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Q:
The Edmond Wine and Cheese shop wants to buy 30 cases of French Champagne on credit. Bank of America writes a letter of credit stating that the Edmond Wine and Cheese shop is a good risk and that if they do not pay off the loan, Bank of America will. Which of the following roles is the bank performing?
A) The intermediation role
B) The payment role
C) The risk management role
D) The guarantor role
E) The policy role
Q:
Given the following cash flows for project Z: C0 = -1,000, C1 = 600, C2 = 720 and C3 = 2000, calculate the discounted payback period for the project at a discount rate of 20%.
A. 1 year
B. 2 years
C. 3 years
D. None of the above
Q:
The U.S. government wants to prevent money laundering by drug cartels. To promote this goal, they have asked banks to report any cash deposits greater than $10,000 to the government. Which of the following roles is the bank performing?
A) The intermediation role
B) The payment role
C) The risk management role
D) The guarantor role
E) The policy role
Q:
The cost of a new machine is $250,000. The machine has a 3-year life and no salvage value. If the cash flow each year is equal to 40% of the cost of the machine, calculate the payback period for the project:
A. 2 years
B. 2.5 years
C. 3 years
D. Cannot be determined because of insufficient data
Q:
Early European banks were places for safekeeping of wealth because:
A) Loans to the poor often carried high interest rates
B) Loans and deposits were primarily for wealthy customers
C) The industrial revolution demanded new methods of making payments and obtaining credit
D) Savings and wealth were lost due to war, theft and expropriation by governments
E) All of the above
Q:
18. Given the following cash flows for project A: C0 = -1000, C1 = +600 ,C2 = +400, and C3 = +1500, calculate the payback period.
A. One year
B. Two years
C. Three years
D. None of the above
Q:
Banks like the Medici Bank in Italy and the Hochstetter Bank in Germany were successful because and they responded well to these new needs.
A) Loans to the poor often carried high interest rates
B) Loans and deposits were primarily for wealthy customers
C) The Industrial Revolution demanded new methods of making payments and obtaining credit
D) Savings and wealth were lost due to war, theft and expropriation by governments
E) All of the above
Q:
The following are disadvantages of using the payback rule except:
A. The payback rule ignores all cash flow after the cutoff date
B. The payback rule does not use the time value of money
C. The payback period is easy to calculate and use
D. The payback rule does not have the value additive property
Q:
Religious opposition decreased during the Renaissance because:
A) Loans to the poor often carried high interest rates
B) Loans and deposits were primarily for wealthy customers
C) The Industrial Revolution demanded new methods of making payments and obtaining credit
D) Savings and wealth were lost due to war, theft and expropriation by governments
E) All of the above
Q:
The main advantage of the payback rule is:
A. Adjustment for uncertainty of early cash flows
B. It is simple to use
C. Does not discount cash flows
D. Both A and C
Q:
During the middle ages, banks encountered religious opposition because:
A) Loans to the poor often carried high interest rates
B) Loans and deposits were primarily for wealthy customers
C) The Industrial Revolution demanded new methods of making payments and obtaining credit
D) Savings and wealth were lost due to war, theft and expropriation by governments
E) All of the above
Q:
The payback period rule accepts all projects for which the payback period is:
A. Greater than the cut-off value
B. Less than the cut-off value
C. Is positive
D. An integer
Q:
Which of the following is considered a fringe bank?
A) Community Bank
B) Wholesale Bank
C) Merchant Bank
D) Payday Lender
E) None of the above
Q:
The payback period rule:
A. Varies the cut-off point with the interest rate.
B. Determines a cut-off point so that all projects accepted by the NPV rule will be accepted by the payback period rule.
C. Requires an arbitrary choice of a cut-off point.
D. Both A and C.
Q:
The Charleston Southern Bank makes loans for families to purchase new and existing homes but does not take deposits. What type of bank is this most likely to be?
A) Virtual Bank
B) Mortgage Bank
C) Community Bank
D) Affiliated Bank
E) None of the above
Q:
Which of the following investment rules may not use all possible cash flows in its calculations?
A. NPV
B. Payback period
C. IRR
D. All of the above
Q:
The Edmond National Bank serves only the City of Edmond, Oklahoma and concentrates on providing the best possible service to this city. What type of bank is this most likely to be?
A) Virtual Bank
B) Mortgage Bank
C) Community Bank
D) Affiliated Bank
E) None of the above
Q:
The net present value of a project depends upon:
A. company's choice of accounting method
B. manager's tastes and preferences
C. project's cash flows and opportunity cost of capital
D. all of the above
Q:
Jonathan Robbins has an account in a bank that does not have a physical branch. Jonathan does all of his banking business over the internet. What type of bank does Jonathan have his account at?
A) Virtual Bank
B) Mortgage Bank
C) Community Bank
D) Affiliated Bank
E) None of the above
Q:
10. If the NPV of project A is + $120, and that of project B is -$40 and that of project C is + $40, what is the NPV of the combined project?
