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Finance Skill for Managers > Overview of Finance > Flashcards

Overview of Finance Flashcards

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1
Q

The study of managing and allocating funds at the personal or business level.

A

Finance

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2
Q

The system of recording, reporting, and summarizing past financial information and transactions.

A

Accounting

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3
Q

A financial asset that can be used by a firm or individual. Examples of capital may be machinery or cash held by a firm.

A

Capital

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4
Q

What are the three primary areas in the world of finance?

A
  • Business finance
  • Investments
  • Financial institutions
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5
Q

An area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to its owners, and the tools and analysis used to allocate financial resources.

A

Business Finance

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6
Q

The mixture of debt and equity used to finance a firm.

A

Capital structure

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7
Q

An area of finance that involves deciding which assets to invest in to create wealth in the future.

A

Investments

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8
Q

The process of valuing assets.

A

Asset pricing

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9
Q

What someone would pay right now for an asset.

A

Current Market Value

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10
Q

An area of finance that includes firms or organizations that exist to accept a wide variety of deposits, to offer investment products to individuals and businesses, to provide loans, or to broker financial transactions.

A

Financial Institutions

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11
Q

{BLANK} is the study of managing and allocating funds at the personal or business level.

A

Finance

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12
Q

{BLANK} is backward-looking, while {BLANK} is forward-looking.

A

Accounting; Finance

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13
Q

{BLANK} is an area of finance that involves activities used to increase shareholder wealth.

A

Corporate finance

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14
Q

{BLANK} is an area of finance that deals with investment allocation and asset pricing.

A

Investments

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15
Q

{BLANK} is an area of finance that involves organizations that accept deposits, offer investment products, loan money, or broker financial transactions.

A

Financial institutions

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16
Q

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?

  1. Financial institutions
  2. Investments
  3. Real estate
  4. Business finance
A

Business finance

Business finance is the area of finance that deals with uses and sources of funding to increase the value of the firm.

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17
Q

What is the primary difference between finance and accounting?

  1. Finance provides financial data to decision makers, and accounting involves making decisions using that data.
  2. Accounting involves investing and forecasting, while finance summarizes a company’s financial information.
  3. Finance focuses on the future, while accounting is generally backward-looking.
  4. Accounting focuses on the future, while finance is generally backward-looking.
A

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

Finance is the management and allocation of capital with the objectives of investing, forecasting, budgeting, saving, lending, and borrowing.

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18
Q

Which subspecialty of finance primarily involves deciding which assets will create more wealth and earn positive returns?

  1. Capital structure
  2. Financial institutions
  3. Accounting
  4. Investments
A

Investments

Investments is the area of finance that seeks to create wealth in the future by deciding where to allocate money.

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19
Q

The toatal satisfaction recieved from consuming goods and services.

A

Utility

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20
Q

Firms that have issued shares to the public.

A

Publicly Traded Firms

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21
Q

Firms that have not issued shares to the public where the ownership rights are provately held.

A

Privately Held Companies

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22
Q

What is the primary goal of the financial manager of a firm?

  1. To maximize the manager’s utility
  2. To minimize the asset holdings of the firm
  3. To minimize the costs of the firm
  4. To maximize owner wealth
A

To maximize owner wealth

The financial manager should make decisions based on the primary goal of maximizing owner wealth.

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23
Q

What should be the main question a firm asks when considering any investment decision?

  1. Do the benefits of this investment outweigh the costs?
  2. Will this investment help the company reduce costs?
  3. What is the best investment in the stock market?
  4. Will this investment add value to the firm?
A

Do the benefits of this investment outweigh the costs?

For any investment, you should expect to receive a benefit worth at least as much as the initial cost.

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24
Q

What is the primary aim of personal finance goals?

  1. To maximize satisfaction from products purchased and services obtained
  2. To maximize shareholders’ utility by increasing a firm’s value
  3. To increase consumption of goods and services
  4. To create more wealth and returns on investments
A

To maximize satisfaction from products purchased and services obtained

The objective of personal financial goals is to maximize one’s utility.

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25
Q

What three main tasks does a financial manager complete?

A
  • making investment decisions
  • making financing decisions
  • managing working capital
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26
Q

Which task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project?

