Financial Theory
Midterm Exam
Course Introduction
Financial Theory explores the fundamental principles that underpin financial decision-making in markets and corporate environments. This course covers topics such as asset valuation, risk and return, capital structure, portfolio theory, market efficiency, and derivative securities. Students will develop an understanding of how individuals and firms value investments under uncertainty, analyze financial instruments, and apply theoretical models to real-world scenarios. Emphasis is placed on both the mathematical foundations and the practical implications of financial theories, preparing students to critically evaluate financial strategies and policies.
Recommended Textbook
Principles of Corporate Finance 12th Edition by Richard Brealey
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Which of the following groups are referred to as stakeholders?
A)Employees, customers, and suppliers only
B)Shareholders only
C)Employees and customers only
D)Employees, customers, shareholders, and suppliers
Answer: D
Q2) Mr.Smith has an income of $40,000 this year and $60,000 next year.He can invest in a project that costs $30,000 this year, which generates an income of $36,000 next year.The market interest rate is 10 percent.What will be his consumption next year if Mr.Smith invests in the project and consumes $50,000 this year?
A)$40,000
B)$52,000
C)$60,000
D)$62,000
Answer: B
Q3) The board of directors is ultimately responsible for all large investment decisions.
A)True
B)False
Answer: True
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Chapter 2: How to Calculate Present Values
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Q1) Define the term perpetuity.
Answer: A perpetuity is defined as a sequence of equal cash flows occurring each period forever.
Q2) You would like to have enough money saved after your retirement such that you and your heirs can receive $100,000 per year in perpetuity.How much would you need to have saved at the time of your retirement in order to achieve this goal? (Assume that the perpetuity payments start one year after the date of your retirement.The annual interest rate is 12.5 percent.)
A)$1,000,000
B)$10,000,000
C)$800,000
D)$1,125,000
Answer: C
Q3) One can find a project's net present value by subtracting the present value of its required investment from the present value of its future cash flows.
A)True
B)False
Answer: True
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Chapter 3: Valuing Bonds
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Sample Questions
Q1) If a bond pays interest semiannually, then it pays interest
A)once per year.
B)every six months.
C)every three months.
D)every two years.
Answer: B
Q2) The volatility of a bond is given by
A)duration/(1 + yield) only.
B)slope of the curve relating the bond price to the interest rate only.
C)yield to maturity only.
D)duration/(1 + yield) and slope of the curve relating the bond price to the interest rate only.
Answer: D
Q3) The yield to maturity on a bond is really its internal rate of return.
A)True
B)False
Answer: True
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Chapter 4: The Value of Common Stocks
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Sample Questions
Q1) Briefly explain the term market capitalization rate.
Q2) The growth rate in dividends is a function of two ratios.They are A)ROA and ROE.
B)dividend yield and growth rate in stock price.
C)ROE and the plowback ratio.
D)book value per share and EPS.
Q3) Most exchange traded funds are not actively managed.
A)True
B)False
Q4) Super Computer Company's stock is selling for $100 per share today.It is expected that, at the end of one year, it will pay a dividend of $6 per share and then be sold for $114 per share.Calculate the expected rate of return for the shareholders.
A)20 percent
B)15 percent
C)10 percent
D)25 percent
Q5) Briefly explain the major types of exchanges prevalent in the United States.
Q6) Explain the term secondary market.
Q7) Explain the term primary market.
Page 6
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Chapter 5: Net Present Value and Other Investment Criteria
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Q1) Project X has the following cash flows: C<sub>0</sub> = +2,000, C<sub>1</sub> = -1,150, and C<sub>2</sub> = -1,150.If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would A)accept the project.
B)reject the project.
Q2) Briefly explain the value additivity property.
Q3) The internal rate of return is the discount rate that makes the NPV of a project's cash flows equal to zero.
A)True
B)False
Q4) Briefly explain the term soft rationing.
Q5) The denominator of the profitability index is the present value of the investment.
A)True
B)False
Q6) Briefly discuss capital rationing.
Q7) The profitability index is always less than 1.
A)True
B)False
Page 7
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Chapter 6: Making Investment Decisions With the Net
Present Value Rule
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Q1) A financial analyst should include interest and dividend payments when calculating a project's cash flows.
A)True
B)False
Q2) Net working capital is best represented as
A)short-term assets only.
B)short-term assets and short-term liabilities.
C)long-term assets and short-term assets.
