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THE GOALS AND FUNCTIONS OF FINANCIAL MANAGEMENT

Which of the following are microeconomic variables that help define and explain the discipline of finance? Risk & Return Capital Structure Inflation All of the Above Explanation: All of the above are relevant in explaining finance. One primary macroeconomic variable that helps define and explain the discipline of finance? Capital Structure Inflation Technology Risk Explanation: Technology is very important in explaining the field of finance. The money markets deal with Short-term Securities Explanation: The money markets are concerned with short-term securities, those with a life less than one year. The ability of a firm to convert an asset to cash is called Liquidity Explanation: Liquidity also means how close an asset is to cash. Early in the history of finance, an important issue was: Liquidity Technology Capital Structure Financing Options Explanation: Maintaining liquidity was a major concern historically. The ___________________ is the most common form of business organization in the U.S. Corporation Partnership Sole Proprietorship None of the Above Explanation: There are more sole proprietorships than any other form of business organization. The ____________________ has more sales in dollars than any other form of business organization. Sole Proprietorship Partnership Corporation None of the Above Explanation: The Corporation is the most important in terms of dollars.

The appropriate firm goal in a capitalist society is Shareholder Wealth Maximization Explanation: The goal is to maximize the wealth of shareholders. The agency problem will occur in business firm if the goals of ____________ & shareholders do not agree.

Investors The Public Management

None of the Above Explanation: The goals of management may be different from those of shareholders.
REVIEW OF ACCOUNTING The Income Statement shows the firm's operating results over a period of time. Explanation: The Income Statement represents a moving picture of a firm's revenues and expenses. All of the following except one are tax-deductible expenses. Interest Expense Depreciation Common Stock Dividends Income Taxes Explanation: Common stock dividends are not tax deductible to a firm. All of the following are non-operating expenses except _____________ Interest Expense Cost of Goods Sold Preferred Stock Dividends Taxes Explanation: The cost of goods sold is an operating expense. Bondholders receive _____________ from the business firm. Preferred Dividend Payments Common Stock Payments Interest Payments Royalties Explanation: Bondholders are typically paid interest semi-annually. The ratio of net income to common shares outstanding is called Earnings per Share. Explanation: This is called the earnings per share (EPS). Usually, Firms with High Price/Earnings ratios are ____________ firms. Growth Declining Mature None of the Above Explanation: A high P/E ratio indicates a firm with strong growth prospects. One of the limitations of the ____________ is that it is based on historical costs. Income Statement Statement of Cash Flows Balance Sheet None of the Above Explanation: The balance sheet uses historical costs. A source of funds is a: Decrease in a Current Asset Decrease in a Current Liability Increase in a Current Liability A & C Above Explanation: A decrease in current assets is equivalent to an increase in current liabilities. Short-term financing for a business firm includes:

Bonds Accounts Payable Stockholder's equity Mortgages Explanation: The other three answers represent long-term financing FINANCIAL ANALYSIS

Trend analysis allows a firm to compare its performance to: A) Other Firms in the Industry B) Other time Periods within the Firm C) Other Industries D) All of the Above Explanation: Trend analysis gives an analyst a long-term perspective. As a security analyst and a portfolio manager with Oppenheimer Capital, Dick Glasebrook spoke to a Senior Finance Managers Meeting at the Boeing Company on May 4, 1999. He said it is one thing to compare a firms performance against competitors within the same industry. But investors are not limited to specific industries. In fact, investors seek to diversify their investments across many different industries. So management should also compare performance to any well run company--both in and outside of their industry. Ratio analysis allows a firm to compare its performance to: A) Other firms in the industry B) Other time periods within the firm C) Other industries D) all of the above Explanation: Trend analysis gives an analyst a long-term perspective. As a security analyst and a portfolio manager with Oppenheimer Capital, Dick Glasebrook spoke to a Senior Finance Managers Meeting at the Boeing Company on May 4, 1999. He said it is one thing to compare a firms performance against competitors within the same industry. But investors are not limited to specific industries. In fact, investors seek to diversify their investments across many different industries. So management should also compare performance to any well run company--both in and outside of their industry. Usually, a firm's suppliers are most interested in its ________ ratios. A) Profitability B) Debt C) Asset utilization D) Liquidity Explanation: The suppliers are most interested in getting paid, as shown by the liquidity of the firm. _______________ would be most interested in a firm's debt utilization ratios. A) Bondholders B) Stockholders C) Short-term creditors D) Both A and B Explanation: Debt is indicated by a firm issuing bonds but is also a function of the debt to equity relationship or the degree of financial leverage. Both bond holders and stockholders are interested in this relationship although from opposing viewpoints. The _____________ ratio indicates the return firm shareholders are earning. A) Return on Assets B) Return on Investment C) Return on Equity D) Net Profit Margin Explanation: The shareholders represent equity, or ownership in the firm. Which of the following is an example of a profitability ratio?

