Financial Markets and Institutions
Pre-Test Questions
Course Introduction
Financial Markets and Institutions provides an in-depth exploration of the structures, functions, and operations of financial markets and the institutions that participate in them. The course examines the roles of banks, insurance companies, mutual funds, pension funds, and other financial intermediaries, while analyzing the instruments traded in money, capital, and foreign exchange markets. Students will learn how financial markets facilitate the flow of funds, manage risks, and contribute to economic growth, as well as the impact of regulations, monetary policy, and global developments on financial systems. Through case studies and real-world examples, the course equips students with a comprehensive understanding of the dynamic environment in which financial markets and institutions operate.
Recommended Textbook
Fundamentals of Corporate Finance 10th Alternate Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) A stakeholder is:
A) a person who owns shares of stock.
B) any person who has voting rights based on stock ownership of a corporation.
C) a person who initially founded a firm and currently has management control over that firm.
D) a creditor to whom a firm currently owes money.
E) any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.
Answer: E
Q2) Which one of the following statements concerning stock exchanges is correct?
A) NASDAQ is a broker market.
B) The NYSE is a dealer market.
C) The exchange with the strictest listing requirements is NASDAQ.
D) Some large companies are listed on NASDAQ.
E) Most debt securities are traded on the NYSE.
Answer: D
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3
Two: Financial Statements and Long-Term Financial Planning
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Q1) Which of the following is (are)included in the market value of a firm but are excluded from the firm's book value?
I.value of management skills
II.value of a copyright
III.value of the firm's reputation
IV.value of employee's experience
A) I only
B) II only
C) III and IV only
D) I,II,and III only
E) I,III,and IV only
Answer: E
Q2) Net working capital is defined as:
A) total liabilities minus shareholders' equity.
B) current liabilities minus shareholders' equity.
C) fixed assets minus long-term liabilities.
D) total assets minus total liabilities.
E) current assets minus current liabilities.
Answer: E
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Chapter 3: Working With Financial Statements
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Q1) According to the Statement of Cash Flows,a decrease in accounts receivable will _____ the cash flow from _____ activities.
A) decrease;operating
B) decrease;financing
C) increase;operating
D) increase;financing
E) increase;investment
Answer: C
Q2) Ratios that measure a firm's financial leverage are known as _____ ratios.
A) asset management
B) long-term solvency
C) short-term solvency
D) profitability
E) book value
Answer: B
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Chapter 4: Long-Term Financial Planning and Growthpart
Three: Valuation of Future Cash Flows
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Q1) A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels.Given this,you can safely assume that the firm:
A) is projected to grow at the internal rate of growth.
B) is projected to grow at the sustainable rate of growth.
C) currently has excess capacity.
D) is currently operating at full capacity.
E) retains all of its net income.
Q2) A firm has a retention ratio of 45 percent and a sustainable growth rate of 6.2 percent.The capital intensity ratio is 1.2 and the debt-equity ratio is 0.64.What is the profit margin?
A) 6.28 percent
B) 7.67 percent
C) 9.49 percent
D) 12.38 percent
E) 14.63 percent
Q3) Identify the four primary determinants of a firm's growth and explain how each factor could either add to or limit the growth potential of a firm.
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Chapter 5: Introduction to Valuation: the Time Value of Money
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Q1) A year ago,you deposited $40,000 into a retirement savings account at a fixed rate of 5.5 percent.Today,you could earn a fixed rate of 6.5 percent on a similar type account.However,your rate is fixed and cannot be adjusted.How much less could you have deposited last year if you could have earned a fixed rate of 6.5 percent and still have the same amount as you currently will when you retire 38 years from today?
A) $10,118.42 less
B) $10,333.33 less
C) $11,417.09 less
D) $12,274.12 less
E) $12,313.30 less
Q2) Which one of the following will produce the highest present value interest factor?
A) 6 percent interest for five years
B) 6 percent interest for eight years
C) 6 percent interest for ten years
D) 8 percent interest for five years
E) 8 percent interest for ten years
Q3) What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
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Chapter 6: Discounted Cash Flow Valuation
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Q1) Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent.How much will she have in her account at the end of 45 years?
