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Principles
of Managerial Finance, Brief, 7e (Gitman)
Chapter
2 The Financial Market Environment
2.1 Understand the role that financial
institutions play in managerial finance.
1) A financial institution is an
intermediary that channels the savings of individuals, businesses, and
governments into loans or investments.
Answer:
TRUE
Diff: 1
Topic:
Financial Institutions
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
2) Commercial banks advise firms on
major transactions such as mergers or financial restructurings.
Answer:
FALSE
Diff: 1
Topic:
Financial Institutions
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
3) As a key participant in financial
transactions, individuals are ________.
A) net demanders of funds because they
save more money than they borrow
B) net users of funds because they save
less money than they borrow
C) net suppliers of funds because they
save more money than they borrow
D) net purchasers of funds because they
save more money than they borrow
Answer:
C
Diff: 1
Topic:
Financial Institutions
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
4) Government is typically a ________.
A) net provider of funds because it
borrows more than it saves
B) net demander of funds because it
borrows more than it saves
C) net provider of funds because it can
print money at will
D) net demander of funds because it
saves more than it borrows
Answer:
B
Diff: 1
Topic:
Financial Institutions
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
5)
Government can obtain funds ________.
A) by trading in equity market
B) by issuing financial instruments such
as futures and options
C) through forex market
D) by selling debt securities
Answer:
D
Diff: 1
Topic:
Financial Institutions
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
6) Firms that require funds from
external sources can obtain them ________.
A) through financial institutions
B) from central bank directly
C) through forex market
D) by issuing T-bills
Answer:
A
Diff: 1
Topic:
Financial Institutions
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
7) Investment banks are institutions
that ________.
A) perform all activities of commercial
banks and retail banks
B) are exempted from Securities and
Exchange Commission regulations
C) engage in trading and market making
activities
D) are only limited to capital market
activities
Answer:
C
Diff: 1
Topic:
Commercial Banks, Investment Banks, And The Shadow Banking System
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
8) Which of the following serves as an
intermediary channeling the savings of individuals, businesses, and governments
into loans and investments?
A) financial institutions
B) financial markets
C) Securities and Exchange Commission
D) OTC market
Answer:
A
Diff: 1
Topic:
Financial Institutions
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
9) The shadow banking system describes a
group of institutions that engage in lending activities, much like traditional
banks.
Answer:
TRUE
Diff: 1
Topic:
Commercial Banks, Investment Banks, And The Shadow Banking System
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
10) Which of the following provides
savers with a secure place to invest funds and offer both individuals and
companies loans to finance investments?
A) investment banks
B) securities exchanges
C) mutual funds
D) commercial banks
Answer:
D
Diff: 1
Topic:
Commercial Banks, Investment Banks, And The Shadow Banking System
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
11) Which of the following assists
companies in raising capital, advise firms on major transactions such as
mergers or financial restructuring, and engage in trading and market making
activities?
A) investment banks
B) securities exchanges
C) mutual funds
D) commercial banks
Answer:
A
Diff: 1
Topic:
Commercial Banks, Investment Banks, And The Shadow Banking System
Learning Obj.: LG 1
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
2.2 Contrast the functions of financial
institutions and financial markets.
1) Primary and secondary markets are
markets for short-term and long-term securities, respectively.
Answer:
FALSE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 2
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
2) Financial markets are intermediaries
that channel the savings of individuals, businesses, and government into loans
or investments.
Answer:
FALSE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 2
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
3) A public offering is the sale of a
new security issue—typically debt or preferred stock—directly to an investor or
group of investors.
Answer:
FALSE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 2
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
4) A primary market is a financial
market in which pre-owned securities are traded.
Answer:
FALSE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 2
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
5) The Glass-Steagall Act was imposed to
allow commercial and investment banks to combine and work together.
Answer:
FALSE
Diff: 1
Topic:
Financial Institutions and Markets
Learning Obj.: LG 2
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
6) Most businesses raise money by
selling their securities in a ________.
A) public offering
B) forex market
C) futures market
D) commodities market
Answer:
A
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 2
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
7) Which of the following is a means of
selling bonds or stocks to the public?
