Financial Management Flashcards
Which of the following functions is performed by freely fluctuating exchange rates?
A.They tend to correct a trade surplus or deficit
B.They make imports cheaper and exports more expensive
C.They eliminate the opportunity for currency speculation
D.They eliminate business’ exposure to currency risk
A. If imports exceed exports then supply of the home currency will exceed demand. Therefore, the home currency will depreciate, boosting demand for exports and naturally correcting the trade imbalance.
What is the primary purpose of supply side economic policy?
A.To raise the level of demand in the economy
B.To increase the provision of state services
C.To improve the ability of the economy to produce goods and services
D.To reduce interest rates by increasing the money supply
C.
Supply-side policies are mainly micro-economic policies designed to make markets and industries operate more efficiently and contribute to a faster underlying-rate of growth of real national output.
Which of the following government policies would NOT tend to raise national income over time?
A.Increased expenditure on infrastructure
B.Tax cuts to encourage higher spending by consumers
C.Supply side policies to increase labour flexibility
D.Incentives to encourage personal saving
D. If consumers increase the proportion of income that they save, they will demand less goods and services.
Which of the following is allowed or prohibited under Islamic financing principles.
use of debt
The financing of alcohol production
Selling something not owned
The use of debt: Debt itself is allowed in Islamic finance, but interest (riba) is prohibited. So, debt can be used as long as it doesn’t involve paying or receiving interest.
The financing of alcohol production: Alcohol production is prohibited in Islam because it is considered haram (forbidden), so financing such activities would also be prohibited.
Selling something not owned: Islamic finance principles emphasize that one must own something before selling it. Selling something that you don’t own is considered gharar (excessive uncertainty), which is prohibited in Islam.
Identify, by clicking on the relevant box in the table below, whether the following statements about the term structure of interest rates are true or false.
1.An inverted yield curve is where long-term interest rates are higher than short-term interest rates
2.A rising yield curve is caused when investors prefer to buy long-dated loan notes
If long-term interest rates are higher than short-term, this is described as a “normal” yield curve. If investors exhibit a preference for long-dates loan notes this will drive up their market prices and hence drive down their yields – leading to a falling, or “inverted” yield curve.
In relation to the term structure of interest rates, what is a “normal” yield curve?
A “normal” yield curve is where short-term interest rates are below long-term interest rates and can be explained by liquidity preference theory.
dentify, by clicking on the relevant box in the table below, whether the following statements about the efficient market hypothesis are true or false.
- TrueFalse In a strongly efficient market, the price/earnings ratios of all companies would be the same.
- True/FalseIn a semi-strong efficient market, a company’s share price should not change when its financial statements are made public
Both false - If the stock market operates at strong form pricing efficiency, investors have all information about each company. Different companies will have different growth potential and hence different P/E ratios. If the market is semi-strong then shares prices quickly react to new publicly available information.
Which of the following statements about interest rates is/are true?
In a period of high inflation, nominal interest rates are higher than in a period of low inflation.
Long-term interest rates are usually lower than short-term interest rates.
A.1 only
B.2 only
C.Both 1 and 2
D.Neither 1 nor 2
A.
Tutorial note: Nominal (money) interest rates include inflation, hence when inflation rises so do nominal interest rates. Long-term interest rates are usually higher than short-term rates, as (i) lenders require higher compensation for deferring their liquidity for a longer period, and (ii) the risk of default is higher on a long-term loan.
Freely floating exchange rates perform which of the following functions?
A.They tend to correct a lack of equilibrium between imports and exports
B.They make imports cheaper and exports more expensive
C.They impose constraints on the domestic economy
D.They eliminate the need to hedge against fluctuations in foreign exchange rates
A.
Tutorial note: If imports exceed exports then supply of the home currency will exceed demand. Hence the home currency will depreciate, boosting demand for exports and naturally correcting the trade imbalance.
What is the just in time system ?
It is used to avoid holding too many inventory in the warehouse(holding cost), save money for the business and the fact that money is tied up in holding inventory. Factors like flexibility, cost savings, speed, reliability, high quality should be taken into account to effective operate such a system of stock control/management.
What is the Linear Interpolation Formula
When cash flows are not perpetuities or annuities, the IRR is estimated as follows:
Calculate the NPV of the project at a chosen discount rate.
If NPV is positive, recalculate NPV at a higher discount rate (i.e. to get an NPV closer to zero).
If NPV is negative, recalculate at a lower discount rate (again to get an NPV closer to zero).
Use the following formula to estimate the IRR by “linear interpolation”:
IRR ~ A + the fraction with numerator cap N sub cap A and denominator cap N sub cap A minus cap N sub cap B (B − A)
Where: A = Lower discount rate
B = Higher discount rate
NA = NPV at rate A
NB = NPV at rate B
The linear interpolation formula always “works”, although care must be taken with + and − signs.
Which of the following statements is true if the net present value of a project is negative $4,000 and the required rate of return is 5%?
A.The project’s IRR is less than 5%
B.The required rate of return is lower than the IRR
C.The project would increase shareholders’ wealth
D.The NPV would be positive if the IRR was equal to 5%
The correct answer is A.
A negative NPV necessarily implies that the IRR is less than the required rate of return. Here, since the required rate of return is 5%, it must be the case that the IRR is less than 5%.
If the NPV is negative at the 5% required rate of return, it means the project is not earning enough to cover its costs at that rate.
The IRR is the rate at which the NPV would be zero. Since the NPV is negative at 5%, it indicates that the IRR is less than 5% because at a lower rate (less than 5%), the NPV would become zero or positive.
