Q&A Hero

Q: A(n)________________________ is a corporation chartered for the express purpose of holding the stock of one or more banks.

Q: You have been asked to evaluate a project with infinite life. Sales and costs are projected to be $1000 and $500 respectively. There is no depreciation and the tax rate is 30%. The real required rate of return is 10%. The inflation rate is 4% and is expected to be 4% forever. Sales and costs will increase at the rate of inflation. If the project costs $3000, what is the NPV? A. $500.00 B. $1629.62 C. $365.38 D. None of the above

Q: A(n) _____________________ is a bank which offers its full range of services from only one location.

Q: A project requires an initial investment of $200,000 and is expected to produce a cash flow before taxes of 120,000 per year for two years. [i.e. cash flows will occur at t = 1 and t = 2]. The corporate tax rate is 30%. The assets will be depreciated using MACRS - 3 year schedule: (t=1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is such that it can make use of all applicable tax shields. The opportunity cost of capital is 11%. Assume that the asset can be sold for book value. Calculate the IRR for the project: (approximately) A. 12.00% B. 11.00% C. 17.73% D. None of the above

Q: A(n) _____________________ is a bank which offers its full range of services from several locations.

Q: A project requires an initial investment of $200,000 and is expected to produce a cash flow before taxes of 120,000 per year for two years. [i.e. cash flows will occur at t = 1 and t = 2]. The corporate tax rate is 30%. The assets will be depreciated using MACRS - 3 year schedule: (t=1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is such that it can make use of all applicable tax shields. The opportunity cost of capital is 12%. Assume that the asset can be sold for book value. Calculate the NPV of the project: (Approximately) A. $22,463 B. $19,315 C. $16,244 D. None of the above

Q: A(n) ___________________ is a machine located at the merchant's place of business which allows depositors to use their debit card to pay for purchases directly.

Q: If the depreciable investment is $1,000,000 and the MACRS 5-Year class schedule is: Year-1: 20%; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6: 5.8% Calculate the depreciation tax shield for Year-2 using a tax rate of 30%: A. $224,000 B. $60,000 C. $96,000 D. $300,000

Q: The Emergency Economic Stabilization Act passed in 2008 during the global credit crisis allowed the following: A) An emergency sale of bad assets B) Temporary increase of FDIC deposit insurance to $250,000 for all deposits C) Injections of capital by the government into banks and other qualified lenders D) Closer surveillance of the mortgage market participants, such as brokers and lenders E) All of the above

Q: If the depreciable investment is $600,000 and the MACRS 5-Year class schedule is: Year-1: 20%; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6: 5.8% Calculate the depreciation for Year-2. A. $120,000 B. $192,000 C. $96,000 D. $115,200

Q: The Financial Services Regulatory Relief Act of 2006 does the following: A) Adds selected new service powers to depository institutions B) Loosens regulations on depository institutions C) Grants the Federal Reserve authority to pay interest on depository institutions legal reserves D) All of the above E) None of the above

Q: If the depreciation amount is $100,000 and the marginal tax rate is 35%, then the tax shield due to depreciation is: A. $35,000 B. $100,000 C. $65,000 D. None of the above

Q: Which federal banking act extends deposit insurance coverage on qualified retirement accounts from $100,000 to $250,000 and authorizes the FDIC to periodically increase deposit insurance coverage to keep up with inflation? A) Sarbanes-Oxley Act B) The Gramm-Leach-Bliley Act C) Check 21 Act D) The FACT Act E) Federal Deposit Insurance Reform Act

Q: If the depreciation amount is 600,000 and the marginal tax rate is 35%, then the tax shield due to depreciation is: A. $210,000 B. $600,000 C. $390,000 D. None of the above

Q: The Federal Reserve buys Treasury Bills in the open market. This will tend to: A) Cause interest rates in the market to rise B) Cause interest rates in the market to fall C) Cause reserves held at the Federal Reserve to decrease D) Cause a decrease in the growth of deposits and loans E) All of the above