A) private placement
B) public offering
C) organized selling
D) direct placement
Answer:
B
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 2
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
8) Which of the following is a forum in
which suppliers and demanders of funds can transact business directly?
A) shadow banking system
B) financial markets
C) commercial banks
D) financial institutions
Answer:
B
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 2
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
9) The sale of a new security directly
to an investor or a group of investors is called ________.
A) arbitraging
B) short selling
C) a capital market transaction
D) a private placement
Answer:
D
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 2
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
10) The ________ market is where
securities are initially issued and the ________ market is where pre-owned
securities (not new issues) are traded.
A) primary; secondary
B) money; capital
C) secondary; primary
D) primary; money
Answer:
A
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 2
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
2.3 Describe the differences between the capital
markets and the money markets.
1) The over-the-counter (OTC) market is
a market for trading smaller and unlisted securities.
Answer:
TRUE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
2) NASDAQ is considered an OTC market
since it is not recognized by the SEC as a "listed exchange."
Answer:
FALSE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
3) In the OTC market, the ask price is
the highest price offered by a dealer to purchase a given security.
Answer:
FALSE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
4) In the Eurobond market, corporations
and governments typically issue bonds denominated in dollars and sell them to
investors located outside the United States.
Answer:
TRUE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
5) Capital markets are for investors who
want a safe temporary place to deposit funds where they can earn interest and
for borrowers who have a short-term need for funds.
Answer:
FALSE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
6) Money markets are markets for
long-term funds such as bonds and equity.
Answer:
FALSE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
7) An efficient market is a market that
establishes correct prices for the securities that firms sell and allocates
funds to their most productive use as a result of the intense competition among
investors.
Answer:
TRUE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
8) Money markets involve the trading of
securities with maturities of one year or less.
Answer:
TRUE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
9) Eurocurrency deposits arise when a
corporation or individual makes a deposit in a bank in a currency other than
the local currency of the country where the bank is located.
Answer:
TRUE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
10) The Eurocurrency market is a market
for short-term bank deposits denominated in U.S. dollars or other easily
convertible currencies.
Answer:
TRUE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
11) The money market is a financial
relationship created by a number of institutions and arrangements that allows
suppliers and demanders of long-term funds to make transactions.
Answer:
FALSE
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
12) The over-the-counter (OTC) market is
________.
A) a highly liquid market as compared to
NASDAQ
B) a market in which low risk-high
return securities are traded
C) an organized market in which all
financial derivatives are traded
D) a market where smaller, unlisted
securities are traded
Answer:
D
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
13) Which of the following is true of a
primary market?
A) It is an organized market in which
all financial derivatives are traded.
B) It is regulated by The Sarbanes-Oxley
Act.
C) It is a market where smaller,
unlisted securities are traded.
D) It is the only market in which the
issuer is directly involved in the transaction.
Answer:
D
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
14) Which of the following is true of a
secondary market?
A) It is a market for an unlisted
company to raise equity capital.
B) It is a market where securities are
issued through private placement
C) It is a market in which short-term
money market instruments such as Treasury bills are traded.
D) It is a market in which preowned
securities are traded.
Answer:
D
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
15) Which of the following is true of
preferred stock?
A) It has features of bonds and a common
stock.
B) It has a claim on assets prior to
creditors in the event of liquidation.
C) Its dividends can be paid only after
paying dividends to the common stockholders.
D) It usually has a maturity of thirty
years.
Answer:
A
Diff: 2
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
16) The key securities traded in the
capital markets are ________.
A) commercial papers and Treasury bills
B) Treasury bills and certificates of
deposit
C) stocks and bonds
D) bills of exchange and commercial
papers
Answer:
C
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
17) Which of the following is true of
international equity markets?
A) In the international equity market,
corporations cannot raise capital through IPOs, instead they can raise capital
by trading in the secondary market.
B) In the international equity market,
corporations can easily manipulate the price of the shares since it is not
regulated by any regulatory bodies.
C) In the international equity market,
corporations can only sell blocks of shares to institutional investors from
European Union.
D) In the international equity market,
corporations can sell blocks of shares to investors in a number of different
countries simultaneously.
Answer:
D
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
18) Which of the following is true of a
dealer market?
