Financial Markets and Institutions
Exam Solutions
Course Introduction
Financial Markets and Institutions explores the structure, function, and operation of financial markets and the key institutions that facilitate the flow of funds in the economy. The course examines the roles of commercial banks, investment banks, insurance companies, mutual funds, and other financial intermediaries, as well as the various types of financial instruments traded within money and capital markets. Students will gain a clear understanding of interest rate determination, risk management, central banking policies, and the regulatory environment governing financial systems. The course emphasizes the importance of financial markets and institutions in supporting economic growth and stability, and prepares students to analyze the effects of global financial developments on domestic economies.
Recommended Textbook
Foundations of Finance 8th Edition by Arthur J. Keown
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17 Chapters
2473 Verified Questions
2473 Flashcards
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Page 2
Chapter 1: An Introduction to the Foundations of Financial Management
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137 Verified Questions
137 Flashcards
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Sample Questions
Q1) The payment of a dividend to current shareholders will have no impact on a corporation's share price because the cash paid is not available to future potential shareholders who may want to buy the corporation's stock.
A)True
B)False
Answer: False
Q2) S-type corporations and limited liability companies are taxed like partnerships,but have the advantage of limited liability for their owners.
A)True
B)False
Answer: True
Q3) The financial manager most directly responsible for producing the company's financial statements and directing its cost accounting functions is the
A)chief financial officer.
B)controller.
C)treasurer.
D)vice president - financer.
Answer: B
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Chapter 2: The Financial Markets and Interest Rates
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152 Flashcards
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Sample Questions
Q1) Prices of securities that are traded in the Over-the-Counter Markets are determined by
A)the Federal Trade Commission.
B)a continuous modified auction process.
C)the buyers of these securities.
D)a "bid" and "ask" negotiation process of broker-dealers of these securities.
Answer: D
Q2) Investment banking firms are prohibited from selling securities due to conflicts of interest.
A)True
B)False
Answer: False
Q3) Investment banking firms offer to facilitate the sale of securities to the public in a variety of ways.Which of the following methods guarantees the corporation with a pre-determined price for the securities?
A)a best efforts basis
B)a commission basis
C)a competitive bid
D)an underwriting
Answer: D
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Chapter 3: Understanding Financial Statements and Cash Flows
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117 Verified Questions
117 Flashcards
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Sample Questions
Q1) Which of the following accounts belong in the liability section of a balance sheet?
A)interest expense
B)accumulated depreciation
C)accounts payable
D)preferred stock
Answer: C
Q2) Based on the information in Table 3-1,calculate the after tax cash flow from operations for 2008 (no assets were disposed of during the year,and there was no change in interest payable or taxes payable).
A)$4,300
B)$1,450
C)$5,500
D)$6,250
Answer: A
Q3) Net working capital is equal to gross working capital minus depreciation.
A)True
B)False
Answer: False
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Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) TransSystems Inc.has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000.What is TransSystems Inc.'s debt ratio?
A)55.4%
B)43.7%
C)31.2%
D)66.7%
Q2) An analyst is evaluating two companies,A and B.Company A has a debt ratio of 50% and Company B has a debt ratio of 25%.In his report,the analyst is concerned about Company B's debt level,but not about Company A's debt level.Which of the following would best explain this position?
A)Company B has much higher operating income than Company A.
B)Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt.
C)Company B has a higher operating return on assets than Company A,but Company A has a higher return on equity than Company B.
D)Company B has more total assets than Company A.
Q3) How could an analyst determine whether a company's ratio is good or bad?
Q4) Discuss five limitations to ratio analysis.
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Page 6
Chapter 5: The Time Value of Money
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Sample Questions
Q1) You just invested $50,000 into an account that earns 7 percent compounded annually.At the end of each year you can withdraw $4,971.How many years can you continue to make the withdrawals?
Q2) If you want to have $5,000 in 10 years,how much money must you put in a savings account today? (Assume that the savings account pays 4% and it is compounded daily; round to the nearest $1).
A)$3,352
B)$3,370
C)$4,102
D)$4,207
Q3) Inputs using an Excel spreadsheet are almost identical to those on a financial calculator,except the interest rate is entered either as a decimal (.05)or a whole number followed by a % sign (5%)rather than simply a whole number (5)as you would enter using a financial calculator.
A)True
B)False
Q4) If you wish to accumulate $200,000 in the child's college fund after 18 years,and can invest at a 7.5% annual rate,how much must you invest at the end of each year if the first deposit is made at the end of the first year?
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Chapter 6: The Meaning and Measurement of Risk and Return
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Sample Questions
Q1) Variation in the rate of return of an investment is a measure of the riskiness of that investment.
