Module 2

Question 1

Why do firms need the financial system?

Answer 1

to obtain long term funds, accommodate near term cash inflows and outflows, to facilitate short term cash management policies

Question 2

What is the hurdle rate?

Answer 2

the cost of financing

Question 3

Financial institutions are intermediaries that channel the savings of individuals, businesses, and governments into loans or investments.

Answer 3

true

Question 4

Investment banks make loans that individuals and businesses use to buy goods or expand business operations, which in turn leads to more deposited funds that make their way to bank

Answer 4

false

Question 5

The capital market is where firms obtain external short term financing.

Answer 5

false

Question 6

The shadow banking system has escaped regulation primarily because it does not accept traditional bank deposits. As a result, many of the shadow banking institutions have been able to employ higher market, credit and liquidity risks, and have higher capital requirements.

Answer 6

false

Question 7

From investors’ perspectives, the role of capital markets is to be an efficient market that allocates funds to their most productive uses.

Answer 7

true

Question 8

a liquid market

Answer 8

has many available buyers and sellers and comparatively low transaction costs

Question 9

Francis Galton’s discovery was

Answer 9

a diverse collection of independently deciding individuals is likely to make better value decisions than individuals or even experts

Question 10

An efficient market (Links to an external site.) allocates funds to their most productive uses as a result of competition among wealth-maximizing investors and determines and publicizes prices that are believed to be close to their true value.

Answer 10

true

Question 11

As described in “The 2008 Credit Crisis Visualized,” the financial system, commonly known as Wall Street, brings together

Answer 11

investors and homeowners (borrowers)

Question 12

As described in “The 2008 Credit Crisis Visualized,” low interest rates

Answer 12

incentivized banks to increase leverage

Question 13

Financial leverage is borrowing money to amplify the outcome of a ________.

Answer 13

deal

Question 14

A collateralized debt obligation (CDO) bundles house payments and creates safe, okay, and risky investment vehildes.

Answer 14

true

Question 15

From” The Inside Job” trailer - One criticism leveled at investment banks following the 2008 financial crisis was they were having massive private gains at the expense of public losses.

Answer 15

true

Question 16

From “The Big Short,” the antagonists (those betting against the big banks) individually or together

Answer 16

sought to profit from the greed and stupdity of big banks, argued fraud has never worked (long term), argued there is not diffrence between stupid and illegal

Question 17

Lending discrimination occurs when lenders base credit decisions on factors related to the applicant’s creditworthiness.

Answer 17

false

Question 18

Lending discrimination happens when lenders base credit decisions on factors other than the borrower’s creditworthiness, including any of the protected classes defined under federal law. Today, what three federal laws offer protection against lending discrimination?

Answer 18

The Fair Housing Act, The Community Reinvestment Act, and the Equal Credit Opportunity Act

Question 19

What practice made it impossible for many members of minority groups to qualify for loans to buy and improve homes?

Answer 19

redlining

Question 20

Suppose Fidelity Investments requires applicants for its financial advisor positions to have the Chartered Financial Analyst (CFA) designation, hires no Black financial advisors, and very few Blacks have the CFA designation. The disparity in Fidelity’s hiring of White versus Black financial advisors is most likely attributable to

Answer 20

statistical discrimination

Question 21

From Professor Charles’ youtube talk in the e-text. Suppose you have two labor markets with different sets of employers and with different average prejudice against Blacks levels. Therefore, discrimination against Blacks will be worse, as measured by wage gaps between Whites and Blacks, in the labor market with the highest average level of prejudice against Blacks.

Answer 21

false

Question 22

From Professor Charles’ youtube talk in the e-text. Professor Charles’ research shows that average prejudice levels over the past 50 years have decreased dramatically but wage and promotion differences persist but at a lower level.

Answer 22

true

Question 23

Finance is mainly a backward-looking summary of past decisions.

Answer 23

false

Question 24

The market value of an assets is its cost at the time of purchase

Answer 24

false

Question 25

Book values have the disadvantage that they change unpredictably and may not be easy to measure.