Q: Which of the following has become the principal tool of central bank monetary policy today? A) Open market operations B) Changing the discount rate C) Changing reserve requirements D) Using moral suasion E) None of the above

Q: Working capital is one of the most common causes of misunderstanding in estimating project cash flows. The following are the most common errors: I) forgetting about working capital entirely II) forgetting that working capital may change during the life of the project III) forgetting that working capital is recovered at the end of the project IV) forgetting to depreciate the working capital A. I and II only B. I, II, and III only C. II,III and IV only D. I,II and IV only

Q: The European Central Bank has the main goal of: A) Ensuring the economy grows at an adequate rate. B) Keeping unemployment low. C) Ensuring price stability. D) Ensuring an adequate and fair supply of loans. E) All of the above

Q: For project A in year-2, inventories increase by $12,000 and accounts payable by $2,000. Calculate the increase or decrease in net working capital for year-2. A. Decreases by $14,000 B. Increases by $14,000 C. Decreases by $10,000 D. Increases by $10,000

Q: There is an important debate raging today regarding whether banks should be regulated at all. George Benston contends that: A) Firms in regulated industries actually seek out regulations because they bring monopolistic rents. B) Regulations shelter firms from changes in demand and cost, lowering its risk. C) Regulations can increase consumer confidence which increases customer loyalty to regulated firms. D) Depository institutions should be regulated no differently than any other corporation with no subsidies or special privileges. E) None of the above

Q: For project Z, year-5 inventories increase by $6,000, accounts receivables by $4,000 and accounts payables by $3,000. Calculate the increase or decrease in working capital for year-5. A. Increases by $6,000 B. Decreases by $4,000 C. Increases by $7,000 D. Decreases by $7,000

Q: Samual Peltzman had an opposing view to George Stigler on the impact of regulation on banks. He contends that: A) Firms in regulated industries actually seek out regulations because they bring monopolistic rents. B) Regulations shelter firms from changes in demand and cost, lowering its risk. C) Regulations can increase consumer confidence which increases customer loyalty to regulated firms. D) Depository institutions should be regulated no differently than any other corporation with no subsidies or special privileges. E) None of the above

Q: A capital equipment costing $400,000 today has no (zero) salvage value at the end of 5 years. If straight-line depreciation is used, what is the book value of the equipment at the end of three years? A. $120,000 B. $80,000 C. $160,000 D. $240,000

Q: One of the earliest theories regarding the impact of regulation on banks was developed by George Stigler. He contends that: A) Firms in regulated industries actually seek out regulations because they bring monopolistic rents. B) Regulations shelter firms from changes in demand and cost, lowering its risk. C) Regulations can increase consumer confidence which increases customer loyalty to regulated firms. D) Depository institutions should be regulated no differently than any other corporation with no subsidies or special privileges. E) None of the above

Q: Capital equipment costing $250,000 today has 50,000 salvage value at the end of 5 years. If the straight line depreciation method is used, what is the book value of the equipment at the end of two years? A. $200,000 B. $170,000 C. $140,000 D. $50,000

Q: The _________ allows adequately capitalized bank holding companies to acquire banks in any state. A) Riegle-Neal Interstate Banking and Branching Efficiency Act B) Competitive Equality Banking Act C) Financial Institutions Reform, Recovery and Enforcement Act D) Federal Deposit Insurance Corporation Improvement Act E) Depository Institutions Deregulation and Monetary Control Act

Q: A firm has a general-purpose machine, which has a book value of $300,000 and is sold for $500,000 in the market. If the tax rate is 35%, what is the opportunity cost of using the machine in a project? A. $500,000 B. $430,000 C. $300,000 D. None of the above

Q: Which federal banking act requires the Federal Trade Commission to make it easier for victims of identity theft to make theft reports and requires credit bureaus to help victims resolve the problem? A) Sarbanes-Oxley Act B) USA Patriot Act C) Check 21 Act D) The FACT Act E) Bankruptcy Abuse Prevention and Consumer Protection Act