A) $1,806,429
B) $1,838,369
C) $2,211,407
D) $2,333,572
E) $2,508,316
Q2) The entire repayment of which one of the following loans is computed simply by computing a single future value?
A) interest-only loan
B) balloon loan
C) amortized loan
D) pure discount loan
E) bullet loan
Q3) Why might a borrower select an interest-only loan instead of an amortized loan,which would be cheaper?
Q4) Explain the difference between the effective annual rate (EAR)and the annual percentage rate (APR).Of the two,which one has the greater importance and why?
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Chapter 7: Interest Rates and Bond Valuation
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Q1) Bonds issued by the U.S.government:
A) are considered to be free of interest rate risk.
B) generally have higher coupons than those issued by an individual state.
C) are considered to be free of default risk.
D) pay interest that is exempt from federal income taxes.
E) are called "munis".
Q2) An investment offers a 10.5 percent total return over the coming year.Sam Bernanke thinks the total real return on this investment will be only 6.2 percent.What does Sam believe the inflation rate will be for the next year?
A) 5.60 percent
B) 5.67 percent
C) 4.05 percent
D) 6.00 percent
E) 6.21 percent
Q3) An indenture is:
A) another name for a bond's coupon.
B) the written record of all the holders of a bond issue.
C) a bond that is past its maturity date but has yet to be repaid.
D) a bond that is secured by the inventory held by the bond's issuer.
E) the legal agreement between the bond issuer and the bondholders.
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Chapter 8: Stock Valuationpart Four: Capital Budgeting
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Q1) Denver Shoppes will pay an annual dividend of $1.46 a share next year with future dividends increasing by 4.2 percent annually.What is the market rate of return if the stock is currently selling for $42.10 a share?
A) 6.55 percent
B) 7.13 percent
C) 7.46 percent
D) 7.67 percent
E) 8.29 percent
Q2) The dividend growth model:
I.assumes that dividends increase at a constant rate forever.
II.can be used to compute a stock price at any point in time.
III.can be used to value zero-growth stocks.
IV.requires the growth rate to be less than the required return.
A) I and III only
B) II and IV only
C) I,III,and IV only
D) I,II,and IV only
E) I,II,III,and IV
Q3) What are the primary differences and similarities between NASDAQ and the NYSE?
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Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Q1) Alicia is considering adding toys to her gift shop.She estimates that the cost of inventory will be $7,500.The remodeling expenses and shelving costs are estimated at $1,800.Toy sales are expected to produce net cash inflows of $2,300,$2,900,$3,200,and $3,400 over the next four years,respectively.Should Alicia add toys to her store if she assigns a three-year payback period to this project? Why or why not?
A) No;The payback period is 2.93 years.
B) No;The payback period is 3.26 years.
C) Yes;The payback period is 2.93 years.
D) Yes;The payback period is 3.01 years.
E) Yes;The payback period is 3.26 years.
Q2) A project's average net income divided by its average book value is referred to as the project's average:
A) net present value.
B) internal rate of return.
C) accounting return.
D) profitability index.
E) payback period.
Q3) Explain the differences and similarities between net present value (NPV)and the profitability index.
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Chapter 10: Making Capital Investment Decisions
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Q1) Hollister & Hollister is considering a new project.The project will require $522,000 for new fixed assets,$218,000 for additional inventory,and $39,000 for additional accounts receivable.Short-term debt is expected to increase by $165,000.The project has a 6-year life.The fixed assets will be depreciated straight-line to a zero book value over the life of the project.At the end of the project,the fixed assets can be sold for 20 percent of their original cost.The net working capital returns to its original level at the end of the project.The project is expected to generate annual sales of $875,000 and costs of $640,000.The tax rate is 34 percent and the required rate of return is 14 percent.What is the amount of the earnings before interest and taxes for the first year of this project?
A) $97,680
B) $130,000
C) $148,000
D) $217,320
E) $235,000
Q2) What is the formula for the tax-shield approach to OCF? Explain the two key points the formula illustrates.
Q3) How can two firms arrive at two different bid prices when bidding for the same job and given the same bid specifications?