  1. Making inventory control decisions
  2. Making investment decisions
  3. Making credit standard decisions
  4. Making financing decisions
A

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.

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27
Q

Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange?

  1. Financial planning
  2. Private equity
  3. Insurance
  4. Corporate finance
A

Private equity

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.

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28
Q

Which task does a financial manager perform when assessing the costs and benefits of potential projects?

  1. Making investment decisions
  2. Making financing decisions
  3. Managing working capital
  4. Implementing financial policies
A

Making investment decisions

Understanding how benefits weigh up against costs is the first priority before moving forward with financing and managerial decisions.

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29
Q

What tool can you use to understand your overall personal cash flows?

  1. Investing
  2. Saving
  3. Budgeting
  4. Setting financial goals
A

Budgeting

Budgeting helps you to understand your income and expenses and to analyze your cash flows.

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30
Q

What is a reasonable alternative to keeping an emergency stash of cash?

  1. Investing in high-risk growth stocks
  2. Investing in long-term bonds
  3. Investing in a savings account
  4. Investing the money in a nicer car
A

Investing in a savings account

Investing in a readily withdrawable account that still earns some interest is a value-preserving alternative.

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31
Q

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?

Financing
Assessing
Investing
Analyzing data

A

Financing

Part of the personal finance process is figuring out how to finance your goals in a way that is within your means.

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32
Q

What area of finance involves deciding which assets to invest in to create wealth in the future?

  1. Investment banking
  2. Organizational finance
  3. Investments
  4. Financial institutions
A

Investments

Investments are an area of finance that involves deciding which assets to invest in to create wealth in the future.

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33
Q

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 those options. What task is Hannah performing in this scenario?

  1. Managing working capital
  2. Making a financing decision
  3. Making an investment decision
  4. Managing financial investments
A

Making a financing decision

Since the project has already been approved, Hannah is trying to find a way to finance the investment and considering its capital structure.

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34
Q

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?

  1. To maximize individual utility
  2. To set priorities in personal finances
  3. To make personal finances predictable
  4. To minimize personal expenses
A

To maximize individual utility

While everyone has different personal financial goals, the objectives of such goals is to maximize individual utility.

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35
Q

Which professional works with individuals to help them achieve their financial goals?

  1. Commercial banker
  2. Corporate financial analyst
  3. Financial planner
  4. Private equity manager
A

Financial planner

Professional financial planners work with individuals to help them achieve their financial goals.

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36
Q

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?

  1. Investing to achieve a goal
  2. Assessing a financial goal
  3. Budgeting
  4. Financing a goal
A

Financing a goal

He has already made a decision to purchase the car and is now deciding on financing options.

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37
Q

The ability to turn financial securities into cash easily without losing significant value.

A

Liquidity

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38
Q

A debt instrument (bond) that is issued by the United States government in order to raise capital.

A

Treasury Securities

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39
Q

The top line of the income statement. The total amount of money a business brings in (before subtracting any costs).

A

Revenues

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40
Q

A debt instrument that is issued by a corporation in order to raise capital.

A

Corporate Bonds

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41
Q

A share of ownership in a company.

A

Stock

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42
Q

A type of financial market used for short-term assets that are held for less than one year.

A

Money Market

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43
Q

A type of financial market used for long-term assets that are held for greater than one year.

A

Capital Markets

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44
Q

The financial market where securities (stocks and/or bonds) are first sold.

A

Primary Market

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45
Q

A group of intermediaries that is used to oversee the issuance of stocks and/or bonds.

A

Syndicate

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46
Q

When a privately held company first offers shares of stock to outside investors to raise capital, therefore becoming a publicly owned company.

A

Initial Public Offering (IPO)

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47
Q

The financial market where securities are traded after the initial issuance.

A

secondary market

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48
Q

A secondary market with a physical location and where prices are determined by investors’ willingness to pay.

A

auction market

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49
Q

A physical trading floor and a computer network where stocks are bought and sold. It is the largest stock exchange in the world.

A

New York Stock Exchange (NYSE)

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50
Q

A secondary market made up of multiple dealers that hold an inventory of securities and quote prices.

A

dealer market

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51
Q

A computer network where stocks are bought and sold. It is the second-largest stock exchange in the world. Typically, technology-related companies will go public through this exchange.