Q: Proper treatment of inflation in the NPV calculation involves: I) Discounting nominal cash flows using the nominal discount rate II) Discounting real cash flows using the real discount rate III) Discounting nominal cash flows using the real discount rates A. I only B. II only C. III only D. I and II only

Q: Real cash flow occurring in year-2 is $60,000. If the inflation rate is 5% per year, the real rate of interest is 2%, calculate the cash flow for the year-2. A. $60,000 B. $55,422 C. $66,150 D. None of the above

Q: Which federal banking act forces more individuals to repay at least part of what they owe and will push higher-income borrowers into more costly forms of bankruptcy? A) Sarbanes-Oxley Act B) USA Patriot Act C) Check 21 Act D) The FACT Act E) Bankruptcy Abuse Prevention and Consumer Protection Act

Q: Which federal banking act reduces the need for banks to transport paper checks across the country? A) Sarbanes-Oxley Act B) USA Patriot Act C) Check 21 Act D) The FACT Act E) Bankruptcy Abuse Prevention and Consumer Protection Act

Q: The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the: I) same as the NPV value obtained by discounting real cash flows using the real discount rate II) same as the NPV value obtained by discounting real cash flows using the nominal discount rate III) same as the NPV value obtained by discounting nominal cash flows using the real discount rate A. I only B. II only C. III only D. II and III only

Q: Which federal banking act prohibits publishing false or misleading information about the financial performance of a public company and requires top corporate officers to vouch for the accuracy of their companys financial statements? A) Sarbanes-Oxley Act B) USA Patriot Act C) Check 21 Act D) The FACT Act E) Bankruptcy Abuse Prevention and Consumer Protection Act

Q: The real rate of interest is 3% and the inflation is 4%. What is the nominal rate of interest? A. 3% B. 4% C. 7.12% D. 1%

Q: Which federal banking act requires that financial service providers establish the identity of any customers opening new accounts? A) Sarbanes-Oxley Act B) USA Patriot Act C) Check 21 Act D) The FACT Act E) Bankruptcy Abuse Prevention and Consumer Protection Act

Q: Given the following data for Project M: A. $25.85 B. $17.77 C. $22.65 D. None of the above

Q: The federal agency that regulates the most banks is the: A) OCC B) FDIC C) FRS D) FHC E) BHC

Q: Given the following data for Project M: A. $51.70 B. $35.54 C. $45.21 D. None of the above

Q: The oldest federal bank agency is the: A) OCC B) FDIC C) FRS D) FHC E) BHC

Q: A cash flow received in two years is expected to be $10,816 in nominal terms. If the real rate of interest is 2% and the inflation rate is 4%, what is the real cash flow for year-2? A. $11,236 B. $10,816 C. $10,000 D. $9,246

Q: The fastest growing crime in the U.S. is: A) Financial statement misrepresentation B) Bank robberies C) Individual privacy violations D) Credit card fraud E) Identity theft

Q: If the nominal interest rate is 7. 5% and the inflation rate is 4%, what is the real interest rate? A. 4% B. 9.5% C. 3.4% D. None of the above

Q: Common minimum capital requirements on banks in leading industrialized nations that are based on the riskiness of their assets is imposed by: A) The National Banking Act B) FIRREA C) The International Banking Act D) The Basel Agreement E) None of the Above

Q: The real interest rate is 3% and the inflation rate is 5%. What is the nominal interest rate? A. 3% B. 5% C. 8.15% D. 2%

Q: A firm owns a building with a book value of $150,000 and a market value of $250,000. If the building is utilized for a project, then the opportunity cost ignoring taxes is: A. $100,000 B. $150,000 C. $250,000 D. None of the above

Q: The 1977 law that prevents banks from redlining certain neighborhoods, refusing to serve those areas is: A) The National Banking Act B) The Garn-St. Germain Act C) FIRREA D) The Riegle-Neal Interstate Banking and Branching Efficiency Act E) Community Reinvestment Act (CRA)