A) Quick ratio B) Average collection period C) Return on equity D) Times interest earned Explanation: This is the only profitability ratio that is listed. All profitability ratios have net income in the denominator. Total asset turnover will indicate if there is a problem with the _________ ratio. A) Debt to Assets B) Times Interest Earned C) Fixed Asset Turnover D) Current Explanation: Fixed asset turnover is part of total asset turnover. All of the following are asset utilization ratios except: A) Average Collection Period B) Inventory Turnover C) Receivables Turnover D) Return on Assets Explanation: Return on assets is a profitability ratio. Any ratio with net income in the denominator is a profitability ratio. If a firm's debt ratio is 55%, this means ______ of the firm's assets are financed by equity financing. A) 55% B) 50% C) 45% D) Not enough information to answer question Explanation: The equity portion plus the debt portion must add up to 100%. All of the following can present problems for ratio analysis except: A) Inflation B) Inventory accounting methods C) Disinflation D) All of the above Explanation: These all may cause problems.

FINANCIAL FORECASTING Planning for future growth is called: A) Capital budgeting B) Working capital management C) Financial forecasting D) None of the above Explanation: This involves looking ahead to the future. Which one of the following is NOT a tool of financial forecasting? A) Cash budget B) Capital budget C) Pro forma balance sheet D) Pro forma income statement Explanation: The other three are all tools used by an analyst. The first step in developing a pro forma income statement is to: A) Build a sales forecast B) determine the production schedule C) Determine cost of goods sold D) None of the above Explanation: A sales forecast begins the process. Explanation: The cost of good sold involves all three of these items. Financial managers use the _____________ to plan for monthly financing needs. A) Capital budget B) Cash budget C) Pro forma income statement D) None of the above Explanation: The cash budget allows for planning cash needs. The payments that a firm collects from its customers are called _______________. A) Cash disbursements B) Cash outflows C) Cash receipts D) None of the above Explanation: Cash receipts represent cash coming into the firm. Examples of cash disbursements are all but _________________. A) Payment for materials purchased B) Collection of accounts receivable C) Payment of dividends D) Payment of taxes Explanation: The collection of accounts receivable is an example of a cash receipt, not a cash disbursement. In developing the pro forma balance sheet, we get common stock from the firm's previous balance sheet Explanation: Common stock appears on the balance sheet.

The percent of sales method of financial forecasting shows us the relationship between ___________ and financing needs. A) Changes in the level of liabilities B) Changes in the level of assets C) Changes in debt D) Changes in the level of sales Explanation: It compares the relationship between balance sheet items and sales. OPERATING & FINANCIAL LEVERAGE An example of a semi-variable cost is: A) Rent B) Raw material C) Depreciation D) Utilities Explanation: The other three represent fixed or variable costs. Breakeven is the point at which firm profit is equal to zero. Explanation: This is the point where the firm's revenues equal its expenses. In breakeven analysis, if fixed costs rise, then the breakeven point will __________. A) Fall B) Rise C) Stay the same D) None of the above Explanation: This implies that a larger quantity will have to be sold in order to break even. In the breakeven formula, Price - Variable Cost is called the_____________. A) Breakeven point B) Leverage C) Contribution margin D) None of the above Explanation: This implies that a larger quantity will have to be sold in order to cover the additional fixed costs and still break even. Which of the following types of firms may operate with high operating leverage? A) A doctor's office B) An auto manufacturing facility C) A mental health clinic D) None of the above would have high operating leverage Explanation: This implies a high break-even point and high operating expenses. The ____________________ is the percentage change in operating income that results from a percentage change in sales. A) Degree of financial leverage B) Breakeven point C) Degree of operating leverage D) Degree of combined leverage Explanation: This is called the degree of operating leverage (DOL). If interest expenses for a firm rise, we know that firm has taken on more financial leverage Explanation: Financial leverage refers to interest expense on debt. The ________________ is the percentage change in earnings per share that results from a percentage change in operating income. A) Degree of combined leverage B) Degree of financial leverage C) Breakeven point

