Finance Skills for Managers

Question 1

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?
A. Real estate
B. Investments
C. Financial institutions
D. Business finance

Answer 1

D. Business finance

Question 2

What is the primary difference between finance and accounting?
A. Accounting focuses on the future, while finance is generally backward-looking.
B. Finance provides financial data to decision makers, and accounting involves making decisions using that data.
C. Accounting involves investing and forecasting, while finance summarizes a company’s financial information.
D. Finance focuses on the future, while accounting is generally backward-looking.

Answer 2

D. Finance focuses on the future, while accounting is generally backward-looking.

Question 3

Which subspecialty of finance primarily involves deciding which assets will create more wealth and earn positive returns?
A. Capital structure
B. Accounting
C. Financial institutions
D. Investments

Answer 3

D. Investments

Question 4

What is the primary goal of the financial manager of a firm?
A. To minimize the asset holdings of the firm
B. To minimize the costs of the firm
C. To maximize owner wealth
D. To maximize the manager’s utility

Answer 4

C. To maximize owner wealth

Question 5

What should be the main question a firm asks when considering any investment decision?
A. What is the best investment in the stock market?
B. Will this investment help the company reduce costs?
C. Do the benefits of this investment outweigh the costs?
D. Will this investment add value to the firm?

Answer 5

C. Do the benefits of this investment outweigh the costs?

Question 6

What is the primary aim of personal finance goals?
A. To maximize shareholders’ utility by increasing a firm’s value
B. To increase consumption of goods and services
C. To create more wealth and returns on investments
D. To maximize satisfaction from products purchased and services obtained.

Answer 6

D. To maximize satisfaction from products purchased and services obtained.

Question 7

Which task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project?
A. Making credit standard decisions
B. Making financing decisions
C. Making inventory control decisions
D. Making investment decisions

Answer 7

B. Making financing decisions

Question 8

Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange?
A. Financial planning
B. Corporate finance
C. Insurance
D. Private equity

Answer 8

D. Private equity

Question 9

Which task does a financial manager perform when assessing the costs and benefits of potential projects?
A. Implementing financial policies
B. Managing working capital
C. Making investment decisions
D. Making financing decisions

Answer 9

C. Making investment decisions

Question 10

What tool can you use to understand your overall personal cash flows?
A. Budgeting
B. Saving
C. Investing
D. Setting financial goals

Answer 10

A. Budgeting

Question 11

What is a reasonable alternative to keeping an emergency stash of cash?
A. Investing in high-risk growth stocks
B. Investing the money in a nicer car
C. Investing in long-term bonds
D. Investing in a savings account

Answer 11

D. Investing in a savings account

Question 12

You want to buy a house, so you obtain a mortgage for which you can afford the monthly payments. What process have you engaged in as part of your financial decision-making?
A. Financing
B. Assessing
C. Analyzing data
D. Investing

Answer 12

A. Financing

Question 13

What area of finance involves deciding which assets to invest in to create wealth in the future?
A. Organizational finance
B. Investments
C. Investment banking
D. Financial institutions

Answer 13

B. Investments

Question 14

Hannah is the financial manager of a firm. A project that she has recommended has been approved and will cost $5 million. Since the company does not have enough cash on reserve, Hannah must figure out how to raise enough money to start the project. She can choose whether to issue new bonds, new stocks, a mortgage loan, or some combination of these options. What task is Hannah performing in this scenario?
A. Making a financing decision
B. Managing financial investments
C. Managing working capital
D. Making an investment decision

Answer 14

A. Making a financing decision

Question 15

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?
A. To set priorities in personal finances
B. To maximize individual utility
C. To make personal finances predictable
D. To minimize personal expenses

Answer 15

B. To maximize individual utility

Question 16

Which professional works with individuals to help them achieve their financial goals?
A. Corporate financial analyst
B. Private equity manager
C. Commercial banker
D. Financial planner

Answer 16

D. Financial planner

Question 17

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?
A. Financing a goal
B. Assessing a financial goal
C. Budgeting
D. Investing to achieve a goal

Answer 17

A. Financing a goal

Question 18

What are the purposes of financial markets?
A. To willingly take risk and capture returns
B. To provide liquidity and determine prices
C. To affect the distribution of income for investors
D. To maintain fair, orderly, and efficient markets.

