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Which area of finance deals with sources of funding and the capital structure of corporations and seeks to increase the value of a firm to its owners? Financial institutions Business finance Investments Real estate ✔✔Business finance is the area of finance that deals with uses and sources of funding to increase the value of the firm. What are the main services offered by financial institutions? ✔✔Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions Which type of financial institution is a mutual fund? Contractual institution Federal institution Depository institution Investment institution ✔✔Investment institution. Investment institutions provide individuals and firms access to financial markets. A mutual fund ✔✔A mutual fund is an investment company that continually offers investments and buys financial securities and instruments (usually stocks or bonds) on behalf of investors. Mutual fund companies often have their own products or portfolios composed of multiple stocks and bonds. The
performance of the funds determines the company's value. Even though the funds are a pool of financial securities, investors normally do not have the same rights that individual stockholders have. Which financial institution specializes in managing and administering retirement funds? Pension funds Private equity Investment banks ✔✔Pension funds specialize in retirement funds. Which type of economic indicator is the consumer price index? Lagging indicator Leading indicator Coincident indicator ✔✔CPI usually changes after the economy as a whole changes. (CPI) measures changes in the inflation rate. It examines the average prices of a basket of consumer goods and services and the changes associated with the cost of living. When the CPI decreases, it indicates deflation; when it increases, it indicates inflation. A company's officers and board of directors are selling their stocks in the firm at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is occurring in this situation? Pursuing individual interest over client interests Conflict between work and personal affairs Agency problem due to conflicting interests ✔✔Agency problem due to conflicting interests! Accounting manipulation by management in pursuit of higher stock-related compensation is an example of an agency problem.
Which task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project? Making credit standard decisions Making investment decisions Making inventory control decisions Making financing decisions ✔✔Making financing decisions. The manager is deciding where to get the funds to support a new project, which means the manager is making a financing decision. Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange? Private equity Financial planning Insurance Corporate finance ✔✔Private equity deals with investments in firms that are privately held and whose ownership is not yet bought or sold on any public stock exchange. Which task does a financial manager perform when assessing the costs and benefits of potential projects? Managing working capital Making financing decisions Making investment decisions Implementing financial policies ✔✔Making investment decisions. Understanding how benefits weigh up against costs is the first priority before moving forward with financing and managerial decisions.
Three main tasks that a financial manager of a firm does in order to achieve the goal of the firm, which is to maximize shareholder wealth. ✔✔making investment decisions making financing decisions managing working capital How does a financial manager manage working capital ✔✔The manager needs pay the firm's suppliers and many other day-to-day operations by setting its credit standards for the customers, discussing inventories with the supply chain manager (inventory control) What tool can you use to understand your overall personal cash flows? Setting financial goals Budgeting Investing Saving ✔✔Budgeting helps you to understand your income and expenses and to analyze your cash flows. What is a reasonable alternative to keeping an emergency stash of cash? Investing in a savings account Investing the money in a nicer car Investing in high-risk growth stocks Investing in long-term bonds ✔✔Investing in a savings account. Investing in a readily withdrawable account that still earns some interest is a value-preserving alternative.