D) Degree of operating leverage Explanation: This is known as the degree of financial leverage (DFL). Combined leverage is the percentage change in relationship between sales and earnings per share Explanation: This combines operating leverage and financial leverage. A highly leveraged firm is more risky than its peers. Explanation: Leverage is equivalent to risk, because it implies a higher level of fixed costs. WORKING CAPITAL & THE FINANCING DECISION Working capital management involves the financing and management of the current assets of the firm. Explanation: Working capital management deals with the financing and management of current assets. An asset sold at the end of a specified time period is called a _____________ asset. A) Temporary current B) Self-liquidating C) current D) Permanent current Explanation: A self-liquidating asset is one that will be sold after a certain amount of time. Fixed assets are usually financed with Long-term funds. Explanation: Fixed assets are by definition long-term assets. Short-term financing is usually used to finance self-liquidating assets. Explanation: These are short-term or temporary assets. Short-term interest rates, in a normal economy, are generally ________ than long-term rates. A) Higher B) The same C) Lower D) None of the above Explanation: Long-term interest rates are normally higher than short-term interest rates to compensate for uncertainty or risk. The expectations hypothesis says that _________ interest rates are a function of _______ interest rates. A) Short-term; long-term B) Long-term; short-term C) Short-term; short-term D) None of the above Explanation: This theory says that long-term interest rates reflect the average of short-term expected rates. Insurance companies would tend to invest in Long-term securities. Explanation: An insurance company would prefer long-term securities because they are more conservative or safer. The ______________ theory says that investors must be paid a premium to hold long-term securities. A) Expectations hypothesis B) Time value theory C) Segmentation D) Liquidity premium Explanation: This is the liquidity premium. Short-term financing plans with high liquidity have: A) High return and high risk B) Moderate return and moderate risk C) Low profit and low risk D) None of the above Explanation: This is known as a "middle-of-the-road" approach.

Long-term financing plans with low liquidity have: A) High return and high risk B) Moderate return and moderate risk C) Low return and low risk D) None of the above Explanation: This is also known as a "middle-of-the-road" approach. CURRENT ASSET MANAGEMENT The transaction motive for holding cash is for A) A safety cushion B) Daily operating requirements C) Compensating balance requirements D) None of the above Explanation: This is money for everyday transactions. Which of the following motives for holding cash is required by the bank before loaning money? A) Compensating balance motive B) Transactions motive C) Precautionary motive D) None of the above Explanation: This can be considered a form of collateral. The difference between the cash balance on the firm's books and the balance shown on the bank's books is called: A) The compensating balance B) Float C) A safety cushion D) None of the above Explanation: Float implies that it takes time for checks to clear. The most utilized marketable security by most firms is the Treasury bill Explanation: Treasury bills (T-Bills) are very safe, popular investments. Of the following marketable securities, which are guaranteed by the Federal government? A) Agency securities B) Negotiable certificates of deposit C) Bankers acceptances D) None of the above Explanation: None of these are backed by the government. The 5 C's of credit include: A) Conditions B) Collateral C) Character D) All of the above Explanation: The other two C's of credit are capacity and capital. The use of safety stock by a firm will: A) Reduce inventory costs B) Increase inventory costs C) Have no effect on inventory costs D) None of the above Explanation: Safety stock is extra inventory a firm keeps in case of unforeseen circumstances. All of these factors are used in credit policy administration except: Credit standards

Terms of trade Dollar Amount of receivables Collection policy Explanation: The other three choices are the primary policy variables to consider. Firms aim to hold Low cash balances since cash is a non-interest earning asset. Explanation: A firm does not want to keep too much cash on hand because it will lose interest (by not keeping the money in a bank). SOURCES OF SHORT-TERM FINANCING The largest provider of short-term credit for a business is: A) Banking organizations B) Suppliers to the firm C) Commercial paper D) Eurodollars Explanation: This is also known as trade credit. The number of days until the firm is past due to a supplier is called the: A) Discount period B) Term to credit C) Payment period D) None of the above Explanation: The payment period is the number of days a firm has to pay its bill. If a firm is given trade credit terms of 2/10, net 30, then the cost of the firm failing to take the discount is: A) 2% B) 30% C) 36.72% E) 10% The interest rate given by a bank to its most creditworthy customers is the: A) Prime rate B) Labor rate C) Federal funds rate D) Discount rate Explanation: This is the "best" interest rate charged to people with excellent credit. Which of the following types of bank loans generally have the highest effective rate of interest? A) simple interest loan B) Discount interest loan C) Loan with a compensating balance D) Installment loan Explanation: Installment loans tend to be the most expensive. If a firm needs to borrow $100,000, at 8% interest, to finance working capital needs and a 20% compensating is required, then the firm should borrow __________. A) $100,000 B) $80,000 C) $125,000 D) $108,000 Explanation: The formula is: amount needed/ (1-c), where c = the compensating balance percentage. If a company raises money to finance short-term needs by selling its accounts receivable to another party, this is called factoring. Explanation: Factoring means selling the accounts receivable outright. The most restrictive policy for using inventory as collateral for short-term borrowing is called: A) Blanket inventory lien

B) Warehousing inventory C) Trust receipt D) Factoring Explanation: This is a complex method of inventory financing wherein the lender takes control of the inventory. A type of accounts receivable financing where a firm uses its receivables as collateral is called pledging Explanation: Pledging means using accounts receivable as collateral.

