yield to maturity of a bond as compared to bonds of comparable rating
D) the issue price of the bond as compared to its face value
Q4) What are callable bonds?
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Chapter 16: Capital Structure
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Q1) The optimal capital structure depends on ________ such as taxes, distress costs and agency costs.
A) capital market factors
B) market imperfections
C) firm specific risks
D) systematic risks
Q2) Suppose a project financed via an issue of debt requires five annual interest payments of $12 million each year. If the tax rate is 35% and the cost of debt is 5%, what is the value of the interest rate tax shield?
A) 14.55 million
B) $21.82 million
C) $36.37 million
D) $18.18 million
Q3) What effect does debt have on a firm's weighted average cost of capital?
Q4) Financial managers prefer to choose the same debt level no matter which industry they operate in.
A)True
B)False
Q5) What are some implications of market imperfections?
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Chapter 17: Payout Policy
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Q1) Future investment plans are important determinants of payout policy because of ________.
A) signal to investors
B) costs of raising new capital
C) stock price depreciation
D) debt holder restrictions
Q2) Prada has nine million shares outstanding, generates free cash flows of $ 40 million each year and has a cost of capital of 10%. It also has $30 million of cash on hand. Prada wants to decide whether to repurchase stock or invest the cash in a project that generates free cash flows of $5 million each year. Should Prada invest or repurchase the shares?
A) indifferent between options
B) repurchase
C) invest
D) cannot say for sure
Q3) What is the general trend over the last few decades of total payouts by firms to shareholders be it through share repurchase or dividends?
Q4) What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) While the assets and accounts payable of a firm may reasonably be expected to grow with sales, ________ will not naturally grow with sales.
A) cash
B) supplier credit
C) long term debt
D) cost of sales
Q2) Building a model for long-term forecasting reveals points in the future where the firm will have ________.
A) excess cash that can be used for dividends, debt repayment, or stock repurchases
B) cash needs that must be funded with external financing
C) a need for expanding property, plant and equipment to meet increases in capacity
D) all of the above
Q3) What are a firm's options when it generates more cash than planned?
Q4) What is the implied assumption in percent of sales method?
Q5) What is common starting point for forecasting?
Q6) How do we compute net new financing?
Q7) What is minimum required cash?
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Chapter 19: Working Capital Management
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Q1) Trade credit should always be used when it is offered.
A)True
B)False
Q2) Which of the following best describes short-term debt issued by banks with a minimum denomination of $100,000?
A) certificates of deposit
B) repurchase agreements
C) banker's acceptances
D) commercial paper
Q3) Which of the following statements is FALSE?
A) Under the Modigliani-Miller assumptions of perfect capital markets, the amounts of payables and receivables are irrelevant.
B) One factor that contributes to the length of a firm's receivables and payables is the delay between the time a bill is paid and the cash is actually received.
C) Collection float is the amount of time it takes before payments to suppliers actually result in a cash outflow for the firm.
D) The credit that the firm is extending to its customer is known as trade credit.
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21
Chapter 20: Short-Term Financial Planning
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Q1) Which of the following best describes an aggressive financing policy?
A) financing part or all of the permanent working capital with short-term debt
B) financing part or all of the permanent working capital with long-term debt
C) financing part or all of the temporary working capital with short-term debt
D) financing part or all of the temporary working capital with long-term debt
Q2) Which of the following statements is FALSE?
A) Unlike long-term debt, because of its short maturity, commercial paper is not rated by credit rating agencies.
B) The interest on commercial paper is typically paid by selling it at an initial discount.
C) Commercial paper is short-term, unsecured debt used by large corporations that is usually a cheaper source of funds than a short-term bank loan.
D) Extending the maturity of commercial paper beyond 270 days triggers a registration requirement with the Securities and Exchange Commission (SEC), which increases issue costs and creates a time delay in the sale of the issue.
Q3) What do we understand by negative cash flow shocks?
Q4) What is single, end-of-period payment loan?
Q5) What are compensating balance and what effect does it have on the loan?
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Chapter 21: Option Applications and Corporate Finance
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Q1) Suppose that a stock sells at a price of $60 on the expiration date. Compute the price of a call option if the option strike price is $20.
A) $20
B) $30
C) $40
D) $50
Q2) Consider the following equation: C = P + S - PV(K) - PV(Div) In this equation, what does the term C represent?
A) the value of the call option
B) the stock's current price
C) the payoff of a zero-coupon bond
D) the strike price of the option
Q3) Suppose that a stock sells at a price of $60 on the expiration date. Compute the payoff to the seller of a call option if the option strike price is $20.
