Test Bank for Financial Management: Core Concepts, 4th Edition

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Financial Management:Core ConceptsFourth EditionRaymond M. BrooksOregon State UniversityTest Bank forFinancial Management: CoreConceptsCurtis BaconSouthern Oregon University

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1Financial Management: Core Concepts, 4e(Brooks)Chapter 1Financial Management1.1The Cycle of Money1) At its most basic level, the function of financial intermediaries is to ________.A) track and report interest ratesB) move money from lenders to borrowers and back againC) report all financial transactions to the federal governmentD) effect a transfer of wealth in societyAnswer: BDiff: 1Topic: 1.1 The Cycle of MoneyAACSB: Analytical ThinkingLO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective ofborrowing and lending.2) Which of the following is NOT an example of a financial transaction?A) Your parents use their credit card to pay for your current term's college tuition.B) You use the ATM at Heathrow airport in London to withdraw British pounds.C) Your roommate lends you $20 and you repay it in one week.D) All of the above are financial transactions.Answer: DDiff: 2Topic: 1.1 The Cycle of MoneyAACSB: Analytical ThinkingLO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective ofborrowing and lending.3) The movement of money from lender to borrower and back again is known as ________.A) the circle of lifeB) corporate financeC) the cycle of moneyD) money launderingAnswer: CDiff: 1Topic: 1.1 The Cycle of MoneyAACSB: Analytical ThinkingLO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective ofborrowing and lending.Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.

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24) The common objective of borrowing and lending is to ________.A) make all parties better offB) gain a profit at the other's expenseC) make a firm or individual appear more liquid than is really the caseD) thwart regulatory authorityAnswer: ADiff: 1Topic: 1.1 The Cycle of MoneyAACSB: Analytical ThinkingLO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective ofborrowing and lending.5) Which of the following is NOT a function of a financial intermediary in thelending/borrowing process?A) To help establish terms of the lending/borrowing agreementB) To match the borrower and the lenderC) To bear the risk that the lender will not repayD) To bear the risk that the borrower will not repayAnswer: CDiff: 1Topic: 1.1 The Cycle of MoneyAACSB: Analytical ThinkingLO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective ofborrowing and lending.6) Professor Gaston, your History teacher, borrows money at a rate of 6% per year from theValley State Bank for a tuition loan for her son. You have $1,200 deposited into your checkingaccount at the same bank earning a rate of 0.5% per year. Which of the following statements isTRUE?A) The bank is criminally liable to you for paying an interest rate lower than the expected rate ofinflation.B) You and your professor have an obvious conflict of interest because you have accounts at thesame financial institution.C) You benefit from earning interest on your deposit, safety for your funds, and having arecognizable means for paying for your financial obligations without having to hold cash.D) Your professor is the only party to be made worse off by this example because she is the onlyparty paying net interest.Answer: CExplanation: Both you and your professor are using services typically provided by banks. Thereis no conflict of interest.Diff: 2Topic: 1.1 The Cycle of MoneyAACSB: Analytical ThinkingLO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective ofborrowing and lending.

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37) The basic function of financial intermediaries is to move advice from lenders to borrowers andback to lenders.Answer: FALSEExplanation: The basic function of financial intermediaries is to move MONEY from lenders toborrowers and back to lenders.Diff: 1Topic: 1.1 The Cycle of MoneyAACSB: Analytical ThinkingLO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective ofborrowing and lending.8) In the lending/borrowing process, a financial intermediary function is to bear the risk that theborrower will not repay.Answer: TRUEDiff: 1Topic: 1.1 The Cycle of MoneyAACSB: Analytical ThinkingLO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective ofborrowing and lending.9) All financial transactions have a buyer and a seller.Answer: TRUEDiff: 1Topic: 1.1 The Cycle of MoneyAACSB: Analytical ThinkingLO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective ofborrowing and lending.10) Give three examples of a financial transaction.Answer: (1) Your parents use their credit card to pay some of your college expenses.(2) You use the ATM to withdraw funds so you can buy your best friend a birthday gift.(3) Your roommate lends you $20 and you repay it when you get your next pay check.Diff: 2Topic: 1.1 The Cycle of MoneyAACSB: Analytical ThinkingLO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective ofborrowing and lending.

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41.2Overview of Finance Areas1) Which of the following best identifies the four main areas of finance?A) Exchange rate management, investments, financial institutions and markets, internationalfinanceB) Corporate finance, investments, capital structure, international financeC) Corporate finance, investments, financial institutions and markets, international financeD) Corporate finance, capital budgeting, financial institutions and markets, regulationAnswer: CExplanation: Exchange rate management, capital structure, and capital budgeting are activitieswithin the functional areas of finance.Diff: 2Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.2) Of the following, which is NOT one of the four main areas of finance?A) International financeB) Corporate financeC) InvestmentsD) Working capital managementAnswer: DExplanation: WCM is a primary function of corporate finance.Diff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.3) The set of financial activities that support the OPERATIONS of a business is best describedby which main area of finance?A) Corporate financeB) InvestmentsC) Financial institutions and marketsD) International financeAnswer: ADiff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.

