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Which of the following statements is most accurate regarding agency problems?

Select one: a. An agency problem likely occurs when there is a conflict of interest between owners and agents

b. None of the choices are correct

c. An agency problem likely occurs when there is a conflict of interest between two senior managers

d. An example of an agency problem is when managers contracts are structured to be related to the price of the company’s stock (i.e. stock options)

e. An example of an agency problem occurs when manages take on more risky projects because they are most profitable

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Beverley Smith
Beverley SmithLv2
28 Sep 2019

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1) The subarea of finance where you need to value uncertain cash flows occurring at different points in time is:

a. investments

b. corporate finance

c. capital markets

d. bank management.

e. all of the above subareas

2) Which of the following statements is correct?

a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.

b. Corporations face fewer regulations than sole proprietorships.

c. One disadvantage of operating a business as a sole proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the Owner level.

d. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents ace required.

e. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

3) Which of the following statements is correct?

a. Corporations generally face fewer regulations than sole proprietorships.

b. Corporate shareholders are exposed to unlimited liability.

c. It is usually easier to transfer ownership in a corporation than in a partnership.

d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.

e. Less of a corporation's income is generally subject to federal taxes.

4) The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to:

a. Maximize its expected total corporate income.

b. Maximize its expected EPS.

c. Minimize the chances of losses.

d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.

e. Maximize the stock price on a specific target date.

5) Which of the following is correct?

a. In most corporations, the CFO ranks above the CEO.

b. By Law in most states, the chairman of the board must also be the CEO.

c. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.

d. The CFO generally reports to the firm's chief accounting officer, who is normally the controller.

e. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.

6) The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

a. Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth.

b. Maximize the firm’s expected EPS, which must also maximize the firm’s price per share.

c. Minimize the firm’s risks because most stockholders dislike risk in turn, this will maximize the firm’s stock price.

d. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.

e. Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.

7) Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?

a. Compensating managers with stock options.

b. Financing risky projects with additional debt.

c. The threat of hostile takeovers.

d. The use of covenants in bond agreements that limit the firm’s use of additional debt and constrain managers' actions.

e. Abolishing the Security and Exchange Commission.

8) Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

a. Pay managers large cash salaries and give them no stock options.

b. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.

c. Beef up the restrictive covenants in the firm’s debt agreements.

d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm’s stock.

e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

9) Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

a. Decrease the use of restrictive covenants in bond agreements.

b. Take actions that reduce the possibility of a hostile takeover.

c. Elect a board of directors tlta.t allows managers greater freedom of action.

d. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

e. Eliminate a requirement that members of the board of directors have a substantial investment in the firm’s stock.

10) Which of the following is correct?

a. Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.

b. Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.

c. There is no good reason to expect a firm’s stockholders and bondholders to react differently to the types of assets in which it invests.

d. Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.

e. Bondholders should generally be happier titan stockholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.

11) You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction?

a. This is an example of a direct transfer of capital

b. This is an example of a primary market transaction.

c. This is an example of an exchange of physical assets.

d. This is an example of a money market transaction.

e. This is an example of a derivative market transaction.

12) Which of the following statements is correct?

a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically.

b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.

c. Capital market instruments include both long-term debt and common stocks.

d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.

e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

13) Which of the following is a primary market transaction?

a. You sell 200 shares of IBM stock on the NYSE through your broker.

b. 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.

c. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction.

e. IBM sells 2,000.000 shares of treasury stock to its employees when they exercise options that were granted in prior years.

14) Money Markets are markets for:

a. Foreign currencies.

b. Consumer automobile loans.

c. Common stocks.

d. Long-term bonds.

e. Short-term debt securities such as Treasury bills and commercial paper.

15) You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:

a. A money market transaction.

b. A primary market transaction.

c. A secondary market transaction.

d. A futures market transaction.

e. An over-the-counter market transaction.

16) Which of the following statements is correct?

a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.

b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.

c. Hedge funds have more in common with investment banks than with any other type of financial institution.

d. Hedge funds have more in common with commercial banks than with any other type of financial institution.

e. Hedge funds are not as highly regulated as most other types of financial institutions.

17) Which of the following factors statements is correct?

a. The New York Stock Exchange is an auction market, and it has a physical location.

b. Home mortgage loans are traded in the money market.

c. If an investor sells shares of stock through a broker, then it would be a primary market transaction.

d. Capital markets deal only with common stocks and other equity securities.

e. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

18) Which of the following statements is correct?

a. The term "IPO" stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public.

b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public.

c. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.

d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed.

e. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.

19) The stock market is thought to be efficient because:

a. There are many brokers working the exchange floors

b. Computers can make very fast calculations these days

c. There are many stock analysts following the same stocks

d. Stocks are available and are very inexpensive

e. Speed trading is now an acceptable trading technique

20) If the stock is priced correctly but with better management the firm could be worth even more, then the firm would be:

a. A potential target for a stock investor

b. A potential target for a private equity firm

c. A potential target for a bond fund

d. A potential target for the SEC

e. A potential target for share repurchases

Question 1

The correlation of stock market returns between the U.S. and Japan is ____ and ____.

High, increasing.

High, decreasing.

Low, increasing.

Low, decreasing.

Low, remaining constant.

Question 5

Which of the following is not a reason given for why forecaster are so often incorrect?

There is a temptation for economic forecasters to stay fairly close to the "norm," that is, "group think."

Many analysts are simply too short-sighted.

Economists and economic forecaster often suffer from information overload.

Some economic forecasters are too broad-minded, trying to include a number of ideas in their forecasts.