Answer 18

B. To provide liquidity and determine prices.

Question 19

In which financial market are securities such as stocks and bonds are traded for their initial issuance?
A. Dealer market
B. Secondary market
C. Initial market
D. Primary market

Answer 19

B. Secondary market

Question 20

What kind of market primarily allows institutions to borrow and lend in the short term?
A. Primary market
B. Futures and options markets
C. Capital market
D. Money market

Answer 20

D. Money market

Question 21

A local start-up company just hit its five-year anniversary and is planning an initial public offering sometime this year. In order to issue public stock, which market will the company use?
A. Secondary market
B. Dealer market
C. Primary market
D. Futures and options market

Answer 21

C. Primary market

Question 22

What is the primary role of financial institutions?
A. To conduct financial transactions such as investments, loans and deposits.
B. To provide liquidity when trading financial assets
C. To provide financial information to the stakeholders of a business
D. To deal with financing, capital structuring, and investment decisions

Answer 22

A. To conduct financial transactions such as investments, loans, and deposits.

Question 23

What is a depository institution?
A. An institution that accepts and pays interest on deposits of money, as well as extends loans.
B. An institution that is a financial intermediary that raises capital on a contractual basis
C. An institution that has a goal to maximize owner or shareholder wealth
D. An institution that provides individuals and firms access to financial markets.

Answer 23

A. An institution that accepts and pays interest on deposits of money, as well as extends loans.

Question 24

Which financial institution ensures that a nation’s economy remains healthy by controlling the amount of money circulating in the economy?
A. Credit union
B. Central bank
C. Commercial bank
D. Mutual fund

Answer 24

B. Central bank

Question 25

How do insurance companies pay policyholders when a claim is made?
A. They raise premiums for everyone who filed a claim during the year.
B. They use returns from stocks and bonds
C. They withdraw funds from policyholders’ premium accounts
D. They withdraw funds from their corporate savings account

Answer 25

B. They use returns from stocks and bonds

Question 26

Which type of financial institution deals mainly with providing for retirement through employers?
A. Pension fund
B. Investment bank
C. Credit union
D. Mutual fund

Answer 26

A. Pension fund

Question 27

A large corporation is looking to merge with another large corporation. Which financial institution can help them do this?
A. Central bank
B. Pension fund
C. Investment bank
D. Private equity institution

Answer 27

C. Investment bank

Question 28

The unemployment rate is which type of economic indicator?
A. Lagging
B. Leading
C. Coincident
D. Concurrent

Answer 28

A. Lagging

Question 29

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?
A. To reduce the amount of outstanding debt owed by U.S. citizens.
B. To regulate inflation and unemployment
C. To increase the size of the Federal Reserve
D. To obtain a positive return for its private investors

Answer 29

B. To regulate inflation and unemployment

Question 30

What would an inverted yield curve signal?
A. It may indicate that inflation is rising at an unsustainable rate
B. It may indicate that the unemployment rate is falling
C. It may indicate an economic downturn
D. It may indicate higher interest rates for long-term bonds.

Answer 30

C. It may indicate an economic downturn

Question 31

In what way are coincident indicators useful?
A. They help investors know which sectors of the economy to invest in
B. They are used to predict future economic trends so that recessions can be avoided
C. They are useful in conjunction with GDP and personal income to predict the future health of the economy.
D. They are analyzed during economic shifts to provide information about the current state of the economy.

Answer 31

D. They are analyzed during economic shifts to provide information about the current state of the economy.

Question 32

Which responsibility is a focus of the U.S. Securities and Exchange Commission?
A. To regulate inflation
B. To raise interest rates
C. To provide liquidity
D. To protect investors

Answer 32

D. To protect investors

Question 33

Which type of financial institution provides individuals and firms access to financial markets?
A. Investment institutions
B. Contractual savings institutions
C. Depository institutions
D. Credit institutions

Answer 33

A. Investment institutions

Question 34

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?
A. Commercial bank
B. Private equity
C. Mutual fund
D. Credit union

Answer 34

B. Private equity

Question 35

Yield curve is which type of economic indicator?
A. Concurrent
B. Coincident
C. Leading
D. Lagging

Answer 35

C. Leading

Question 36

About a year ago, the short-term Treasury bill had 1.54% interest and the long-term Treasury note had 2.54% interest. This week, the 1-year Treasury bill has an interest rate of 3.13%, while the 10-year Treasury note has an interest rate of 2.28%. What does this information indicate about the future economy?
A. It may indicate that the economy is in a steady state
B. It may reflect an expectation that the economy will grow in the future along with higher inflation
C. It may indicate an economic downturn
D. It may indicate a decreasing unemployment rate along with higher wages

Answer 36

C. It may indicate an economic downturn, since the long-term Treasury interest rate is lower than the short-term rate, it has an inverted yield curve. This may indicate an economic downturn.