A) Buyers and sellers are never brought
together directly.
B) Brokers execute the buy or sell
orders in a dealer market.
C) It has centralized trading floors.
D) It is a part of the broker market.
Answer:
A
Diff: 2
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
19) Which of the following is true of a
securities exchange?
A) It serves as an intermediary by
channeling the savings of individuals, businesses, and governments into loans
or investments.
B) It borrows funds directly from the
financial institutions.
C) It is an association of banks who
meet to buy and sell stocks and bonds.
D) It provides a marketplace in which
firms can raise funds through the sale of new securities and purchasers can
resell securities.
Answer:
D
Diff: 2
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
20) A market that establishes correct
prices for the securities that firms sell and allocates funds to their most
productive uses is called a(n) ________.
A) future market
B) forex market
C) efficient market
D) weak-form market
Answer:
C
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
21) The ________ is created by a
financial relationship between suppliers and demanders of short-term funds.
A) stock market
B) capital market
C) forex market
D) money market
Answer:
D
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
22) By definition, the money market
involves the buying and selling of ________.
A) stocks and bonds
B) short-term securities
C) all financial instruments except
derivatives
D) secured premium notes
Answer:
B
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
23) Most money market transactions are
made in ________.
A) common stock
B) marketable securities
C) commodities market
D) preferred stock
Answer:
B
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
24) The ________ is created by a number
of institutions and arrangements that allow the suppliers and demanders of
long-term funds to make transactions.
A) forex market
B) capital market
C) money market
D) commodities market
Answer:
B
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
25) Long-term debt instruments used by
both government and business are known as ________.
A) preferred stocks
B) T-bills
C) bonds
D) equities
Answer:
C
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
26) Which of the following is an example
of marketable securities?
A) U.S.Treasury bills
B) treasury stock
C) mortgage backed securities
D) loans
Answer:
A
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
27) In a ________ market, the buyer and
seller are brought together to trade securities in an organization called
________.
A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market
Answer:
C
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
28) In a ________ market, the buyer and
seller are not brought together to trade securities directly but instead have
their orders executed on the ________.
A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market
Answer:
D
Diff: 1
Topic:
Financial Markets
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
29) An efficient market is one where
________.
A) prices of stocks move up and down
widely without apparent reason
B) prices of stocks remain low for long
periods of time
C) prices of stocks are unaffected by
market news
D) the price of a security is an
unbiased estimate of its true value
Answer:
D
Diff: 1
Topic:
The Capital Market
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
30) The money market is a market
________.
A) that enables suppliers and demanders
of long-term funds to make transactions
B) which brings together suppliers and
demanders of short-term funds
C) where smaller, unlisted securities
are traded
D) where all derivatives are traded
Answer:
B
Diff: 2
Topic:
The Capital Market
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
31) Apex Inc. issues a bond of $1,000
which pays interest semiannually at a coupon interest rate of 8%. The maturity
of the bond is 15 years. Where should this bond be traded?
A) forex market
B) money market
C) capital market
D) commodities market
Answer:
C
Diff: 2
Topic:
The Capital Market
Learning Obj.: LG 3
Learning Outcome: F-01
Question Status: New
AACSB Tag: Reflective Thinking Skills
2.4 Explain the root causes of the 2008
financial crisis and recession.
1) Securitization is the process of
pooling mortgages or other types of loans and selling the claims or securities
against that pool in the secondary market.
Answer:
TRUE
Diff: 1
Topic:
Financial Institutions and Real Estate Finance
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
2) Securitization made it harder for
banks to lend money because they could not pass the risk on to other investors.
Answer:
FALSE
Diff: 1
Topic:
Financial Institutions and Real Estate Finance
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
3) Mortgage-backed securities are
securities that represent claims on the cash flows generated by a pool of
mortgages.
Answer:
TRUE
Diff: 1
Topic:
Financial Institutions and Real Estate Finance
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
4) Prior to the 2008 financial crisis,
most investors viewed mortgage-backed securities as relatively safe
investments.
Answer:
TRUE
Diff: 1
Topic:
Falling Home Prices And Delinquent Mortgages
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
5) Subprime mortgages are mortgage loans
made to borrowers with high incomes and better than average credit histories.