Q: The act which requires financial institutions to share information about customer identities with government agencies is: A) The Sarbanes-Oxley Act B) The U.S. Treasury Department Act C) The 9/11 Act D) The USA Patriot Act E) The Gramm-Leach-Bliley Act

Q: If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent manner requires that project: I) cash flows be estimated in nominal terms II) cash flows be estimated in real terms III) accounting income be used A. I only B. II only C. III only D. None of the above

Q: The new financial organization created by Gramm-Leach-Bliley is the A) Financial Holding Company B) Bank Holding Company C) European Central Bank D) Financial Service Corporation E) Financial Modernization Organization

Q: If the discount rate is stated in nominal terms, then in order to calculate the NPV in a consistent manner requires that project: I) cash flows be estimated in nominal terms II) cash flows be estimated in real terms III) accounting income be used A. I only B. II only C. III only D. None of the above

Q: The equivalent of the Federal Reserve System in Europe is known as the: A) European Union B) Bank of London C) Basle Group D) European Central Bank E) Swiss Bank Corporation

Q: In the case of freely traded resources, opportunity cost is the: A. book value B. market value C. historical value D. none of the above

Q: The law that allowed bank holding companies to acquire nonbank depository institutions and convert them to branches is: A) The National Banking Act B) The Garn-St. Germain Act C) FIRREA D) The Riegle-Neal Interstate Banking and Branching Efficiency Act E) None of the Above

Q: For example, in the case of an electric car project, which of the following cash flows should be treated as incremental flows when deciding whether to go ahead with the project? A. The cost of research and development undertaken for developing the electric car in the past three years B. The annual depreciation charge C. Tax savings resulting from the depreciation charges D. Dividend payments

Q: The law that made bank and nonbank depository institutions more alike in the services they could offer and allowed banks and thrifts to more fully compete with other financial institutions is: A) The National Banking Act B) The Federal Reserve Act C) The Garn-St. Germain Act D) The Riegle-Neal Interstate Banking and Branching Efficiency Act E) The Gramm-Leach-Bliley Act (Financial Services Modernization Act)

Q: The cost that is incurred as a result of past, irrevocable decisions and is irrelevant to future decisions is called: A. Opportunity cost B. Sunk cost C. Incremental cost D. None of the above

Q: Which of the following is an unresolved issue in the new century? A) What should be done about the regulatory safety net set up to protect small depositors? B) If financial institutions are allowed to take on more risk, how can taxpayers be protected from paying the bill when more institutions fail? C) Does functional regulation actually work? D) Should regulators allow the mixing of banking and commerce? E) All of the above are unresolved issues

Q: Money that a firm has already spent or committed to spend regardless of whether a project is taken is called: A. Fixed cost B. Opportunity cost C. Sunk cost D. None of the above

Q: Of the principal reasons for regulating banks, what was the primary purpose of the Truth in Lending Law? A) Protection of the public's savings B) Control of the money supply C) Preventing banks from realizing monopoly powers D) Ensuring an adequate and fair supply of loans E) None of the above.

Q: The value of a previously purchased machine to be used by a proposed project is an example of: A. Sunk cost B. Opportunity cost C. Fixed cost D. None of the above

Q: The law that allows banks to affiliate with insurance companies and security brokerage firms to form financial services conglomerates is A) The National Banking Act B) The Glass Steagall Act C) The Garn St. Germain Act D) The Riegle Neal Interstate Banking Act E) The Gramm-Leach-Bliley Act (Financial Services Modernization Act)

Q: The principal short-term assets are: I) Cash, II) Accounts receivable, III) Inventories, and IV) Accounts Payable A. I only B. I and IV only C. I, II, and III D. IV only

Q: The law that allows lifted government deposit interest ceilings and allowed them to pay a competitive interest rate is: A) The National Banking Act. B) The Glass Steagall Act. C) The Bank Merger Act. D) DIDMCA E) None of the above.