A) -$20
B) -$30
C) -$40
D) -$50
Q4) What are American options?
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Chapter 22: Mergers and Acquisitions
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Q1) Which of the following statements regarding efficiency gains is FALSE?
A) Takeovers relying on the improvement of target management are difficult to complete, and post-takeover resistance to change can be great. Thus not all inefficiently run organizations are necessarily more efficient following a takeover.
B) Although identifying poorly performing corporations is relatively easy, fixing them is another matter entirely.
C) A justification that acquirers cite for paying a premium for a target is efficiency gains, which are often achieved through an elimination of duplication.
D) A chief executive of an inefficiently run corporation can be ousted by current shareholders voting to replace the board of directors, and in fact a large number of ineffective managers are replaced in this way.
Q2) You work for a levered buyout firm and are evaluating a potential buyout of Boogle Inc. Boogle's stock price is $18, and it has 3 million shares outstanding. You believe that if you buy the company and replace its dismal management team, its value will increase by 50%. You are planning on doing a levered buyout of Boogle and will offer $25 per share for control of the company. Assuming you get 50% control, what will your gain from the transaction be?
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Chapter 23: International Corporate Finance
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Q1) What is floating rate?
Q2) The present value (PV) of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to ________.
A) $8,950,495
B) $8,954,615
C) $8,943,695
D) $8,961,420
Q3) If the cash flows generated by a foreign investment are ________ with ________, we do not need to consider the impact of exchange rate risk.
A) uncorrelated, costs
B) negatively correlated, revenues
C) uncorrelated, cash flows
D) none of the above
Q4) The amount of the taxes paid in dollars for the Japanese operations is closest to
A) $29.5 million
B) $5.1 million
C) $50.0 million
D) $20.5 million
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Chapter 24: Leasing
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Q1) Which of the following is a valid argument for leasing?
A) tax differences
B) reduced resale costs
C) efficiency gains from specialization
D) All of the above are valid arguments for leasing.
Q2) Which of the following statements is FALSE?
A) Absent market imperfections, leases represent another form of zero-NPV financing available to a firm, and the Modigliani-Miller propositions apply: Leases neither increase nor decrease firm value, but serve only to divide the firm's cash flows and risks in different ways.
B) In a perfect market, the cost of leasing is equivalent to the cost of purchasing and reselling the asset.
C) Each lease agreement can be tailored to fit the precise nature of the asset and the needs of the parties at hand.
D) Features of leases will be priced as part of the lease payment. Terms that give valuable options to the lessee lower the amount of the lease payments, whereas terms that restrict these options will raise them.
Q3) If St. Martin purchases the CT scanner, what is the amount of the lease-equivalent loan?
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Chapter 25: Insurance and Risk Management
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Q1) An operator of an oil well has a 0.5% chance of experiencing a catastrophic failure over the next year. This failure will cost the operator $500 million. If the risk-free rate is 2%, the expected return on the market is 8%, and the beta of the risk is 0, what is the actuarially fair insurance premium?
A) $2,450,980
B) $2,500,000
C) $2,550,000
D) $2,314,815
Q2) Which of the following statements is FALSE?
A) Long-term supply contracts cannot be entered into anonymously; the buyer and seller know each other's identity. This lack of anonymity may have strategic disadvantages.
B) A futures contract is an agreement to trade an asset on some future date, at a price that is locked in today.
C) An alternative to vertical integration or storage is a long-term supply contract.
D) Long-term supply contracts are unilateral contracts negotiated by a seller.
Q3) What is the actuarially fair cost of full insurance?
Q4) What are some of the disadvantages of long-term supply contracts?
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Chapter 26: Corporate Governance
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Source URL: https://quizplus.com/quiz/69743
Sample Questions
Q1) Which of the following statements is FALSE?
A) The shareholders as a group elect a board of directors to monitor managers. The directors themselves, however, have the same conflict of interest-monitoring is costly and in many cases directors do not get significantly greater benefits than other shareholders from monitoring the managers closely.
B) In principle, the board of directors hires the executive team, sets its compensation, approves major investments and acquisitions, and dismisses executives if necessary.
C) In the United States, the board of directors has a clear fiduciary duty to protect the interests of both the owners of the firm (the shareholders) and the interests of other stakeholders in the firm (such as the employees).
D) When the ownership of a corporation is widely held, no one shareholder has an incentive to bear the cost of monitoring, because she bears the full cost of monitoring but the benefit is divided among all shareholders.
Q2) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
Q3) What is the difference between inside, gray, and outside directors?
Q4) What is corporate governance?
Q5) What is the role of takeovers in corporate governance?
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