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Chapter 11: Project Analysis and Evaluationpart Five: Risk and Return
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Q1) Mr.Bear,your boss,will only agree to accept a project that,as a minimum,provides a rate of return equal to the requirement he has set for the project.Given this,explain how you can use break-even analysis to ascertain which projects will be acceptable to him as you don't want to risk hearing him growl if you waste his time presenting him with a project that is unacceptable.
Q2) Steve,the sales manager for TL Products,wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits.Which one of the following represents the price that should be charged for the additional units during this sale?
A) average variable cost
B) average total cost
C) average total revenue
D) marginal revenue
E) marginal cost
Q3) What is forecasting risk and why is it important to the analysis of capital expenditure projects? What methods can be used to reduce this risk?
Q4) What are the key features of the accounting,cash,and financial break-even points?
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Chapter 12: Some Lessons From Capital Market History
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Q1) A stock had returns of 14 percent,13 percent,-10 percent,and 7 percent for the past four years.Which one of the following best describes the probability that this stock will lose no more than 10 percent in any one year?
A) greater than 0.5 but less than 1.0 percent
B) greater than 1.0 percent but less than 2.5 percent
C) greater than 2.5 percent but less than 16 percent
D) greater than 84 percent but less than 97.5 percent
E) greater than 95 percent
Q2) You own 400 shares of Western Feed Mills stock valued at $51.20 per share.What is the dividend yield if your annual dividend income is $352?
A) 1.68 percent
B) 1.72 percent
C) 1.83 percent
D) 1.13 percent
E) 1.21 percent
Q3) What are the two primary lessons learned from capital market history? Use historical information to justify that these lessons are correct.
Q4) Define and explain the three forms of market efficiency.
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Page 14
Six: Cost of Capital and Long-Term Financial Policy
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Q1) You have $10,000 to invest in a stock portfolio.Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 8 percent.Your goal is to create a portfolio with an expected return of 12.4 percent.All money must be invested.How much will you invest in stock X?
A) $800
B) $1,200
C) $4,600
D) $8,800
E) $9,200
Q2) Which one of the following is an example of unsystematic risk?
A) income taxes are increased across the board
B) a national sales tax is adopted
C) inflation decreases at the national level
D) an increased feeling of prosperity is felt around the globe
E) consumer spending on entertainment decreased nationally
Q3) Explain how the beta of a portfolio can equal the market beta if 50 percent of the portfolio is invested in a security that has twice the amount of systematic risk as an average risky security.
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Chapter 14: Cost of Capital
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Q1) Textile Mills borrows money at a rate of 13.5 percent.This interest rate is referred to as the:
A) compound rate.
B) current yield.
C) cost of debt.
D) capital gains yield.
E) cost of capital.
Q2) All else constant,which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.
A) a reduction in the dividend amount
B) an increase in the dividend amount
C) a reduction in the market rate of return
D) a reduction in the firm's beta
E) a reduction in the risk-free rate
Q3) Give an example of a situation where a firm should adopt the pure play approach for determining the cost of capital for a project.
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16
Chapter 15: Raising Capital
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Q1) Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415.The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year.What type of registration was this?
A) standby registration
B) shelf registration
C) Regulation A registration
D) Regulation Q registration
E) private placement registration
Q2) What is a prospectus?
A) a letter issued by the SEC authorizing a new issue of securities
B) a report stating that the SEC recommends a new security to investors
C) a letter issued by the SEC that outlines the changes required for a registration statement to be approved
D) a document that describes the details of a proposed security offering along with relevant information about the issuer
E) an advertisement in a financial newspaper that describes a security offering
Q3) Firms encounter several costs when issuing new securities.Identify and describe at least four of these costs.
Q4) Explain why there is a tendency for IPOs to be underpriced.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) Down Bedding has an unlevered cost of capital of 14 percent,a cost of debt of 7.8 percent,and a tax rate of 32 percent.What is the target debt-equity ratio if the targeted cost of equity is 15.51 percent?
A) .24
B) .29
C) .36
D) .52
E) .71
Q2) Pete is the CFO of Dexter International.He would like to increase the debt-equity ratio of the firm but is concerned that the firm's shareholders may not be willing to accept additional financial leverage.Pete has come to you for advice.What is your recommendation?
Q3) Based on the M & M propositions with and without taxes,how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?
Q4) Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
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18
Chapter
Short-Term Financial Planning and Management
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Q1) Which two of the following are the best justifications for a reverse stock split?