A

NASDAQ

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52
Q

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

A

risk

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53
Q

The difference between the bid and ask prices that compensate the specialist for the risk that he or she bears for willingness to provide liquidity.

A

bid-ask spread

54
Q

An independent federal government agency that (1) protects investors, (2) maintains fair, orderly, and efficient markets, and (3) facilitates capital formation.

A

U.S. Securities and Exchange Commission (SEC)

55
Q

The {BLANK} is for short-term borrowing and lending while a {BLANK} is for long-term borrowing and lending.

A

money market; capital market

56
Q

Companies use the {BLANK} to sell their financial securities to raise capital, while the {BLANK} is where securities are traded after the initial issuance.

A

primary market; secondary market

57
Q

The purpose of financial markets is to determine the {BLANK} of financial securities based on supply and demand and to provide {BLANK}.

A

market price; liquidity.

58
Q

What are the purposes of financial markets?

  1. To affect the distribution of income for investors
  2. To willingly take risk and capture returns
  3. To maintain fair, orderly, and efficient markets
  4. To provide liquidity and determine prices
A

To provide liquidity and determine prices

The purposes of financial markets are to provide liquidity and to determine prices.

59
Q

In which financial market are securities such as stocks and bonds are traded after their initial issuance?

  1. Primary market
  2. Dealer market
  3. Initial market
  4. Secondary market
A

Secondary market

Financial securities are first sold in the primary financial market and then traded among investors in the secondary financial market.

60
Q

What kind of market primarily allows institutions to borrow and lend in the short term?

  1. Futures and options markets
  2. Primary market
  3. Capital market
  4. Money market
A

Money Market

Assets in money markets are typically highly liquid and intended for use within a year or less.

61
Q

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?

  1. Secondary market
  2. Dealer market
  3. Primary market
  4. Futures and options market
A

Primary Market

When a company issues stock for the first time to raise capital, shares must initially be sold through a primary market.

62
Q

Financial institution that accepts monetary deposits and provides loans. Includes savings banks, commercial banks, savings and loan associations, and credit unions.

A

Depository institution

63
Q

A type of depository institution also known as a “thrift” institution that places a significant focus on providing loans for residential mortgages and real estate.

A

Savings and loans association

64
Q

Financial institution that is not allowed to accept monetary deposits but may perform functions such as lending money or acting as an intermediary between savers and lenders. Examples include brokerage firms, investment firms, mutual funds, and hedge funds.

A

Non-depository institution

65
Q

Financial institution that facilitates the investment and purchase of securities in financial markets. Common services include underwriting, trading of securities on secondary markets, and the general sale of securities.

A

Securities firm

66
Q

Company that invests the capital of investors in financial securities. Examples include mutual funds and investment trusts. The company may also be involved in issuing securities.

A

Investment firm

67
Q

Financial intermediary that raises capital for long-term contractual agreements. Examples include an insurance company or a private pension fund.

A

Contractual savings institution

68
Q

What is the primary role of financial institutions?

  1. To provide liquidity when trading financial assets
  2. To deal with financing, capital structuring, and investment decisions
  3. To conduct financial transactions such as investments, loans, and deposits
  4. To provide financial information to the stakeholders of a business
A

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

Financial institutions conduct transactions to circulate money.

69
Q

What is a depository institution?

  1. An institution that has a goal to maximize owner or shareholder wealth
  2. An institution that is a financial intermediary that raises capital on a contractual basis
  3. An institution that accepts and pays interest on deposits of money, as well as extends loans
  4. An institution that provides individuals and firms access to financial markets
A

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.

70
Q

Ensure that a nation’s economy remains healthy by controlling the amount of money circulating in the economy.

A

Central Banks

71
Q

Receive deposits and extend loans to individuals and businesses.

A

Banks and Credit Unions

72
Q

Charge premiums to invest in bonds and stocks to pay claims.

A

Insurance Companies

73
Q

An investment company that continually offers investments and buys financial securities and instruments on behalf of investors.

A

Mutual Fund

74
Q

A financial institution that specializes in managing and administering retirement funds.

A

Pension Fund

75
Q

A financial intermediary that offers complex financial transactions such as underwriting, facilitating mergers, and buying and selling financial securities on behalf of large institutions.

