Financial Management: Core Concepts, 4e (Brooks)
Chapter 1 Financial Management
1) At its most basic level, the function of financial intermediaries is to ________.
A) track and report interest rates
B) move money from lenders to borrowers and back again
C) report all financial transactions to the federal government
D) effect a transfer of wealth in society
2) Which of the following is NOT an example of a financial transaction?
A) Your parents use their credit card to pay for your current term’s college tuition.
B) You use the ATM at Heathrow airport in London to withdraw British pounds.
C) Your roommate lends you $20 and you repay it in one week.
D) All of the above are financial transactions.
3) The movement of money from lender to borrower and back again is known as ________.
A) the circle of life
B) corporate finance
C) the cycle of money
D) money laundering
4) The common objective of borrowing and lending is to ________.
A) make all parties better off
B) gain a profit at the other’s expense
C) make a firm or individual appear more liquid than is really the case
D) thwart regulatory authority
5) Which of the following is NOT a function of a financial intermediary in the
lending/borrowing process?
A) To help establish terms of the lending/borrowing agreement
B) To match the borrower and the lender
C) To bear the risk that the lender will not repay
D) To bear the risk that the borrower will not repay
6) Professor Gaston, your History teacher, borrows money at a rate of 6% per year from the
Valley State Bank for a tuition loan for her son. You have $1,200 deposited into your checking
account at the same bank earning a rate of 0.5% per year. Which of the following statements is
TRUE?
A) The bank is criminally liable to you for paying an interest rate lower than the expected rate of
inflation.
B) You and your professor have an obvious conflict of interest because you have accounts at the
same financial institution.
C) You benefit from earning interest on your deposit, safety for your funds, and having a
recognizable means for paying for your financial obligations without having to hold cash.
D) Your professor is the only party to be made worse off by this example because she is the only
party paying net interest.
7) The basic function of financial intermediaries is to move advice from lenders to borrowers and
back to lenders.
8) In the lending/borrowing process, a financial intermediary function is to bear the risk that the
borrower will not repay.
9) All financial transactions have a buyer and a seller.
10) Give three examples of a financial transaction.
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1.2 Overview of Finance Areas
1) Which of the following best identifies the four main areas of finance?
A) Exchange rate management, investments, financial institutions and markets, international
finance
B) Corporate finance, investments, capital structure, international finance
C) Corporate finance, investments, financial institutions and markets, international finance
D) Corporate finance, capital budgeting, financial institutions and markets, regulation
2) Of the following, which is NOT one of the four main areas of finance?
A) International finance
B) Corporate finance
C) Investments
D) Working capital management
3) The set of financial activities that support the OPERATIONS of a business is best described
by which main area of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
D) International finance
4) ________ is the area of finance concerned with activities such as borrowing funds to finance
long-term projects; For example, plant expansions or new product launches.
A) Working capital management
B) International finance
C) Investments
D) Corporate finance
5) ________ is the area of finance concerned with activities such as repayment of borrowed
funds through dividends or interest payments.
A) Investments
B) Corporate finance
C) Capital budgeting
D) International finance
6) ________ is the area of finance concerned with the activities of buying and selling financial
assets such as stocks and bonds.
A) Investments
B) Corporate finance
C) International finance
D) Financial markets and institutions
7) Which of the following is NOT typically thought of as an investment activity?
A) Accurately pricing financial assets
B) The process of buying and selling financial assets
C) Repaying borrowed funds
D) Negotiating the rules and regulations of financial transactions
8) “The organized financial intermediaries and the forums that promote the cycle of money” is a
good definition of which of the following main areas of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
D) International finance
9) Financial institutions and markets ________.
A) are the organized financial intermediaries and the forums that promote the cycle of money
B) compose the set of financial activities that support the operations of a business
C) are the activities centered on the purchase and sale of financial assets
D) are concerned only with the addition of a multinational element to all finance activities
10) Of the following, which is NOT an example of a financial intermediary?
A) Commercial bank
B) Insurance company
C) Investment bank
D) All of the above are financial intermediaries.
11) Of the following, which is NOT an activity engaged in by a financial intermediary?
A) Matching borrowers and lenders
B) Bearing risk
C) Managing retirement portfolios for large classes of employees
D) Enforcement of regulations including the application of fines for financial violations
12) “Concern with the multinational elements of financial activities” best describes which of the
four main areas of finance?
A) Investments
B) International finance
C) Corporate finance
D) Financial institutions and markets
13) Which of the following is a reason why expertise in international finance is important?
A) The process of assessing risk among many countries is more difficult than assessing risk for a
single country.
B) Financial regulatory rules and requirements differ from country to country.
C) Changes in economic conditions impact the relative values of currency among countries.
D) All of the above are reasons for gaining expertise in international finance.
14) Which of the following is NOT an activity of a financial institution or market?
A) Bringing together buyers and sellers of financial assets
B) Providing a market for the transaction of financial assets
C) Providing information to buyers and/or sellers of financial assets
D) All are activities of financial institutions.
15) Financial markets and institutions is the set of activities generally concerned with the buying
and selling of financial assets such as stocks and bonds.
16) Financial institutions and markets are the organized financial intermediaries and the forums
that promote the cycle of money.
17) The four main areas of finance (corporate, investments, financial markets and institutions,
and international finance) are mutually exclusive topics.
18) Gold and land are considered “real assets” because they are permanent, whereas a
commodity such as rice is not a real asset because it is consumable.
19) What are the four main areas of finance? Give a brief definition of each.
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1.3 Financial Markets
1) ________ are the forums where buyers and sellers of financial assets and commodities meet.