D)long-term assets and long-term liabilities.
Q3) What are some of the important points to remember while estimating the cash flows of a project?
Estimate after-tax cash flows on an incremental basis.
Include all incidental effects.
Include working capital requirements.
Include opportunity costs.
Do not include sunk costs.
Take inflation into consideration in a consistent manner.
Q4) Briefly explain the acronym MACRS.
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Q5) Briefly discuss how tax reporting to governments versus shareholders is treated in countries like Japan.
Chapter 7: Introduction to Risk and Return
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Sample Questions
Q1) Which portfolio had the highest standard deviation during the period between 1900 and 2014?
A)Common stocks
B)Government bonds
C)Treasury bills
D)None of the answers is correct.
Q2) The beta of the market portfolio is
A)+1.0.
B)+0.5.
C)0.0.
D)-1.0.
Q3) Stock M and Stock N have had the following returns for the past three years: 12 percent, -10 percent, and 32 percent; and 15 percent, 6 percent, and 24 percent, respectively.Calculate the covariance between the two securities.(Ignore the correction for the loss of a degree of freedom set out in the text.)
A)-99
B)126
C)+250
D)-250
Q4) Regarding stock returns, briefly explain the term variance.
Page 9
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Chapter 8: Portfolio Theory and the Capital Asset Pricing Model
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Q1) The distribution of daily returns over short periods for stocks is more closely related to the normal distribution than the lognormal distribution.
A)True
B)False
Q2) If a stock were overpriced, it would plot
A)above the security market line.
B)below the security market line.
C)on the security market line.
D)on the y-axis.
Q3) Investments B and C both have the same standard deviation of 20 percent and have the same correlation to the market portfolio.If the expected return on B is 15 percent and that of C is 18 percent, then the investors would
A)prefer B to C.
B)prefer C to B.
C)reject both B and C.
D)The answer cannot be determined without knowing investors' risk preferences.
Q4) According to the CAPM, all investments plot along the security market line.
A)True
B)False
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Chapter 9: Risk and the Cost of Capital
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Q1) If a firm uses a project-specific cost of capital for evaluating all projects, which situation(s) will likely occur?
A)The firm will accept poor low-risk projects only.
B)The firm will reject good high-risk projects only.
C)The firm will correctly accept projects with average risk only.
D)The firm will accept poor low-risk projects, reject good high-risk projects, and correctly accept projects with average risk.
Q2) Generally, for CAPM calculations, the value to use for the risk-free interest rate is the
A)short-term U.S.Treasury bill rate.
B)long-term corporate bond rate.
C)medium-term corporate bond rate.
D)medium-term average rate on common stocks.
Q3) Which of the following types of projects generally have the highest total risk?
A)Speculative ventures
B)New products
C)Expansions of existing business
D)Cost improvements using known technology
Q4) Why do firms with large cash-flow betas also have high asset betas?
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Page 11
Chapter 10: Project Analysis
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Sample Questions
Q1) A project requires an initial investment of $150.Your research generates the following estimates of revenues and costs (there are no taxes): \(\begin{array} { | l | c | c | c | }
\hline & \text { Pessimistic } & \text { Mast Likely } & \text { Optimistic } \\ \hline \text { Revenues } & \mathbf { 3 0 } & \mathbf { 5 0 } & \mathbf { 6 5 } \\
\hline \text { Costs } & 20 & 20 & 15 \\ \hline \end{array}\) The cost of capital equals 10 percent.Assume that the cash flows occur in perpetuity.Conduct a sensitivity analysis of the project's NPV to variations in costs.(Answers appear in order: [Pessimistic, Most Likely, Optimistic].)
A)+50, -100, +400
B)-50, +300, +500
C)-100, +150, +350
D)+100, +150, +200
Q2) Explain the usefulness of decision trees in project analysis.
Q3) Firms with higher fixed costs tend to have higher degrees of operating leverage.
A)True
B)False
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Chapter 11: Investment Strategy and Economic Rents
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Sample Questions
Q1) A firm that expects long-run economic rents from a particular project is likely ignoring the effects of competition.
A)True
B)False
Q2) A new grocery store requires $50 million in initial investment.You estimate that the store will generate $5 million of after-tax cash flow each year for five years.At the end of five years, it can be sold for $60 million (ignore taxes).What is the NPV of the project at a discount rate of 10 percent?
A)$2.42 million
B)$10.82 million
C)$6.21 million
D)$2.82 million
Q3) In a highly competitive market, how will a firm most likely produce positive economic rents?