Question 37

Which term reflects a person’s beliefs about right and wrong, good and bad, or just and unjust?
A. Ethical
B. Legal
C. Moral
D. Standard

Answer 37

C. Moral

Question 38

What characterizes an ethical action?
A. An ethical action is based on accepted standards of conduct
B. An ethical action is based on what is right or wrong, whether or not society agrees
C. An ethical action takes into account over individuals’ values over the decision maker’s own.
D. An ethical action will achieve the best outcome for the decision maker

Answer 38

A. An ethical action is based on accepted standards of conduct.

Question 39

Lucas is a financial advisor working for Bullzai, Inc. He is faced with a dilemma. Bullzai has started changing its practices in order to increase profit. As a financial advisor, he is now supposed to suggest to clients to invest in portfolios that will not do as well as the portfolios that Bullzai is invested in. This is an accepted practice done by other businesses in the industry, and it complies with all standards set by the government. However, Lucas knows that this practice is not in his clients’ best interest. What type of dilemma is Lucas facing?
A. Moral
B. Technical
C. Legal
D. Ethical

Answer 39

A. Moral

Question 40

Which type of error would result in a set repercussion or penalty given by the government?
A. Legal
B. Moral
C. Ethical
D. Spiritual

Answer 40

A. Legal

Question 41

Nora is an investment manager, which means that she is paid to invest other people’s money. To meet her goal for the month, she is seeking to invest money from clients in an investment that is risky but potentially has a higher return. What about this situation represents an ethical dilemma?
A. Nora is considering investing in a risky asset just to meet her monthly goal
B. Nora is not explaining to her clients the riskiness of the specific investment
C. Nora is not currently meeting her goal for the month
D. Nora is uncertain about the outcome of the investment opportunity

Answer 41

A. Nora is considering investing in a risky asset just to meet her monthly goal.

Question 42

What are the effects of attempting to maximize shareholder value for a business in an unethical way?
A. It often gives the business an opportunity to improve its branding and reputation
B. It often leads to decreased shareholder value for the business
C. It often decreases vulnerability to long and expensive litigations
D. It often leads to employing more workers and boosting the economy

Answer 42

B. It often leads to decreased shareholder value for the business.

Question 43

Endothon Company has decided to move its production from the U.S. to a foreign country. Which situation below would constitute an unethical action by the company?
A. Telling current employees about the decision early on
B. Saving money by paying inadequate wages to workers overseas
C. Monitoring public perception of the company
D. Lowering costs while keeping prices the same for customers

Answer 43

B. Saving money by paying inadequate wages to workers overseas.

Question 44

Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects?
A. Bondholders are primarily interested in making sure they will be paid back
B. Bondholders are primarily interested in maintaining the company’s current financial status
C. Bondholders are primarily interested in the company paying more dividends
D. Bondholders are primarily interested in maximizing shareholder wealth.

Answer 44

A. Bondholders are primarily interested in making sure they will be paid back.

Question 45

Which kind of projects are bondholders interest in?
A. Riskier projects that will provide higher returns
B. Riskier projects that will increase the value of the company’s stocks and their own financial return
C. Safe projects with a higher chance of providing sufficient compensation
D. Projects that allow the company the most freedom in how it spends money.

Answer 45

C. Safe projects with a higher chance of providing sufficient compensation.

Question 46

Which scenario is an example of an agency problem?
A. An employee takes a potential client to dinner and pays for it using the company credit card
B. The owners of the company offer shares of the company to management
C. The management team works overtime without pay to complete financial reports
D. A manager purchases a company car and allocates it as a company expense

Answer 46

D. A manager purchases a company car and allocates it as a company expense

Question 47

How can agency costs by mitigated?
A. Releasing managers who do not attempt to maximize immediate shareholder value
B. Creating a corporate hierarchy of several managers
C. Separating owners from management so their interests do not conflict
D. Aligning managers’ interests with shareholders’ interest

Answer 47

D. Aligning managers’ interests with shareholders’ interest

Question 48

What is the third step in finding a solution to an ethical dilemma?
A. Consider all stakeholders involved
B. Consider alternative courses of action
C. Identify and define the problem
D. Move forward with the course of action you have chosen

Answer 48

A. Consider all stakeholders involved.

Question 49

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 company’s loyalty to the company is doubled. Which actions should Jack take?
A. Give the client a recommendation of the company’s product, and only offer more information about other products if she asks for it.
B. After introducing the product, show the client data about the index fund from only the years that the index fund did poorly.
C. Introduce the company’s product as the best choice available and offer to waive the fee to invest.
D. Give a personal recommendation of the company’s product while explaining its performance relative to the market over the past several years.