I.combine a reverse stock split with a stock repurchase to enable a firm to go dark II.increase the respectability of the stock
III.avoid delisting
IV.reduce transaction costs for shareholders
A) I and II only
B) I and III only
C) II and III only
D) II and IV only
E) III and IV only
Q2) Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment?
A) ex-rights date
B) ex-dividend date
C) date of record
D) date of payment
E) declaration date
Q3) Explain the meaning of the dividend clientele effect and why it is important.
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Chapter 18: Short-Term Finance and Planning
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Q1) Money deposited by a borrower with the bank in a low or non-interest-bearing account as a condition of a loan agreement is called a:
A) compensating balance.
B) secured credit deposit.
C) letter of credit.
D) line of credit.
E) pledge.
Q2) Costs that decrease as a firm acquires additional current assets are called _____ costs.
A) carrying
B) shortage
C) debt
D) equity
E) payables
Q3) A firm with a flexible short-term financial policy will:
A) maintain a low balance in accounts receivables.
B) only have minimal amounts,if any,invested in marketable securities.
C) invest heavily in inventory.
D) have low cash balances.
E) have tight restrictions on granting credit to customers.
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Chapter 19: Cash and Liquidity Management
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Q1) Lockboxes:
A) should be geographically located close to a firm's primary customers.
B) should be located in remote locations to increase the net disbursement float.
C) offer no additional benefit to a firm now that the Check Clearing Act for the 21<sup>st</sup> Century has been enacted.
D) tend to be negative net present value projects for firms with a large number of sizeable transactions.
E) tend to also be used as concentration accounts.
Q2) Your neighbor goes to the post office once a month and picks up two checks,one for $18,000 and one for $4,000.The larger check takes 4 days to clear after it is deposited;the smaller one takes 6 days.Assume 30 days per month.What is the weighted average delay?
A) 4.21 days
B) 4.36 days
C) 4.78 days
D) 5.00 days
E) 6.00 days
Q3) Explain how the Check Clearing Act for the 21<sup>st</sup> Century affects both collection and disbursement float.
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Page 21
Chapter 20: Credit and Inventory Managementpart Eight: Topics in Corporate Finance
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Q1) You have recently been hired as an accounting intern for Jefferson Mills.The job that you have been assigned for today is to compile a spreadsheet that has six columns.The column headings are: Invoice #;Customer name;< 30 days;31-60 days;61-90 days;> 90 days.You are to list every unpaid invoice by customer name with the amount owed entered into the appropriate column for the number of days between the sale date and today.Once you have completed that,you are to sort the report by customer name and then total the amounts listed in each column.What is this report called?
A) credit report
B) aging schedule
C) risk assessment report
D) turnover delineation
E) receivables consolidation report
Q2) All else equal,firms with (1)excess capacity, (2)low variable costs,and (3)repeat customers are more apt to offer liberal credit terms to their customers than are other firms.Explain why this tendency exists.
Q3) Why might firms forego discounts offered by their suppliers even though it is costly to do so? What steps might a firm pursue to be able to take these discounts?
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Chapter 21: International Corporate Finance
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Q1) The LIBOR is primarily used as the basis for the rate charged on:
A) short-term debt in the Lisbon market.
B) mortgage loans in the Lisbon market.
C) Eurodollar loans in the London market.
D) U.S.federal funds.
E) interbank loans in the U.S.
Q2) Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1925.The nominal risk-free rate in Canada is 3 percent while it is 4 percent in the U.S.Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.
A) $0.005
B) $0.006
C) $0.008
D) $0.015
E) $0.018
Q3) How well do you think relative purchasing power parity (PPP)and uncovered interest parity (UIP)behave? That is,do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Recently,a neighbor you have known for years won a lottery and received a $250,000 prize.This neighbor decided to invest all of his winnings in a new business venture that he knew only had a five percent chance of success.Previous to this,the neighbor had always been ultra conservative with his money and had refused to invest in this business venture as recently as last week.Which one of the following behaviors most applies to your neighbor's decision to invest in this business venture now?
A) overoptimisim
B) affect heuristic
C) loss aversion
D) house money
E) get-evenitis
Q2) A sudden and severe decline in market prices is best described as a market: A) crash.
