Fundamentals of Corporate Finance, 10e (Brealey) Chapter 1 Goals and Governance of the Corporation 1) The liability of sole proprietors is limited to the amount of their investment in the company. Answer: FALSE Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Communication Accessibility: Keyboard Navigation 2) General partners have limited personal liability for business debts in a limited partnership. Answer: FALSE Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Communication Accessibility: Keyboard Navigation 3) The separation of ownership and management is one distinctive feature of corporations. Answer: TRUE Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
1
4) A major disadvantage of partnerships is that they have double taxation of profits. Answer: FALSE Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Communication Accessibility: Keyboard Navigation 5) Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce. Answer: TRUE Difficulty: 1 Easy Topic: Financial management decisions Learning Objective: 01-02 Distinguish between real and financial assets. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 6) Capital budgeting decisions are used to determine how to raise the cash necessary for investments. Answer: FALSE Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 7) A successful investment is one that increases the value of the firm. Answer: TRUE Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
2
8) Facebook's decision to spend $700 million to acquire Instagram is an investment decision. Answer: TRUE Difficulty: 1 Easy Topic: Financial management decisions Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 9) Boards of directors are generally appointed by the firm's senior officers. Answer: FALSE Difficulty: 1 Easy Topic: Management organization and roles Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 10) Financial analysts are involved in monitoring the risk associated with investment projects and financing decisions. Answer: TRUE Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 11) The primary goal of any company should be to maximize current period profits. Answer: FALSE Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
3
12) Maximizing profits is the same as maximizing the value of the firm. Answer: FALSE Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation. Bloom's: Analyze AACSB: Reflective Thinking Accessibility: Keyboard Navigation 13) The Dodd-Frank financial reform law in 2010 granted shareholders a binding vote on executive compensation. Answer: FALSE Difficulty: 1 Easy Topic: Ethics, governance, and regulation Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation 14) Sole proprietorships face the same agency problems as those associated with corporations. Answer: FALSE Difficulty: 1 Easy Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation 15) Real assets can be intangible assets. Answer: TRUE Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-02 Distinguish between real and financial assets. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
4
16) Making good investment and financing decisions is the chief task of the financial manager. Answer: TRUE Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 17) If a project's value is less than its required investment, then the project is financially attractive. Answer: FALSE Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 18) GlaxoSmithKline's spending of $3.6 billion on research and development of new drugs is a capital budgeting decision but not a financing decision. Answer: TRUE Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 19) Deltas's issuance of a $1.0 billion bond is a financing decision. Answer: TRUE Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation
5
20) An IOU ("I owe you") from your brother-in-law is a financial asset. Answer: TRUE Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-02 Distinguish between real and financial assets. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21) The separation of ownership and management is one distinctive feature of both corporations and sole proprietors. Answer: FALSE Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 22) Shareholders welcome higher short-term profits even when they damage long-term profits. Answer: FALSE Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 23) A well-designed compensation package can help a firm achieve its goal of maximizing market value. Answer: TRUE Difficulty: 2 Medium Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Apply AACSB: Ethics Accessibility: Keyboard Navigation
6
24) While control of large public companies in the United States is exercised through the board of directors and pressure from the stock market, in many other countries the stock market is less important and control shifts to major stockholders, typically banks and other companies. Answer: TRUE Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Remember AACSB: Diversity Accessibility: Keyboard Navigation 25) Investors are responsible for deciding whether to reinvest in the firm's operations or take the profits as a distribution. Answer: FALSE Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 26) Established firms can create value by developing long-term relationships and maintaining a good reputation. Answer: TRUE Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation
7
27) Which one of these is a disadvantage of the corporate form of business? A) Access to capital B) Unlimited personal liability for owners C) Limited firm life D) Legal requirements Answer: D Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 28) Which one of the following gives a corporation its permanence? A) Multiple owners B) Limited liability C) Corporation taxation D) Separation of ownership and control Answer: D Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 29) In a partnership form of organization, income tax liability, if any, is incurred by: A) the partnership itself. B) the partners individually. C) both the partnership and the partners. D) neither the partnership nor the partners. Answer: B Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation
8
30) Which one of the following would correctly differentiate general partners from limited partners in a limited partnership? A) General partners have more job experience. B) General partners have an ownership interest. C) General partners are subject to double taxation. D) General partners have unlimited personal liability. Answer: D Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 31) Which form of organization provides limited liability for the firm but yet allows the professionals working within that firm to be sued personally? A) Limited liability partnership B) Limited liability company C) Sole proprietorship D) Professional corporation Answer: D Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
9
32) Which of the following organizations is least likely to use a professional corporation (PC) structure? A) Accountants B) Doctors C) Lawyers D) Manufacturers Answer: D Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 33) Which of the following is least likely to be discussed in the articles of incorporation? A) How the firm is to be financed B) The purpose of the business C) The price range of the shares of stock D) How the board of directors is to be structured Answer: C Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 34) When a corporation fails, the maximum that can be lost by an individual shareholder is: A) the amount of their initial investment. B) the amount of their share of the profits. C) their proportionate share required to pay the corporation's debts. D) the amount of their personal wealth. Answer: A Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
10
35) Which of the following is a disadvantage to incorporating a business? A) Easier access to financial markets B) Limited liability C) Becoming a permanent legal entity D) Profits taxed at the corporate level and the shareholder level Answer: D Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 36) Unlimited liability is faced by the owners of: A) corporations. B) partnerships and corporations. C) sole proprietorships and general partnerships. D) all forms of business organization. Answer: C Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 37) Which one of these statements correctly applies to a limited partnership? A) All partners share the daily management duties. B) All partners enjoy limited personal liability. C) General partners have unlimited personal liability. D) Taxes are imposed at both the firm and the personal level on profits earned. Answer: C Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
11
38) In the case of a limited liability partnership, A) only some of partners B) only the managing partner C) all of the partners D) none of the partners
has/have limited liability.
