Fin 223: Sample MCQ , CH-1

1. A surplus spending unit is one who(se): (a) Income and expenditures for the period are equal. (b) Income for the period exceeds consumption and real investment expenditure. (c) Expenditure for the period exceeds receipts. (d) Uses credit cards for all consumer purchase.. 2. All except one is associated with direct financing: (a) One financial claim contract. (b) A broker, dealer or investment banker. (c) Small denomination financial claims. (d) Government and business borrowers dominate. 3. A capital market financing is most likely to finance: (a) New plant and equipment. (b) Seasonal inventory needs. (c) A quarterly dividend payment. (d) The sale of common stock. 4. Large industrial corporations are involved in the money market by: (a) Investing excess cash balances. (b) Buying and selling goods on credit in international trade. (c) Issuing commercial papers. (d) All of the above. 5. The money market is an important financial market because: (a) The money market is the worlds liquidity market. (b) It is the market in which the central bank conducts monetary policy. (c) The government finances most of its credit needs in the money market. (d) All of the above. 6. Financial intermediation is best described as (a) The flow of savings of lenders to borrowers in return for the IOU of the borrower. (b) The flow of borrowed funds directly to deficit spending units. (c) The purchase of indirect financial claims of financial intermediaries and the subsequent purchase of direct financial claims, held as liabilities of financial intermediaries. (d) The purchase of direct financial claims with funds raised by issuing separate indirect financial claims to savers. Answers: 1. (b) 2. (c) 3. (a) 4. (d) 5. (d) 6(d)

7. Shareholder wealth" in a firm is represented by: a) b) c) d) The market price per share of the firm's common stock. The amount of salary paid to its employees. The book value of the firm's assets less the book value of its liabilities. The number of people employed in the firm.

8. The long-run objective of financial management is to: a) b) c) d) Maximize earnings per share. Maximize the value of the firm's common stock. Maximize return on investment. Maximize market share.

9. The focal point of financial management in a firm is: a) b) c) d) The number and types of products or services provided by the firm. The minimization of the amount of taxes paid by the firm. The creation of value for shareholders. The dollars profits earned by the firm.

10. The decision function of financial management can be broken down into the decisions. a. b. c. d. financing and investment investment, financing, and asset management financing and dividend capital budgeting, cash management, and credit management

11. Which of the following enjoys limited liability? a. b. c. d. A general partnership. A corporation. A sole proprietorship. None of the above.

Answers 7. (a) 8. (b) 9. (c) 10. (b) 11.(b)

12. A major advantage of the corporate form of organization is: a. b. c. d. Ease of organization. Limited owner liability. Legal restrictions. Reduction of double taxation.

13. Which of the following is not an example of a financial intermediary? a. b. c. d. International Business Machines, Inc. (IBM). Vanguard Mutual Fund. El Dorado Savings and Loan Association. Bank of America.

14. The purpose of financial markets is to: a. b. c. d. Increase the price of common stocks. Lower the yield on bonds. Allocate savings efficiently. Control inflation.

15. How are funds allocated efficiently in a market economy? a. The most powerful economic unit receives the funds. b. The economic unit that is willing to pay the highest expected return receives the funds. c. The economic unit that considers itself most in need of funds receives them. d. Receipt of the funds is rotated so that each economic unit can receive them in turn. 16. Which of the following statements best describes the purpose of financial accounting in a limited liability company? a. b. c. d. To assist in the day-to-day management of the company. To enable the business to pay the correct amount of tax. To ensure that the business pays the correct dividend. To help the directors discharge their obligations to the shareholders.

Answers 12. (b) 13. (a) 14. (c) 15. (b) 16. (d)

17. Sole traders differ from other types of trading organizations. Which of the following statements correctly summarizes the key characteristics of a sole traders business? a. Liability is limited to the providers of loan finance and only the trader takes an active part in managing the business. b. The trader has unlimited liability and runs the business in conjunction with the providers of loan finance. c. The trader has unlimited liability and must have the business accounts audited. d. The trader has unlimited liability, takes sole responsibility for management of the business and no audit is needed.

18. Financial markets and institutionsa. b. c. d. Involve the movement of huge quantities of money. Affect the profits of businesses. Affect the types of goods and services produced in an economy. Do all of the above.

19. Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called a. b. c. d. Commodity markets. Fund-available markets. Derivative exchange markets. Financial markets.

20. Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediariesa. Act as middlemen, borrowing funds from those who have saved and lending these funds to others. b. Produce nothing of value and are therefore a drain on societys resources. c. Help promote a more efficient and dynamic economy. d. Do all of the above e. Do only (a) and (c) of the above.