A) Housing markets
B) Federal Reserve banks
C) Financial markets
D) Automotive shows
2) Financial markets can be classified by which of the following?
A) Type of asset traded
B) Maturity of the financial asset
C) Owner of the financial asset
D) All of the above can be classifications of financial markets.
3) Stocks are bought and sold in ________ markets.
A) equity
B) debt
C) derivatives
D) foreign exchange
4) Bonds are bought and sold in ________ markets.
A) equity
B) debt
C) derivatives
D) foreign exchange
5) Options are bought and sold in ________ markets.
A) equity
B) debt
C) derivatives
D) foreign exchange
6) Currencies are bought and sold in ________ markets.
A) equity
B) debt
C) derivatives
D) foreign exchange
7) Which of the following is NOT an example of an equity market transaction?
A) Mark sells his shares of Apple stock.
B) Grant contacts his broker and requests a purchase of IBM bonds.
C) Pavlina buys shares of a small company stock traded on the NASDAQ.
D) All of the above are equity market transactions.
8) Financial assets that will mature within a year are bought and sold in the ________ market.
A) debt
B) capital
C) stock
D) money
9) The sale of “new” securities, where the financial asset is being traded for the very first time, is
said to take place in the ________ market.
A) primary
B) money
C) secondary
D) capital
10) The sale of “used” securities, where the financial asset is being traded from one individual to
another and the proceeds do not go to the original issuer of the security, is said to take place in
the ________ market.
A) primary
B) money
C) secondary
D) capital
11) Sale of new common stock in the primary market is regulated by the ________, and a sale of
used common on the secondary market is regulated by the ________.
A) SEC; FDIC
B) SEC; SEC
C) FDIC; Federal Reserve
D) Federal Reserve; SEC
12) Which of the following is TRUE of a dealer market?
A) The dealer buys and sells assets out of his own inventory.
B) The dealer acts as a broker, lining up the owners of assets with the purchasers of assets.
C) The dealer acts as an auctioneer of securities and takes a percentage of the sale as
compensation.
D) None of the above is true of a dealer market.
13) Which of the following is NOT a characteristic of a dealer market?
A) Dealers make a profit on the spread between what they pay for financial assets and what they
sell them for.
B) Securities are auctioned off to the highest bidder.
C) Dealers buy and sell from their own portfolio.
D) All of the above are characteristics of the dealer market.
14) Financial markets are the forums where buyers and sellers of financial assets come together.
15) If a company offers stock for sale for the first time and the proceeds go to the company, then
this is a sale in the primary market.
16) Auction markets consist of dealers buying and selling from their own portfolios.
17) Equity markets are where bonds are bought and sold.
18) Give an example of how a corporate manager might use the capital markets in the operation
of his/her corporation. Be sure to define capital market in your answer.
19) Define “money market” and “capital market” and give an example of a security that trades in
each.
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1.4 The Finance Manager and Financial Management
1) ________ is the typical title of the corporate executive charged with determining the best
repayment structure for borrowed funds to ensure timely repayment and sufficient cash for daily
operations.
A) Chief Executive Officer (CEO)
B) Chief Financial Officer (CFO)
C) Chairman
D) Chief Operating Officer (COO)
2) ________ is NOT a main category of financial management.
A) Capital budgeting
B) Capital structure
C) Accounts payable management
D) Working capital management
3) The process of planning, evaluating, selecting, and managing the financing of long-term
operating projects of the company is termed ________.
A) capital budgeting
B) capital structure
C) accounts receivable management
D) working capital management
4) ________ addresses the question of what business a firm should be in over the long run.
A) Capital budgeting
B) Capital structure
C) Working capital management
D) Accounts receivable management
5) The means by which a company is financed refers to the firm’s ________.
A) capital budgeting
B) capital structure
C) accounts receivable management
D) working capital management
6) ________ addresses the question of where a firm raises money to finance its business
activities.
A) Capital budgeting
B) Capital structure
C) Working capital management
D) Accounts receivable management
7) Managing the firm’s short-term financing activities is known as ________.
A) capital budgeting
B) capital structure
C) accounts receivable management
D) working capital management
8) Which of the following is NOT a capital structure question?
A) A delivery company chooses to buy more trucks.
B) A manufacturing firm chooses to take the discount for paying accounts payable early.
C) A retail firm chooses to use a new supplier.
D) None of the above are capital structure questions.
9) Capital budgeting is best defined by which of the following questions?
A) How will we fund our product and service choices?
B) What business are we in?
C) How will we manage our day-to-day financial needs?
D) What is our firm’s best choice for corporate governance?
10) Capital structure is best defined by which of the following questions?
A) How will we finance our product and service choices?
B) What business are we in?
C) How will we manage our day-to-day financial needs?
D) What is our firm’s best choice for corporate governance?
11) Which of the following is NOT an activity of working capital management?
A) Establishing the firm’s receivable policies
B) Establishing the firm’s payment policies
C) Choosing the appropriate level of inventory
D) Choosing the appropriate mix of long-term debt and equity
12) Which of the following is NOT a capital budgeting question?
A) The choice of which long-term assets to purchase to meet the firm’s business goals
B) The choice of what type of business a firm wants to operate
C) The proper mix of stocks and bonds to issue for financing assets
D) None of the above are capital budgeting questions.
13) ________ addresses the question of how to handle our day-to-day business needs.
A) Capital budgeting
B) Capital structure
C) Working capital management
D) Accounts receivable management
14) Capital budgeting is the means by which a company is financed.
15) Capital structure is the process of planning, evaluating, selecting, and managing the long-
term operating projects of the company.