Answer: C Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 39) A board of directors is elected as a representative of the corporation's: A) top management. B) stakeholders. C) shareholders. D) customers. Answer: C Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 40) The legal "life" of a corporation is: A) coincidental with that of its CEO. B) equal to the life of its board of directors. C) permanent, as long as shareholders don't change. D) permanent, regardless of current ownership. Answer: D Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
12
41) In which type of organizational structure is the agency problem least likely to exist? A) Limited Liability Corporation B) Partnership C) Professional Corporation D) Sole Proprietorship Answer: D Difficulty: 2 Medium Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation 42) When the management of a business is conducted by individuals other than the owners, the business is most likely to be a: A) corporation. B) sole proprietorship. C) partnership. D) general partner. Answer: A Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 43) "Double taxation" refers to: A) all partners paying equal taxes on profits. B) corporations paying taxes on both dividends and retained earnings. C) paying taxes on profits at the corporate level and dividends at the personal level. D) the fact that marginal tax rates are doubled for corporations. Answer: C Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation
13
44) A corporation is considered to be closely held when: A) only a few shareholders exist. B) the market value of the shares is stable. C) it operates in a small geographic area. D) management also serves as the board of directors. Answer: A Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 45) Which of the following is NOT a requirement of the Sarbanes-Oxley Act of 2002? A) The compensation committee must be appointed by an outside director B) The CEO and CFO must sign off personally on corporate accounting results C) The board of directors must meet in executive session D) More board of directors members are independent Answer: A Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 46) Corporations are referred to as public companies when their: A) shareholders have no tax liability. B) shares are held by the federal or state government. C) stock is publicly traded. D) products or services are available to the public. Answer: C Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation
14
47) A common problem for closely held corporations is: A) the lack of access to substantial amounts of capital. B) the restriction that shareholders receive only one vote each. C) the separation of ownership and management. D) an abundance of agency problems. Answer: A Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 48) Corporate managers are expected to make corporate decisions that are in the best interest of: A) top corporate management. B) the corporation's board of directors. C) the corporation's shareholders. D) all corporate employees. Answer: C Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 49) Which one of the following is a financial asset? A) A corporate bond B) A machine C) A patent D) A factory Answer: A Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-02 Distinguish between real and financial assets. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation
15
50) Which of the following statements best distinguishes the difference between real and financial assets? A) Real assets have less value than financial assets. B) Real assets are tangible; financial assets are not. C) Financial assets represent claims to income that is generated by real assets. D) Financial assets appreciate in value; real assets depreciate in value. Answer: C Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-02 Distinguish between real and financial assets. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 51) Which one of the following is a real asset? A) A patent B) A personal IOU C) A checking account balance D) A share of stock Answer: A Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-02 Distinguish between real and financial assets. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 52) Which one of these is not considered to be a security? A) Shares of GE stock B) A bond traded in the financial market C) A mortgage loan issued and held by a bank D) A convertible bond issued to the public Answer: C Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-02 Distinguish between real and financial assets. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation
16
53) Corporations that issue financial securities such as stock or debt obligations to the public do so primarily to: A) increase sales. B) become profitable. C) increase their access to funds. D) avoid double taxation of their profits. Answer: C Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 54) Which one of the following would be considered a capital budgeting decision? A) Planning to issue common stock rather than issuing preferred stock B) Deciding to expand into a new line of products, at a cost of $5 million C) Repurchasing shares of common stock D) Issuing debt in the form of long-term bonds Answer: B Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 55) Which one of these is a capital budgeting decision? A) Deciding between issuing stock or debt securities B) Deciding whether or not the firm should go public C) Deciding if the firm should repurchase some of its outstanding shares D) Deciding whether to buy a new machine or repair the old machine Answer: D Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation
17
