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Banking and Finance Quiz 15

Ques 1: Which statement about equity financing is true?

(a) Interest payments are mandatory.

(b) Dividend payments are in a fixed amount.

(c) Dividend payments are optional.

(d) The initial investment amount must be repaid.

Answer: Option(C): Dividend payments are optional.

Ques 2: The average person cannot accurately make predictions about the stock market because of _____.

(a) a lack of funds

(b) a lack of information

(c) a lack of time

Answer: Option(B): a lack of information

Ques 3: FarmCo. is a farming machine company in an agricultural-heavy area in Australia, and it has been in operation for 10 years. What should FarmCo. use to set the price for its IPO?

(a) its current share price mulitplied by its average price/earnings ratio

(b) its current earnings per share mulitplied by the agricultural industry's price/earnings ratio

(c) its current price earnings per share mulitplied by its average price/earnings ratio

(d) its current share price mulitplied by the agricultural industry's price/earnings ratio

Answer: Option(B): its current earnings per share mulitplied by the agricultural industry's price/earnings ratio

Feedback

Because FarmCo. is going to compete in the Australian agricultural market, it should use the price/earnings ratio in that market.

Ques 4: For which finance-related reason would a company invest with an investment fund using index funds?

(a) because index funds are stable and short-term

(b) to manage the company's investments

(c) because there are no fees

(d) to diversify its investments

Answer: Option(D): to diversify its investments

Ques 5: You are a small investor with only a couple thousand dollars to invest. Your cousin is an investment broker, who advises against an index fund. Under what circumstances would your cousin's advice be correct?

(a) When the return on your investment beats investing in a random selection of the 500 largest companies in the United States.

(b) When the return on your investment does not beat investing in a random selection of the 500 largest companies in the United States.

(c) When the return on your investment is low, even though an index fund is basically risk-free.

Answer: Option(B): When the return on your investment does not beat investing in a random selection of the 500 largest companies in the United States.

Ques 6: Which type of fund uses statistical tests to find relations among different market prices, and comes up with sophisticated rapid trading strategies?

(a) hedge funds

(b) private equity funds

(c) index funds

(d) managed funds

Answer: Option(A): hedge funds

Feedback

Hedge funds use complex statistical analysis to find mathematical relations and come up with rapid trading strategies.

Ques 7: How do traditional banks operate?

(a) They assume the role of a caretaker by investing savers' money in secure stocks and bonds.

(b) They assume the role of a facilitator by taking money from investors and returning that money at the highest possible interest rate to savers.

(c) They assume the role of a caretaker by safeguarding the money from savers and adding interest on savers' deposits.

(d) They assume the role of a facilitator by taking money from savers and putting the money in the hands of trustworthy entrepreneurs.

Answer: Option(D): They assume the role of a facilitator by taking money from savers and putting the money in the hands of trustworthy entrepreneurs.

Feedback

The loans that banks make to these entrepreneurs provide the ability for banks to pay interest to savers.

Ques 8: How do insurance companies make money?

(a) by limiting themselves to one type of insurance, and by making investments from their cash flows

(b) by pricing premiums based on estimated losses, and by making investments from their cash flows

(c) by shifting risk to the company, and by estimating what their losses are

(d) by estimating what their losses are, and by pricing premiums to cover the losses

Answer: Option(B): by pricing premiums based on estimated losses, and by making investments from their cash flows

Feedback

If you are 25 years old and the average life expectancy is 75, they have 50 years of cash flow coming in before having to pay out any cash.

Ques 9: From a finance perspective, what is the worst thing that can be said about a capital-budgeting decision regarding a project?

(a) The project has a negative net present value.

(b) The project has a positive net present value.

(c) The project will have discounted cash flows.

(d) The project will have reduced cash flows over time.

Answer: Option(A): The project has a negative net present value.

Feedback

If a project has a negative net present value, you are already losing money the moment you write the check.

Ques 10: What are two significant factors that are unique to capital budgeting?

(a) There is a large initial cash outlay, and the potential for a long-term impact on earnings.

(b) There is a large initial cash outlay, and the potential for the assets to not return the desired cash flows.

(c) There is a large source of financing, and the potential for a short-term impact on earnings.

Answer: Option(A): There is a large initial cash outlay, and the potential for a long-term impact on earnings.

Feedback

You run the risk of wasting current cash; also, future earnings may be affected because you are carrying the asset for a long time.

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