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54) ________ is the area of finance concerned with activities such as borrowing funds to financelong-term projects; For example, plant expansions or new product launches.A) Working capital managementB) International financeC) InvestmentsD) Corporate financeAnswer: DDiff: 2Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.5) ________ is the area of finance concerned with activities such as repayment of borrowedfunds through dividends or interest payments.A) InvestmentsB) Corporate financeC) Capital budgetingD) International financeAnswer: BDiff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.6) ________ is the area of finance concerned with the activities of buying and selling financialassets such as stocks and bonds.A) InvestmentsB) Corporate financeC) International financeD) Financial markets and institutionsAnswer: ADiff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.

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67) Which of the following is NOT typically thought of as an investment activity?A) Accurately pricing financial assetsB) The process of buying and selling financial assetsC) Repaying borrowed fundsD) Negotiating the rules and regulations of financial transactionsAnswer: CDiff: 2Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.8) "The organized financial intermediaries and the forums that promote the cycle of money" is agood definition of which of the following main areas of finance?A) Corporate financeB) InvestmentsC) Financial institutions and marketsD) International financeAnswer: CDiff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.9) Financial institutions and markets ________.A) are the organized financial intermediaries and the forums that promote the cycle of moneyB) compose the set of financial activities that support the operations of a businessC) are the activities centered on the purchase and sale of financial assetsD) are concerned only with the addition of a multinational element to all finance activitiesAnswer: ADiff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.

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710) Of the following, which is NOT an example of a financial intermediary?A) Commercial bankB) Insurance companyC) Investment bankD) All of the above are financial intermediaries.Answer: DDiff: 2Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.11) Of the following, which is NOT an activity engaged in by a financial intermediary?A) Matching borrowers and lendersB) Bearing riskC) Managing retirement portfolios for large classes of employeesD) Enforcement of regulations including the application of fines for financial violationsAnswer: DDiff: 2Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.12) "Concern with the multinational elements of financial activities" best describes which of thefour main areas of finance?A) InvestmentsB) International financeC) Corporate financeD) Financial institutions and marketsAnswer: BDiff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.

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813) Which of the following is a reason why expertise in international finance is important?A) The process of assessing risk among many countries is more difficult than assessing risk for asingle country.B) Financial regulatory rules and requirements differ from country to country.C) Changes in economic conditions impact the relative values of currency among countries.D) All of the above are reasons for gaining expertise in international finance.Answer: DDiff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.14) Which of the following is NOT an activity of a financial institution or market?A) Bringing together buyers and sellers of financial assetsB) Providing a market for the transaction of financial assetsC) Providing information to buyers and/or sellers of financial assetsD) All are activities of financial institutions.Answer: DDiff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.15) Financial markets and institutions is the set of activities generally concerned with the buyingand selling of financial assets such as stocks and bonds.Answer: FALSEExplanation: Investments are the set of activities generally concerned with the buying andselling of financial assets such as stocks and bonds.Diff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.16) Financial institutions and markets are the organized financial intermediaries and the forumsthat promote the cycle of money.Answer: TRUEDiff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.

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917) The four main areas of finance (corporate, investments, financial markets and institutions,and international finance) are mutually exclusive topics.Answer: FALSEExplanation: The four main areas of finance (corporate, investments, financial markets andinstitutions, and international finance) are NOT mutually exclusive topics.Diff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.18) Gold and land are considered "real assets" because they are permanent, whereas acommodity such as rice is not a real asset because it is consumable.Answer: FALSEDiff: 1Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.19) What are the four main areas of finance? Give a brief definition of each.Answer: The four main areas of finance are corporate finance, investments, financial institutionsand markets, and international finance. Corporate finance deals with the financial operations ofthe firm and focuses on capital budgeting, capital structure, and working capital management. Itis the primary focus of this text. Investments focuses on the activities associated with the buying,selling, pricing, and risk evaluation of financial assets. It is commonly the part of finance mostinteresting to students. Financial institutions and markets is the study of the firms andorganizations that facilitate and regulate the trading of financial assets as well as the markets thatmake the trading possible. International finance deals with the multinational aspects of the otherthree areas of finance. Decision-making in the international arena is complicated by languagedifferences, currency differences, taxation issues and differences in local and national laws. Anexpertise in international finance is a valuable asset to firms that have business dealings that spanmore than one country.Diff: 3Topic: 1.2 Overview of Finance AreasAACSB: Analytical ThinkingLO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activitiesthat each encompasses.