56) The best criterion for success in a capital budgeting decision would be to: A) minimize the cost of the investment. B) maximize the number of capital budgeting projects. C) maximize the value added to the firm. D) finance all capital budgeting projects with debt. Answer: C Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 57) The overall goal of capital budgeting projects should be to: A) decrease the firm's reliance on debt. B) increase the firm's sales. C) increase the firm's outstanding shares of stock. D) increase the wealth of the firm's shareholders. Answer: D Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 58) An example of a firm's financing decision would be: A) acquiring a competitive firm. B) determining how much to pay for a specific asset. C) issuing 10-year versus 20-year bonds. D) deciding whether or not to increase the price of its products. Answer: C Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation
18
59) Which of the following is a capital budgeting decision? A) Should the firm borrow money from a bank or sell bonds? B) Should the firm shut down an unprofitable factory? C) Should the firm buy or lease a new machine that it is committed to acquiring? D) Should the firm issue preferred stock or common stock? Answer: B Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 60) Which of these duties are responsibilities of the corporate treasurer? A) Financial statements and taxes B) Cash management and tax reporting C) Cash management and banking relationships D) Raising capital and financial statements Answer: C Difficulty: 1 Easy Topic: Management organization and roles Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 61) The term "capital structure" refers to: A) the mix of long-term debt and equity financing. B) the length of time needed to repay debt. C) whether or not the firm invests in capital budgeting projects. D) the types of assets a firm acquires. Answer: A Difficulty: 1 Easy Topic: Capital structure Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
19
62) Firms can alter their capital structure by: A) not accepting any new capital budgeting projects. B) investing in intangible assets. C) issuing stock to repay debt. D) becoming a limited liability company. Answer: C Difficulty: 1 Easy Topic: Capital structure Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 63) Which one of these statements is correct? A) Financial managers have a fiduciary duty to stockholders. B) Financial managers are concerned only with funds that flow to investors. C) The chief financial officer generally reports directly to the corporate treasurer. D) The corporate controller is primarily responsible for overseeing a firm's cash functions. Answer: A Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 64) A firm decides to pay for a small investment project through a $1 million increase in shortterm bank loans. This is best described as an example of a(n): A) financing decision. B) investment decision. C) capital budgeting decision. D) capital expenditure decision. Answer: A Difficulty: 1 Easy Topic: Financial management decisions Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation
20
65) Which of the following is NOT a claim on the assets of a company? A) Bond B) Patent C) Promissory Note D) Stock Answer: B Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-02 Distinguish between real and financial assets. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 66) The short-term decisions of financial managers are comprised of: A) capital structure decisions only. B) investment decisions only. C) financing decisions only. D) both investment and financing decisions. Answer: D Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 67) A block holder is commonly defined as an investor who: A) owns 5 percent or more of a firm's outstanding shares. B) invests in more than one firm within the same industry. C) is another corporation. D) is also one of the firm's managers or directors. Answer: A Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation
21
68) Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm? A) Treasurer B) Controller C) Chief Operating Officer D) Board of directors Answer: A Difficulty: 1 Easy Topic: Management organization and roles Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 69) In a large corporation, preparation of the firm's financial statements would most likely be conducted by the: A) treasurer. B) controller. C) chief financial officer. D) financial manager. Answer: B Difficulty: 1 Easy Topic: Management organization and roles Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 70) In a firm having both a treasurer and a controller, which of the following would most likely be handled by the controller? A) Internal auditing B) Credit management C) Banking relationships D) Insurance Answer: A Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation
22
71) Which one of the following statements more accurately describes the controller than the treasurer? A) Reports directly to the chief executive officer B) Monitors capital expenditures to make sure that they are not misappropriated C) Responsible for investing the firm's spare cash D) Responsible for arranging any issue of common stock Answer: B Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 72) A chief financial officer would typically: A) report to the treasurer, but supervise the controller. B) report to the controller, but supervise the treasurer. C) report to both the treasurer and controller. D) supervise both the treasurer and controller. Answer: D Difficulty: 1 Easy Topic: Management organization and roles Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 73) Which one of these determines the minimum acceptable rate of return on a capital investment? A) The alternative investment opportunities available to investors B) The profit margin of the existing firm C) The rate of return on the firm's outstanding shares D) The rate of return on risk-free debt securities Answer: A Difficulty: 1 Easy Topic: Introduction to corporate finance Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
23