Answer:
FALSE
Diff: 1
Topic:
Falling Home Prices And Delinquent Mortgages
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
6) Recessions associated with a banking
crisis tend to be more severe than other recessions because many businesses
rely on credit to operate.
Answer:
TRUE
Diff: 1
Topic:
Spillover Effects And The Great Recession
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
7) The process of pooling mortgages or
other types of loans and selling the claims or securities against that pool in
the secondary market is called ________.
A) valuation
B) securitization
C) private placement
D) capital restructuring
Answer:
B
Diff: 1
Topic:
Financial Institutions and Real Estate Finance
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
8) The primary risk of mortgage-backed
securities is ________.
A) that the prices of have high
volatility
B) that the prices of housing will
increase
C) that the government will not be able
to meet the guarantees on the cash flows
D) that homeowners may not be able to,
or choose not to, repay their loans
Answer:
D
Diff: 2
Topic:
Financial Institutions and Real Estate Finance
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
9) Which of the following is true of
mortgage-backed securities?
A) Mortgage-backed securities assure a
flat 15% return.
B) Mortgage-backed securities are
guaranteed by the U.S. government.
C) Mortgage-backed securities can only
be purchased by investment banks.
D) Mortgage-backed securities represent
claims on the cash flows generated by a pool of homeloans.
Answer:
D
Diff: 2
Topic:
Financial Institutions and Real Estate Finance
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
10) When home prices are falling, we
would expect a(n) ________.
A) high mortgage default rates
B) low mortgage default rates
C) unchanged mortgage default rates
D) higher percentage of owner home
equity
Answer:
A
Diff: 2
Topic:
Falling Home Prices And Delinquent Mortgages
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Reflective Thinking Skills
11) A crisis in the financial sector
often spills over into other industries because when financial institutions
________ borrowing, activity in most other industries ________.
A) increase; slows down
B) contract; slows down
C) increase; increases
D) contract; increases
Answer:
B
Diff: 1
Topic:
Spillover Effects And The Great Recession
Learning Obj.: LG 4
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
2.5 Understand the major regulations and
regulatory bodies that affect financial institutions and markets.
1) The Glass-Steagall Act ________.
A) was intended to regulate the
activities in the secondary market
B) created the Securities Exchange
Commission
C) separated the activities of
commercial and investment banks
D) was intended to regulate the
activities in the primary market
Answer:
C
Diff: 2
Topic:
Regulations Governing Financial Institutions
Learning Obj.: LG 5
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
2) The Securities Act of 1933 focuses on
regulating the sale of securities in the primary market, whereas the 1934 Act
deals with the regulations governing the transactions in the secondary market.
Answer:
TRUE
Diff: 1
Topic:
Regulations Governing Financial Markets
Learning Obj.: LG 5
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
3) The Federal Deposit Insurance
Corporation (FDIC) ________.
A) is an agency, created by the
Glass-Steagall Act, that monitors banks on a regular basis to ensure that they
were safe and sound.
B) is an agency that monitors business
combinations between commercial banks, investment banks, and insurance
companies
C) guarantees individuals will not lose
any money held at any type of financial institution that fails
D) guarantees individuals will not lose
any money, up to a specified amount, held at any type of financial institution
that fails
Answer:
A
Diff: 1
Topic:
Regulations Governing Financial Institutions
Learning Obj.: LG 5
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
4) The Gramm-Leach-Bliley Act ________.
A) is created to monitor banks on a
regular basis to ensure that they were safe and sound.
B) allows business combinations between
commercial banks and investment banks, but not insurance companies
C) allows business combinations between
commercial banks, investment banks, and insurance companies
D) was signed during the Great
Depression because of the financial crisis
Answer:
C
Diff: 1
Topic:
Regulations Governing Financial Institutions
Learning Obj.: LG 5
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
5) Which of the following acts regulates
the secondary market?
A) The Securities Act of 1933
B) The Gramm-Leach-Bliley Act
C) The Securities Exchange Act of 1934
D) The Glass-Steagall Act
Answer:
C
Diff: 1
Topic:
Regulations Governing Financial Markets
Learning Obj.: LG 5
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
6) Which of the following acts regulates
the primary market in which securities are originally issued to the public?
