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Finance
Q:
Why do firms with large cash flow betas also have high asset betas?
Q:
Which of the following would be the best example of a ratio used to examine the bank's interest rate risk?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Q:
Briefly discuss the risk adjusted discount rate approach to estimating the NPV of a project.
Q:
Which of the following would be the best example of a ratio used to examine the return of one of the bank's assets?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Q:
Briefly discuss the certainty equivalent approach to estimating the NPV of a project.
Q:
Which of the following would be the best example of a ratio used to examine the cost of one of the bank's liabilities?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Q:
Briefly describe the factors that determine asset betas.
Q:
A bank that has a high asset utilization (AU) ratio most likely:
A) Is doing a poor job of controlling expenses
B) Has a small amount of financial leverage
C) Has a small amount of liquidity risk
D) Is allocating assets to the most productive investments
E) None of the above
Q:
Briefly explain what value should be used for the risk-free interest rate.
Q:
A bank that has a low profit margin most likely:
A) Is doing a poor job of controlling expenses
B) Has a small amount of financial leverage
C) Has a small amount of liquidity risk
D) Has assets that are not very productive
E) None of the above
Q:
Briefly explain how a firm's cost of equity is estimated using the capital asset pricing model (CAPM).
Q:
A ratio that can be used to measure a bank's credit risk would be:
A) Net loans/total assets
B) Interest sensitive assets/interest sensitive liabilities
C) Total assets/number of full time employees
D) Nonperforming loans/total loans
Q:
Discuss why one might use an industry beta to estimate a company's cost of capital.
Generally, an industry beta can be estimated more precisely than a company's beta. This is similar to the estimate of the beta of a portfolio is more precise than the estimate of the beta of a single stock. The estimated industry cost of capital must be suitably adjusted before using for company's cost of capital. For example, differences in the capital structure of the firm and the industry. Type: Medium
Q:
OE for a bank reflects:
A) How well the assets of the bank are managed
B) The bank's use of leverage
C) How well the bank controls expenses
D) All of the above
E) None of the above
Q:
Briefly explain how the use of single company cost of capital to evaluate projects might lead to erroneous decisions.
Q:
The ratio of net loans to total assets is considered to be a measure of what form of risk in banking?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest-rate risk
E) None of the above
Q:
Briefly explain the difference between company and project cost of capital.
Q:
The so-called tax-management efficiency ratio consists of:
A) Total tax liabilities over net income
B) Tax-exempt assets over taxable assets
C) Net income over pre-tax net operating income
D) Taxes owed over total liabilities of a bank
E) None of the above.
Q:
Portfolio betas for an industry are usually higher than the beta of individual stocks in that same industry.
Q:
The relative accuracy of a beta estimate for risk can be determined by the standard error.
Q:
What do loans and security investments represent for a bank?
A) Earning assets
B) Classified assets
C) Discretionary accounts
D) Market-valued assets
E) None of the above
Q:
The ratio that equals total interest income divided by total earning assets less total interest expense divided by total interest-bearing liabilities is known as the:
A) Earnings base
B) Earnings spread
C) Net income margin
D) Net return prior to special transactions
E) None of the above
Q:
Risky projects can be evaluated by discounting certainty equivalent cash flows at the risk-free interest rate.
Q:
A bank's stock price will tend to rise if the:
A) Value of the stream of future stockholder dividends is expected to increase
B) The banking organization's perceived level of risk has fallen
C) Expected dividends increase, while perceived level of risk declines
D) All of the above.
E) None of the above.
Q:
Risky projects can be evaluated by discounting the expected cash flows at a risk-adjusted discount rate.
Q:
According to the textbook the most profitable banks in the United States in 2007 fell in the asset size range of:
A) Under $25 million in total assets
B) Under $100 million in total assets
C) Between $100 million and $10 billion in total assets
D) Over $10 billion in total assets
E) None of the above.
Q:
Firms with cyclical revenues tend to have lower asset betas.
Q:
The so-called employee productivity ratio for a bank is equal to:
A) Net operating revenue less total interest expenses per employee.
B) Total interest and noninterest expense per employee
C) Net operating income per full-time-equivalent employee
D) Total operating earnings less salaries and wages expense per employee.
E) None of the above.