74) A financial analyst in a corporation may be involved with all of the following EXCEPT: A) analyzing a new investment project. B) monitoring risk. C) managing investment of the company's cash. D) purchasing the firm's plant and equipment. Answer: D Difficulty: 1 Easy Topic: Management organization and roles Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 75) Investment banks like Morgan Stanley or Goldman Sachs: A) collect deposits and relend the cash to corporations and individuals. B) help companies sell their securities to investors. C) design and sell insurance policies for businesses. D) lend to corporations and investors in commercial real estate. Answer: B Difficulty: 1 Easy Topic: Introduction to corporate finance Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 76) The primary goal of corporate management should be to: A) maximize the number of shareholders. B) maximize the firm's profits. C) minimize the firm's costs. D) maximize the shareholders' wealth. Answer: D Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
24
77) A corporate board of directors should provide support for the top management team: A) under all circumstances. B) in all decisions related to cash dividends. C) only when the board approves of management's actions. D) if shareholders are pleased with the firm's performance. Answer: C Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-07 Explain why unethical behavior does not maximize market value. Bloom's: Apply AACSB: Ethics Accessibility: Keyboard Navigation 78) Which of the following appears to be the most appropriate goal for corporate management? A) Maximizing market value of the company's shares B) Maximizing the company's market share C) Maximizing the current profits of the company D) Minimizing the company's liabilities Answer: A Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 79) A firm with spare cash A) should always reinvest it in new equipment. B) should pay it out to shareholders unless the firm can earn a higher rate of return on the cash than the shareholders can earn by investing in the capital market. C) should invest it in the safest projects available. D) Should always invest it in U.S. equities. Answer: B Difficulty: 3 Hard Topic: Goal of financial management Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
25
80) Financial managers should only accept investment projects that: A) increase the current profits of the firm. B) can increase the firm's market share. C) earn a higher rate of return than the firm currently earns on its existing projects. D) earn a higher rate of return than shareholders can get by investing on their own. Answer: D Difficulty: 3 Hard Topic: Goal of financial management Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 81) Agency problems can least be controlled by: A) establishing good internal controls and procedures. B) designing compensation packages that align manager's goals with those of the shareholders. C) good systems of corporate governance. D) electing senior managers to the board of directors. Answer: D Difficulty: 2 Medium Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation 82) Which one of these best defines the objective of a well-functioning financial market? A) Establishing accurate security prices B) Creating higher security prices C) Eliminating short-selling profits D) Increasing shareholder value by any means possible Answer: A Difficulty: 1 Easy Topic: Introduction to corporate finance Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation
26
83) Corporate raiders will be looked upon most favorably if they: A) divide up large profitable entities. B) take actions that increase current shareholder wealth. C) create value for themselves through their actions. D) change the capital structure of a firm by increasing its debt. Answer: B Difficulty: 3 Hard Topic: Goal of financial management Learning Objective: 01-07 Explain why unethical behavior does not maximize market value. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation 84) Ethical decision making by management has a payoff for shareholders in terms of: A) improved capital structure. B) enhanced firm reputation value. C) increased managerial benefits. D) higher current dividend payments. Answer: B Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-07 Explain why unethical behavior does not maximize market value. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation 85) Ethical decision making in business: A) reduces the firm's profits. B) requires adherence to implied rules as well as written rules. C) is not in the best interests of shareholders. D) is less important than good capital budgeting decisions. Answer: B Difficulty: 3 Hard Topic: Ethics, governance, and regulation Learning Objective: 01-07 Explain why unethical behavior does not maximize market value. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation
27
86) A corporate director: A) is selected by and can be removed by management. B) can be voted out of power by the shareholders. C) has a lifetime appointment to the board. D) is selected by a vote of all corporate stakeholders. Answer: B Difficulty: 2 Medium Topic: Management organization and roles Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 87) In which of the following organizations would agency problems be least likely to occur? A) A sole proprietorship B) A partnership C) A corporation D) A closely held corporation Answer: A Difficulty: 1 Easy Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation 88) Sole proprietorships resolve the issue of agency problems primarily by: A) avoiding excessive expense accounts. B) discharging those who violate the rules. C) allowing owners to share the cost of their actions with others. D) forcing owners to bear the full cost of their actions. Answer: D Difficulty: 2 Medium Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation
28
