Chapter 1 Practice Problems key PDF

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Practice Problems for Chapter 1 Key The Financial Environment TRUE-FALSE QUESTIONS 1. Finance is the study of how individuals, institutions, and businesses acquire, spend and manage money and other financial resources. Answer: T p 4 (5) statement includes government but this doesn’t make the statement false 2. Financial markets provide the mechanism for allocating financial resources or funds from savers to borrowers. Answer: T p 5 (6) statement on this page, more about this in chapters 2 and 3 3. The goal of the financial manager in a profit-seeking organization should be to maximize the owners’ wealth. Answer: T p 5, 10 (6, 11) while this SHOULD be their goal sometimes they have their own goals 4. The secondary securities markets are involved in creating and issuing new securities, mortgages, and other claims to wealth. Answer: F p 15 (16) these are primary markets 5. Money markets are the markets where debt securities with maturities of one year or less are issued and traded. Answer: T p 14 (16) definition of money markets 6. One of the most significant functions of the monetary system within the financial system is the creation of money, which serves as a medium of exchange. Answer: T p 13 (14) statement on this page 7. Personal finance is the study of how growth-driven performance-focused, early-stage firms raise financial capital and manage operations and assets. Answer: F p 6 (7) entrepreneurial finance 8. Personal finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth. Answer: T p 6 (7) definition of personal finance 9. An effective financial system is a complex mix of government and policy makers, a monetary system, financial institutions, and financial markets that interact to expedite the flow of financial capital from savings into investment. Answer: T p 11-12 (13) and Figure 1.2 10. Capital markets are markets where debt securities with maturities of greater than one year and equity securities are issued and traded. Answer: T p 15 (16) definition of capital markets, stocks never mature 11. Money markets are markets where equity securities and debt securities with maturities of greater than one year are traded. Answer: F p 14 (16) these markets are capital markets

Practice Problems key Chapter 1

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12. The six principles of finance include (1) Money has a time value, (2) Higher returns are expected for taking on more risk, (3) Diversification of investments can reduce risk, (4) Financial markets are efficient in pricing securities, (5) Manager and stockholder objectives may differ, and (6) Reputation matters. Answer: T p 8 (10) 13. The principle of finance that "money has a time value" implies money in hand today is worth less than the promise of receiving the same amount in the future because a sum of money today could be invested and grow over time. Answer: F p 8 (10) because money in hand today grows over time it is worth more 14. The principle of finance that "lower returns are expected for taking on less risk" implies that rational investors would choose a risky investment only if they feel the expected return is high enough to justify the greater risk. Answer: T p 8 (10) people do not like risk → rational investors will consider a riskier investment only if they feel the expected return is high enough to justify the greater risk, similar to TF 31 15. The principle of finance that "financial markets are efficient in pricing securities" implies that the prices of securities reflect some information available to the public and that when new information becomes available, prices change over time to reflect that information. Answer: F p 9 (10-11) “prices reflect all information”, more about “efficient markets” in chapter 12 16. The principle of finance that "management objectives may differ from owner objectives" implies that owner returns may suffer as a result of manager objectives. Answer: T p 10 (11) decisions may benefit the manager’s career but be detrimental to the corporation 17. The principle of finance that "management objectives may differ from owner objectives" can be resolved by increasing manager salaries. Answer: F p 10 (12) tie manager compensation to measures of performance beneficial to owners 18. The principle of finance that "reputation matters" implies that for institutions or businesses to be successful, they must have the trust and confidence of their customers, employees, and owners, as well as the community and society within which they operate. Answer: T p 10 (12) 19. The principle of finance that "reputation matters" sometimes is harmed by the different objectives of owners and managers. Answer: T p 10 (11-12) directors, officers, managers and other individuals sometimes are guilty of unethical behavior 20. While the financial press chooses to highlight examples of unethical behavior, most individuals exhibit sound ethical behavior in their personal and business dealings and practices. Answer: T p 11 (12) statement on this page, “good behavior” is not a new worthy event 21 The U.S. Treasury Department is primarily responsible for the amount of money that is created in the U.S. economy. Answer: F p 13 (14) “the Federal Reserve System is primarily responsible for the amount of money created although most of the money is created by depository institutions”, we will explore this in greater detail in chapters 4 and 5