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101.3Financial Markets1) ________ are the forums where buyers and sellers of financial assets and commodities meet.A) Housing marketsB) Federal Reserve banksC) Financial marketsD) Automotive showsAnswer: CDiff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.2) Financial markets can be classified by which of the following?A) Type of asset tradedB) Maturity of the financial assetC) Owner of the financial assetD) All of the above can be classifications of financial markets.Answer: DDiff: 2Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.3) Stocks are bought and sold in ________ markets.A) equityB) debtC) derivativesD) foreign exchangeAnswer: ADiff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.4) Bonds are bought and sold in ________ markets.A) equityB) debtC) derivativesD) foreign exchangeAnswer: BDiff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.

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115) Options are bought and sold in ________ markets.A) equityB) debtC) derivativesD) foreign exchangeAnswer: CDiff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.6) Currencies are bought and sold in ________ markets.A) equityB) debtC) derivativesD) foreign exchangeAnswer: DDiff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.7) Which of the following is NOT an example of an equity market transaction?A) Mark sells his shares of Apple stock.B) Grant contacts his broker and requests a purchase of IBM bonds.C) Pavlina buys shares of a small company stock traded on the NASDAQ.D) All of the above are equity market transactions.Answer: BExplanation: Mark contacts his broker and requests a purchase of IBM bonds—this is a debtmarket transaction.Diff: 2Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.8) Financial assets that will mature within a year are bought and sold in the ________ market.A) debtB) capitalC) stockD) moneyAnswer: DExplanation: Debt, capital, and the stock markets are longer term in nature.Diff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.

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129) The sale of "new" securities, where the financial asset is being traded for the very first time, issaid to take place in the ________ market.A) primaryB) moneyC) secondaryD) capitalAnswer: ADiff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.10) The sale of "used" securities, where the financial asset is being traded from one individual toanother and the proceeds do not go to the original issuer of the security, is said to take place inthe ________ market.A) primaryB) moneyC) secondaryD) capitalAnswer: CDiff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.11) Sale of new common stock in the primary market is regulated by the ________, and a sale ofused common on the secondary market is regulated by the ________.A) SEC; FDICB) SEC; SECC) FDIC; Federal ReserveD) Federal Reserve; SECAnswer: BDiff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.

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1312) Which of the following is TRUE of a dealer market?A) The dealer buys and sells assets out of his own inventory.B) The dealer acts as a broker, lining up the owners of assets with the purchasers of assets.C) The dealer acts as an auctioneer of securities and takes a percentage of the sale ascompensation.D) None of the above is true of a dealer market.Answer: AExplanation: Broker markets are characterized by brokers bringing buyers and sellers togetherwith the brokers earning a commission. Auction markets involve the purchase and sale ofsecurities not currently held in the dealer's portfolio.Diff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.13) Which of the following is NOT a characteristic of a dealer market?A) Dealers make a profit on the spread between what they pay for financial assets and what theysell them for.B) Securities are auctioned off to the highest bidder.C) Dealers buy and sell from their own portfolio.D) All of the above are characteristics of the dealer market.Answer: BExplanation: Dealers buy and sell to customers; they do not auction to the highest bidder.Diff: 2Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.14) Financial markets are the forums where buyers and sellers of financial assets come together.Answer: TRUEDiff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.15) If a company offers stock for sale for the first time and the proceeds go to the company, thenthis is a sale in theprimarymarket.Answer: TRUEDiff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.

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1416) Auction markets consist of dealers buying and selling from their own portfolios.Answer: FALSEExplanation: DEALER markets consist of dealers buying and selling from their own portfolios.Diff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.17) Equity markets are where bonds are bought and sold.Answer: FALSEExplanation: Equity markets are where STOCKS are bought and sold.Diff: 1Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.18) Give an example of how a corporate manager might use the capital markets in the operationof his/her corporation. Be sure to define capital market in your answer.Answer: There are several acceptable examples a student can list for this question, for example:The capital market is the market for longer-term financial assets such as stocks and bonds. Thefinancial manager must finance the purchase of long-term assets and will often enter the capitalmarket to raise sufficient funds by issuing new stock or bonds.Diff: 3Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.19) Define "money market" and "capital market" and give an example of a security that trades ineach.Answer: The money market is the term for the market for short-term, low-risk, highly liquid,homogeneous securities such as Treasury bills, negotiable certificates of deposit or commercialpaper. The capital market consists of transactions in longer-term financial assets such as stocksand bonds.Diff: 3Topic: 1.3 Financial MarketsAACSB: Analytical ThinkingLO: 1.3 Explain the different ways of classifying financial markets.

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