A) The Securities Act of 1933
B) The Gramm-Leach-Bliley Act
C) The Securities Exchange Act of 1934
D) The Glass-Steagall Act
Answer:
A
Diff: 1
Topic:
Regulations Governing Financial Markets
Learning Obj.: LG 5
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
2.6 Discuss business taxes and their importance
in financial decisions.
1) The ordinary income of a corporation
is income earned through the sale of goods or services and is currently taxed
subject to the individual income tax rates.
Answer:
FALSE
Diff: 1
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
2) The marginal tax rate represents the
rate at which the next dollar of income is taxed.
Answer:
TRUE
Diff: 1
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
3) All dividend income received by a corporation
is exempted from taxation.
Answer:
FALSE
Diff: 1
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
4) The marginal tax rate paid on a
firm's ordinary income can be calculated by dividing its taxes by its net
income.
Answer:
FALSE
Diff: 1
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
5) The average tax rate paid on the
firm's ordinary income can be calculated by dividing its taxes by its taxable
income.
Answer:
TRUE
Diff: 1
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: New
AACSB Tag: Analytic Skills
6) Dividends received by a corporation
on an investment in the common and preferred stock of another corporation,
where ownership in the dividend paying corporation is less than 20%, is subject
to 70 percent exclusion for tax purposes.
Answer:
TRUE
Diff: 1
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
7) The tax deductibility of various
expenses such as general and administrative expenses ________.
A) increases their pretax cost
B) reduces their after-tax cost
C) has no effect on their after-tax cost
D) has an unpredictable effect on their
after-tax cost
Answer:
B
Diff: 1
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
8) The tax liability of a corporation
with ordinary income of $105,000 is ________.
Range of taxable income Marginal rate
$0 to $50,000 15%
50,000 to 75,000 25
75,000 to 100,000 34
100,000 to 335,000 39
335,000 to 10,000,000 34
10,000,000 to 15,000,000 35
15,000,000 to 18,333,333 38
Over 18,333,333 35
A) $42,000
B) $35,700
C) $23,950
D) $24,450
Answer:
D
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
9) The tax liability of a corporation
with ordinary income of $1,500,000 is ________.
Range of taxable income Marginal rate
$0 to $50,000 15%
50,000 to 75,000 25
75,000 to 100,000 34
100,000 to 335,000 39
335,000 to 10,000,000 34
10,000,000 to 15,000,000 35
15,000,000 to 18,333,333 38
Over 18,333,333 35
A) $498,250
B) $510,000
C) $585,000
D) $690,000
Answer:
B
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
10) The tax liability of a corporation
with ordinary income of $1,100,000 is ________.
Range of taxable income Marginal rate
$0 to $50,000 15%
50,000 to 75,000 25
75,000 to 100,000 34
100,000 to 335,000 39
335,000 to 10,000,000 34
10,000,000 to 15,000,000 35
15,000,000 to 18,333,333 38
Over 18,333,333 35
A) $362,250
B) $340,000
C) $374,000
D) $390,000
Answer:
C
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
11) Jennings, Inc. has a tax liability
of $170,000 on pretax income of $500,000. What is the average tax rate for
Jennings, Inc.?
A) 34 percent
B) 46 percent
C) 25 percent
D) 40 percent
Answer:
A
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
12) The average tax rate of a
corporation with ordinary income of $105,000 and a tax liability of $24,200 is
________.
A) 46 percent
B) 23 percent
C) 34 percent
D) 15 percent
Answer:
B
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
13) If a corporation sells certain
capital equipment for more than their initial purchase price, the difference
between the sale price and the purchase price is called a(n) ________.
A) ordinary gain
B) revenue gain
C) capital gain
D) abnormal gain
Answer:
C
Diff: 1
Topic:
Capital Gains
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
14) In general, most corporate capital
gains are taxed at ________ tax rate.
A) a 46 percent
B) the regular corporate
C) a 28 percent
D) a 30 percent
Answer:
B
Diff: 1
Topic:
Capital Gains
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Analytic Skills
15) Congress allows corporations to
exclude from taxes 70 to 100 percent of dividends received from other
corporations. Congress did this to ________.
