D076 Unit 2 Practice Questions
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?
-Let the company manipulate accounting procedures.
-Set a strict covenant that the company cannot easily achieve.
-Push the company to pay dividends to the shareholders.
-Let the company take the mortgage loan because of its long partnership with the bank. - ✔✔B
A financial manager at a company is trying to determine whether to issue new stocks or new bonds to
cover the costs of a project the company is doing the next year.
Which main task in business finance is this situation an example of?
-Making investment decisions
-Making financing decisions
-Managing interdepartmental loans
-Managing working capital - ✔✔B
A large corporation is looking to merge with another large corporation. Which financial institution can
help them do this?
-Investment bank
-Private equity institution
-Pension fund
-Central bank - ✔✔A
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?
-Dealer market
,-Primary market
-Secondary market
-Futures and options market - ✔✔B
A sign company is planning to have an initial public offering (IPO). In which type of market will its stock
first be sold to the public?
-Money market
-Secondary market
-Primary market
-Efficient market - ✔✔C
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.
-It may indicate a decreasing unemployment rate along with higher wages.
-It may indicate that the economy is in a steady state.
-It may reflect an expectation that the economy will grow in the future along with higher inflation. - ✔
✔A
Endothon Company has decided to move its production from the United States to a foreign country.
Which situation below would constitute an unethical action by the company?
-Monitoring public perception of the company
-Telling current employees about the decision early on
-Lowering costs while keeping prices the same for customers
-Saving money by paying inadequate wages to workers overseas - ✔✔D
, 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 an investment decision
-Making a financing decision
-Managing working capital
-Managing financial investments - ✔✔B
How can agency costs be mitigated?
-Creating a corporate hierarchy of several managers
-Aligning managers' interests with shareholders' interests
-Releasing managers who do not attempt to maximize immediate shareholder value
-Separating owners from management so their interests do not conflict - ✔✔B
How can agency problems be reduced through corporate control?
-Setting strict goals
-Executive compensation
-Accounting manipulations
-Acquisition of a foreign subsidiary - ✔✔B
How can investing help a person reach personal financial goals?
-It provides access to potential revenue or increases in value to help meet goals faster.
-It provides a guaranteed future outcome in order to predictably meet financial goals.
-It helps a person understand how money was spent previously in order to reliably predict future
expenses.
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?
-Let the company manipulate accounting procedures.
-Set a strict covenant that the company cannot easily achieve.
-Push the company to pay dividends to the shareholders.
-Let the company take the mortgage loan because of its long partnership with the bank. - ✔✔B
A financial manager at a company is trying to determine whether to issue new stocks or new bonds to
cover the costs of a project the company is doing the next year.
Which main task in business finance is this situation an example of?
-Making investment decisions
-Making financing decisions
-Managing interdepartmental loans
-Managing working capital - ✔✔B
A large corporation is looking to merge with another large corporation. Which financial institution can
help them do this?
-Investment bank
-Private equity institution
-Pension fund
-Central bank - ✔✔A
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?
-Dealer market
,-Primary market
-Secondary market
-Futures and options market - ✔✔B
A sign company is planning to have an initial public offering (IPO). In which type of market will its stock
first be sold to the public?
-Money market
-Secondary market
-Primary market
-Efficient market - ✔✔C
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.
-It may indicate a decreasing unemployment rate along with higher wages.
-It may indicate that the economy is in a steady state.
-It may reflect an expectation that the economy will grow in the future along with higher inflation. - ✔
✔A
Endothon Company has decided to move its production from the United States to a foreign country.
Which situation below would constitute an unethical action by the company?
-Monitoring public perception of the company
-Telling current employees about the decision early on
-Lowering costs while keeping prices the same for customers
-Saving money by paying inadequate wages to workers overseas - ✔✔D
, 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 an investment decision
-Making a financing decision
-Managing working capital
-Managing financial investments - ✔✔B
How can agency costs be mitigated?
-Creating a corporate hierarchy of several managers
-Aligning managers' interests with shareholders' interests
-Releasing managers who do not attempt to maximize immediate shareholder value
-Separating owners from management so their interests do not conflict - ✔✔B
How can agency problems be reduced through corporate control?
-Setting strict goals
-Executive compensation
-Accounting manipulations
-Acquisition of a foreign subsidiary - ✔✔B
How can investing help a person reach personal financial goals?
-It provides access to potential revenue or increases in value to help meet goals faster.
-It provides a guaranteed future outcome in order to predictably meet financial goals.
-It helps a person understand how money was spent previously in order to reliably predict future
expenses.