Answer 49

D. Give a personal recommendation of the company’s product while explaining its performance relative to the market over the past several years.

Question 50

Why might a manager manipulate accounting procedures?
A. To make the company’s performance look good
B. To maximize shareholder wealth
C. To spend capital on wasteful projects
D. To restrict a firm from taking on risky projects

Answer 50

A. To make the company’s performance look good

Question 51

Which situation is an example of an agency problem?
A. Owners prevent managers from maximizing profits
B. Managers follow their own interests instead of the owners’ interest
C. Managers do not agree with employees on material supply issues
D. A firm fails to maximize long-term investment

Answer 51

B. Managers follow their own interests instead of the owners’ interest.

Question 52

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?
A. Let the company manipulate accounting procedures
B. Push the company to pay dividends to the shareholders
C. Let the company take the mortgage loan because of its long partnership with the bank
D. Set a strict covenant that the company cannot easily achieve.

Answer 52

D. Set a strict covenant that the company cannot easily achieve.

Question 53

Which area of finance involves deciding which assets to invest in to create wealth in the future?
A. Financial institutions
B. Financial management
C. Asset pricing
D. Investments

Answer 53

D. Investments

Question 54

What is the main goal of a firm?
A. To make investment decisions
B. To make decisions on how to finance projects
C. To maximize owner wealth
D. To circulate money in the economy

Answer 54

C. To maximize owner wealth

Question 55

What are financial managers doing if they evaluate whether it is worth spending money on research and development for a new product?
A. Making an investment decision
B. Implementing a financial policy
C. Making a financing decision
D. Managing working capital

Answer 55

A. Making an investment decision

Question 56

Which type of financial market is where securities such as stocks and bonds are traded after their initial issuance?
A. The dealer market
B. The secondary financial market
C. The initial public offering
D. The primary financial market

Answer 56

B. The secondary financial market

Question 57

What type of financial institution is an insurance company?
A. Circulatory
B. Contractual
C. Investment
D. Depository

Answer 57

B. Contractual

Question 58

Which financial institution invests funds contributed by a company to provide retirement funds for the company’s employees?
A. Pension fund
B. Central bank
C. Insurance
D. Mutual fund

Answer 58

A. Pension fund

Question 59

Personal income is which type of economic indicator?
A. Unifying
B. Coincident
C. Lagging
D. Leading

Answer 59

B. Coincident

Question 60

Which term refers to something that conforms with accepted standards of conduct that guide a person’s behavior?
A. Standard
B. Legal
C. Moral
D. Ethical

Answer 60

D. Ethical

Question 61

What is the second step in finding a solution to an ethical dilemma?
A. Calculate the value added to the company
B. Consider the consequences that may come from the action
C. Consider alternative courses of action
D. Identify and define the problem

Answer 61

C. Consider alternative courses of action

Question 62

How can agency problems be reduced through corporate control?
A. Accounting manipulations
B. Acquisition of a foreign subsidiary
C. Executive compensation
D. Setting strict goals

Answer 62

C. Executive compensation

Question 63

What is the term for the percentage of the principal that a lender charges a borrower for the use of assets?
A. Simple interest
B. Inflation rate
C. Compound interest
D. Interest rate

Answer 63

D. Interest rate

Question 64

How is the interest rate expressed?
A. As a ratio
B. As a fractional probability
C. As a dollar amount
D. As a percentage

Answer 64

D. As a percentage

Question 65

What is the main purpose of charging interest?
A. It is what makes trading assets such as vehicles and land possible
B. It allows financial analysts to accurately calculate the time value of money when evaluating a project
C. It allows borrowers to pay to use the assets of another entity to accomplish their own goals.
D. It funds private banking institutions

Answer 65

C. It allows borrowers to pay to use the assets of another entity to accomplish their own goals.

Question 66

What is a component of the required rate of return?
A. Opportunity cost
B. Simple interest
C. Hurdle rate
D. Compound interest

Answer 66

A. Opportunity cost

Question 67

Why would a long-term investment require a higher rate of return?
A. There is less risk involved and a lower opportunity cost
B. There is a greater risk involved and a higher opportunity cost
C. Projects with longer lives always produce a very high return.
D. Regulations require a higher rate of return on long-term investments.