A)True
B)False
Q2) Security A has an expected rate of return of 29.8 percent and a beta of 3.1.Security B has a beta of 1.70.If the Treasury bill rate is 5 percent,what is the expected rate of return for Security B?
Q3) The Beta of a T-bill is zero.
A)True
B)False
Q4) The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.
A)True
B)False
Q5) Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.
A)True
B)False
8
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) A bond rating of "BB" indicates that the company's financial position is above average and hence the default risk on the bonds is very low.
A)True
B)False
Q2) The correct relationship for a premium bond is
A)current yield > yield to maturity > coupon rate.
B)current yield > coupon rate > yield to maturity.
C)coupon rate > yield to maturity > current yield.
D)coupon rate > current yield > yield to maturity.
Q3) To determine the periodic interest payments that a bond makes,multiply the bond's stated coupon rate by its par value and divide by the number of coupon payments per year.
A)True
B)False
Q4) Which of the following statements is true?
A)Short-term bonds have greater interest rate risk than do long-term bonds.
B)Long-term bonds have greater interest rate risk than do short-term bonds.
C)All bonds have equal interest rate risk.
D)Interest rate risk is highest during periods of high interest rates.
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Beaver Corporation stock is currently selling for $58.00.It is expected to pay a dividend of $5.00 at the end of the year.Dividends are expected to grow at a constant rate of 7.5% indefinitely.Compute the required rate of return on Beaver Corporation stock.
A)12.48%
B)15.65%
C)13.64%
D)16.12%
Q2) Limited liability for a corporation's common shareholders is a protective provision that aids the corporation in raising funds.
A)True B)False
Q3) U.S Technologies preferred stock sells for $80 and pays $9 each year in dividends.What is the expected rate of return?
Q4) Preferred stock is less risky than common stock,but more risky than debt.
A)True B)False
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10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) Haroldson Inc.common stock is selling for $22 per share.The last dividend was $1.20,and dividends are expected to grow at a 6% annual rate.Flotation costs on new stock sales are 5% of the selling price.What is the cost of Haroldson's retained earnings?
A)5.73%
B)11.45%
C)11.78%
D)12.09%
Q2) A company has preferred stock that can be sold for $21 per share.The preferred stock pays an annual dividend of 3.5% based on a par value of $100.Flotation costs associated with the sale of preferred stock equal $1.25 per share.The company's marginal tax rate is 35%.Therefore,the cost of preferred stock is
A)18.87%.
B)17.72%.
C)14.26%.
D)12.94%.
Q3) Toto and Associates' preferred stock is selling for $27.50 a share.The firm nets $25.60 after issuance costs.The stock pays an annual dividend of $3.00 per share.What is the cost of existing,and new,preferred stock respectively?
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11
Chapter 10: Capital-Budgeting Techniques and Practice
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Sample Questions
Q1) Advantages of the payback period include that it is easy to calculate,easy to understand,and that it is based on cash flows rather than on accounting profits.
A)True
B)False
Q2) The size disparity problem occurs when mutually exclusive projects of unequal size are being examined.
A)True
B)False
Q3) The profitability index can be helpful when a financial manager encounters a situation where capital rationing is required.
A)True
B)False
Q4) The main disadvantage of the NPV method is the need for detailed,long-term forecasts of free cash flows generated by prospective projects.
A)True
B)False
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Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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154 Flashcards
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Sample Questions
Q1) Which of the following should be included in the initial outlay?
A)taxable gain on the sale of old equipment being replaced
B)first year depreciation expense on any new equipment purchased
C)preexisting firm overhead reallocated to the new project
D)increased investment in inventory and accounts receivable
Q2) The simulation approach provides us with
A)a single value for the risk-adjusted net present value.
B)an approximation of the systematic risk level.
C)a probability distribution of the project's net present value or internal rate of return.
D)a graphic exposition of the year-by-year sequence of possible outcomes.
Q3) If the cash flows of an accepted investment project are negatively correlated with the average cash flow of the firm's existing assets,then the company's total exposure to risk can decrease.
A)True
B)False
Q4) The initial outlay of a project may be reduced by the after-tax salvage value of replaced equipment.
A)True
B)False
Page 13
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Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) Which of the following statements about financial leverage is true?
A)Financial leverage is the responsiveness of the firm's EBIT to fluctuations in sales.
B)Financial leverage involves the incurrence of fixed operating costs in the firm's income stream.
C)Financial leverage is the responsiveness of the firm's EPS to fluctuations in EBIT.
D)Financial leverage reduces a firm's risk.