A)Devising a new marketing plan that will gain market share from competitors
B)Renegotiating financing terms with the firm's funding sources
C)Introducing new technology that creates manufacturing efficiencies
D)Purchasing one of its competitor firms
Q4) Why are economic rents important to a manager?
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Chapter 12: Agency Problems Compensation and Performance Measurement
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Q1) Agency problems in capital budgeting include reduced effort, perks, empire building, and entrenching investments.
A)True
B)False
Q2) Agency costs can be reduced by
A)monitoring managers' efforts only.
B)monitoring managers' efforts and managers' actions.
C)monitoring managers' efforts, monitoring managers' actions, and intervening when managers veer off-course.
D)intervening when managers veer off-course.
Q3) Survey data show that managers admit to managing earnings.
A)True
B)False
Q4) Top management generally use spreadsheet programs to analyze all capital budgeting projects before deciding on them.
A)True
B)False
Q5) Define the term economic value added (EVA).
Q6) Define the term economic rate of return.
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Chapter 13: Efficient Markets and Behavioral Finance
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Q1) Analysis of past monthly movements in IBM's stock price produces the following estimates: = 2.5 percent and = 1.6.If the market index subsequently rises by 12 percent in one month and IBM's stock price increases by 20 percent, what is the abnormal change in IBM's stock price?
A)+1.7 percent
B)+8 percent
C)-1.7 percent
D)+2.5 percent
Q2) List the three forms of market efficiency and explain the bases for them.
Q3) The following are anomalies countering the efficient market hypothesis except A)the small-firm effect.
B)the small-firm effectandthe earnings announcement puzzle.
C)the small-firm effect, the earnings announcement puzzle, and the new-issue puzzle. D)trading rules based on patterns.
Q4) State the important differences between investment decisions and financing decisions.
Q5) List the five lessons of market efficiency.
Q6) State the weak form of market efficiency and its implications.
Q7) State the semistrong form of market efficiency and its implications.
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Chapter 14: An Overview of Corporate Financing
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Q1) If a bond is junior or subordinated, it
A)has a higher priority status than specified creditors.
B)has been issued because the company is in default.
C)must give preference to senior creditors in the event of default.
D)is secondary to equity.
Q2) Debt that comes due after one year is called long-term debt.
A)True
B)False
Q3) Which of the following investments allows investors to own assets indirectly via shares that are part of a pool of other investors?
A)REIT only
B)REIT and royalty trust
C)REIT, royalty trust, and option
D)Option
Q4) When securities are sold by a firm, this is termed a(n):
A)primary issue.
B)secondary transaction.
C)OTC transaction.
D)open operation.
Q5) Indicate the major sources of finance available to corporations.
Page 16
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Chapter 15: How Corporations Issue Securities
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Q1) What costs in an IPO generally exceed all other costs?
A)Commissions
B)Issues fees
C)Spreads
D)Underpricing
Q2) Briefly explain the basic procedure for a new issue.
Q3) Most financial economists attribute the drop in the price of equity subsequent to the announcement of a new issue to
A)an increase in the supply of shares.
B)information effect.
C)an increase in the supply of shares and information effect.
D)neither an increase in the supply of shares nor information effect.
Q4) Briefly explain the role of underwriters in the issuance of securities.
Q5) Mezzanine financing must come in the third stage.
A)True
B)False
Q6) Discuss the advantages of shelf registration.
Q7) The first public issue by a firm is known as a seasoned equity offering.
A)True
B)False
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Chapter 16: Payout Policy
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Q1) Which of the following lists events in chronological order from earliest to latest?
A)Record date, declaration date, ex-dividend date
B)Declaration date, record date, ex-dividend date
C)Declaration date, ex-dividend date, record date
D)Record date, ex-dividend date, declaration date
Q2) What information does a share repurchase convey to investors?
Q3) Briefly describe the middle-of-the-roaders' position on dividend policy.
Q4) Adoption of Rule 10b-18 by the SEC has protected firms from being prosecuted for manipulating their share price through share repurchases.
A)True
B)False
Q5) Briefly explain how the imputation tax system works in Australia by providing an example.Assume a 30 percent corporate tax rate and a 15 percent marginal tax rate for the investor.
Q6) Dividend payments are used to change the firm's capital structure by replacing equity with debt.