THE TIME VALUE OF MONEY


Both the future and present value of a sum of money are based on: A) Interest Rate B) Number of time periods C) Both a and b D) None of the above Explanation: These two factors are used in time value of money calculations. An annuity is a series of equal and consecutive payments Explanation: An annuity is a stream of equal payments to be received in the future. If you have $1000 and you plan to save it for 4 years with an interest rate of 10%, what is the future value of your savings? A) $1464.00 B) $1000.00 C) $1331.00 D) Cannot be determined Time value of money is an important finance concept because: A) It takes risk into account B) It takes time into account C) It takes compound interest into account D) All of the above Explanation: Time value of money incorporates all of these concepts. The present value of a dollar to be received in the future is less than a dollar Explanation: The reason is because you can earn interest on the money. The future value of a dollar that you invest today is: A) More than a dollar B) Equal to a dollar C) Less than a dollar D) None of the above Explanation: Again, the reason is because the money can earn interest. The future value of an annuity is more than each annuity payment Explanation: The reason has to do with compound interest (or interest earning more interest). The concepts of present value and future value are inversely related to each other Explanation: They are essentially opposite sides of a coin. You have $1000 you want to save. If four different banks offer four different compounding methods for interest, which method should you choose to maximize your $1000? A) Compounded daily B) Compounded quarterly C) Compounded semi-annually D) Compounded annually Explanation: The more often interest is compounded the faster it will grow because you will begin to earn interest on the interest sooner.

VALUATION & RATES OF RETURN In valuing a financial asset, you use these variables: A) Present value of future cash flows B) Discount rate C) Required rate of return D) All of the above Explanation: All of these are needed in order to value an asset. The principal amount of a bond at issue is called Par Value Explanation: This is also known as the face value or stated value. If a bond's value rises above its par value during its life, interest rates have: A) Gone up B) Gone down C) Stayed the same D) There is no correlation with interest rates Explanation: There is an inverse relationship between bond prices and interest rates (or yields). The basic "rent" that you are charged when you borrow money is called: A) Inflation premium B) Risk premium C) Real rate of return D) None of the above Explanation: This is known as the opportunity cost in economics. As time to maturity draws near, a bond's value approaches Par Explanation: The bond price gets closer to its face value the closer it is to maturity. One characteristic of preferred stock is that: A) It has no maturity date B) It is a hybrid security with characteristics of both common stock & debt C) It pays a fixed dividend payment D) All of the above Explanation: Preferred stock is described by all of the above characteristics. Common stock that has no growth in dividends is valued as if it were: A) Preferred stock B) A bond C) An option D) None of the above Explanation: It is treated the same as preferred stock. A high price/earnings ratio usually indicates that a firm is a Growth stock Explanation: A high P/E ratio indicates a stock that is growing and has positive future expectations. A low price/earnings ratio usually means that a firm: A) Is a growth stock B) Has positive expectations for the future C) Is a mature firm

D) is doomed in the marketplace. Explanation: This is the opposite of a growth stock. The premium to compensate an investor for the eroding effect of rising prices is called the inflation premium Explanation: This is compensation for inflation or the loss of purchasing power.

COST OF CAPITAL A firm's cost of capital is the Overall cost of financing to the firm Explanation: This is also called the weighted average cost of capital (WACC). The cost of debt financing is generally less than the cost of preferred or common equity financing. Explanation: This is because there is less risk to the lender than if he/she were to buy stock and because interest payments on debt are tax deductible to a firm. The cost of preferred stock is usually more than the cost of debt because of: A) Low dividends B) Tax deductibility of interest payments on debt C) High stock price D) None of the above Explanation: Preferred stock is not tax deductible and there is slightly more risk associated with preferred stock than with bonds. The cost of issuing new stock is called Flotation costs Explanation: Flotation costs are the selling or distribution costs associated with a new issue of stock. The cost of retained earnings does not consider _________ in the equation. A) Flotation costs B) The dividend in the next time period C) the value of the common equity D) The growth rate of dividends Explanation: When a company retains its earnings there are no flotation costs incurred. The most expensive source of financing for a firm is: A) Debt B) Preferred stock C) Retained earnings D) New common stock Explanation: This is because of flotation costs, as described above. The cost of capital at the retained earnings breakpoint is the: A) Weighted average cost of capital B) Marginal cost of capital C) Cost of new stock D) None of the above Explanation: The marginal cost of capital is the cost of the last dollar of funds raised. The cost of each component of a firm's capital structure multiplied by its weight in the capital structure is called the: A) Marginal cost of capital B) Cost of debt C) Weighted average cost of capital D) None of the above Explanation: This represents the overall cost of financing to the firm. When establishing their optimal capital structure, firms should strive to:

