1. At its most basic level, the function of financial intermediaries is to ________.
A) track and report interest rates
B) move money from lenders to borrowers and back again
C) report all financial transactions to the federal government
D) effect a transfer of wealth in society
2. Which of the following is NOT an example of a financial transaction?
A) Your parents use their credit card to pay this term’s college tuition.
B) You use the ATM to withdraw British pounds so you can fly to London.
C) Your roommate lends you $20 and you repay it in one week.
D) All of the above are financial transactions.
3. The movement of money from lender to borrower and back again is known as ________.
A) the circle of life
B) corporate finance
C) the cycle of money
D) money laundering
4. The fundamental starting point of all the accounting statements is the ________.
A) accounting identity
B) computing identity
C) investing identity
D) financing identity
5. Which of the statements below is TRUE?
A) Accounting Identity is: Assets ≡ Liabilities – Owners’ Equity.
B) Accounting Identity is: Assets ≡ Liabilities + Owners’ Equity.
C) Accounting Identity is: Assets ≡ Owners’ Equity – Liabilities.
D) Accounting Identity is: Liabilities ≡ Assets + Owners’ Equity.
6. To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.
A) number of compounding periods for the length of an investment
B) number of discounting periods for the length of an investment
C) number of compounding periods per year
D) number of compounding periods per month
7. Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5.00%. What is your investment worth in one year?
8. Suppose you invest $2,000 today, compounded monthly, with an annual interest rate of 7.50%. What is your investment worth in one year?
9. The four steps to determining the price of a bond are:
A) determine the amount and timing of the present cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.
B) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add the FVs of the principal and coupons.
C) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and multiply the PVs of the principal and coupons.
D) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.
10. Blackburn Inc. has issued 30-year $1,000 face value, 10% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________.
11. Stocks are different from bonds because ________.
A) stocks, unlike bonds, are major sources of funds
B) stocks, unlike bonds, represent residual ownership
C) stocks, unlike bonds, give owners legal claims to payments
D) bonds, unlike stocks, represent voting ownership
12. Stocks differ from bonds because:
A) bond cash flows are known while stock cash flows are uncertain.
B) firms pay bond cash flows prior to paying taxes while stock cash flows are after tax.
C) the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase.
D) of all of the above.
13. Bonds are different from stocks because ________.
A) bonds promise fixed payments for the length of their maturity
B) bonds give payments only after other owners are paid
C) bonds do not have maturity dates
D) bonds promise growth in earnings
14. Jarvis bought a share of stock for $15.75 that paid a dividend of $.45 and sold three months later for $18.65. What was his dollar profit or loss and holding period return?
A) $2.90, 18.41%
B) $3.35, 21.27%
C) -$2.90, -18.41%
D) $.45, 2.86%
15. Amy bought a share of stock for $64.50 that paid a dividend of $.50 and sold nine months later for $64.00. What was her dollar profit or loss and holding period return?
A) $0.50, 0.78%
B) -$0.50, -0.78%
C) $0.00, 0.00%
D) There is no correct solution to this question.
16. ________ is at the heart of corporate finance, because it is concerned with making the best choices about project selection.
A) Capital budgeting
B) Capital structure
C) Payback period
D) Short-term budgeting
17. The ________ model is usually considered the best of the capital budgeting decision-making models.
A) Internal Rate of Return (IRR)
B) Net Present Value (NPV)
C) Profitability Index (PI)
D) Discounted Payback Period
18. A major metric of a company’s health and its prospects for a long life is how much ________ it can generate.
A) cash flow
C) tax deferral
D) net income
19. Most businesses fail because their ________ dries up.
A) net working capital
B) cash flow
D) tax shield
20. The ________ are critical to business decisions, business growth, and ultimately business success.
A) risk and timing but not the amount of cash flow
B) the currency denomination of profits
C) risk and profits but not the amount of cash flow
D) timing and amount of cash flow
21. There are two primary tools used to forecast and set in action a company plan. Which of the tools below is one of these?
A) Statements of retained earnings
B) Profit budgets
C) Income statements
D) Pro forma statements
22. As with a lot of planning, the financial forecast begins with ________ estimates and ________ schedules.
A) sales, production
B) sales, profit
C) dividends, production
D) profits, dividend
23. The ________ starts at the time production begins and ends with the collection of cash from the sale of the product.
A) accounts receivable cycle
B) business operating cycle
C) cash conversion cycle
D) production cycle
24. The ________ begins at the time a firm first starts to make a product and lasts until the time the customer buys the product.
A) business operating cycle
B) accounts receivable cycle
C) cash conversion cycle
D) production cycle
25. Which of the statements below is FALSE?
A) Financial statements are a collection of historical and current activities of the company.
B) The collection of value over time found in financial statements requires us to pay attention to how we construct financial ratios so as to glean information for analysis.
C) We want to analyze financial statements so as to compare different companies and their performance relative to our company.
D) All of the above statements are TRUE.
26. An example of a financial statement is ________.
A) the Income Statement
B) the Sources and Uses of Cash
C) the Statement of Financial Position (Balance Sheet)
D) All of these
27. Typically, shares of stock are stored in the vault of the brokerage firm and you, as owner, will not take physical possession. Under these circumstances the brokerage firm is the ________ and you are the ________.
A) street owner; settlement owner
B) settlement owner; street owner
C) owner of record; beneficiary owner
D) beneficiary owner; owner of record
28. A common practice today is to have shares of stock in the ________ , using the name of the broker as owner rather than you.
A) street name
B) bearer name
C) broker name
D) beneficiary name
29. The difficulties of managing international business operations stem from three special issues. Which of the choices below is NOT one of these?
A) Political risk
B) Differences in business practices
C) Social fads
D) Cultural differences
30. ________ arise(s) from differences in customs, social norms, attitudes, assumptions, and expectations of the local society in a host country.
A) Cultural risk
B) Political risk
C) Social fads
D) Similarities in business beliefs
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