A)True
B)False
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Chapter 17: Does Debt Policy Matter
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Q1) The firm's asset beta is usually higher than the firm's equity beta.
A)True
B)False
Q2) The M&M Company is financed by $4 million (market value) in debt and $6 million (market value) in equity.The cost of debt is 5 percent and the cost of equity is 10 percent.Calculate the weighted average cost of capital.(Assume no taxes.)
A)10 percent
B)15 percent
C)8 percent
D)7 percent
Q3) An investor can create the effect of leverage on his/her account by
A)buying equity of a levered firm.
B)investing in risk-free debt like T-bills.
C)borrowing on his/her own account.
D)buying equity of a levered firm and borrowing on his/her own account.
Q4) Generally, which of the following is true? (b = beta)
A)b<sub>D</sub> < b<sub>A</sub> < b<sub>E</sub>
B)b<sub>E</sub> < b<sub>A</sub> < b<sub>D</sub>
C)b<sub>A</sub> < b<sub>E</sub> < b<sub>D</sub>
D)b<sub>A</sub> < b<sub>D</sub> < b<sub>E</sub>
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Chapter 18: How Much Should a Corporation Borrow
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Q1) The pecking order theory implies that firms prefer internal to external financing.
A)True
B)False
Q2) According to the trade-off theory, more profitable firms should have more debt and thus higher debt ratios on average.
A)True
B)False
Q3) Compared to a firm with unlimited liability, the limited liability feature of common equity results in a
A)lower present value of the interest tax shield.
B)higher value to equityholders.
C)leveraged buyout mechanism.
D)higher value to debtholders.
Q4) Briefly explain the trade-off theory of capital structure.
Q5) Financial distress always results in bankruptcy.
A)True
B)False
Q6) Briefly discuss bankruptcy costs.
Q7) Explain the pecking order theory of capital structure.
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Chapter 19: Financing and Valuation
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Q1) Generally, the imposition of government restrictions increases the APV of a project.
A)True
B)False
Q2) What effect will subsidized loans have?
A)They will increase the APV of a project.
B)They will decrease the APV of a project.
C)They will not affect APV.
D)None of the options.
Q3) A firm has debt beta of 0.2 and an asset beta of 1.9.If the debt-equity ratio is 75 percent, what is the levered equity beta?
A)1.90
B)3.18
C)2.42
D)2.63
Q4) What discount rate should be used for calculating the present value of safe, nominal cash flows?
Q5) What are some of the additional factors that have to be considered when analyzing an international project? Briefly explain.
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Chapter 20: Understanding Options
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Q1) Which of the following investors would be happy to see the stock price rise sharply?
A)An investor who owns the stock and a put option and an investor who has sold a put option and bought a call option
B)An investor who owns the stock and has sold a call option and an investor who has sold a call option
C)An investor who owns the stock and has sold a call option
D)An investor who has sold a call option
Q2) Consider the following data for a European option: Expiration = 6 months; Stock price = $80; Exercise price = $75; Call option price = $12; Risk-free rate = 5 percent per year.Using put-call parity, calculate the price of a put option having the same exercise price and expiration date.
A)$3.07
B)$5.19
C)$11.43
D)$3.42
Q3) Briefly explain what is meant by put-call parity.
Q4) Define the term option.
Q5) Define the term call option.
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Chapter 21: Valuing Options
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Q1) Suppose Carol's stock price is currently $20.In the next six months it will either fall to $10 or rise to $40.What is the current value of a six-month call option with an exercise price of $15? The six-month risk-free interest rate is 5 percent per six-month period.(Use the replicating portfolio method.)
A)$8.73
B)$10.28
C)$16.88
D)$13.33
Q2) For lookback options,
A)the option holder must decide before maturity whether the option is a call or a put.
B)the option holder chooses as the exercise price any of the asset prices that occurred before the final date.
C)the option payoff is zero if the asset price is on the wrong side of the exercise price and otherwise is a fixed sum.
D)the exercise price is equal to the average of the asset's price during the life of the option.
Q3) Briefly explain put-call parity.
Q4) Briefly explain what is meant by risk-neutral probability.
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Chapter 22: Real Options
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Q1) Temporary abandonment is a very simple call option that allows the firm to stop a project temporarily until conditions improve.
A)True
B)False
Q2) How does an abandonment option increase the value of a project?
Q3) The first step in a real options analysis is to value the underlying asset using the discounted cash flow (DCF) method.