A) Minimize the weighted average cost of capital B) Minimize the amount of debt financing used C) Maximize the marginal cost of capital D) None of the above Explanation: This means the least expensive cost to the firm. The overall cost of financing for the firm is called the weighted average cost of capital Explanation: This is the weighted average cost of capital (WACC) THE CAPITAL BUDGETING DECISION Capital Budgeting focuses on long-term decision-making regarding the acquisition of projects. Explanation: Capital budgeting deals with long-term financial decisions occurring in the future. Since capital budgeting uses cash flows instead of accounting flows, the financial manager must add back Depreciation to the analysis. Explanation: Since depreciation is a non-cash expenditure it must be added back to determine cash flow. Which of the following capital budgeting methods focuses on firm liquidity? A) Payback method B) Net present value C) Internal rate of return D) None of the above Explanation: The payback method determines how quickly the cash investment is recouped. When faced with mutually exclusive option, which project should accepted under the payback method? A) The one with the longest payback period. B) The one with the shortest Payback period. C) It doesnt matter because the payback method is not theoretically correct. D) None of the above. Explanation: The payback method emphasizes liquidity, so the one with the shortest payback period is preferable. If the NPV of two, mutually exclusive options are both greater than zero, which option should be selected if the firm uses the Net Present Value method? A) The one with the largest Net Present Value. B) The one with the smallest Net Present Value. C) Either one. Both are greater than the cost of capital. D) None of the above Explanation: The one with the largest Net Present Value adds the most value to the firm. If the Internal Rates of Return of two, mutually exclusive options are both greater than the cost of capital, which option should be selected under the Internal Rate of Return method? A) The one with the largest Internal Rate of Return. B) The one with the smallest Internal Rate of Return. C) The one with the highest Net Present Value at the firms cost of capital. D) None of the above Explanation: The Internal Rate of Return is not reliable for decisions involving mutually exclusive options. The Net Present Value method should be used to select between mutually exclusive options. According to the reinvestment rate assumption, which method of capital budgeting assumes cash flows are reinvested at the project's rate of return? A) Payback period B) Net present value C) Internal rate of return D) None of the above Explanation: The internal rate of return method assumes that the rate of reinvestment will be equal to the actual internal rate of return. When a firm places a budgetary constraint on the projects it invests in, this is called Capital rationing

Explanation: This means there is a limit to the amount of funds available. Which of the following capital budgeting methods states the return of a project as a percentage? A) Payback period B) Net present value C) Internal rate of return D) None of the above Explanation: The internal rate of return is an interest rate. RISK & CAPITAL BUDGETING Because investors dislike uncertainty, they will require higher rates of return from risky investments. Explanation: This is to compensate them for risk. Risk is the variability of possible outcomes from a given investment. Explanation: Risk is a measure of uncertainty. Generally, the larger the standard deviation of an investment's expected outcomes, the Higher the risk. Explanation: A smaller standard deviation implies less risk. When stocks are held in a portfolio instead of individually, which measure of risk is appropriate? A) Standard deviation B) Beta C) Coefficient of variation D) None of the above Explanation: The coefficient of variation is used to measure more than one stock. If an individual stock's beta is higher than 1.0 that stock is: A) Exactly as risky as the market. B) Riskier than the market. C) Less risky than the market D) None of the above Explanation: A beta less than 1.0 means a stock is less risky than the overall market. The component of the risk-adjusted discount rate that is derived from the risk of Treasury securities is: A) Risk premium B) Cost of capital C) Call premium D) risk-free rate Explanation: Treasury securities are safe, risk-free investments. The component of the risk-adjusted discount rate that compensates the investor for holding risky assets is A) risk-free rate B) Cost of capital C) Risk premium D) None of the above Explanation: The risk premium is a compensation for risk. The standard deviation measures: A) Portfolio risk B) The risk of an individual security C) The risk of two securities, with different expected returns, compared to each other D) None of the above Explanation: Risk is measured by the standard deviation. Coefficient of variation measures the degree of risk per unit of expected return. Explanation: The coefficient of variation is used to compare more than one security, with differing expected returns and levels of risk.