Answers 17. (d) 18. (d) 19. (d) 20. (e)

21. Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediariesa. Act as middlemen, borrowing funds from those who have saved and lending these funds to others. b. Play an important role in determining the quantity of money in the economy. c. Help promote a more efficient and dynamic economy. d. Do all of the above. e. Do only (A) and (C) of the above. 22. Every financial market has the following characteristic: a. b. c. d. It determines the level of interest rates. It allows common stock to be traded. It allows loans to be made. It channels funds from lenders-savers to borrowers-spenders.

23. Financial markets have the basic function of : a. Bringing together people with funds to lend and people who want to borrow funds. b. Assuring that the swings in the business cycle are less pronounced. c. Assuring that governments need never resort to printing money. d. Both (a) and (c) of the above. e. Both (b) and (c) of the above. 24. Financial intermediaries a. Exist because there are substantial information and transaction costs in the economy. b. Improve the lot of the small saver. c. Are involved in the process of indirect finance. d. Do all of the above. e. Do only (a) and (c) of the above. Answers 21. (d) 22. (d) 23. (a) 24. (d)

25. Which of the following can be described as involving direct finance? a. b. c. d. A corporations stock is traded in an over-the-counter market. People buy shares in a mutual fund. A pension fund manager buys commercial paper in the secondary market. An insurance company buys shares of common stock in the over-the-counter markets. e. None of the above.

26. The main sources of financing for businesses, in order of importance, are a. b. c. d. financial intermediaries, issuing bonds, issuing stocks. issuing bonds, issuing stocks, financial intermediaries. issuing stocks, issuing bonds, financial intermediaries. issuing stocks, financial intermediaries, issuing bonds.

27. Investor generally their money in money market fora. b. c. d. 5 years 2 years 1 year and above 1 year and less

28. A financial managers daily function: a. b. c. d. Inventory control Receipt and disbursement of funds Credit management All of the above

29. Financial markets (1 year or less) that deals with short term securities called asa. b. c. d. Capital Market Money Market Secondary Market Stock Market

Answers 25. (e) 26. (a) 27. (d) 28. (d) 29. (b)

30. Which has continual life? a. b. c. d. Sole proprietorship Corporation Partnership All of the above

31. The Subchapter S corporation designation can be applied to corporations with up toa. b. c. d. 55 stockholders 65 stockholders 75 stockholders 85 stockholders

32. The Subchapter S corporation is designed toa. Earn more profit b. Avoid the double taxation of earnings and dividends found in the corporate form of organization. c. Control corruption d. Simplify decision making. 33. Insider trading occurs when a. Someone has information not available to the public which they use to profit from trading in stocks. b. Corporate officers buy stock in their company. c. Lawyers, investment bankers, and others buy common stock in companies represented by their firms. d. Any stock transactions occur in violation of the Federal Trade Commissions restrictions on monopolies.

34. One of the major disadvantages of a sole proprietorship is a. b. c. d. That there is unlimited liability to the owner. The simplicity of decision making. Low organizational costs. Low operating costs. Answers 30. (b) 31. (c) 32. (b) 33. (a) 34. (a)

35. What is the primary goal of financial management? a. b. c. d. Increased earnings Maximizing cash flow Maximizing shareholder wealth Minimizing risk of the firm

36. Proper risk-return management means that a. b. c. d. The firm should take as few risks as possible. The firm must determine an appropriate trade-off between risk and return. The firm should earn the highest return possible The firm should value future profits more highly than current profits.

37. A corporation is a. b. c. d. Owned by stockholders who enjoy the privilege of limited liability. Easily divisible between owners. A separate legal entity with perpetual life. All of these.

38. Corporate governance is the a. Relationship and exercise of oversight by the board of directors of the company b. Relationship between the chief financial officer and institutional investors. c. Operation of a company by the chief executive officer (CEO) and other senior executives on the management team. d. Governance of the company by the board of directors with a focus on social responsibility. 39. Agency theory examines the relationship between the a. b. c. d. Shareholders of the firm and the firm's investment banker. Owners of the firm and the managers of the firm. Board of directors and large institutional investors. Shareholders and the firm's transfer agent.

Answers 35. (c) 36. (b) 37. (d) 38. (a) 39. (b)

40. Agency problems are least likely to arise in which organizational form?

a. b. c. d.

Sole proprietorship Limited partnership Corporation Subchapter S corporation

41. Maximization of shareholder wealth is a concept in which a. b. c. d. Increased earnings is of primary importance. Profits are maximized on a quarterly basis. Virtually all earnings are paid as dividends to common stockholders. Optimally increasing the long-term value of the firm is emphasized.

42. Which of the following is not a true statement about the goal of maximizing shareholder wealth? a. b. c. d. It takes into account the timing of cash-flows. It is a short-run point of view which takes risk into account. It considers risk as a factor. None of these.

Answers 40. (a) 41. (d) 42. (b)

A. S. Masum Leading University, Sylhet