Q:
Firms with high operating leverage tend to have higher asset betas.
Q:
The earnings spread for a bank is equal to:
A) Total interest income divided by total earning assets less total interest-expense divided by total interest-bearing bank liabilities.
B) Total interest income less total interest expenses divided by earning assets.
C) Total operating revenues less total operating expenses divided by total assets.
D) Total cash and noncash expenses subtracted from interest and noninterest income divided by total assets.
E) None of the above.
Q:
Cyclical firms tend to have high betas.
Q:
A bank's ROE equals its ROA times its:
A) Net profit margin
B) Total assets divided by total equity capital
C) Total operating revenues divided by total assets
D) Ratio of net after-tax income to total operating revenues
E) None of the above.
Q:
Generally, the value to use for the risk-free rate is the short-term Treasury bill rate.
Q:
The difference between such sources of bank income as service charges on deposits and trust-service fees and such sources of bank expenses as salaries and wages and overhead expenses divided by total assets or total earning assets is called the:
A) Net profit margin
B) Net operating margin
C) Net noninterest margin
D) Net return on assets
E) None of the above
Q:
It is generally more accurate to estimate an "industry beta" for a portfolio of companies in the same industry than to estimate beta for a single company.
Q:
Company cost of capital is the cost of equity of the firm.
Q:
ROE for a bank is calculated by:
A) Dividing net after-tax income by total equity capital.
B) Dividing total operating revenue less operating expenses by total assets.
C) Deducting total interest expenses from total interest income and dividing by total equity capital.
D) Noninterest income less noninterest expenses divided by total earning assets.
E) None of the above.
Q:
The ratio of a bank's interest income from its loans and security investments less interest expenses on debt issued divided by total earning assets measures a bank's:
A) Net operating margin
B) Net return before special transactions
C) Net interest margin
D) Return on assets
E) None of the above
Q:
Company cost of capital is the cost of debt of the firm.
Q:
The weighted average cost of capital (WACC) on an after-tax basis is calculated as:
WACC = (rD) (1 - TC ) (D/V) + (rE) (E/V) where: V = D + E
Q:
One part of ROE is or net income over pre-tax net operating income which measures the financial firms use of security gains and losses and other tax management tools to minimize tax exposure.
Q:
Each project should be evaluated at its own opportunity cost of capital. The true cost of capital depends on the use to which the capital is put.
Q:
A traditional measure of earnings efficiency is the or total interest income over total earnings assets less total interest expenses over total interest bearing bank liabilities. It measures the effectiveness of a firms intermediation function in the borrowing and lending of money.
Q:
The company cost of capital is the correct discount rate for any project undertaken by the company.
Q:
As data processing of financial information becomes more important, managers of financial firms can realize cost savings from , transferring tasks from inside to firm itself to other firms specializing in information technology.
Q:
What does a low standard error mean relative to beta?
A. Beta is a reliable measurement of risk
B. Beta has very little meaning
C. There is tremendous benefit to be gained from diversification
D. Nothing
Q:
is the uncertainty associated with public opinion. Negative publicity (whether true or not) can affect a financial firms earnings by dissuading customers from using the services of the institution.
Q:
A fudge factor might include:
A. Commodity price changes
B. Labor costs
C. Stock price fluctuations
D. Risk of government non-approval
Q:
includes violations of rules and regulations. It can include failure to hold adequate capital which can lead to costly corrective actions.
Q:
An example of diversifiable risk that should be ignored when analyzing project risk would include
A. Commodity price changes
B. Labor costs
C. Stock price fluctuations
D. Risk of government non-approval
Q:
refers to variability in earnings resulting from actions taken by the legal system including unenforceable contracts, lawsuits and adverse judgements.
Q:
Financial slang referring to the reduction of the cash flow from its forecasted value to its certainty equivalent is a
A. Deep discount
B. Haircut for risk
C. Arbitrage profit
D. Speculative gain
Q:
refers to the uncertainty regarding the financial firms earnings due to failures in computer systems, errors, misconduct by employees, lightening strikes and similar events.
Q:
The country beta for Egypt is:
A. 1.0
B. 0.14
C. 1.35
D. 0.93
Q:
The risk-free rate is 5%, the market risk premium is 8% and the project's beta is 1.25. Calculate the certainty equivalent cash flow for
year-3.