89) Which one of the following can best be characterized as an agency problem? A) differing opinions among directors as to the merits of paying a higher dividend. B) differing incentives between managers and owners. C) persistently late delivery times by a major supplier. D) Geological problems in the company's new gold mine. Answer: B Difficulty: 2 Medium Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Communication Accessibility: Keyboard Navigation 90) Which of the following is least likely to represent an agency problem? A) Lavish spending on expense accounts B) Plush remodelling of the executive suite C) Excessive avoidance of taxes D) Executive incentive compensation plans Answer: D Difficulty: 3 Hard Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Apply AACSB: Ethics Accessibility: Keyboard Navigation 91) When managers' compensation plans are tied in a meaningful manner to the value of the firm, agency problems: A) can be reduced. B) will be created. C) are shifted to other stakeholders. D) are eliminated entirely from the firm. Answer: A Difficulty: 2 Medium Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation
29
92) A firm's reputation: A) has no value. B) is an important firm asset. C) is irrelevant to shareholders. D) can be easily restored once damaged. Answer: B Difficulty: 2 Medium Topic: Goal of financial management Learning Objective: 01-07 Explain why unethical behavior does not maximize market value. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation 93) Which of the following groups is least likely to be considered a stakeholder of the firm? A) Government B) Customers C) Competitors D) Employees Answer: C Difficulty: 1 Easy Topic: Forms of business organization Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 94) A manager's compensation plan that offers financial incentives for increases in quarterly profitability may create agency problems in that: A) the managers are not motivated by personal gain. B) the board of directors may claim the credit. C) short-term, not long-term profits become the focus. D) investors desire stable profits. Answer: C Difficulty: 3 Hard Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
30
95) One continuing problem with managerial incentive compensation plans is that: A) the plans increase agency problems. B) managers prefer guaranteed salaries. C) their effectiveness is difficult to evaluate. D) the plans do not reward shareholders. Answer: C Difficulty: 2 Medium Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 96) Which one of the following forms of compensation is most apt to align the interests of managers and shareholders? A) A fixed salary B) A salary that is linked to current company profits C) A salary that is paid partly in the form of the company's shares D) A salary that is linked to the company's market share Answer: C Difficulty: 2 Medium Topic: Agency costs and problems Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 97) Which of the following is a real asset? A) A patent B) A share of stock issued by Bank of New York C) An IOU ("I owe you") from your brother-in-law D) A mortgage loan taken out to help pay for a new home Answer: A Difficulty: 2 Medium Topic: Financial management decisions Learning Objective: 01-02 Distinguish between real and financial assets. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation
31
98) Which one of these statements is correct? A) A dollar received next year has the same value as a dollar received today. B) Risky cash flows are more valuable than certain cash flows. C) Smart investment decisions create more value than smart financing decisions. D) Corporate governance is irrelevant. Answer: C Difficulty: 2 Medium Topic: Introduction to corporate finance Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 99) Short selling involves selling a security: A) you do not own. B) that you have owned for less than one year. C) at a price below current market value. D) for less than you originally paid to purchase it. Answer: A Difficulty: 1 Easy Topic: Introduction to corporate finance Learning Objective: 01-07 Explain why unethical behavior does not maximize market value. Bloom's: Understand AACSB: Ethics Accessibility: Keyboard Navigation
32
Fundamentals of Corporate Finance, 10e (Brealey) Chapter 2 Financial Markets and Institutions 1) Only small companies can go through financial markets to obtain financing. Answer: FALSE Difficulty: 1 Easy Topic: Financial institution functions Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 2) The reinvestment of cash back into the firm's operations is an example of a flow of savings to investment. Answer: TRUE Difficulty: 1 Easy Topic: Financial institution functions Learning Objective: 02-01 Understand how financial markets and institutions channel savings to corporate investment. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 3) Smaller businesses are especially dependent upon internally generated funds. Answer: TRUE Difficulty: 2 Medium Topic: Financial institution functions Learning Objective: 02-01 Understand how financial markets and institutions channel savings to corporate investment. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
1
4) An individual can save and invest in a corporation by lending money to it or by purchasing additional shares. Answer: TRUE Difficulty: 1 Easy Topic: Financial institution functions Learning Objective: 02-01 Understand how financial markets and institutions channel savings to corporate investment. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 5) Previously issued securities are traded among investors in the secondary markets. Answer: TRUE Difficulty: 1 Easy Topic: Primary and secondary markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 6) Only the IPOs for large corporations are sold in primary markets. Answer: FALSE Difficulty: 2 Medium Topic: Initial public offerings Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 7) Hedge fund managers, unlike mutual fund managers, do not receive fund-performance-related fees. Answer: FALSE Difficulty: 2 Medium Topic: Types of financial institutions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
2