Answer 67

B. There is a greater risk involved and a higher opportunity cost.

Question 68

You just inherited $25,000 from a long-lost relative. You decide to put the money in a savings account for the time being. What would be considered an opportunity cost of putting the money in savings?
A. Earning interest on the $25,000 you just put in savings.
B. The fees you must pay to your bank to hold $25,000
C. Buying a brand new car worth $25,000
D. Having access to the money should you have some sort of financial emergency

Answer 68

C. Buying a brand new car worth $25,000

Question 69

Five years ago, Ahmed decided he was going to save up to purchase a car with cash. The car he wants is priced at $15,000. He saved $245 a month in an account that gave him enough interest to have $15,000 in five years. Today, he pulled out $15,000 from his account to buy the car, but the price of the car is now $16,562. Which component of the required rate of return did Ahmed forget to consider?
A. Risk
B. Inflation
C. Interest rate
D. Opportunity cost

Answer 69

B. Inflation

Question 70

Why is built-in inflation linked to adaptive expectations?
A. Expectations of accidents or high demand cause expectations of price increases.
B. Increased demand for goods and services becomes unbalanced with the supply of goods and services.
C. Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher.
D. Regulations set by the authorities build an expectation of price increases.

Answer 70

C. Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher.

Question 71

Why does an increased demand for goods and services cause inflation?
A. An increase in demand results in better quality goods, which means that they will be more expensive
B. An increase in demand causes a decrease in prices because suppliers are not willing to meet the increased demand.
C. An increase in demand causes people to want less goods and services because of increased competition, which will result in a decrease in market price.
D. An increase in demand often causes an insufficient supply in the market, which causes prices to go up until the demand is once again equal to the supply.

Answer 71

D. An increase in demand often causes an insufficient supply in the market, which causes prices to go up until the demand is once again equal to the supply.

Question 72

What happens to prices in a market in which their is inflation?
A. Prices rise
B. Prices fall
C. Prices remain the same
D. Prices fluctuate from day to day, sometimes increasing and sometimes decreasing.

Answer 72

A. Prices rise.

Question 73

What is the compensation for risk given to investors called?
A. Real rate
B. Opportunity cost
C. Risk-free rate
D. Risk premium

Answer 73

D. Risk premium

Question 74

Which type of interest rate is the rate at which invested money grows for a certain period of time?
A. Nominal rate
B. Risk-free rate
C. Real rate
D. Inflation rate

Answer 74

A. Nominal rate

Question 75

Which component of an interest rate is an indicator of inflation and opportunity cost?
A. Purchasing power
B. Growth rate
C. Risk-free rate
D. Risk premium

Answer 75

C. Risk-free rate

Question 76

What is the name for the interest rate expressed on an annual basis?
A. Compound interest
B. Real interest rate
C. Annual percentage rate
D. Simple interest

Answer 76

C. Annual percentage rate

Question 77

Why is the required rate of return also known as the hurdle rate?
A. It is the minimum rate that a firm must surpass to accept a project
B. Investors have to overcome a certain level of risk to invest
C. The investors cannot invest their money elsewhere
D. It takes into account that the prices of goods and services will increase

Answer 77

A. It is the minimum rate that a firm must surpass to accept a project.

Question 78

What is the inflation rate?
A. The rate of return that an investor will accept for investment
B. The rate at which invested money grows for a certain period of time
C. The rate that is adjusted to remove the effects of increased prices of goods and services
D. The rate at which the average price level of a basket of goods and services in an economy increases.

Answer 78

D. The rate at which the average price level of a basket of goods and services in an economy increases.

Question 79

What does the risk-free rate indicate?
A. Opportunity cost and risk
B. Risk
C. Inflation and risk
D. Inflation and opportunity cost

Answer 79

D. Inflation and opportunity cost

Question 80

Suppose Sophia is considering a new stock investment for her retirement account. This stock has significant risk, but is quite popular in the market. Inflation for the next few years is expected to be 2-3% per year, and the current U.S. Treasury rates are about 2%. How should she use this information to decide what type of return she can expect from the stock?
A. Based on the stock’s popularity, she should not consider the opportunity costs or other assets’ potential returns when setting the required rate.
B. Based on the inflation rate, she should expect this stock to provide a return higher than this for the associated risk.
C. Based on the risk level, she should be willing to accept a return from the stock less than the current U.S. Treasury rates.
D. Based on the type of financial security, the company selling the stock should set the required return used to assess the stock.

Answer 80

B. Based on the inflation rate, she should expect this stock to provide a return higher than this for the associated risk.

Question 81

_______ is a series of equal payments made at the end of consecutive periods over a fixed length of time. Indicates 0.

Answer 81

Ordinary Annuity

Question 82

_______ is paid at the beginning of consecutive periods. Indicates a 1.

Answer 82

Annuity due.