A

Investment Bank

76
Q

A financial institution that invests in an entity that is not publicly listed or traded using money received from institutional investors and wealthy individuals.

A

Private Equity

77
Q

Which financial institution ensures that a nation’s economy remains healthy by controlling the amount of money circulating in the economy?

  1. Central bank
  2. Credit union
  3. Mutual fund
  4. Commercial bank
A

Central Bank

Central banks control the supply of money in the economy.

78
Q

How do insurance companies pay policyholders when a claim is made?

  1. They raise premiums for everyone who filed a claim during the year.
  2. They withdraw funds from policyholders’ premium accounts.
  3. They use returns from stocks and bonds.
  4. They withdraw funds from their corporate savings account.
A

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.

79
Q

Which type of financial institution deals mainly with providing for retirement through employers?

  1. Mutual fund
  2. Credit union
  3. Pension fund
  4. Investment bank
A

Pension Fund

Through employers, individuals can contribute to pension funds, which then invest their money in the market to provide retirement funds.

80
Q

A large corporation is looking to merge with another large corporation. Which financial institution can help them do this?

  1. Central bank
  2. Private equity institution
  3. Pension fund
  4. Investment bank
A

Investment bank

Investment banks facilitate complex financial deals, like mergers.

81
Q

Leading indicators change {BLANK} the economy changes and include yield curve and stock market return.

A

before

82
Q

Lagging indicators change {BLANK} the economy changes and include unemployment rate and CPI.

A

after

83
Q

{BLANK} are collected and analyzed as economic shifts happen and include GDP and personal income.

A

Coincident indicators

84
Q

What are the three types if economic indicators?

A
  • Leading
  • Lagging
  • Coincident
85
Q

Unemployment rate is which type of economic indicator?

  1. Coincident
  2. Lagging
  3. Concurrent
  4. Leading
A

Lagging

Lagging indicators change after the economy changes.

86
Q

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?

  1. To obtain a positive return for its private investors
  2. To increase the size of the Federal Reserve
  3. To regulate inflation and unemployment
  4. To reduce the amount of outstanding debt owed by U.S. citizens
A

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.

87
Q

What would an inverted yield curve signal?

  1. It may indicate that the unemployment rate is falling.
  2. It may indicate that inflation is rising at an unsustainable rate.
  3. It may indicate an economic downturn.
  4. It may indicate higher interest rates for long-term bonds.
A

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.

88
Q

In what way are coincident indicators useful?

  1. They are analyzed during economic shifts to provide information about the current state of the economy.
  2. They help investors know which sectors of the economy to invest in.
  3. They are useful in conjunction with GDP and personal income to predict the future health of the economy.
  4. They are used to predict future economic trends so that recessions can be avoided.
A

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.

89
Q

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

A

To protect investors

The responsibilities of SEC are to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

90
Q

Which type of financial institution provides individuals and firms access to financial markets?

  1. Investment institutions
  2. Depository institutions
  3. Contractual savings institutions
  4. Credit institutions
A

Investment institutions

Investment institutions provide both individuals and firms access to financial markets.

91
Q

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?

  1. Commercial bank
  2. Private equity
  3. Mutual fund
  4. Credit union
A

Private equity

This is the role of a buyout private equity firm.

92
Q

Yield curve is which type of economic indicator?

  1. Leading
  2. Lagging
  3. Concurrent
  4. Coincident
A

Leading

Leading indicators change before the economy changes.

93
Q

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?

  1. It may indicate an economic downturn.
  2. It may reflect an expectation that the economy will grow in the future along with higher inflation.
  3. It may indicate that the economy is in a steady state.
  4. It may indicate a decreasing unemployment rate along with higher wages.
A

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, which may indicate an economic downturn.

94
Q

{BLANK} refers to the accepted standards of conduct that guide a person’s behavior.

A

Ethics

95
Q

{BLANK} reflect one’s beliefs about right and wrong, good and bad, or just and unjust.

A

Morals

96
Q

Following the laws and rules set by an authority.

A

Legal

97
Q

Which term reflects a person’s beliefs about right and wrong, good and bad, or just and unjust?

  1. Ethical
  2. Moral
  3. Legal
  4. Standard
A

Moral

Moral reflects one’s beliefs about right and wrong, good and bad, or just and unjust.

98
Q

What characterizes an ethical action?