The automobile industry and the heavy manufacturing industry probably have expected returns with a ___________ correlation. A) Positive B) Perfect positive C) Negative D) Slightly negative Explanation: A positive correlation is associated with industries that are related to each other. CAPITAL MARKETS The U.S. capital markets are composed of securities with maturities of one year & greater Explanation: The capital markets deal with long-term securities. The following can be classified as a capital market security: A) Bankers acceptance B) U.S. Treasury bills C) Money market mutual fund D) Common stock Explanation: The other answers represent short-term securities, which are traded in the money market. The NAFTA agreement involved which two countries besides the U.S.? A) Mexico and Canada B) Cuba and Mexico C) Panama and Cuba D) Canada and Cuba Explanation: It is the North American Free Trade Agreement. Which of the following types of securities are exempt from at least some taxes? A) Federally sponsored agency securities B) Municipal bonds C) Common stock D) Preferred stock Explanation: Municipal bonds are exempt from federal income taxes. Which of the following financial markets is the largest in terms of dollar value? A) Derivatives market B) Stock market C) Bond market D) Commercial paper market Explanation: The bond market represents the largest dollar amount. Which of the following is a source of internal capital for the business firm? A) Retained earnings B) Depreciation C) Common stock D) A and B above Explanation: Common stock is a source of external capital for a firm. Which of the following is not an organized exchange? A) AMEX B) NASDAQ C) NYSE D) None of the above Explanation: All of the above are organized exchanges. Recently stock exchanges have moved toward share prices stated in _________. A) Fractions

B) Whole numbers C) Decimals D) None of the above Explanation: Historically they traded in fractions for many years. The regulatory body for the New York Stock Exchange is Securities & Exchange Commission Explanation: The Securities & Exchange Commission is the "policeman" for the securities markets. INVESTMENT BANKING: PUBLIC & PRIVATE PLACEMENT Investment bankers are intermediaries between business firms & the investing public Explanation: They are the "middlemen" between the two. Leveraged buyouts rely on ________ to purchase a firm. A) Debt B) Equity C) Cash D) None of the above Explanation: It involves issuing bonds or debt. The Gramm-Leach-Bliley Act repealed the _________________. A) McFadden Act B) Securities Act of 1933 C) The Federal Reserve Act D) The Glass-Stegall Act Explanation: This act broke down barriers between investment banking and commercial banking. Which of the following pieces of legislation required that banks keep their commercial and investment functions separate? A) McFadden Act B) Gramm-Leach-Bliley Act C) Glass-Steagall Act D) None of the above Explanation: This act was repealed by the Gramm-Leach-Bliley Act. An investment banker may engage in buying and selling a new issue of securities in order to ensure a liquid market. This function is called ______________. A) Market making B) Advising C) Agency function D) Underwriting Explanation: The purpose of this is to make sure there is a liquid market for the security. Dilution of earnings may occur after a new stock issue is made. Explanation: This means that earnings per share (EPS) may go down. How long does an investment banker usually try to stabilize the market after an initial public offering? A) 2-3 days B) 2-3 months C) 1 month D) None of the above A disadvantage of being a public company is disclosure of information to the SEC. Explanation: Public companies open themselves up to public scrutiny. A private debt issue is the most popular way of raising debt capital for most corporations. Explanation: Privately placed debt now exceeds 50% of all long term corporate debt outstanding.

Which of the following are functions of an investment banker? A) underwriter B) Market maker C) Advisor D) all of the above Explanation: The investment banker provides all of these functions. LONG-TERM DEBT & LEASE FINANCING The principal value of a bond is called the par value Explanation: It is also called the stated value or face value. The coupon rate is the stated interest rate at the time the bond was issued. Explanation: This is the interest rate stated on the bond. A debenture is a long-term senior bond without collateral. Explanation: In other words, there is nothing to back up or secure the bond. The method of bond repayment where bonds are paid off in installments over the life of the bond issue is called: A) Sinking fund provision B) Call provision C) Serial repayment D) Conversion Explanation: A serial repayment means the bond is paid off in installments over its life. The method of bond repayment where debt is converted to shares of common stock in the company is called Conversion Explanation: This allows the company to convert bonds into shares of stock. Firms generally decide to call their bonds when interest rates Drop Explanation: This way a firm will save money on interest expense. The current yield on a bond worth $900 with a par value of $1000 and a coupon rate of 10% is: A) 10% B) 11.11% C) 12.05% D) None of the above Explanation: This is calculated by dividing the stated interest payment (10% x 1000) by the current price of the bond. Zero coupon bonds: A) Are sold at par. B) Pay no interest payment C) Are sold at a deep discount. D) B and c above Explanation: Zero coupon bonds have no interest payments and are sold at a discount from their face value. An advantage of debt financing is: A) Interest payments are tax deductible B) The use of debt, up to a point, lowers the firm's cost of capital C) Does not dilute owner's earnings D) all of the above Explanation: All of these are advantages of using debt.