A) encourage corporations to invest in
each other
B) avoid double taxation on dividends
C) eliminates most of the potential tax
liability from the dividends received by the second and any subsequent
corporations
D) lower the cost of equity financing
for corporations
Answer:
C
Diff: 1
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Reflective Thinking Skills
16) Corporation X needs $1,000,000 and
can raise this through debt at an annual rate of 10 percent, or preferred stock
at an annual cost of 7 percent. If the corporation has a 40 percent tax rate,
the after-tax cost of each is ________.
A) debt: $100,000; preferred stock:
$70,000
B) debt: $60,000; preferred stock:
$42,000
C) debt: $60,000; preferred stock:
$70,000
D) debt: $100,000; preferred stock:
$42,000
Answer:
C
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Reflective Thinking Skills
17) Corporation A owns 15 percent of the
stock of corporation B. Corporation B pays corporation A $100,000 in dividends
in 2002. Corporation A must pay tax on ________.
A) $100,000 of ordinary income
B) $ 30,000 of ordinary income
C) $ 70,000 of ordinary income
D) $ 70,000 of capital gain
Answer:
B
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Reflective Thinking Skills
18) The dividend exclusion for
corporations receiving dividends from another corporation has resulted in
________.
A) a lower cost of equity for the
corporation paying the dividend
B) a higher relative cost of
bond-financing for the corporation paying the dividend
C) stock investments being relatively
less attractive, relative to bond investments made by one corporation in
another corporation
D) stock investments being relatively
more attractive relative to bond investments made by one corporation in another
corporation
Answer:
D
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Reflective Thinking Skills
19) Which of the following is true?
A) The process of pooling mortgages or
other types of loans and then selling claims or securities against that pool in
a secondary market is called depreciation.
B) Corporations pay taxes on all
dividends received from other corporations, no matter their share of ownership.
C) Corporations may pay taxes on only 30
percent of the dividends received from other corporations, depending on their
percentage of ownership.
D) Capital gains are treated separately
from ordinary corporate income for tax purposes.
Answer:
C
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Revised
AACSB Tag: Reflective Thinking Skills
20) Meese Paper Distributors, Inc. has
before-tax earnings of $1,900,000. Calculate the amount of the total tax
liability.
Range of taxable income Marginal rate
$0 to $50,000 15%
50,000 to 75,000 25
75,000 to 100,000 34
100,000 to 335,000 39
335,000 to 10,000,000 34
10,000,000 to 15,000,000 35
15,000,000 to 18,333,333 38
Over 18,333,333 35
Answer:
Meese
Paper Distributors
Diff:
2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Reflective Thinking Skills
21) During 2002, a firm has sold 5 assets
described below. Calculate the tax liability on the assets. The firm pays a 40
percent tax rate on ordinary income.
Answer:
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Analytic Skills
22) Consider two firms, Go Debt
corporation and No Debt corporation. Both firms are expected to have earnings
before interest and taxes of $100,000 during the coming year. In addition, Go
Debt is expected to incur $40,000 in interest expenses as a result of its
borrowings whereas No Debt will incur no interest expense because it does not
use debt financing. However, No Debt will have to pay stockholders $40,000 in
dividend income. Both firms are in the 40 percent tax bracket. Calculate the
Earnings after tax for both firms. Which firm has the higher after-tax
earnings? Which firm appears to have the higher cash flow? How do you account
for the difference?
Answer:
Go Debt has lower earnings after taxes
compared to No Debt. However, from a cash outflow perspective, Go Debt paid out
a total of only $64,000 ($40,000 in interest expenses plus $24,000 in taxes)
while No debt paid out a total of $80,000 ($40,000 in taxes and $40,000 in
dividends). The difference between the two is $16,000 which is exactly the
difference in taxes paid between the two firms ($24,000 compared to $40,000).
This difference results from the fact that interest expense is a tax deductible
expense.
Diff: 2
Topic:
Ordinary Income
Learning Obj.: LG 6
Learning Outcome: F-01
Question Status: Previous Edition
AACSB Tag: Reflective Thinking Skills
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