Q2) Balon Plastics,Inc.is financed entirely with 3 million shares of common stock selling for $20 a share.Capital of $4 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 13 percent 10-year bonds.The firm's tax rate is 40 percent.
a.Calculate the financing plan's EBIT indifference point.
b.The expected level of EBIT is $10,320,000 with a standard deviation of $2,000,000.What is the probability that EBIT will be above the indifference point?
c.Does the "indifference point" calculated in question (a)above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.
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14
Chapter 13: Dividend Policy and Internal Financing
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Sample Questions
Q1) The problem with the constant dividend payout ratio is
A)investors may come to expect a specified amount.
B)the dollar amount of the dividend fluctuates from year to year.
C)management is reluctant to cut the dividend even if there are low profits that year.
D)management cannot decrease the dividend when times are tough.
Q2) The residual dividend theory implies that internally generated funds (i.e.,retained earnings)should be used to fund all new investment projects before the company uses any additional debt.
A)True
B)False
Q3) Each of the following factors may cause a corporation to lower its dividend payout ratio EXCEPT
A)the corporation's earnings predictability is high.
B)the corporation's current and quick ratios are higher than industry average.
C)the corporation's retained earnings balance is high.
D)current common shareholders are unable to participate in new equity offerings.
Q4) A stock split is defined as a stock dividend exceeding 25%.
A)True
B)False
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Chapter 14: Short-Term Financial Planning
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141 Flashcards
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Sample Questions
Q1) Forecasts of revenues and their related expenses are the basis on which firms forecast their future financing needs.
A)True B)False
Q2) Discretionary financing needed (DFN)is equal to projected total assets minus projected total liabilities minus projected owners' equity.
A)True
B)False
Q3) DAS,Inc.is preparing its financial forecast for next year and its discretionary financing needed is negative.This means that A)sales growth must be negative.
B)the predicted change in total assets must be negative.
C)the predicted change in spontaneous liabilities and retained earnings must be greater than the predicted change in total assets.
D)the dividend payout ratio must be greater than the predicted growth rate in sales.
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16
Chapter 15: Working-Capital Management
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Sample Questions
Q1) Symco Corp.needs $500,000 for 90 days to get through a period of unexpectedly high oil prices.Symco's line of credit with the bank allows the company to borrow at 6% per year with a compensating balance of 10% of the amount borrowed.Currently,Symco has no money on deposit with the bank.
a.Calculate the amount Symco must borrow to meets its needs plus the compensating balance.
b.What is the annual percentage rate for this financing?
c.If the bank requires discount interest,what is the annual percentage rate for this financing?
Q2) One example of the hedging principle is to reduce a company's foreign exchange risk by purchasing futures contracts,which are called hedges.
A)True
B)False
Q3) Which of the following actions would improve a firm's liquidity?
A)purchasing inventories for cash
B)purchasing inventory on trade credit
C)purchasing inventory with long-term debt
D)buying machinery with long-term debt
Q4) Discuss the risk-return tradeoff experienced in working-capital management.
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Chapter 16: International Business Finance
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Sample Questions
Q1) Why do currency exchange rates throughout the world trade within a very narrow range on any given day?
A)because of purchasing power parity
B)because of the international translation effect
C)because of arbitrage
D)because of the law of one price
Q2) Only purely domestic firms that buy all of their inputs and sell all of their outputs in their home countries are unaffected by events in international financial markets.
A)True
B)False
Q3) The current direct quote in New York is .01075 dollars per yen.Suppose the current direct quote in Tokyo is 91 yen per dollar.What is the appropriate indirect quote in New York? What will arbitrageurs do to eliminate the differential rates in these markets?
Q4) Prior to 1973 the exchange rates between the major currencies of the world were
A)on a floating exchange rate system.
B)on an arbitrage exchange rate system.
C)on a fixed exchange rate system.
D)on a spot exchange rate system.
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Page 18
Chapter 17: Cash,receivables,and Inventory Management
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Sample Questions
Q1) In the EOQ model the optimal ordering quantity is the quantity for which the sum of the costs of ordering and carrying inventory is minimized.
A)True
B)False
Q2) All of the following are false EXCEPT
A)the mail float is caused by the time lapse from the moment a firm receives the check and begins to process it.
B)the processing float is caused by the time necessary for a bank to process the check.
C)the transit float is caused by the time lapse from the moment a customer mails a check until the firm begins to process it.
D)the disbursing float derives from the fact that funds remain in a firm's bank account until its payment check is cleared through the banking system.
Q3) Available yields on financial securities depend on their financial risk,interest rate risk,liquidity,and taxability.
A)True
B)False
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