A capital lease: A) Is generally used by corporations more often than an operating lease. B) Is placed on the balance sheet. C) Is capitalized. D) all of the above Explanation: All of these are true of a capital lease. COMMON & PREFERRED STOCK FINANCING Common Stockholders have a claim to the residual income of the firm. Explanation: Common stockholders are the ultimate owners of a firm. Which of the following types of voting includes minority shareholders? A) Cumulative B) Preferred C) Majority D) None of the above Explanation: Cumulative voting allows those with less than a 50% interest to elect some of the BOD. If a corporate charter says that current stockholders must be given the first option to purchase new stock, then that is a __________ rights offering. A) Pre-emptive B) Rights-on C) Ex-rights D) None of the above Explanation: A pre-emptive right gives priority to the current stockholders. When a rights offering is announced, the stock initially trades: A) Ex-rights B) Rights-on C) No-rights D) Pre-emptive right Explanation: Rights-on means that someone who purchases the stock will also receive a right toward a future purchase of the stock. __________ makes a firm unattractive in case of a takeover bid. A) Rights offering B) Greenmail C) Poison Pill D) Black Knight Explanation: This is an attempt to "poison" an attempted takeover. American Depository Receipts are certificates that have a legal claim on an ownership interest in a foreign company's stock. Explanation: This is the definition of American Depository Receipts (ADRs). Securities that have a mandatory dividend are: A) Bonds B) Preferred stock C) Common stock D) None of the above Explanation: A firm is not obligated to pay a dividend on any security. One provision of preferred stock is that they can participate in the firm's yield during good years. That provision is the participation provision

Explanation: The participation provision means that the owners may receive more than the quoted yield if the firm is having a very good year. Which of the following have ownership interest in the firm? A) Common stockholders B) Preferred stockholders C) Bondholders D) All of the above Explanation: Common stockholders are the ultimate owners of a firm. DIVIDEND POLICY & RETAINED EARNINGS The Board of Directors may do which of the following with net income? A) Put it in the cash account B) Retain it C) Pay it out as dividends D) B & C above Explanation: Net income may be either retained by the company or paid out as dividends. One desire of stockholders regarding dividend policy is: A) Stable dividends B) Frequent dividends C) Low dividends D) High dividend Explanation: Stability of dividends is important to stockholders. A stock dividend: A) Increases the value of stockholder's equity. B) Decreases the value of stockholder's equity C) Does not change the value of stockholder's equity. D) None of the above Explanation: Owners' equity is not changed by a stock dividend. The purpose of a stock split is usually to: A) Increase the investor's wealth B) Bring down the stock price into a lower trading range. C) Reduce of threat of takeover D) Decrease the number of shares outstanding Explanation: Stock splits are used when the price of a stock gets too high. Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split? A) Dividends in arrears B) Cash C) Common stock D) Retained earnings Explanation: A stock split will not affect a company's retained earnings account. A firm may repurchase its own stock because: A) It provides positive information about the firm. B) The firm has inadequate capital budgeting alternatives C) It will increase shareholder's wealth D) all of the above Explanation: These are all reasons for a firm to repurchase its stock. A stock split does not change the amount in the common stock account Explanation: A stock split doesn't change the total value of common stock, only the number of shares.

The ex-dividend date is the date: A) On which recipients of the dividend are determined B) The dividend is declared C) Which no longer includes dividend payments for stock bought on that date? D) None of the above Explanation: The ex-dividend date is also two business days before the holder-of-record date. CONVERTIBLES, WARRANTS, & DERIVATIVES The conversion ratio is the: A) ratio of the conversion premium to market value of the convertible security. B) Price at which a convertible security is exchanged for common stock. C) Number of shares of common stock in to which the convertible may be converted. D) None of the above Explanation: The conversion ratio tells how many shares of stock will result from the conversion. The floor value for a convertible bond is: A) The conversion value B) The pure bond value C) The conversion price D) None of the above Explanation: If the stock price falls below the conversion price, the conversion option becomes worthless and the value of the bond becomes simply the present value of the future interest and principal payments. This is the value of the bond without the conversion feature. A convertible security is a security that can be converted into common stock at the option of the owner. Explanation: This allows one to exchange the security for common stock. The conversion price is usually ________ than the market price of the common stock at the time the bond issue is sold. A) Higher B) Lower C) The same as D) None of the above Explanation: The reason for this is to make the convertible security more desirable. The interest rate on convertibles is generally less than the interest rate on nonconvertible securities. Explanation: Convertible securities are more desirable than nonconvertible; therefore, they don't have to pay as high an interest rate. The conversion premium will be large: A) If investors think the price of the stock will rise. B) If interest rates decline C) When the stock price is falling D) None of the above Explanation: If investors are optimistic about the prospects of the common stock, the conversion premium may be large. The price of a convertible bond: A) has upside and downside limits B) Has only downside limits C) has only upside limits D) None of the above Explanation: A convertible bond has only a floor or lowest value.