Question 83

Which statement correctly contextualizes what a return is?
A. A return is a gain that one makes on an investment over a period of time.
B. A return is probably one of the simplest terms in finance but is used only as part of data analytics.
C. A return is the gain or loss on an investment over some period of time.
D. A return is the amount of time it will take for an investor to recuperate their initial investment.

Answer 83

C. A return is the gain or loss on an investment over some period of time.

Question 84

What is an expected return?
A. The annual interest rate that is charged for borrowing money
B. A hypothesized estimate of future returns under different scenarios based on expectational data
C. A return over the entire period that an investor owns a financial security
D. The cost to a firm to use an investor’s capital.

Answer 84

B. A hypothesized estimate of future returns under different scenarios based on exceptional data.

Question 85

In 1980, the inflation rate was 5% and a particular investment gave a return of 15%. In 2010, the inflation rate was 5% and the same investment gave a return of 12%. In which year did stockholders gain greater purchasing power and why?
A. 2010 because the nominal rate was higher than in 1980
B. 1980 because the real rate was higher than in 2010
C. 1980 because the return was higher than in 2010
D. 2010 because the inflation was greater than in 1980.

Answer 85

B. 1980 because the real rate was higher in 2010.
When comparing purchasing power, you have to find real rates. The real rate is nominal rate minus inflation.

Question 86

The word risk is used in many different contexts. How is risk defined in finance?
A. The possibility that the realized or actual return will differ from the expected return.
B. The uncertainty that one project will be more or less successful than another
C. The idea that accepting one project will result in forgoing projects with greater returns
D. The probability that the expected return will accurately calculate the realized return on a project

Answer 86

A. The possibility that the realized or actual return will differ from the expected return

Question 87

What makes market risk different from firm-specific risk?
A. Market risk is a factor in the risk-return relationship, and firm-specific risk is not
B. Market risk depends on internal systems within a company, and firm-specific risk is independent of internal systems
C. Market risk is caused by unexpected changes, and firm-specific risk is caused by expected changes.
D. Market risk cannot be diversified away; and firm-specific risk can.

Answer 87

D. Market risk cannot be diversified away; and firm-specific risk can.

Question 88

Which statement accurately describes firm-specific risk?
A. Firm-specific risk can be defined as risk that results from factors at a certain point in the economy
B. Firm-specific risk is the risk associated with problems that companies may face because of lawsuits, labor problems, or management decisions, among other factors
C. Firm-specific risk is the risk associated with problems that companies may face because of changes in interest rates, changes in cash flows due to tax changes, and business cycle changes.
D. Firm-specific risk can be defined as risk that can be diversified away by choosing the appropriate industry to invest in.

Answer 88

B. Firm-specific risk is the risk associated with problems that companies may face because of lawsuits, labor problems, or management decisions, among other factors.

Question 89

Which phrase accurately depicts what interest rate risk is?
A. An example of market risk because all bonds will react in the same direction to a change in rates
B. An example of firm-specific risk because the value of a bond is determined by its maturity and coupon rate
C. An example of firm-specific risk where the value of a bond is affected by changes in interest rates
D. An example of market risk where the value of a bond is affected by changes in interest rates.

Answer 89

D. An example of market risk where the value of a bond is affected by changes in interest rates.

Question 90

Which type of risk can be reduced by adding a variety of different assets into a portfolio?
A. No risk
B. Firm-specific risk
C. Systematic risk
D. Interest rate risk

Answer 90

B. Firm-specific risk

Question 91

How is risk separation different from diversification?
A. Risk separation involves dispersing assets geographically instead of concentrating them in one location
B. Risk separation involves dispersing resources across different investment vehicles within the same asset class
C. Risk separation involves dispersing resources geographically in one location instead of across several locations
D. Risk separation involves dispersing assets across economies instead of focusing them in one economy.

Answer 91

A. Risk separation involves dispersing assets geographically instead of concentrating them in one location.

Question 92

Which situation is a real-life example of risk transfer?
A. Buying home insurance–risk is transferred from one policyholder to the insurer
B. Changing investment vehicles–risk is transferred from one asset to another
C. Purchasing U.S. Treasury bonds–risk is transferred from the holder of the bond to the government
D. Using your 401K investment to buy a home–risk is transferred from the 401K fund to the home.

Answer 92

A. Buying home insurance–risk is transferred from the policyholder to the insurer.

Question 93

Why would a company or individual want to retain risk?
A. Individuals retain risk because they are unable to transfer that risk to other entities.
B. Companies never retain risk because they are already prone to so much market risk
C. Both companies and individuals retain risk when they believe that the cost of pursuing an activity is less than the alternative.
D. Both companies and individuals retain risk when they cannot afford the cost to reduce the risk.