Q: For example, in case of an electric car project, the following cash flows should be treated as incremental flows when deciding whether to go ahead with the project except: A. The consequent reduction in sales of the company's existing gasoline models (i.e.: incidental effects) B. Interest payment on debt C. The value of tools that can be transferred from the company's existing plants D. The expenditure on new plants and equipment

Q: Investment in inventories includes investment in: I) Raw material II) Work-in-progress III) Finished goods A. I only B. I and II only C. I, II, and III D. III only

Q: Of the principal reasons for regulating banks, what was the primary purpose of the Federal Reserve Act of 1913? A) Protection of the public's savings B) Control of the money supply C) Preventing banks from realizing monopoly powers D) Ensuring an adequate and fair supply of loans E) None of the above.

Q: Of the principal reasons for regulating banks, what was the primary purpose of the National Banking Act (1863)? A) Protection of the public's savings B) Control of the money supply C) Providing support for government activities D) Maintaining confidence in the banking system E) Preventing banks from realizing monopoly powers

Q: Net Working Capital should be considered in project cash flows because: A. Firms must invest cash in short-term assets to produce finished goods B. They are sunk costs C. Firms need positive NPV projects for investment D. None of the above

Q: The federal law that allowed the Federal Reserve to set margin requirements is: A) The National Banking Act. B) The McFadden-Pepper Act. C) The Glass Steagall Act. D) The Federal Reserve Act. E) None of the above.

Q: Investment in net working capital is not depreciated because: A. It is not a cash flow B. It is recovered during or at the end of the project and is not a depreciating asset C. It is a sunk cost D. All of the above

Q: The 1994 law that allowed bank holding companies to acquire banks anywhere in the U.S. is: A) The Glass-Steagall Act B) The Federal Deposit Insurance Corporation Improvement Act C) The National Bank Act D) The Riegle-Neal Interstate Banking and Branching Efficiency Act. E) None of the above.

Q: Net Working Capital is the: I) short-term assets II) short term liabilities III) long-term assets IV) long term liabilities A. I only B. (I - II) C. (III - I) D. (III - IV)

Q: The Federal Reserve policy tool under which the Fed attempts to bring psychological pressure to bear on individuals and institutions to conform to the Fed's policies, using letters, phone calls, and speeches, is known as: A) Margin requirements B) Moral suasion C) Discount window supervision D) Conference and compromise E) None of the above.

Q: The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a (an): A. Sunk cost B. Opportunity cost C. Working capital D. None of the above

Q: The Gramm-Leach-Bliley Act (Financial Services Modernization Act) calls for linking government supervision of the financial-services firm to the types of activities that the firm undertakes. For example the insurance portion of the firm would be regulated by state insurance commissions and the banking portion of the firm would be regulated by banking regulators. This approach to government supervision of financial services is known as: A) Consolidated regulation and supervision. B) Functional regulation. C) Services oversight. D) Umbrella supervision and regulation. E) None of the above.

Q: For example, when Honda develops a new engine, the incidental effects might include the following: I) demand for replacement parts II) profitable service facilities III) offer modified or improved versions of the engine for other uses A. I only B. I and II only C. I,II, and III D. None of the given ones

Q: A reduction in the sales of existing products caused by the introduction of a new product is an example of: A. incidental effects B. opportunity cost C. sunk cost D. none of the above

Q: The federal law that prohibited federally supervised commercial banks from offering investment banking services on privately issued securities is known as: A) The Glass-Steagall Act B) The Bank Merger Act C) The Depository Institutions Deregulation and Monetary Control Act D) The Federal Reserve Act E) None of the Above

Q: When a firm has the opportunity to add a project that will utilize excess factory capacity (that is currently not being used), which costs should be used to determine if the added project should be undertaken? A. Opportunity cost B. Sunk cost C. Incremental costs D. None of the above