  1. An ethical action will achieve the best outcome for the decision maker.
  2. An ethical action takes into account other individuals’ values over the decision maker’s own.
  3. An ethical action is based on what is right or wrong, whether or not society agrees.
  4. An ethical action is based on accepted standards of conduct.
A

An ethical action is based on accepted standards of conduct.

An ethical action conforms to accepted standards of conduct.

99
Q

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?

  1. Technical
  2. Moral
  3. Ethical
  4. Legal
A

Moral

This is not a legal issue because the new practice complies with the law, and it is not an ethical issue because it is a commonly accepted practice within the industry. It is a moral issue because it deals with Lucas’s own sense of right and wrong.

100
Q

Which type of error would result in a set repercussion or penalty given by the government?

  1. Spiritual
  2. Moral
  3. Legal
  4. Ethical
A

Legal

A legal error would result in a predetermined penalty by the government.

101
Q

An {BLANK} is an issue in the process of deciding between multiple options where no option is completely acceptable from an ethical standpoint.

A

ethical dilemma

102
Q

A person who makes strategic financial decisions in a corporation.

A

Financial Managers

103
Q

A person who owns shares of a company’s stock.

A

Shareholders

104
Q

A person who loans a corporation money by buying debt securities.

A

Bondholders

105
Q

{BLANK} make strategic decisions, {BLANK} own the company through buying shares of company stock, and {BLANK} give the company credit.

A

Financial managers; shareholders; bondholders

106
Q

Costs that are incurred when management does not act in the best interest of shareholders.

A

Agency Costs

107
Q

When the agent (the management) does not act in the best interest of the principal (the owners).

A

Agency Problem

108
Q

The business function responsible for generating sales.

A

Marketing

109
Q

The top line of the income statement. The total amount of money a business brings in (before subtracting out any costs).

A

Sales

110
Q

Anyone who may be affected by actions taken or a decision made.

A

Stakeholder

111
Q

Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects?

  1. Bondholders are primarily interested in the company paying more dividends.
  2. Bondholders are primarily interested in maintaining the company’s current financial status.
  3. Bondholders are primarily interested in making sure they will be paid back.
  4. Bondholders are primarily interested in maximizing shareholder wealth.
A

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

If a company takes on a riskier project, there is a higher probability of the project being unsuccessful, which means that the bondholders may put themselves at a higher risk of not receiving their loan back.

112
Q

Which kind of projects are bondholders interested in?

  1. Riskier projects that will increase the value of the company’s stocks and their own financial return
  2. Projects that allow the company the most freedom in how it spends money
  3. Riskier projects that will provide higher returns
  4. Safe projects with a higher chance of providing sufficient compensation
A

Safe projects with a higher chance of providing sufficient compensation

Bondholders provide money for a company for a certain period of time and want companies to pay them back for their investment.

113
Q

Which scenario is an example of an agency problem?

  1. A manager purchases a company car and allocates it as a company expense.
  2. An employee takes a potential client to dinner and pays for it using the company credit card.
  3. The owners of the company offer shares of the company to management.
  4. The management team works overtime without pay to complete financial reports.
A

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.

114
Q

How can agency costs be mitigated?

  1. Releasing managers who do not attempt to maximize immediate shareholder value
  2. Separating owners from management so their interests do not conflict
  3. Aligning managers’ interests with shareholders’ interests
  4. Creating a corporate hierarchy of several managers
A

Aligning managers’ interests with shareholders’ interests

This is most commonly done by compensating management with shares of ownership in the company.

115
Q

What is the third step in finding a solution to an ethical dilemma?

  1. Consider alternative courses of action
  2. Consider all stakeholders involved
  3. Move forward with the course of action you have chosen
  4. Identify and define the problem
A

Consider all stakeholders involved

First, you should identify and define the problem. Second, consider alternative courses of action. Third, consider all stakeholders involved.

116
Q

What does the term legal describe?

  1. An idea or thing used as a measure, norm, or model in comparative evaluations.
  2. An action that reflects one’s beliefs about right and wrong, good and bad, or just and unjust.
  3. An action that conforms to accepted standards of conduct that guide a person’s behavior.
  4. An action that is in accordance with the laws and rules set by an authority.
A

An action that is in accordance with the laws and rules set by an authority.