Answer 93

C. Both companies and individuals retain risk when they believe that the cost of pursuing an activity is less than the alternative.

Question 94

Which statement correctly identifies the relationship between systematic risk and different types of firms?
A. Utility companies have high systematic risk because as the market moves up and down, more people will invest in their stocks and bonds.
B. Luxury good providers have low systematic risk because as the market moves up and down, their level of risk will also move up and down but in a diminished way.
C. Utility companies have low systematic risk because as the market moves up and down, their level of risk will also move up and down, but in a diminished way.
D. Luxury companies have high systematic risk because as the market moves up and down, more people will invest in their stocks and bonds.

Answer 94

C. Utility companies have low systematic risk because as the market moves up and down, their level of risk will also move up and down but in a diminished way.

Question 95

How does the amount of time affect the risk associated with different investment vehicles?
A. Treasury bills are more risky over a longer period of time than over a short period of time
B. Stock investments are more risky over a shorter period of time than over a longer period of time
C. Corporate bonds are riskier over time because it is uncertain whether the company will be around that long
D. Time does not affect the level of risk associated with each investment vehicle.

Answer 95

B. Stock investments are more risky over a shorter period of time than over a longer period of time.

Question 96

What tends to happen to the risk of an investment that offers a higher return?
A. The risk is higher for an investment with a higher return
B. The risk is lower for an investment with a higher return
C. The risk of a well-diversified portfolio with high returns is always higher than the highest-risk stock in the portfolio
D. The risk is not affected when an investment has a higher return.

Answer 96

A. The risk is higher for an investment with a higher return.

Question 97

What makes the expected return subjective and different from other types of returns?
A. The expected return is based on expectational data and the probability of different scenarios occurring
B. The expected return is the only return used to compare different investment decisions
C. The expected return is subjective because it is used 260 days as a full year instead of 365 days
D. The expected return is based on prices and cash flows.

Answer 97

A. The expected return is based on expectational data and the probability of different scenarios occuring.

Question 98

A company that produces soap, shampoo, lotion, and other personal care products has recently taken a hit due to a competitors new product line. The company decides to reduce wages for its labor force to save money while the company focuses on building up its reputation again, but the company’s labor force goes on strike to protest the pay cuts. What type of risk does the strike represent?
A. Non-diversifiable risk
B. Market risk
C. Idiosyncratic risk
D. Systematic risk

Answer 98

C. Idiosyncratic risk

Question 99

Which description below correctly identifies one type of price risk?
A. Business cycle risk–depends on how the firm is performing relative to its industry’s leaders
B. Default risk–depends on how much debt the firm has, which affects earnings and stock prices
C. Financial risk–depends on the firm’s ability to pay back its debt payments and dividend payments
D. Operating risk–depends on the effect of the firm’s operating decisions on its operating costs.

Answer 99

D. Operating risk–depends on the effect of the firm’s operating decisions on its operating costs.

Question 100

What is the name for the process of “spreading” money over many different assets?
A. Minimization
B. Diversification
C. Spreading
D. Correlation

Answer 100

B. Diversification

Question 101

What is default risk?
A. A firm-specific risk that demonstrates the inverse relationship between the probability of default and the required rate of return
B. A market-specific risk that comes from the probability of a loss resulting from a borrower’s failure to repay a contractual obligation
C. A market-specific risk that affects both the bonds and stocks of a firm
D. A firm-specific risk that comes from the probability of a loss resulting from a borrower’s failure to repay a contractual obligation.

Answer 101

D. A firm-specific risk that comes from the probability of a loss resulting from a borrower’s failure to repay a contractual obligation.

Question 102

Which type of interest rate includes interest on interest in addition to interest on the principal?
A. Nominal interest rate
B. Compound interest
C. Simple interest
D. Yield to maturity

Answer 102

B. Compound interest

Question 103

What is the rate at which the average price level of particular goods and services in an economy increases over a period of time?
A. Opportunity cost
B. Nominal rate
C. Inflation rate
D. Real rate

Answer 103

C. Inflation rate

Question 104

You signed an apartment contract today. You are going to pay $1,500 at the beginning of each month for the next 12 months, starting today. What type of cash flows is this contract?
A. An ordinary annuity
B. A perpetuity
C. Uneven cash flows
D. An annuity due

Answer 104

D. An annuity due

Question 105

What is the term for the return over the entire period that an investor owns a financial security?
A. Expected return
B. Holding period return
C. Real return
D. Required rate of return