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22. The functions of financial institutions include accumulating savings and lending funds. Answer: T p 13 (15) more about this in chapters 2 and 3 23. Three financial system components are the U.S. Treasury, financial institutions, and financial markets. Answer: F p 12-13 (14) and Figure 1.3, monetary system is more than the U.S. Treasury (chapters 4 & 5) 24. Individuals and businesses hold money for purchases or payments they expect to make in the near future. Answer: T p 13 1(5 )see Transferring Money 25. Money markets are where debt securities with maturities of one year or more are issued and traded. Answer: F p 14 (16) 26. Derivative securities may be used to speculate on the future price direction of the underlying financial assets or to reduce price risk associated with holding the underlying financial assets. Answer: T p 15 (17) statement in middle of this page, more about derivatives in Chapters 6, 7, and 11 27. Because the relative values of currencies may change, firms cannot use the currency exchange markets to reduce the risk of holding too much of certain currencies. Answer: F p 16 (17) discussed in greater detail in Chapter 6 28. Entrepreneurial finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth. Answer: F p 6 (7) this is personal finance 29. The six principles of finance include (1) Money has a time value, (2) Higher returns are expected for taking on less risk, (3) Diversification of investments can increase risk, (4) Financial markets are inefficient in pricing securities, (5) Manager and stockholder objectives may differ, and (6) Reputation matters. Answer: F p 8 (10-12) 30. The principle of finance that "money has a time value" implies Money in hand today is worth more than the promise of receiving the same amount in the future because a sum of money today could be invested and grow over time. Answer: T p 8 (10) see TIME VALUE OF MONEY, compare dollar amounts at the same point in time, Chapter 9 is devoted to an extensive investigation of TVM concepts 31. The principle of finance that "higher returns are expected for taking on more risk" implies that rational investors would choose only safe investments because they generally do not feel that a higher return is enough to justify taking greater risk. Answer: F p 8 (10) see RISK VERSUS RETURN, rational investors would consider a riskier investment if they feel the expected return is high enough to justify the greater risk, similar to TF 14 32. The principle of finance that "financial markets are efficient in pricing securities" implies that the prices of securities reflect all information available to the public and that when new information becomes available, prices quickly change to reflect that information. Answer: T p 9 (11) similar to TF 15 & 33, more about “efficient markets” in chapter 12

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33. The principle of finance that "financial markets are inefficient in pricing securities" implies that the prices of securities reflect all information available to the public and that when new information becomes available, prices quickly change to reflect that information. Answer: F p 9 (11) because statement says financial markets are inefficient, similar to TF 15 & 32, more about “efficient markets” in chapter 12 34. The role of financial institutions in a country’s financial system is to accumulate and invest savings. Answer: T p 12 (14) Fig 1.3 “role” is another word for function 35. The role of financial markets in a country’s financial system is to accumulate and invest savings. Answer: F p 12 (14) Fig 1.3 the roles or functions of financial markets are marketing financial assets and transferring financial assets MULTIPLE-CHOICE and MULTIPLE-ANSWER QUESTIONS 1.The primary goal of the financial manager of a profit-seeking organization should be to: a. maximize market share b. maximize the owners’ wealth c. increase sales and profit d. have healthy cash flow Answer: b p 5, 10 (6, 11-12) while this SHOULD be their goal sometimes they have their own goals 2. Finance has its origins in: a. economics and statistics b. accounting and sociology c. accounting and economics d. psychology and mathematics Answer: c p 4 (5) 3. Finance is: a. the study of how individuals, institutions, governments, and businesses acquire, spend, and manage money and other financial assets b. the study of how businesses acquire, spend, and manage money and other financial assets c. the study of how governments, and businesses acquire, spend, and manage money and other financial assets d. none of the above Answer: a p 4 (5) choose the statement that best describes what finance is 4. Crucial elements of the three areas of finance include: a. financial institutions b. financial markets c. investments and financial management d. all of the above Answer: d p 5 (5) & Fig 1.1, slide 2 Practice Problems key Chapter 1

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5. An area of finance that involves the sale or marketing of securities, the analysis of securities, and the management of investment risk through portfolio diversification is referred to as: a. financial management b. investments c. financial institutions d. financial markets e. none of the above Answer: b p 4 (5) definition of investment 6. The issuing of new securities, mortgages, and other claims to wealth takes place in the: a. secondary market b. money market c. primary market d. securities market Answer: c p 15 (16) from the definition of primary markets, initial offering of new securities 7. Multiple Answer Question: Select ALL of the following statements that an effective financial system must have: a. several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies b. an efficient monetary system for creating and transferring money c. financial markets that facilitate the transfer of financial assets amongst individuals, institutions, and businesses c. three branches of government (Executive, Legislative, and Judicial) Answer: it must have a, b, and c pp 11-12 (13-14) and Figure 1.2 8. An area of finance that refers to the physical locations or electronic forums that facilitate the flow of funds among investors, businesses, and governments is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above Answer: d p 4, 14-15 (5, 16-17) definition of financial markets 9 An area of finance that involves financial planning, asset management and fund-raising decisions to enhance the value of businesses is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above Answer: a p 4 (5) definition of financial management

