Question 1

Money markets are markets for

Accepted Answer

A)  Foreign stocks. 
B)  Consumer automobile loans. 
C)  U.S. stocks. 
D)  Short-term debt securities. 
E)  Long-term bonds. 
A)  Foreign stocks. 
B)  Consumer automobile loans. 
C)  U.S. stocks. 
D)  Short-term debt securities. 
E)  Long-term bonds.

Question 2

Suppose the Central Bank sells Government securities to banks. What effect would that have on interest rates and inflation?

Accepted Answer

A)  Prices and interest rates would both rise. 
B)  Prices would rise and interest rates would decline. 
C)  Prices and interest rates would both decline. 
D)  There would be no changes in either prices or interest rates. 
E)  Prices would decline and interest rates would rise. 
A)  Prices and interest rates would both rise. 
B)  Prices would rise and interest rates would decline. 
C)  Prices and interest rates would both decline. 
D)  There would be no changes in either prices or interest rates. 
E)  Prices would decline and interest rates would rise.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  A hostile takeover is the main method of transferring ownership interest in a corporation. 
B)  Unlimited liability and limited life are two key advantages of the
Corporate form over other forms of business organization. 
C)  A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the
Lives of its individual owners and managers. 
D)  Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of
This form of organization. 
E)  Although its stockholders are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of
Poor economic conditions. 
A)  A hostile takeover is the main method of transferring ownership interest in a corporation. 
B)  Unlimited liability and limited life are two key advantages of the
Corporate form over other forms of business organization. 
C)  A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the
Lives of its individual owners and managers. 
D)  Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of
This form of organization. 
E)  Although its stockholders are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of
Poor economic conditions.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners. 
B)  There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of new asset
Investments a firm makes. 
C)  Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as
Opposed to safer projects with lower expected returns. 
D)  Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as
Opposed to safer projects with lower expected returns. 
E)  Relative to sole proprietorships, corporations generally face fewer regulations, and this makes it easier for corporations to raise
Capital. 
A)  One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners. 
B)  There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of new asset
Investments a firm makes. 
C)  Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as
Opposed to safer projects with lower expected returns. 
D)  Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as
Opposed to safer projects with lower expected returns. 
E)  Relative to sole proprietorships, corporations generally face fewer regulations, and this makes it easier for corporations to raise
Capital.

Question 5

You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:

Accepted Answer

A)  A futures market transaction. 
B)  A primary market transaction. 
C)  A secondary market transaction. 
D)  A money market transaction. 
E)  An over-the-counter market transaction. 
A)  A futures market transaction. 
B)  A primary market transaction. 
C)  A secondary market transaction. 
D)  A money market transaction. 
E)  An over-the-counter market transaction.

Question 6

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate in one of these forms rather than as a corporation.
However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have
Important tax advantages over proprietorships and partnerships. 
B)  Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number
Of businesses) are organized as corporations. 
C)  Due to legal considerations related to ownership transfers and limited liability, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often
Less favorable tax treatment. 
D)  Large corporations are taxed more favorably than sole
Proprietorships. 
E)  Corporate stockholders are exposed to unlimited liability. 
A)  Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate in one of these forms rather than as a corporation.
However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have
Important tax advantages over proprietorships and partnerships. 
B)  Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number
Of businesses) are organized as corporations. 
C)  Due to legal considerations related to ownership transfers and limited liability, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often
Less favorable tax treatment. 
D)  Large corporations are taxed more favorably than sole
Proprietorships. 
E)  Corporate stockholders are exposed to unlimited liability.

Question 8

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

Accepted Answer

A) True 
 B)False

Question 9

If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. 
B)  Hedge funds have more in common with commercial banks than with any
Other type of financial institution. 
C)  Hedge funds have more in common with investment banks than with any
Other type of financial institution. 
D)  Hedge funds are legal in the United States, but they are not
Permitted to operate in Europe or Asia. 
E)  The justification for the "light" regulation of hedge funds is that only "sophisticated" investors with high net worths and high incomes are permitted to invest in these funds, and such investors supposedly can do the necessary "due diligence" on their own rather
Than have it done by the SEC or some other regulator. 
A)  Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. 
B)  Hedge funds have more in common with commercial banks than with any
Other type of financial institution. 
C)  Hedge funds have more in common with investment banks than with any
Other type of financial institution. 
D)  Hedge funds are legal in the United States, but they are not
Permitted to operate in Europe or Asia. 
E)  The justification for the "light" regulation of hedge funds is that only "sophisticated" investors with high net worths and high incomes are permitted to invest in these funds, and such investors supposedly can do the necessary "due diligence" on their own rather
Than have it done by the SEC or some other regulator.

Question 11

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  When a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or
Privately, held." 
B)  "Going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the
Firm's shares. 
C)  When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and
The market for such stock is called the new issue market. 
D)  Publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with
And report to a regulatory agency such as the SEC. 
E)  It is possible for a firm to go public and yet not raise any
Additional new capital at the time. 
A)  When a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or
Privately, held." 
B)  "Going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the
Firm's shares. 
C)  When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and
The market for such stock is called the new issue market. 
D)  Publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with
And report to a regulatory agency such as the SEC. 
E)  It is possible for a firm to go public and yet not raise any
Additional new capital at the time.