A)True
B)False
Q4) Briefly discuss three practical problems associated with real options analysis.
Q5) Briefly explain how temporary abandonment can be thought of as a complex option.
Q6) How does an option to wait or postpone a project add value to the project?
Q7) Which of the following conditions might lead a financial manager to decide to expedite a positive net present value investment project?
A)The risk-free interest rate increases.
B)Uncertainty about future project value increases.
C)The cash inflows generated by the project are lower than previously thought.
D)Investment required for the project is expected to increase in the near future.
Page 24
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Chapter 23: Credit Risk and the Value of Corporate Debt
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Q1) If the discount rate on a bond is 7 percent and the expected payment in year 1 is $952.50, calculate the price of the bond.
A)$1,050
B)$985
C)$890
D)$935
Q2) The U.S.federal government has guaranteed loans to the following industries: A)housing.
B)housing and airlines.
C)housing, airlines, ship owners and shipyards, and steel companies.
D)housing, airlines, ship owners and shipyards, steel companies, and oil and gas companies.
Q3) It is extremely rare for a corporate bond to have a higher expected yield than a government bond.
A)True
B)False
Q4) Briefly describe bond ratings.
Q5) What is a major drawback to value-at-risk calculations?
Q6) Define the term credit risk.
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Q7) Briefly explain how the option pricing model can be used for pricing risky debt.
Chapter 24: The Many Different Kinds of Debt
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Q1) The bonds that are sold to local investors issued by a firm from another country are called
A)private placement.
B)foreign bonds.
C)junk bonds.
D)investment-grade bonds.
Q2) Explain why firms issue convertible debt.
Q3) Discuss the valuation of a convertible bond.
Q4) Firms often bundle up a group of assets and then sell the cash flows from these assets in the form of securities.They are called A)debentures.
B)subordinated issues.
C)asset-backed securities.
D)mortgage bonds.
Q5) Project finance requires a capital investment that can be clearly separated from the parent and offers tangible security to lenders.
A)True
B)False
Q6) Briefly explain the provisions of a typical bond indenture.
Page 26
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Chapter 25: Leasing
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Q1) Which of the following is not a financial lease?
A)A direct lease
B)An operating lease
C)A sale-and-leaseback
D)All of the options are financial leases.
Q2) One of the sensible reasons for leasing is that short-term leases are convenient.
A)True
B)False
Q3) Briefly describe a sale and lease-back arrangement.
Q4) Assume the initial financing provided by a lease is $500,000 and the present value of the cash outflow attributable to the lease is $525,000.Then the net value of the lease is
A)$25,000.
B)-$25,000.
C)$1,025,000.
D)$500,000.
Q5) The IRS can modify the tax code to alter the attractiveness of leases.
A)True B)False
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Chapter 26: Managing Risk
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Q1) Your firm operates an oil refinery and is therefore naturally short on crude oil.You buy offsetting oil market futures to hedge your natural position.Shortly thereafter, local pipelines were damaged in a recent earthquake, leaving you with the highest local crude oil prices in decades.Simultaneously, unexpectedly high recent production from Mexico, Brazil, and the Baltic Sea has driven down the global price of crude and your financial hedge has lost you millions.You have fallen victim to what kind of risk?
A)Counterparty risk
B)Basis risk
C)Market risk
D)Political risk
Q2) Are companies that purchase or sell derivative contracts necessarily speculating?
Q3) The spot price for home heating oil is $0.55 per gallon.The futures price for one year from now is $0.57.If the risk-free rate is 6 percent per year, what is the net convenience yield?
A)0.0411
B)0.0364
C)0.0236
D)0.0440
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Chapter 27: Managing Risk
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Q1) Briefly describe what happens in foreign exchange markets.
Q2) Briefly explain the term economic exposure.
Q3) An Australian firm is evaluating a proposal to build a new plant in the United States. The expected cash flows in $US (in millions) are as follows: Year 0, -100; Year 1, 40; Year 2, 50; Year 3, 65. The discount rate in $A is 10 percent, while the discount rate in $US is 12 percent and the spot rate is $US0.60/$A. Calculate the NPV of the project in $US.
A)+36.40
B)-21.84
C)+13.10
D)+21.84
Q4) The Big Mac exchange rate matches official exchange rate quotes for different currencies.
A)True
B)False
Q5) Briefly explain why a currency forecast is not necessarily required when a multinational firm estimates the cash flows from an international project?