Maria and Mateo are setting financial goals. They decide that they need to save $200 each month to reach their goal of taking their children to visit their grandparents in Spain next summer. What is the objective of setting such a goal? To minimize personal expenses To set priorities in personal finances To maximize individual utility To make personal finances predictable ✔✔To maximize individual utility. While everyone has different personal financial goals, the objectives of such goals is to maximize individual utility. Which professional works with individuals to help them achieve their financial goals? Commercial banker Corporate financial analyst Private equity manager Financial planner ✔✔Financial planner. Professional financial planners work with individuals to help them achieve their financial goals. Omar is about to purchase a new car for $30,000. He knows he wants to buy the car, but he is still trying to decide how to pay for it. He has barely over $30,000 in his bank account. He can either take out an auto loan from a bank or use a mix of cash and an auto loan. In this scenario, what is Omar doing? Budgeting Investing to achieve a goal Financing a goal
Assessing a financial goal ✔✔Financing a goal. He has already made a decision to purchase the car and is now deciding on financing options. What are the purposes of financial markets? To provide liquidity and determine prices To affect the distribution of income for investors To maintain fair, orderly, and efficient markets To willingly take risk and capture returns ✔✔To provide liquidity and determine prices. The purposes of financial markets are to provide liquidity and to determine prices. Leverage Multiplier ✔✔If a leverage multiplier is less than the industry average it implies that the firm is more conservatively financed and uses less debt than other companies In which financial market are securities such as stocks and bonds are traded after their initial issuance? Secondary market Primary market Initial market Dealer market ✔✔Secondary market. Financial securities are first sold in the primary financial market and then traded among investors in the secondary financial market. What kind of market primarily allows institutions to borrow and lend in the short term? Futures and options markets Capital market Primary market
What is the primary role of financial institutions? ✔✔To conduct financial transactions such as investments, loans, and deposits. Financial institutions conduct transactions to circulate money. What is a depository institution? ✔✔An institution that accepts and pays interest on deposits of money, as well as extends loans. This is the definition of a depository institution. Examples include banks and credit unions. Which financial institution ensures that a nation's economy remains healthy by controlling the amount of money circulating in the economy? Commercial bank Central bank Mutual fund Credit union ✔✔Central banks control the supply of money in the economy. A commercial bank ✔✔A commercial bank accepts deposits; offers checking and savings accounts and other basic financial products; and extends various loans, such as auto loans and home mortgages. Banks make money by charging a higher interest rate on extended loans than the interest rate they pay out on deposits. These firms play a vital role in the economy, and without them many people would not be able to afford homes or pay for college. Insurance companies ✔✔Charge premiums to invest in bonds and stocks to pay claims How do insurance companies pay policyholders when a claim is made? They raise premiums for everyone who filed a claim during the year.
They use returns from stocks and bonds. ✔✔They use returns from stocks and bonds. Insurance companies invest the money that they earn from premiums into stocks and bonds, and then the returns are used to fill claims. Which type of financial institution deals mainly with providing for retirement through employers? Investment bank Pension fund Credit union Mutual fund ✔✔Pension fund. Through employers, individuals can contribute to pension funds, which then invest their money in the market to provide retirement funds. A large corporation is looking to merge with another large corporation. Which financial institution can help them do this? Central bank Pension fund Private equity institution Investment bank ✔✔Investment banks facilitate complex financial deals, like mergers. Unemployment rate is which type of economic indicator? Lagging Coincident Concurrent Leading ✔✔Lagging indicators change after the economy changes.
just monetary inflation rather than economic growth. Monetary inflation is not sustainable; thus, one day inflation will slow down and the stock market will fall. What are the 2 coincident indicators? ✔✔Gross domestic product and personal income The Federal Reserve sometimes adjusts the interest rate at which commercial banks can borrow from it. What is the purpose of adjusting the interest rate? ✔✔To regulate inflation and unemployment. Regulating inflation and unemployment is the main objective of the Federal Reserve and central banks, and it is accomplished by adjusting the interest rate. Personal income (coincident indicator) ✔✔Personal income provides some insight into overall consumer spending in an economy and can be related to changes in overall consumption. When the economy is doing well, personal income generally increases, which leads to an increase in spending. When the economy is not doing so well, personal income decreases and consumer spending will tighten. Gross domestic product (GDP) (coincident indicator) ✔✔The gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. Therefore, when GDP increases, it is a sign that the economy is strong. When GDP decreases, it is a sign that the economy is in recession. What would an inverted yield curve signal? ✔✔It may indicate an economic downturn. An inverted yield curve reflects the expectation that the economy will have low or negative growth in the future. In what way are coincident indicators useful?