Warrants are investments whose value is directly related to the price of the underlying stock. Explanation: A warrant is an option to buy a stated number of shares of a stock at a specified price (the exercise price) over a given time period. Which of the following is an advantage of a convertible bond? A) Downside protection is ineffectual if the bond is bought at a large premium over par value B) Conversion may be forced on the bondholder by call provisions on the convertible bond C) There is downside risk for the investor D) None of the above Explanation: This means that there is a lowest possible value (called the floor value) for the security. EXTERNAL GROWTH THROUGH MERGERS Which of the following is NOT a potential benefit of merger? A) Synergy B) Portfolio Effect C) Dilution of EPS D) Tax loss carries forward Explanation: The other three answers are all benefits of a merger. A business combination where the two firms who are merging develop a new firm is called a business consolidation Explanation: The result of a business consolidation is a new firm. The price that an acquiring company must pay for the acquired company is: A) Book value B) Market value C) A higher price than market value D) None of the above Explanation: This is known as the merger premium. Merging with an unrelated company is called a conglomerate merger. Explanation: This is a merger of totally unrelated companies. A business combination where the resulting firm maintains the identity of the acquiring firm is called a merger Explanation: A merger occurs when the acquiring firm's original identity is kept with the new firm. Which of the following is a tender offer that uses debt to buy the firm? A) Hostile takeover B) Negotiated merger C) Two-step buyout D) Leveraged buyout Explanation: A leveraged buyout involves bonds or debt. The financial motives for merger include all of the following except: A) The portfolio effect B) Improved access to the capital markets C) Tax loss carries forwards D) Synergy Explanation: All of these are financial motives for a merger. The elimination of overlapping functions and the meshing of two firms' strong areas creates the managerial incentive for merger that is called: A) Pooling of interest B) Purchase of assets C) Synergy D) None of the above

Explanation: Synergy also occurs when the whole is greater than the sum of its parts. Which of the following kinds of mergers lead to diversification benefits? A) vertical B) Conglomerate C) horizontal D) None of the above Explanation: A conglomerate merger involves unrelated companies. INTERNATIONAL FINANCIAL MANAGEMENT What type of MNC produces a product domestically and ships it to a foreign market? A) Joint venture B) Fully owned foreign subsidiary C) Exporter D) Importer Explanation: An exporter sells a product to a foreign market. When an MNC cannot produce an actual product in a foreign subsidiary due to political restrictions, it can export technology and knowledge through: A) An exporter B) A joint venture C) An importer D) A licensing agreement Explanation: A licensing agreement allows a multinational corporation (MNC) to export technology and knowledge. Many MNCs prefer Joint ventures above all other methods of establishing a foreign presence. Explanation: A joint venture has many pluses, including exposing the MNC to the least amount of political risk. What one currency is worth in terms of another currency is called an exchange rate Explanation: The exchange rate shows the price or value of one currency as compared to another. Currency exchange rates tend to vary inversely with their Purchasing power Explanation: This provides a similar purchasing power in each country and is known as purchasing power parity (PPP). The system of government accounts that catalog the flow of economic transactions between the residents of one country and the residents of other countries is called ________________. A) A joint venture B) Current account C) Balance of payments D) Balance of interest rates Explanation: The balance of payments (BOP) shows the economic transactions between two countries. The exchange rate that is paid for a currency for immediate delivery is the: A) Spot rate B) Cross rate C) Forward rate D) None of the above Explanation: The spot rate is the price of a currency right now or "on the spot". The exchange rate between two currencies outside the American dollar is called the: A) Forward rate B) Cross rate

C) Spot rate D) None of the above Explanation: The cross rate is the exchange rate for two currencies quoted against the U.S. dollar. A fully owned foreign subsidiary is a form of MNC in which: A) The MNC owns and operates the firm by itself. B) The MNC has a partner in the foreign country. C) The foreign government is cooperative. D) None of the above