B) revolver.
C) bubble.
D) limit.
E) mispricing.
Q3) Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.
Page 24
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Chapter 23: Enterprise Risk Management
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Q1) By definition,which one of the following contracts is marked to the market on a daily basis?
A) forward contract
B) spot contract
C) hedge
D) swap
E) futures contract
Q2) A forward contract:
A) requires that payment be made in full when the contract is originated.
B) provides the buyer with an option to buy an asset on the settlement date at the forward price.
C) is a binding agreement on both the buyer and the seller and nets out as a zero sum game.
D) is marked to the market daily at the seller's request.
E) allows for immediate delivery at an agreed upon price which is to be paid on the settlement date.
Q3) What is cross-hedging? Why do you suppose firms use this method of risk management? What are some of the drawbacks?
Q4) Explain why a swap is effectively a series of forward contracts.
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Chapter 24: Options and Corporate Finance
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Q1) What is the final day on which an option can be exercised called?
A) payment date
B) ex-option date
C) opening date
D) expiration date
E) intrinsic date
Q2) Which one of the following terms applies to the value of an option on its expiration date?
A) strike price
B) upper limit
C) deadline price
D) time value
E) intrinsic value
Q3) Employee stock options:
A) usually have a positive intrinsic value when issued.
B) must be backdated at least six months to comply with Sarbanes-Oxley.
C) are generally "underwater" when issued.
D) are frequently repriced if the options are in-the-money.
E) are generally issued with a zero intrinsic value.
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Chapter 25: Option Valuation
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Q1) Today,you purchased 100 shares of Lazy Z stock at a market price of $47 per share.You also bought a one year,$45 put option on Lazy Z stock at a cost of $0.15 per share.What is the maximum total amount you can lose on these purchases?
A) -$4,715
B) -$4,685
C) -$4,015
D) -$215
E) -$0
Q2) Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?
A) American call
B) European call
C) American put
D) European put
E) either an American or a European put
Q3) Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.
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Chapter 26: Mergers and Acquisitions
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Q1) Alpha is planning on merging with Beta.Alpha will pay Beta's shareholders the current value of their stock in shares of Alpha.Alpha currently has 4,200 shares of stock outstanding at a market price of $40 a share.Beta has 2,500 shares outstanding at a price of $18 a share.The after-merger earnings will be $8,800.What will the earnings per share be after the merger?
A) $1.61
B) $1.65
C) $1.75
D) $1.81
E) $1.86
Q2) Which one of the following best defines synergy given the following?
V<sub>A</sub> = Value of firm A
V<sub>B</sub> = Value of firm B
V<sub>AB</sub> = Value of merged firm AB
A) (V<sub>A</sub> + V<sub>B</sub>)- V<sub>AB</sub>
B) V<sub>AB</sub> - (V<sub>A</sub> + V<sub>B</sub>)
C) greater of 0 or (V<sub>A</sub> + V<sub>B</sub>)- V<sub>AB</sub>
D) greater of 0 or V<sub>AB</sub> - (V<sub>A</sub> + V<sub>B</sub>)
E) greater of 0 or V<sub>AB</sub>
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Page 28
Chapter 27: Leasing
Available Study Resources on Quizplus for this Chatper
72 Verified Questions
72 Flashcards
Source URL: https://quizplus.com/quiz/74224
Sample Questions
Q1) The relevant discount rate for evaluating a lease is the firm's:
A) cost of equity financing.
B) pre-tax cost of borrowing.
C) aftertax cost of borrowing.
D) cost of working capital.
E) rate of return on short-term assets.
Q2) Val's Pizzeria is contemplating the acquisition of some new commercial ovens.The purchase price is $39,000.The equipment will be depreciated based on MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The equipment will be worthless at the end of 4 years.The equipment can be leased for $12,500 a year.The firm can borrow money at 8 percent and has a 35 percent tax rate.What is the amount of the depreciation tax shield in year 3?
A) $1,525.27
B) $1,624.50
C) $2,022.93
D) $2,325.00
E) $2,631.60
Q3) Why might a firm opt to sell and leaseback an asset which it currently owns?
Q4) Explain the differences between purchasing an asset and leasing an asset.
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