A. $228.35
B. $197.25
C. $300
D. None of the above
Q:
is one of the most widely respected private institutions that rates the credit quality of financial institutions.
Q:
The ____________________ Act restricts combined auditing and consulting relationships in order to promote auditor independence and objectivity.
Q:
The risk-free rate is 4%, the market rate of return is 14%, and the project's beta is 1.2. Calculate the certainty equivalent cash flow for year-3.
A. $622.04
B. $360.33
C. $401.90
D. None of the above
Q:
__________________________ is the risk that shifting interest rates in the market will adversely affect a financial institution's net income or the value of its assets or equity.
Q:
A project has an expected risky cash flow of $500, in year-2. The risk-free rate is 4%, the market rate of return is 14%, and the project's beta is 1.2. Calculate the certainty equivalent cash flow for year-2.
A. $622.04
B. $164.29
C. $401.90
D. None of the above
Q:
A project has an expected risky cash flow of $200, in year-1. The risk-free rate is 6%, the market rate of return is 16%, and the project's beta is 1.5. Calculate the certainty equivalent cash flow for year-1.
A. $175.21
B. $164.29
C. $228.30
D. None of the above
Q:
__________________________ measures the bank's risk of long run survival. It measures the bank's capital position and shows if there has been any erosion of capital over time.
Q:
Generally, the value to use for the risk-free interest rate is:
A. Short-term Treasury bill rate
B. Long-term Corporate bond rate
C. Medium-term Corporate bond rate
D. none of the above
Q:
The beta of the computer company is 1.7 and the standard error of the estimate is 0.3. What is the range of values for beta, that has 95% chance of being right?
A. 1.1 - 2.3
B. 1.4 - 2.0
C. 1.5 - 2.0
D. None of the above
Q:
__________________________ measures the amount of debt or leverage a bank has and is one part of the evaluation of the bank's ROE) It is generally a number larger than one.
Q:
__________________________ measures the return to stockholders on their investment in the bank. It is the product of net profit margin, asset utilization and the equity multiplier.
Q:
The historical returns data for the past four years for Stock C and the stock market portfolio returns are: Stock C: 10%, 30%, 20%, 20%; Market Portfolio: 5%, 15%, 25%, 15%. If the risk-free rate of return is 5%, calculate the required rate of return on the Stock C using CAPM.
A. 5%
B. 10%
C. 15%
D. none of the above
Q:
The historical returns data for the past four years for Stock C and the stock market portfolio returns are: Stock C: 10%, 30%, 20%,20%; Market Portfolio: 5%, 15%, 25%, 15%. Calculate the beta for the stock:
A. 0.86
B. 0.5
C. 1.5
D. none of the above
Q:
__________________________ reflects the effectiveness of the expense management of the bank and is one part of the evaluation of ROE.
Q:
The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the required rate of return (cost of equity) for Stock B using CAPM. (The risk-free rate of return = 4%)
A. 8.6%
B. 12.6%
C. 14.3%
D. None of the above
Q:
__________________________ reflects the bank's portfolio management policies and the mix and yield on the bank's securities and is one part of the evaluation of ROE.
Q:
On a graph with common stock returns on the Y- axis and market returns on the X-axis, the slope of the regression line represents the:
A. Alpha
B. Beta
C. R-squared
D. Adjusted beta
Q:
__________________________ are loans which are past due by 90 days or more.
Q:
The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. If the risk-free rate is 4%, calculate the market risk premium.
A. 18.1%
B. 14%
C. 10%
D. None of the above
Q:
__________________________ is the risk that the financial institution may not be able to meet the needs of depositors for cash.
Q:
The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the beta for Stock B.
A. 0.86
B. 1.0
C. 0.125
D. None of the above
Q:
Eurodollars, Fed Funds, Repurchase Agreements, and large CDs together are know as _____________________.
Q:
The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the covariance of returns between Stock B and the market portfolio.
A. 24
B. 28
C. 292
D. None of the above
Q:
__________________________ is the risk that the value of the financial institution's asset portfolio (particularly government or other marketable securities) will decline in value.
Q:
The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the variance of the market portfolio returns.
A. 192
B. 128
C. 28
D. None of the above