8) The markets for long-term debt and equity are called capital markets. Answer: TRUE Difficulty: 1 Easy Topic: Capital markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 9) The stocks of major corporations trade in many markets throughout the world on a continuous or near-continuous basis. Answer: TRUE Difficulty: 1 Easy Topic: Stock trading Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 10) The market for derivatives is also a source of financing for corporations. Answer: FALSE Difficulty: 2 Medium Topic: Derivatives and other securities Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 11) During the Financial Crisis of 2007-2009, the U.S. government bailed out all firms in danger of failing. Answer: FALSE Difficulty: 2 Medium Topic: Financial distress Learning Objective: 02-04 Understand the main events behind the financial crisis of 2007-2009 and the subsequent eurozone crisis. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
3
12) In the United States, banks are the most important source of long-term financing for corporations. Answer: FALSE Difficulty: 2 Medium Topic: Financial institution functions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 13) A financial intermediary invests in financial assets rather than real assets. Answer: TRUE Difficulty: 1 Easy Topic: Financial institutions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 14) Households hold directly three quarters of U.S. corporate equities. Answer: FALSE Difficulty: 1 Easy Topic: Raising capital Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 15) The key to the banks' ability to make illiquid loans is their ability to pool liquid deposits from thousands of depositors. Answer: TRUE Difficulty: 2 Medium Topic: Financial institution functions Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
4
16) From June 2001 to June 2006, house prices in the United States rose sharply. Answer: TRUE Difficulty: 2 Medium Topic: Financial distress Learning Objective: 02-04 Understand the main events behind the financial crisis of 2007-2009 and the subsequent eurozone crisis. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 17) For corporate bonds, the higher the credit quality of an issuer, the higher the interest rate. Answer: FALSE Difficulty: 2 Medium Topic: Bond ratings and credit risk Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 18) The cost of capital is the interest rate paid on a loan from a bank or some other financial institution. Answer: FALSE Difficulty: 2 Medium Topic: Cost of capital-general Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 19) Like public companies, private companies can also use their stock price as a measure of performance. Answer: FALSE Difficulty: 2 Medium Topic: Stock market prices and reporting Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
5
20) The opportunity cost of capital is the expected rate of return that shareholders can obtain in the financial markets on investments with the same risk as the firm's capital investments. Answer: TRUE Difficulty: 2 Medium Topic: Expected (required) return Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21) Once Apple Computer had become a public company, it was able to raise financing from venture capital companies. Answer: FALSE Difficulty: 2 Medium Topic: Raising capital Learning Objective: 02-01 Understand how financial markets and institutions channel savings to corporate investment. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 22) Insurance companies provide a mechanism for individuals to pool their risks. Answer: TRUE Difficulty: 2 Medium Topic: Financial institution functions Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 23) Financial markets and intermediaries allow investors and businesses to reduce and reallocate risk. Answer: TRUE Difficulty: 2 Medium Topic: Financial institution functions Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
6
24) The effects of the financial crisis of 2007-2009 were confined to the U.S. and domestic companies. Answer: FALSE Difficulty: 2 Medium Topic: Financial distress Learning Objective: 02-04 Understand the main events behind the financial crisis of 2007-2009 and the subsequent eurozone crisis. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 25) The cost of capital is the minimum acceptable rate of return for capital investment. Answer: TRUE Difficulty: 2 Medium Topic: Expected (required) return Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 26) One root of the financial crisis of 2007-2009 was the strict money policies promoted by the U.S. Federal Reserve and other central banks after the technology bubble burst (i.e., money was relatively expensive during this time). Answer: FALSE Difficulty: 2 Medium Topic: Financial distress Learning Objective: 02-04 Understand the main events behind the financial crisis of 2007-2009 and the subsequent eurozone crisis. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 27) The rates of return on investments outside the corporation set the minimum return for investment projects inside the corporation. Answer: TRUE Difficulty: 2 Medium Topic: Expected (required) return Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
7
28) Financing for public corporations must flow through financial markets. Answer: FALSE Difficulty: 2 Medium Topic: Financial institution functions Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 29) Financing for private companies must flow through financial intermediaries such as mutual funds. Answer: FALSE Difficulty: 2 Medium Topic: Financial institution functions Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 30) Most securities sold via NASDAQ are sold in the secondary market. Answer: TRUE Difficulty: 1 Easy Topic: Primary and secondary markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 31) Almost all foreign exchange trading occurs on the floors of the FOREX exchanges in New York and London. Answer: FALSE Difficulty: 2 Medium Topic: Foreign exchange markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation
8
