D076- Finance skills for managers
TESTS
1What are the purposes of financial markets? - ✔✔✔To provide liquidity and determine prices
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? - ✔✔✔Set a strict covenant
that the company cannot easily achieve.
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? - ✔✔✔Agency problem due to conflicting interests
A large corporation is looking to merge with another large corporation. Which financial institution can
help them do this? - ✔✔✔Investment bank
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? - ✔✔✔Primary
market
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? - ✔✔✔It may indicate an economic downturn
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? - ✔✔✔Making a financing decision
, How can agency costs be mitigated? - ✔✔✔Aligning managers' interests with shareholders' interests
How can agency problems be reduced through corporate control? - ✔✔✔Executive compensation
How do insurance companies pay policyholders when a claim is made? - ✔✔✔They use returns from
stocks and bonds.
In what way are coincident indicators useful? - ✔✔✔They are analyzed during economic shifts to
provide information about the current state of the economy.
In which financial market are securities such as stocks and bonds are traded after their initial issuance? -
✔✔✔Secondary market
In which type of market would a company issue bonds or stocks for the first time? - ✔✔✔Primary
market
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? - ✔✔✔Give a personal recommendation of the company's product while
explaining its performance relative to the market over the past several years.
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? - ✔✔✔To maximize individual utility
TESTS
1What are the purposes of financial markets? - ✔✔✔To provide liquidity and determine prices
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? - ✔✔✔Set a strict covenant
that the company cannot easily achieve.
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? - ✔✔✔Agency problem due to conflicting interests
A large corporation is looking to merge with another large corporation. Which financial institution can
help them do this? - ✔✔✔Investment bank
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? - ✔✔✔Primary
market
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? - ✔✔✔It may indicate an economic downturn
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? - ✔✔✔Making a financing decision
, How can agency costs be mitigated? - ✔✔✔Aligning managers' interests with shareholders' interests
How can agency problems be reduced through corporate control? - ✔✔✔Executive compensation
How do insurance companies pay policyholders when a claim is made? - ✔✔✔They use returns from
stocks and bonds.
In what way are coincident indicators useful? - ✔✔✔They are analyzed during economic shifts to
provide information about the current state of the economy.
In which financial market are securities such as stocks and bonds are traded after their initial issuance? -
✔✔✔Secondary market
In which type of market would a company issue bonds or stocks for the first time? - ✔✔✔Primary
market
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? - ✔✔✔Give a personal recommendation of the company's product while
explaining its performance relative to the market over the past several years.
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? - ✔✔✔To maximize individual utility