Answer 25

false

Question 26

Revenues or Sales ←money received by the firm - Expenses ← debts to suppliers and employees - ??? ← accounting item to estimate a reduction in the value of an asset with the passage of time, due in particular to wear and tear = EBIT ←Earnings before Interest and Taxes - Interest Expense ← Money owed to banks or bondholders = EBT ←Earnings before taxes - Tax ← debt to the government = Net Income ←Net Income

Answer 26

depreciation expense

Question 27

Select all the different methods that can be used to compute depreciation expense.

Answer 27

Straight-line Depreciation, Accelerated Cost Recovery System (ACRS), Modified Accelerated Cost Recovery System (MACRS)

Question 28

Depreciation represents a change in cash holdings so it impacts earnings after taxes.

Answer 28

false

Question 29

The top corporate tax rate is ... percent for 2018 and after.

Answer 29

21

Question 30

Operating Cash Flow (OCF) = X – Y+ Z

Answer 30

OCF = EBIT - taxes + depreciation

Question 31

Net income is determined by accounting items such as depreciation and represents actual changes in the cash available to a firm.

Answer 31

false

Question 32

Which of these are liquidity ratios?

Answer 32

quick ratio, current ratio, cash ratio

Question 33

Liquidity (Links to an external site.) is the ability to convert assets into cash quickly and cheaply.

Answer 33

true

Question 34

The purpose of liquidity ratios is to determine a company's ability to pay off current debt obligations by raising external capital.

Answer 34

false

Question 35

Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the cash ratio, the quick ratio, the water ratio, and the current ratio

Answer 35

false

Question 36

Which of these are leverage ratios?

Answer 36

``` Debt/Equity Ratio Debt Ratio Long-term Debt Ratio Equity Multiplier Quick Ratio ```

Question 37

Leverage may increase both the risk and the return to a firm’s shareholders.

Answer 37

true

Question 38

Which of these are Turnover ratios?

Answer 38

Inventory Turnover Ratio Total Asset Turnover Ratio Days’ Sales in Inventory Receivables Turnover

Question 39

Firms with higher turnover ratios are generally more operationally efficient than firms with lower turnover ratios.

Answer 39

true

Question 40

Which of these are profitability ratios?

Answer 40

ROE, net profit margin, ROA

Question 41

Profitability ratios give measures of how the firm’s accounting measures of profits are related to its other accounting items. A Profit Margin is the firm’s profit per dollar of assets and there are three main profit margin measures.

Answer 41

false

Question 42

Which of these are market ratios?

Answer 42

Market-to-Book Ratio Market Capitalization Earnings Per Share P/E Ratio

Question 43

The market value of healthy companies exceed their book value. After all, if managers are not creating value investors will close the business and liquidate (sell) the assets and be better off.

Answer 43

true

Question 44

Which are payout and growth rate ratios?

Answer 44

Sustainable Growth Rate Internal Growth Rate Retention Ratio Dividend Payout Ratio

Question 45

According to the letter to shareholders in Berkshire Hathaway's 2019 Annual Report, Berkshire seeks to buy new businesses that

Answer 45

are available at a sensible price are run by able and honest managers earn good returns on the net tangible capital required in their operation

Question 46

What tools can be used to solve time value of money problems?

Answer 46

Excel spreadsheet Manually by a mathematical formula Tables of TVM factors Financial calculator

Question 47

Which of the following is NOT true about the time value of money concept?

Answer 47

The general approach is to take money received in the future as a benchmark and compare that to how much the same amount of money is worth now.

Question 48

You should never compare cash flows occurring at different times without first discounting them to a common date.

Answer 48

true

Question 49

The advantage to savers and investors of receiving compound interest rather than simple interest is that future values are larger because interest is earned on accumulated interest payments. Also, the difference in future values becomes smaller as time goes by.

Answer 49

false

Question 50

Future values are positively related to interest rates and time - the bigger the interest rate and the more compounding periods, the greater the future value will be.

Answer 50

true

Question 51

There is a linear relationship between future values and the number of compounding periods for any present value and non-zero interest rate.

Answer 51

false

Question 52

An ordinary (deferred) annuity is an annuity for which the cash flow occurs at the beginning of each period.

Answer 52

false

Question 53

A ______ is a special type of annuity with infinite life, providing continual annual cash flow.

Answer 53

perpetuity

Question 54

Other things being equal, the more frequent the compounding period, the:

Answer 54

higher the future value