They are analyzed during economic shifts to provide information about the current state of the economy. ✔✔They are analyzed during economic shifts to provide information about the current state of the economy. Coincident indicators help analysts see the big picture of economic trends. Which responsibility is a focus of the U.S. Securities and Exchange Commission? To provide liquidity To regulate inflation To raise interest rates To protect investors ✔✔To protect investors. The responsibilities of SEC are to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation Which type of financial institution provides individuals and firms access to financial markets? Depository institutions Credit institutions Investment institutions Contractual savings institutions ✔✔Investment institutions. Investment institutions provide both individuals and firms access to financial markets. Which financial institution includes entities that receive money from institutional investors and wealthy individuals to buy troubled companies to improve them and earn returns by selling them or going public? Credit union Commercial bank Mutual fund
A manager purchases a company car and allocates it as a company expense. An employee takes a potential client to dinner and pays for it using the company credit card. The management team works overtime without pay to complete financial reports. ✔✔A manager purchases a company car and allocates it as a company expense. This is a luxury that does not improve shareholder value and costs the company money. How can agency costs be mitigated? ✔✔Aligning managers' interests with shareholders' interests. This is most commonly done by compensating management with shares of ownership in the company. What is the third step in finding a solution to an ethical dilemma? Move forward with the course of action you have chosen Identify and define the problem Consider alternative courses of action Consider all stakeholders involved ✔✔Consider all stakeholders involved. First, you should identify and define the problem. Second, consider alternative courses of action. Third, consider all stakeholders involved. Then move forward with the course of action you have chosen Jack is a personal financial advisor. He is with a new client, and the client is asking him what he recommends for her portfolio. Jack knows that his firm's investment product performed well last year, but its performance changes from year to year—some years it is better than the market, and some years it is not. Also, the fee to invest in the product is higher than the fee to invest in a market index fund. If Jack sells his company's investment product, the customer's loyalty to the company is doubled. Which actions should Jack take? ✔✔Give a personal recommendation of the company's product while explaining its performance relative to the market over the past several years. Giving a recommendation to sell a product is fine, but you should never hide other information. Sharing information about index funds and comparing your product to others is a fair action to take for the client.
Why might a manager manipulate accounting procedures? To maximize shareholder wealth To restrict a firm from taking on risky projects To make the company's performance look good ✔✔To make the company's performance look good. A manager might manipulate accounting procedures to inflate the earnings of a company, which would optimize bonuses and stock-price-related benefits for management. Which situation is an example of an agency problem? A firm fails to maximize long-term investment. Owners prevent managers from maximizing profits. Managers do not agree with employees on material supply issues. Managers follow their own interests instead of the owners' interest. ✔✔Managers follow their own interests instead of the owners' interest. An agency problem occurs when the agent (a manager) does not act in the best interest of the owners. A company is trying to finance a project with a mortgage loan from a bank. The company's assessment of the project indicates that the company may experience several years of loss until the project becomes profitable. This means that the company might lose its ability to pay back the loan and the interest on the mortgage. What action might the bank take to protect its interest? ✔✔Set a strict covenant that the company cannot easily achieve. By setting a strict covenant, there is a risk that the company may not meet its obligation, which would deter the company from taking on risky projects. Which area of finance involves deciding which assets to invest in to create wealth in the future? Financial management
Depository ✔✔Contractual. Insurance companies are contractual savings institutions. Contractual firms raise capital for long-term contractual agreements. Examples include an insurance company or a private pension fund. Depository institutions ✔✔Financial institution that accepts monetary deposits and provides loans. Includes savings banks, commercial banks, savings and loan associations, and credit unions. Bankrate reports that the largest banks in America were JP Morgan Chase and Bank of America as of May 2019. Which financial institution invests funds contributed by a company to provide retirement funds for the company's employees? Insurance Pension fund Mutual fund Central bank ✔✔Pension fund How can agency problems be reduced through corporate control? Accounting manipulations Acquisition of a foreign subsidiary Setting strict goals Executive compensation ✔✔Executive compensation. By compensating the management team with stocks and stock options, management may be willing to take on riskier projects. This creates more value for the owners because riskier projects will increase the value of financial securities. What is the term for the percentage of the principal that a lender charges a borrower for the use of assets?
Simple interest Compound interest Inflation rate Interest rate ✔✔Interest rate. This is the definition of interest rate. How is the interest rate expressed? As a fractional probability As a dollar amount As a percentage As a ratio ✔✔As a percentage. Interest is the percentage of the principal that a lender receives or that a borrower pays to use the money. Cost of capital ✔✔The interest rate from the borrower's perspective is called the cost of capital. If the lender requires you to pay interest as stated by a required rate, the required rate becomes the cost of borrowing to you. What is the main purpose of charging interest? ✔✔It allows borrowers to pay to use the assets of another entity to accomplish their own goals. Because the funds do not belong to borrowers, they must pay to use them. This payment is the interest rate. What is a component of the required rate of return? Simple interest Opportunity cost Hurdle rate