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10. An area of finance that involves the study of organizations or intermediaries that help the financial system operate efficiently and transfer funds from savers and investors to individuals, businesses, and governments that seek to spend or invest the funds in physical assets (inventories, buildings, and equipment) is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above Answer: c p 4 (5) 11. An area of finance that involves the study of government institutions and their involvement in rescuing private firms is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above Answer: e p 4 (5) not an area of finance, opinions differ about government rescuing private firms 12. The ______________ is a term used to describe the financial system, institutions, markets, businesses, individuals, and global interactions that help the economy operate efficiently a. financial environment b. regulatory environment c. international environment d. operating environment e. none of the above Answer: a p 4 (5) 13. The primary securities markets are a. the markets for previously issued securities such as the New York Stock Exchange b. the markets where financial assets such as stocks and bonds are initially issued c. the three most important financial markets in any economy d. the markets for stocks and bonds only includes mortgages

secondary markets

Answer: b p 15 (16) 14. Finance has its origins in: a. economics and statistics b. accounting and mathematics c. management and operations d. economics and accounting Answer: d p 4 (5)

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15. Economists use a ___________________ framework to explain how the prices and quantities of goods and services are determined in a free-market economic system. a. opportunity b. marginal cost c. supply-and-demand d. anti-monopoly e. none of the above Answer: c p 4 (5) 16. ____________________ provide the record-keeping mechanism for showing ownership of the financial instruments used in the flow of financial funds between savers and borrowers and record revenues, expenses, and profitability of organizations that produce and exchange goods and services. a. Financial Managers b. Accountants c. Operations Managers d. Statisticians e. none of the above Answer: b p 4 (5-6) Finance has its origins in economics and accounting 17. _________________________________________ are crucial elements of the three areas of finance. a. Businesses and the federal government b. International organizations such as the World Bank and International Monetary Fund c. Well-developed barter systems d. Financial institutions, financial markets, investments, and financial management Answer: d p 5 (5-6) & Fig 1.1 and slide 2 18. ___________________ are intermediaries, such as banks, insurance companies, and investment companies that engage in financial activities to aid the flow of funds from savers to borrowers or investors. a. Financial Institutions b. Financial market organizations Financial institutions: organizations or intermediaries c. Federal agencies that help the financial system operate efficiently and d. International financial organizations transfer funds from savers and investors to individuals, e. none of the above businesses, and governments that seek to spend or invest the funds in physical assets

Answer: a p 4 (5) 19. ____________________ in business involves making decisions relating to the efficient use of financial resources in the production and sale of goods and services. a. Financial management b. Financial economics c. Investment management d. Asset allocation e. none of the above Answer: a p 14, 16 (5, 8) being efficient is important for businesses to be successful

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20. Maximizing _____________________ is accomplished through effective financial planning and analysis, asset management, and the acquisition of financial capital. a. the value of perquisites. b. the owners’ wealth. c. the firm's profits d. the firm's earnings e. none of the above Answer: b p 5 (6) owners’ wealth maximization should be the goal of financial decision makers 21. Successful businesses typically progress through a series of life-cycle stages—from the idea stage to exiting the business; these five stages include the: a. development stage, startup stage, survival stage, rapid growth stage, and maturity stage. b. idea stage, design stage, operating stage, rebuilding stage, and decline stage c. development stage, operating stage, rebuilding stage, rapid growth stage, and maturity stage d. idea stage, startup stage, rapid growth stage, survival stage, and decline stage Answer: a p 6 (7) statement on this page, this is the terminology commonly used for these stages 22. _______________ is the study of how growth-driven, performance-focused, early-stage (from development through early rapid growth) firms raise financial capital and manage their operations and assets. a. Personal finance b. Corporate finance c. Entrepreneurial finance definition d. Investment banking e. none of the above Answer: c p 6 (7) 23. _______________ is the study of how individuals prepare for financial emergencies, protect against premature death and the loss of property, and accumulate wealth over time. a. Personal finance b. Corporate finance c. Entrepreneurial finance d. Investment banking e. none of the above Answer: a p 6 (7) 24. Reasons we study finance include all of the following except: a. To make informed economic decisions b. To make informed personal and business investment decisions c. To make informed career decisions based on a basic understanding of business finance d. To make informed medical decisions e. all of the above are reasons to study finance. Answer: d p 6-7 (7-8)

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25. Multiple Answer Question: Select ALL of the following are among the six principles of finance: a. Money has a time value. b. Higher returns are expected for taking on more risk. c. Diversification of investments most of the time increases risk. d. Financial markets are efficient in pricing securities. e. Reputation does not matter. Answer: a, b, and d p 8 (10) 26. Multiple Answer Question: Select ALL of the following are not among the six principles of finance: a. All decisions are ultimately financial decisions. b. Higher returns are expected for taking on more risk. c. Diversification of investments can reduce risk. d. Financial markets are efficient in pricing securities. e. Managers and stockholders objectives are always the same. Answer: a and e p 8 (10) 27. Which statement best describes the six principles of finance? a. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments does not impact risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters. b. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters. c. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are inefficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters. d. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation doesn’t matter. Answer: b p 8-11 (10-12) 28. Multiple Answer Question: Select ALL of the following that an effe...