32) Exchange traded funds are tied to an index or basket of securities. Answer: TRUE Difficulty: 2 Medium Topic: Financial institution functions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 33) Corporate financing comes ultimately from: A) savings by households and foreign investors. B) cash generated from the firm's operations. C) the financial markets and intermediaries. D) the issue of shares in the firm. Answer: A Difficulty: 1 Easy Topic: Financial institution functions Learning Objective: 02-01 Understand how financial markets and institutions channel savings to corporate investment. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 34) A company can pay for its expansion in all the following ways except: A) by using the earnings generated from its sale of obsolete equipment. B) by persuading a director's mother to make a personal loan to the company. C) by purchasing bonds in the secondary market. D) by plowing back part of its profits. Answer: C Difficulty: 2 Medium Topic: Raising capital Learning Objective: 02-01 Understand how financial markets and institutions channel savings to corporate investment. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation
9
35) "Reinvestment" means: A) new investment in new operations. B) additional investment in existing operations. C) new investment by new shareholders. D) the reinvestment of earnings into new projects. Answer: D Difficulty: 2 Medium Topic: Raising capital Learning Objective: 02-01 Understand how financial markets and institutions channel savings to corporate investment. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 36) Financing for public corporations flows through: A) the financial markets only. B) financial intermediaries only. C) derivatives markets. D) the financial markets, financial intermediaries, or both. Answer: D Difficulty: 1 Easy Topic: Financial institution functions Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 37) Which security is more efficient because it allows trading throughout the day and does not have managers with discretionary investment authority? A) Bond fund B) Exchange traded fund C) Mutual fund D) Stock fund Answer: B Difficulty: 3 Hard Topic: Types of financial institutions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
10
38) When corporations need to raise funds through stock issues, they rely on the: A) primary market. B) secondary market. C) tertiary market. D) centralized NASDAQ exchange. Answer: A Difficulty: 2 Medium Topic: Primary and secondary markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 39) A primary market would be utilized when: A) investors buy or sell existing securities. B) shares of common stock are exchanged. C) securities are initially issued. D) a commission must be paid on the transaction. Answer: C Difficulty: 1 Easy Topic: Primary and secondary markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 40) The primary distinction between securities sold in the primary and secondary markets is: A) the riskiness of the securities. B) the price of the securities. C) whether the securities are new or already exist. D) the profitability of the issuing corporation. Answer: C Difficulty: 2 Medium Topic: Primary and secondary markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
11
41) The New York Stock Exchange mostly serves as what kind of financial market? A) Foreign Exchange market B) Over the counter market C) Primary market D) Secondary market Answer: D Difficulty: 2 Medium Topic: Primary and secondary markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 42) Which of the following are both a financial intermediary and a financial institution? A) Mutual funds B) Pension funds C) Insurance companies D) Hedge funds Answer: C Difficulty: 2 Medium Topic: Financial institutions Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 43) A share of IBM stock is purchased by an individual investor for $75 and later sold to another investor for $125. Who profits from this sale? A) IBM B) The first investor C) The second investor D) IBM and both investors Answer: B Difficulty: 2 Medium Topic: Stock returns and yields Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation
12
44) Which of the following financial assets is least likely to have an active secondary market? A) Common stock of a large public firm B) Bank loans made to smaller firms C) Bonds of a major, multinational corporation D) Debt issued by the U.S. Treasury Answer: B Difficulty: 3 Hard Topic: Primary and secondary markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 45) When Patricia sells her General Motors common stock at the same time that Brian purchases the same amount of GM stock, GM receives: A) the dollar value of the transaction. B) the dollar amount of the transaction, less brokerage fees. C) only the par value of the common stock. D) nothing. Answer: D Difficulty: 2 Medium Topic: Primary and secondary markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 46) Which one of these is a money market security? A) Commercial paper B) Common stock C) 2-year bond D) 20-year bond Answer: A Difficulty: 2 Medium Topic: Money and capital markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation
13
47) A mother in a developing country wants to borrow the equivalent of $20 to enable her to start a small restaurant run by her family. Which type of financing is she looking to obtain? A) Public bond issue B) IPO C) Micro loan D) Futures contract on a commodity Answer: C Difficulty: 2 Medium Topic: Debt Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 48) Corporate debt instruments are most commonly traded: A) on the NYSE. B) on NASDAQ. C) in the money market. D) in the over-the-counter market. Answer: D Difficulty: 2 Medium Topic: Primary and secondary markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 49) A bond differs from a share of stock in that a bond: A) represents a claim on the firm. B) has more risk. C) has guaranteed returns. D) has a maturity date. Answer: D Difficulty: 2 Medium Topic: Bond features Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
14