Q6) What is wrong with the following news report? "Today the dollar ended the trading session stronger."
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Chapter 28: Financial Analysis
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Q1) Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200.Calculate the quick ratio.
A)1
B)2
C)1.2
D)0.4
Q2) Leverage ratios indicate how heavily the company is in debt. A)True
B)False
Q3) Net working capital (NWC) is calculated as
A)total assets - total liabilities.
B)current assets + current liabilities.
C)current assets - current liabilities.
D)current liabilities - current assets.
Q4) Net working capital equals total assets minus total liabilities. A)True B)False
Q5) What are the three basic financial statements?
Q6) Discuss the DuPont system.
Q7) What are the common ratios used to measure the liquidity of a firm?
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Chapter 29: Financial Planning
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Q1) Arrange the following assets in decreasing order of liquidity (i.e., the most liquid should be listed first).
A)Equipment and machinery, inventories, accounts receivable, and marketable securities
B)Inventories, accounts receivable, marketable securities, and equipment and machinery
C)Accounts receivable, marketable securities, inventories, and equipment and machinery
D)Marketable securities, accounts receivable, inventories, and equipment and machinery
Q2) Cash inflow, in cash budgeting, comes mainly from
A)collections on accounts receivable.
B)short-term debt.
C)issue of securities.
D)sale of seasoned equity.
Q3) The firm's internal growth rate is defined as
A)retained earnings/net income.
B)retained earnings/net assets.
C)retained earnings/total assets.
D)net income/net assets.
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Chapter 30: Working Capital Management
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Q1) Bankers' acceptances are used in overseas trade.
A)True
B)False
Q2) A commercial draft can be a(n)
A)sight draft.
B)time draft.
C)overdraft.
D)sight draft and time draft.
Q3) A factor buys a firm's receivables, and then the firm's customer makes payments directly to the factor.
A)True
B)False
Q4) If goods are sold on an open account, the customer is asked to sign an IOU.
A)True
B)False
Q5) What is the effective annual cost of not taking a discount under terms 3/30, net 60?
Q6) A commercial draft is simply an order to pay.
A)True
B)False
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Chapter 31: Mergers
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Q1) Suppose that the market price of Company A is $50 per share and that of Company B is $20.If A offers half a share of common stock for each share of B, what is the percentage increase in wealth for B's shareholders? (Assume that the offer has no effect on the value of A?s shares.)
A)-20 percent
B)+25 percent
C)-25 percent
D)+20 percent
Q2) The "Bootstrap Game" may mislead investors regarding the prospects for a merged firm.How are investors potentially misled?
A)The firm's management generates cost savings via temporary layoffs of highly paid executives.
B)The firm gains intellectual property in a merger but then divests the operations of the target firm.
C)The firm's management changes the name of an acquired firm to feign diversification.
D)The firm acquires a target with low a P/E ratio, which generates short-term earnings per share growth without any true economic advantage.
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Chapter 32: Corporate Restructuring
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Q1) Briefly describe the main features of the Bankruptcy Reform Act of 1978.
Q2) The gains from LBOs typically derive from
A)tax savings because of high debt servicing.
B)loss in the value to bondholders.
C)improved performance because of incentives to managers and employees.
D)All of these options are correct.
Q3) Private-equity investment funds are organized as
A)C corporations.
B)sole proprietorships.
C)partnerships.
D)nonprofit corporations.
Q4) Leveraged buyouts (LBOs) almost always involve which of the following?
A)A large part of the purchase price is financed by debt.
B)Most of the issued debt is below investment grade (i.e., junk).
C)A large part of the purchase price is financed by debt and most of the issued debt is below investment grade (i.e., junk).
D)A large part of the purchase price is financed by debt, most of the issued debt is below investment grade (i.e., junk), and the firm goes private and its shares are no longer traded on the open market.
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Chapter 33: Governance and Corporate Control Around the World
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Q1) In Japan, a keiretsu is a network of companies usually organized around a major bank.
A)True
B)False
Q2) In which country do financial markets play the most important role as sources of corporate funding?
A)The United States
B)Japan
C)Germany
D)Korea
Q3) In which area do households allocate most of their portfolio savings to banks?
A)The euro area
B)The UK
C)The United States
D)Japan
Q4) Firms raise funds from financial markets and from financial institutions.
A)True
B)False
Page 35
Q5) Briefly explain the term pyramid in the context of corporate control.
Q6) Briefly explain the term keiretsu.
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