None of the above (that is, all are reasons cited for why forecasters are often incorrect)

Question 6

Which of the following statements concerning asset allocation is false?

Diversification across international boundaries can improve risk-adjusted portfolio returns.

Economies expected to grow at an above-average rate with above-average profit growth should be considered as candidates to overweight in a global portfolio.

Severe currency blockages should not impact global diversification selections.

Portfolio allocation among asset classes may provide higher portfolio returns while lowering portfolio risk levels.

None of the above (that is, all statements are true).

Question 17

Defensive companies are firms where

Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.

Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.

Sales, earnings and cash flows are heavily influenced by aggregate business activity.

Sales, earnings and cash flows are growing exponentially.

None of the above.

Question 18

Speculative companies are firms where

Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.

Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.

Sales, earnings and cash flows are heavily influenced by aggregate business activity.

Sales, earnings and cash flows are growing exponentially.

None of the above.

Question 19

A firm that follows a defensive competitive strategy could

Lower production costs.

Create a strong brand image.

Use its buying power to obtain price concessions.

a and b

b and c

Question 22

A growth company can invest in projects that generate a return greater than the firm's

Return on equity.

Cost of debt.

Cost of equity.

Cost of capital.

Return on assets.

Question 33

A bond denominated in U.S. dollars and sold in Japan to Japanese investors is called a

Samurai bond.

Eurobond.

Yankee bond.

Euroyen bond

Foreign bond.

Question 43

Futures contracts are similar to forward contracts in that they both

Have volatile price movements and strong interest from buyers and sellers.

Give the holder the option to make a transaction in the future.

Have similar liquidity.

Have similar credit risk.

None of the above.

Question 46

Which of the following is not considered a "cost of carry"?

Commissions for physical storage

An opportunity cost for the net amount of invested capital

A premium for the convenience of consuming the asset now

A risk premium for uncertainty

All of the above are considered costs of carry.

Question 48

The most popular financial futures in terms of average daily volume is the

OEX contracts.

S&P 500 contracts.

LIBOR contracts.

T-bill contracts.

T-bond contracts.

Question 49

The bond that maximizes the difference between the invoice price and the delivery price is referred to as the

Cheapest-to-deliver.

Conversion bond.

Delivery bond.

Cheapest to substitute.

Cost-of-carry.

Question 50

An investor who wants a long position in a ____ must first place the order with a broker, who then passes it on to the trading pit or electronic network. Details of the order are then passed on to the exchange clearinghouse.

Call option

Put option

Forward contract

Futures contract

None of the above

Question 1

The correlation of stock market returns between the U.S. and Japan is ____ and ____.

High, increasing.

High, decreasing.

Low, increasing.

Low, decreasing.

Low, remaining constant.

Question 5

Which of the following is not a reason given for why forecaster are so often incorrect?

There is a temptation for economic forecasters to stay fairly close to the "norm," that is, "group think."

Many analysts are simply too short-sighted.

Economists and economic forecaster often suffer from information overload.

Some economic forecasters are too broad-minded, trying to include a number of ideas in their forecasts.

None of the above (that is, all are reasons cited for why forecasters are often incorrect)

Question 6

Which of the following statements concerning asset allocation is false?

Diversification across international boundaries can improve risk-adjusted portfolio returns.

Economies expected to grow at an above-average rate with above-average profit growth should be considered as candidates to overweight in a global portfolio.

Severe currency blockages should not impact global diversification selections.

Portfolio allocation among asset classes may provide higher portfolio returns while lowering portfolio risk levels.

None of the above (that is, all statements are true).

Question 17

Defensive companies are firms where

Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.

Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.

Sales, earnings and cash flows are heavily influenced by aggregate business activity.

Sales, earnings and cash flows are growing exponentially.

None of the above.

Question 18

Speculative companies are firms where

Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.

Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.

Sales, earnings and cash flows are heavily influenced by aggregate business activity.

Sales, earnings and cash flows are growing exponentially.

None of the above.

Question 19

A firm that follows a defensive competitive strategy could

Lower production costs.

Create a strong brand image.

Use its buying power to obtain price concessions.

a and b

b and c

Question 22

A growth company can invest in projects that generate a return greater than the firm's

Return on equity.

Cost of debt.

Cost of equity.

Cost of capital.

Return on assets.

Question 33

A bond denominated in U.S. dollars and sold in Japan to Japanese investors is called a

Samurai bond.

Eurobond.

Yankee bond.

Euroyen bond

Foreign bond.

Question 43

Futures contracts are similar to forward contracts in that they both

Have volatile price movements and strong interest from buyers and sellers.

Give the holder the option to make a transaction in the future.

Have similar liquidity.

Have similar credit risk.

None of the above.

Question 46

Which of the following is not considered a "cost of carry"?

Commissions for physical storage

An opportunity cost for the net amount of invested capital

A premium for the convenience of consuming the asset now

A risk premium for uncertainty

All of the above are considered costs of carry.

Question 48

The most popular financial futures in terms of average daily volume is the

OEX contracts.

S&P 500 contracts.

LIBOR contracts.

T-bill contracts.

T-bond contracts.

Question 49

The bond that maximizes the difference between the invoice price and the delivery price is referred to as the

Cheapest-to-deliver.

Conversion bond.

Delivery bond.

Cheapest to substitute.

Cost-of-carry.

Question 50

An investor who wants a long position in a ____ must first place the order with a broker, who then passes it on to the trading pit or electronic network. Details of the order are then passed on to the exchange clearinghouse.

Call option

Put option

Forward contract

Futures contract

None of the above

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