Legal means to follow the laws and rules set by an authority.

117
Q

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?

  1. Give a personal recommendation of the company’s product while explaining its performance relative to the market over the past several years.
  2. Give the client a recommendation of the company’s product, and only offer more information about other products if she asks for it.
  3. After introducing the product, show the client data about the index fund from only the years that the index fund did poorly.
  4. Introduce the company’s product as the best choice available and offer to waive the fee to invest.
A

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.

118
Q

Why might a manager manipulate accounting procedures?

  1. To spend capital on wasteful projects
  2. To restrict a firm from taking on risky projects
  3. To maximize shareholder wealth
  4. To make the company’s performance look good
A

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.

119
Q

Which situation is an example of an agency problem?

Managers do not agree with employees on material supply issues.
A firm fails to maximize long-term investment.
Managers follow their own interests instead of the owners’ interest.
Owners prevent managers from maximizing profits.

A

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.

120
Q

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?

  1. Let the company manipulate accounting procedures.
  2. Set a strict covenant that the company cannot easily achieve.
  3. Let the company take the mortgage loan because of its long partnership with the bank.
  4. Push the company to pay dividends to the shareholders.
A

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.

121
Q

What are the main services offered by financial institutions?

  1. Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions
  2. Soliciting charitable donations and then managing the distribution of these funds
  3. Deciding which assets to invest in to create wealth in the future
  4. Evaluating sources of funding for a business project, the capital structure of a firm, or actions managers could take to increase the value of the firm
A

Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions

Financial institutions such as banks, insurance companies, and mutual fund companies provide these services.

122
Q

What is the main objective of personal financial goals?

  1. To maximize owner wealth
  2. To maximize stock investments
  3. To maximize individual utility
  4. To maximize charity donations
A

To maximize individual utility

You set goals and act to increase your satisfaction or happiness by taking care of necessities and achieving priorities.

123
Q

Which task does the financial manager of a firm perform that involves the issuance of new stocks and bonds?

  1. Managing working capital
  2. Deciding on accounting standards
  3. Making financing decisions
  4. Making investing decisions
A

Making financing decisions

Once investment decisions are made, a financial manager considers different possibilities of financing sources for the investments. This may include issuing new stocks and bonds.

124
Q

Why is understanding the definition of finance important in managing personal finances?

  1. It helps individuals compare the costs and benefits of an action to determine whether to take that action.
  2. It helps individuals act ethically with regard to finances.
  3. It helps individuals understand legal issues related to finance.
  4. It allows individuals to find an investment with the highest return possible.
A

It helps individuals compare the costs and benefits of an action to determine whether to take that action.

Any financial decision should make sense in terms of its costs and benefits.

125
Q

In which type of market would a company issue bonds or stocks for the first time?

  1. Primary market
  2. Secondary market
  3. Money market
  4. Dealer market
A

Primary market

This is the purpose of a primary market.

126
Q

Which type of financial institution is a mutual fund?

  1. Contractual institution
  2. Depository institution
  3. Investment institution
  4. Federal institution
A

Investment institution

Investment institutions provide individuals and firms access to financial markets.

127
Q

Which financial institution specializes in managing and administering retirement funds?

Private equity
Mutual funds
Investment banks
Pension funds

A

Pension funds

Pension funds specialize in retirement funds.

128
Q

Which type of economic indicator is the consumer price index?

Forecasting indicator
Coincident indicator
Leading indicator
Lagging indicator

A

Lagging indicator

CPI usually changes after the economy as a whole changes.

129
Q

What does the term ethical refer to?

  1. One’s beliefs about right and wrong, good and bad, or just and unjust
  2. Following the laws and rules set by an authority
  3. An idea or thing used as a measure, norm, or model in comparative evaluations
  4. The accepted standards of conduct that guide a person’s behavior
A

The accepted standards of conduct that guide a person’s behavior

Ethical refers to the accepted standards of conduct that guide a person’s behavior.

130
Q

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?

Conflict between work and personal affairs
Agency problem due to conflicting interests
Maximizing shareholder value
Pursuing individual interest over client interests

A

Agency problem due to conflicting interests

Accounting manipulation by management in pursuit of higher stock-related compensation is an example of an agency problem.

Finance Skill for Managers (4 decks)

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