978-0132757089 Chapter 02

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Financial Management: Principles and Applications, 11e (Titman)

Chapter 2 Firms and the Financial Market

1) Most businesses are considered to be savers.

Topic: 2.1 The Basic Structure of the U.S. Financial Markets

Keywords: financial intermediaries

Principles: Principle 2: There Is a Risk-Return Tradeoff

2) Financial intermediaries help bring savers and borrowers together.

Topic: 2.1 The Basic Structure of the U.S. Financial Markets

Keywords: financial intermediaries

Principles: Principle 2: There Is a Risk-Return Tradeoff

3) Individuals are often savers because they wish to save for things such as a down payment on a

home or graduate school.

Topic: 2.1 The Basic Structure of the U.S. Financial Markets

Keywords: risk

Principles: Principle 2: There Is a Risk-Return Tradeoff

4) Financial markets are where money and credit are exchanged.

Topic: 2.1 The Basic Structure of the U.S. Financial Markets

Keywords: financial markets

Principles: Principle 2: There Is a Risk-Return Tradeoff

1) All of the following operate as financial intermediaries EXCEPT:

A) commercial banks.

B) mutual funds.

C) insurance companies.

D) public universities.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: financial intermediaries

2) All of the following are true about insurance companies EXCEPT:

A) They invest their reserves.

B) They may guarantee to reimburse lenders should lenders’ loans go into default.

C) They participate in equipment leasing.

D) They may only invest their reserves in interest paying bank accounts under Federal law.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: financial institutions

Principles: Principle 1: Money Has a Time Value

3) Which of the following is true regarding Investment Banks?

A) As a result of the financial crisis of 2008, all stand alone Investment banks either failed, were

merged into commercial banks, or became commercial banks.

B) Under the Glass-Steagal act, commercial banks were allowed to operate as Investment banks.

C) When Glass-Steagal was repealed in 1999, commercial banks and Investment banks had to be

separate entities.

D) As of 2010, stand alone Investment banks are numerous.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: financial institutions

4) Each of the following is true of Mutual Funds EXCEPT:

A) Funds can be classified as load or no-load funds.

B) Mutual Fund shares must be bought from or sold to the Fund by investors.

C) An index fund is the fund with the highest expenses payable by investors.

D) The NAV is the total value of stock held by the fund divided by the number of outstanding

shares in the mutual fund.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: mutual funds

Principles: Principle 3: Cash Flows Are the Source of Value

5) In financial markets, borrowers pay savers by giving them a return on investment.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: financial intermediaries

Principles: Principle 3: Cash Flows Are the Source of Value

6) All financial intermediaries are banks.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: financial intermediaries

7) Mutual Funds and ETFs provide the investor a chance to diversify without having to buy

shares in numerous corporations.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: mutual funds

Principles: Principle 2: There Is a Risk-Return Tradeoff

8) Private equity firms are financial intermediaries that are not traded on public capital markets.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: financial intermediaries

Principles: Principle 2: There Is a Risk-Return Tradeoff

9) Capital markets are markets for short term debt instruments maturing in less than one year,

and money markets are markets for long term debt instruments maturing in more than one year.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: capital markets

Principles: Principle 1: Money Has a Time Value

10) Banks that are financial intermediaries generate earnings when they facilitate the transfer of

money from savers to borrowers by paying savers a smaller return than they demand from

borrowers.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: financial intermediaries

Principles: Principle 3: Cash Flows Are the Source of Value

11) In Financial markets, borrowers and lenders most both be located in the same country.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: capital markets

12) The difference between mutual funds and ETFs is that ETFs are traded on exchanges and

mutual funds are not.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: financial intermediaries

Principles: Principle 3: Cash Flows Are the Source of Value

13) Describe the costs and benefits to investors of owning Mutual Funds.

Topic: 2.2 The Financial Marketplace: Financial Institutions

Keywords: mutual funds

Principles: Principle 3: Cash Flows Are the Source of Value

1) Which of the following is true about bonds?

A) They are obligations from the investor to the corporation.

B) Their interest rate always varies with the Consumer Price Index

C) They have a fixed maturity, and they pay an amount equal to the maturity value times the

coupon rate each year.

D) At maturity of the bond, the investor receives the market price of the bond.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: bonds

Principles: Principle 3: Cash Flows Are the Source of Value

2) Which of the following is true about Preferred Stock?

A) Preferred shareholders always have voting rights.

B) If at a time a dividend is due on preferred stock, if the company does not have the funds to

pay the dividend, the right of the preferred shareholders to collect that dividend lapses.

C) Preferred dividends are not tax deductible to the corporation.

D) Like bonds, preferred stock always has a maturity date at which time the issue price must be

repaid to shareholders.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: preferred stock

Principles: Principle 2: There Is a Risk-Return Tradeoff

3) A security is a written instrument that represents a financial claim.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: securities

Principles: Principle 1: Money Has a Time Value

4) Primary markets are always larger than secondary markets.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: primary and secondary markets

Principles: Principle 2: There Is a Risk-Return Tradeoff

5) ABC Corporation issued and sold 10 shares of stock to Irene Investor, a private individual.

This represents a secondary market transaction.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: primary and secondary markets

Principles: Principle 3: Cash Flows Are the Source of Value

6) Colin, a private individual, sold one thousand shares of stock in DEF Corporation to Colleen,

also a private individual. This represents a secondary market transaction.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: primary and secondary markets

Principles: Principle 3: Cash Flows Are the Source of Value

7) Investors in securities markets do not use a financial intermediary.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: securities

Principles: Principle 3: Cash Flows Are the Source of Value

8) A bond matures in less than 10 years.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: bonds

Principles: Principle 2: There Is a Risk-Return Tradeoff

9) Bonds are less risky than are stocks because their return is more predictable.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: bonds

Principles: Principle 2: There Is a Risk-Return Tradeoff

10) Owners of common stock are the owners of the firm.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: stocks

11) Each year, shareholders receive a dividend equal to the firm’s net earnings divided by the

number of shares of common stock.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: stocks

Principles: Principle 3: Cash Flows Are the Source of Value

12) A stock’s market value is dependent on investors’ expectations of future cash flows to the

firm.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: stocks

Principles: Principle 3: Cash Flows Are the Source of Value

13) Preferred stock prices are solely dependent on investors’ expectations of future cash flows to

the corporation.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

14) A company has the option to pay bond interest or not.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: bonds

Principles: Principle 3: Cash Flows Are the Source of Value

15) There are more companies listed on NASDAQ than are listed on the New York Stock

Exchange.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: stock exchanges

16) Organized security exchanges do not physically occupy space.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: stock exchanges

17) Explain how securities markets provide a link between the corporation and investors.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: securities markets

Principles: Principle 3: Cash Flows Are the Source of Value

18) Describe the tax benefits to a corporation of issuing debt rather than issuing stock.

Topic: 2.3 The Financial Marketplace: Securities Markets

Keywords: tax benefits