Answer 105

B. Holding period return

Question 106

What is used to measure total risk?
A. Standard deviation
B. Bond ratings
C. Holding period return
D. Beta

Answer 106

A. Standard deviation

Question 107

What is the term for the risk that changes in interest rates will impact the value of a bond?
A. Interest rate risk
B. Default risk
C. Systematic risk
D. Firm-specific risk

Answer 107

A. Interest rate risk

Question 108

Why are ratios useful for analyzing and comparing company performance between firms of different sizes?
A. They allow for performance evaluation
B. They help us focus
C. They provide flexibility
D. They provide standardization

Answer 108

D. They provide standardization

Question 109

You are the financial manager of a firm. The firm is small and is struggling to collect cash from accounts receivable. Also, due to the nature of industry, inventories are illiquid. To make sure that the firm has enough cash holdings for short-term obligations, you decide to create a new ratio of cash to short-term obligations. What is this scenario an example of?
A. Cross-sectional analysis
B. Flexibility
C. Standardization
D. Trend analysis

Answer 109

B. Flexibility

Question 110

Why are activity ratios also called efficiency ratios or asset use efficiency ratios?
A. Because they are used to evaluate the current value of a company
B. Because they consider how a firm’s assets are financed
C. Because they measure how well a company uses its assets to generate sales or cash
D. Because they are used to directly judge how well management is doing at maximizing owner wealth.

Answer 110

C. Because they measure how well a company uses its assets to generate sales or cash.

Question 111

What type of ratio is used to consider how a firm is financed and to assess a firm’s ability to pay interest and pay back long-term obligations?
A. Market ratios
B. Activity ratios
C. Profitability ratios
D. Financing ratios

Answer 111

D. Financing ratios

Question 112

What does a net margin of 7% indicate?
A. For every dollar of revenue, 7 cents remain for the debt holders and equity holders after all other costs are covered.
B. For every dollar of revenue, 7 cents remain for the equity holders after all other costs are covered.
C. For every dollar of fixed assets, 7 cents are generated in sales
D. For every dollar of total assets, 7 cents are generated as sales.

Answer 112

B. For every dollar of revenue, 7 cents remain for the equity holders after all other costs are covered.

Question 113

Firm A has an average collection period of 67 days, and the industry norm is 40 days. What can the firm do in order to be competitive with accounts receivable management in the industry?
A. Tighten the credit standards for its customers
B. Pay suppliers more quickly
C. Pay suppliers more slowly
D. Loosen the credit standards for its customers

Answer 113

A. Tighten the credit standards for its customers

Question 114

What is the difference between the current ratio and the quick ratio?
A. Inventory is excluded in the calculation of the quick ratio
B. Cash is excluded in the calculation of a quick ratio
C. Accounts payable are excluded in the calculation of a quick ratio
D. Notes payable are excluded in the calculation of a quick ratio

Answer 114

A. Inventory is excluded in the calculation of the quick ratio

Question 115

Which term is used to describe the stock of a firm with market-to-book ratio of less than 1?
A. Undervalued
B. Growth stock
C. Value stock
D. Overvalued

Answer 115

C. Value stock

Question 116

What does inventory turnover assess?
A. How well a firm can meet short-term obligations through sales
B. The proportion of inventory financed by equity
C. The inventory management of a firm
D. How well a company is doing overall

Answer 116

C. The inventory management of a firm

Question 117

You are comparing the return on equity of Firm 1 and Firm 2. Both firms have an identical profit margin and asset turnover, but Firm 1 has an overall higher return on equity. What must be true?
A. Firm 2 is not using its assets as efficiently as Firm 1 to generate sales.
B. Firm 2 has a higher cost of sales relative to Firm 1.
C. Firm 1 is using a higher proportion of debt to finance its operations.
D. Firm 1 has a lower times interest earned because its return on equity is higher.

Answer 117

C. Firm 1 is using a higher proportion of debt to finance its operations

Question 118

What is the difference between tracking and monitoring cash flows?
A. Tracking involves using your monitoring to verify cash flows against your goals, discover changes and patterns in cash flows, and understand when correction may be needed.
B. Monitoring is revising your budget, whereas tracking is identifying patterns and changes in your cash flows.
C. Tracking involves using envelopes or computer programs to record cash flows, whereas monitoring involves evaluating cash flows by hand.
D. Monitoring involves using your tracking record to evaluate cash flows against your target, identify patterns and changes in cash flows, and gauge when correction is needed.

Answer 118

D. Monitoring involves using your tracking record to evaluate cash flows against your target, identify patterns and changes in cash flows, and gauge when correction is needed.