Question 12

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

Accepted Answer

A)  Corporations generally find it relatively difficult to raise large amounts of capital. 
B)  Less of a corporation's income is generally subjected to taxes than
Would be true if the firm were a partnership. 
C)  Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate
Form of organization. 
D)  Corporate investors are exposed to unlimited liability. 
E)  Corporations generally face relatively few regulations. 
A)  Corporations generally find it relatively difficult to raise large amounts of capital. 
B)  Less of a corporation's income is generally subjected to taxes than
Would be true if the firm were a partnership. 
C)  Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate
Form of organization. 
D)  Corporate investors are exposed to unlimited liability. 
E)  Corporations generally face relatively few regulations.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally
Help companies raise capital from other parties. 
B)  A liquid security is a security whose value is derived from the
Price of some other "underlying" asset. 
C)  Money market mutual funds usually invest most of their money in a
Well-diversified portfolio of liquid common stocks. 
D)  Money markets are markets for long-term debt and common stocks. 
E)  The NYSE operates as an auction market, whereas the Nasdaq is a
Dealer market. 
A)  While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally
Help companies raise capital from other parties. 
B)  A liquid security is a security whose value is derived from the
Price of some other "underlying" asset. 
C)  Money market mutual funds usually invest most of their money in a
Well-diversified portfolio of liquid common stocks. 
D)  Money markets are markets for long-term debt and common stocks. 
E)  The NYSE operates as an auction market, whereas the Nasdaq is a
Dealer market.

Question 14

Which of the following is a primary market transaction?

Accepted Answer

A)  You sell 200 shares of IBM stock on the NYSE through your broker. 
B)  IBM issues 2,000,000 shares of new stock and sells them to the
Public through an investment banker. 
C)  You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you
The stock. 
D)  One financial institution buys 200,000 shares of IBM stock from
Another institution. An investment banker arranges the transaction. 
E)  You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the NYSE. 
A)  You sell 200 shares of IBM stock on the NYSE through your broker. 
B)  IBM issues 2,000,000 shares of new stock and sells them to the
Public through an investment banker. 
C)  You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you
The stock. 
D)  One financial institution buys 200,000 shares of IBM stock from
Another institution. An investment banker arranges the transaction. 
E)  You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the NYSE.

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the
Business. 
B)  Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership
Interests. 
C)  A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster
Growing company. 
D)  In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro
Rata basis, for the firm's debts in the event of bankruptcy. 
E)  A major disadvantage of all partnerships relative to all corporations is the fact that income taxes must be paid by the partners rather than by the firm itself. 
A)  In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the
Business. 
B)  Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership
Interests. 
C)  A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster
Growing company. 
D)  In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro
Rata basis, for the firm's debts in the event of bankruptcy. 
E)  A major disadvantage of all partnerships relative to all corporations is the fact that income taxes must be paid by the partners rather than by the firm itself.

Question 16

Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs?

Accepted Answer

A)  Proprietorship, because of ease of entry. 
B)  S corporation, to gain some tax advantages and also to obtain
Limited liability. 
C)  Partnership, but only if she needs additional capital. 
D)  Regular corporation, because of the limited liability. 
E)  In this situation, the various forms of organization seem equally
Desirable. 
A)  Proprietorship, because of ease of entry. 
B)  S corporation, to gain some tax advantages and also to obtain
Limited liability. 
C)  Partnership, but only if she needs additional capital. 
D)  Regular corporation, because of the limited liability. 
E)  In this situation, the various forms of organization seem equally
Desirable.

Question 17

There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. 
B)  It is generally easier to transfer one's ownership interest in a
Partnership than in a corporation. 
C)  One of the advantages of the corporate form of organization is that
It avoids double taxation. 
D)  One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person,
One vote." 
E)  Corporations of all types are subject to the corporate income tax. 
A)  One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. 
B)  It is generally easier to transfer one's ownership interest in a
Partnership than in a corporation. 
C)  One of the advantages of the corporate form of organization is that
It avoids double taxation. 
D)  One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person,
One vote." 
E)  Corporations of all types are subject to the corporate income tax.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  A good goal for a firm's management is maximization of expected EPS. 
B)  Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax
Treatment. 
C)  Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize
Their stock prices have little benefit to society. 
D)  Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of
Businesses is more limited. 
E)  The potential exists for agency conflicts between stockholders and
Managers. 
A)  A good goal for a firm's management is maximization of expected EPS. 
B)  Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax
Treatment. 
C)  Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize
Their stock prices have little benefit to society. 
D)  Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of
Businesses is more limited. 
E)  The potential exists for agency conflicts between stockholders and
Managers.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. 
B)  If you purchased 100 shares of Disney stock from your brother-in-
Law, this would be an example of a primary market transaction. 
C)  The IPO market is a subset of the secondary market. 
D)  Only institutions, and not individuals, can participate in
Derivatives market transactions. 
E)  As they are generally defined, money market transactions involve debt securities with maturities of less than one year. 
A)  If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. 
B)  If you purchased 100 shares of Disney stock from your brother-in-
Law, this would be an example of a primary market transaction. 
C)  The IPO market is a subset of the secondary market. 
D)  Only institutions, and not individuals, can participate in
Derivatives market transactions. 
E)  As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

Exam 1: An Overview of Financial Management and the Financial Environment

Money markets are markets for

Suppose the Central Bank sells Government securities to banks. What effect would that have on interest rates and inflation?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.

Which of the following statements is CORRECT?

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.

Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

Which of the following statements is CORRECT?

Which of the following is a primary market transaction?

Which of the following statements is CORRECT?

There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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