50) Short-term financing transactions commonly occur in the: A) primary markets. B) secondary markets. C) capital markets. D) money markets. Answer: D Difficulty: 1 Easy Topic: Money and capital markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 51) Long-term financing decisions commonly occur in the: A) option markets. B) secondary markets. C) capital markets. D) money markets. Answer: C Difficulty: 1 Easy Topic: Money and capital markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 52) You can buy silver in the: A) capital markets. B) foreign exchange markets. C) commodities markets. D) option markets. Answer: C Difficulty: 1 Easy Topic: Money and capital markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation
15
53) Commodity and derivative markets: A) are additional sources of financing for corporate projects. B) enable the financial manager to adjust a firm's exposure to various business risks. C) are always over-the-counter markets. D) deal only in foreign currencies. Answer: B Difficulty: 3 Hard Topic: Derivatives and other securities Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 54) Foreign currencies are traded: A) only by banks in New York and London. B) over the counter. C) on both the NYSE and NASDAQ. D) on the Intercontinental Exchange. Answer: B Difficulty: 2 Medium Topic: Foreign exchange markets Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 55) Which one of the following statements is not characteristic of mutual funds? A) They are always considered to be financial institutions. B) They raise money by selling shares to investors. C) They pool the savings of many investors. D) They offer professional management and portfolio diversification. Answer: A Difficulty: 2 Medium Topic: Types of financial institutions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
16
56) In which of the following financial markets is an investor least likely to interact with a public corporation? A) Bond market B) Foreign exchange market C) Primary market D) Secondary market Answer: B Difficulty: 2 Medium Topic: Financial institutions Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 57) Which one of these correctly applies to mutual funds? A) Mutual funds are a costly means of achieving portfolio diversification. B) Funds are required to limit their annual fees and expenses to less than 1 percent of the portfolio value. C) You can generally buy additional shares in the fund at any time. D) Shareholders sell their shares to other shareholders. Answer: C Difficulty: 2 Medium Topic: Types of financial institutions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 58) "Balanced" mutual funds: A) invest in both stocks and bonds. B) spread their investments equally over a specified geographic area. C) spread their investments equally over various industries. D) charge a management fee that is proportionate to the investment return. Answer: A Difficulty: 2 Medium Topic: Types of financial institutions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation
17
59) Who was responsible for the financial crisis of 2007-2009? A) The U.S. Federal Reserve, for its policy of easy money B) The U.S. government, for pushing banks to expand credit for low-income housing C) Bankers, who aggressively promoted and resold subprime mortgages D) The U.S. Federal Reserve, the U.S. government, rating agencies, and bankers Answer: D Difficulty: 2 Medium Topic: Financial distress Learning Objective: 02-04 Understand the main events behind the financial crisis of 2007-2009 and the subsequent eurozone crisis. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 60) Which one of the following funds provides a tax advantage to individual investors? A) Balanced funds B) Pension funds C) Bond funds D) Funds that invest in foreign countries Answer: B Difficulty: 2 Medium Topic: Types of financial institutions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation 61) A financial institution: A) is a kind of financial intermediary. B) simply pools and invests savings. C) raises financing by selling shares. D) invests primarily in commodities. Answer: A Difficulty: 3 Hard Topic: Financial institutions Learning Objective: 02-03 Explain the functions of financial markets and institutions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
18
62) Which type of financial institution generally does not accept deposits but does underwrite stock offerings? A) Insurance company B) Mutual fund C) Commercial bank D) Investment bank Answer: D Difficulty: 2 Medium Topic: Types of financial institutions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 63) Which one of the following financial intermediaries has shown the greatest preference for investing in long-term financial assets? A) Commercial banks B) Insurance companies C) Finance companies D) Savings banks Answer: B Difficulty: 2 Medium Topic: Financial institution functions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
19
64) Which one of these may provide a financial return to some investors while not providing any financial return to other investors? A) Mutual funds B) Pension funds C) Insurance companies D) Hedge fund Answer: C Difficulty: 1 Easy Topic: Types of financial institutions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 65) Insurance companies can usually cover the claims of policyholders because: A) the incidence of claims normally averages out across all policyholders. B) they issue a very limited number of policies. C) they are fully insured by the U.S. government. D) their stockholders will cover any cash shortfalls encountered by the company. Answer: A Difficulty: 2 Medium Topic: Types of financial institutions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 66) Which of the following is not typically considered a function of financial intermediaries? A) Providing a payment mechanism B) Investing in real assets C) Accumulating funds from smaller investors D) Spreading, or pooling risk among individuals Answer: B Difficulty: 2 Medium Topic: Financial institution functions Learning Objective: 02-02 Understand the basic structure of banks, insurance companies, mutual funds, and pension funds. Bloom's: Remember AACSB: Communication Accessibility: Keyboard Navigation
20