A. +$100
B. -$40
C. +$70
D. +$120
Q:
Wholesale banks are those banks that:
A) Sell at a discount relative to all commercial banks
B) Only make loans to the wholesale industry
C) Lend almost exclusively to farmers
D) Are large banks which serve corporations and government
E) Have only retail customers
Q:
The survey of CFOs indicates that IRR method is used for evaluating investment projects by:
A. 12% of firms
B. 20% of firms
C. 76% of firms
D. 57% of firms
Q:
Bank equipment leasing activity involves:
A) A bank leasing its office facilities instead of buying
B) A bank buying equipment and then leasing the item to a customer
C) A customer buying equipment and then leasing it to a bank
D) A bank leasing computer equipment
E) None of the above
Q:
The survey of CFOs indicates that NPV method is always, or almost always, used for evaluating investment projects by:
A. 12% of firms
B. 20% of firms
C. 57% of firms
D. 75% of firms
Q:
The phenomenon of convergence refers to:
A) Financial service firms expanding into other product lines
B) Firms reducing their product lines
C) Bank merger activity
D) Globalization in banking
E) Technological innovation in banking
Q:
The following are measures used by firms when making capital budgeting decisions except:
A. Payback period
B. Internal rate of return
C. P/E ratio
D. Net present value
Q:
Which of the following types of banks would most likely offer the largest number of financial services?
A) A retail bank
B) A community bank
C) A commercial bank
D) A universal bank
E) An international bank
Q:
Suppose a firm has a $100 million in excess cash. It could:
A. Invest the funds in projects with positive NPVs
B. Pay high dividends to the shareholders
C. Buy another firm
D. All of the above
Q:
Which of the following is not a current trend in the banking industry?
A) The number of banks is declining
B) The number of bank branches is declining
C) The number of bank services is increasing
D) The number of bank competitors is increasing
E) Bank industry convergence
Q:
Which of the following investment rules does not use the time value of the money concept?
A. Net present value
B. Internal rate of return
C. The payback period
D. All of the above use the time value concept
Q:
Which of the following is a trend that has affected all banks today?
A) Increased isolation of banks in the U.S.
B) Decreased competition from other financial institutions
C) Decreased amount of services provided by modern banks
D) Rising funding costs
E) Increased regulations
Q:
Briefly explain why Microsoft experienced a significant drop in price when it announced its first ever regular dividend along with huge profits.
Q:
A bank which manages the investment portfolio and pays the bills of an elderly customer who is unable to do it for him or herself is carrying out the __________ of banks.
A) The intermediation role
B) The payment role
C) The guarantor role
D) The agency role
E) The policy role
Q:
Briefly explain how the formulas that are used for valuing common stocks can also be used to value businesses.
Q:
Examples of imperfections in the financial system which allow banks to exist include which of the following?
A) Informational asymmetry
B) Efficiency of markets
C) All individuals and businesses have full information about all investment opportunities.
D) All individuals and businesses have no difficulty meeting their liquidity needs on their own.
E) All of the above are examples of the imperfections that exist.
Q:
Discuss the term "price-earnings (P/E) ratio."
Q:
A bank that wires funds for the purchase of a beach house in South Carolina for a customer in Oklahoma is carrying out the __________ of banks.
A) The intermediation role
B) The payment role
C) The guarantor role
D) The agency role
E) The policy role
Q:
The banking services that includes executing buy and sell orders for security trading customers and marketing new securities to raise funds for corporations and other institutions is referred to:
A) Comprehensive Packaging
B) Wrap-around Accounts
C) Investment Banking
D) Professional Banking
E) None of the above.
Q:
Briefly explain the assumptions associated with the constant dividend growth formula.
Q:
Smaller, locally focused commercial and savings banks that offer narrower but more personalized menu of financial services are known as:
A) Money center banks
B) Community banks
C) Mutual Funds
D) State banks
E) Fringe banks.
Q:
Discuss the general principle in the valuation of a common stock.
Q:
Briefly explain the term "market capitalization rate."
Q:
Included among leading structural trends in the U.S. banking industry in recent years are:
A) The number of independently owned banks has declined
B) The average size of individual banking firms has increased
C) Entry across state lines from neighboring states has increased
D) A and B only
E) All of the above.
Q:
Which of the following has been an important trend regarding consolidation and geographic expansion in banks?
A) Increased bank branching activity
B) The formation of more holding companies to purchase smaller banks
C) Mergers among some of the largest banks in the industry
D) A and C above
E) All of the above.
Q:
Briefly explain the major types of exchanges prevalent in the USA.
Q:
Explain the term "secondary market."
Q:
The view that depositors hire banks to analyze the financial condition of prospective borrowers and continually evaluate the condition of outstanding loans is referred to as:
A) Delegated monitoring
B) The concept of financial intermediation
C) The liquidity function in banking
D) Market imperfection theory
E) The efficiency contribution of banking
Q:
Explain the term "primary market."
Q:
Banks perform the indispensable task of:
A) Creating money without making loan.
B) Absorbing the excess liquidity created by other financial institutions
C) Intermediating between surplus-spending individuals or institutions and deficit-spending individuals or institutions
D) Issuing risky deposits
E) None of the above
Q:
The discounted-cash-flow formulas that is used to value common stocks can also be used to value entire businesses.
Q:
A study of history shows that one of the first services offered by banks was:
A) Equipment Leasing
B) Currency Exchange
C) Security Brokerage and Underwriting
D) Sale of Real Estate
E) None of the above
Q:
Everyone regards Microsoft as an income stock and Cummins as a growth stock.
Q:
E. F. Hutton, J.C. Penney, and Sears Roebuck are among leading firms that in the1980s organized competitors with banks that are known as:
A) Nonbank Banks
B) Discount Security Brokerage Companies
C) Money Market Funds
D) Finance Companies
E) Investment Banking Units
Q:
In the United States a commercial bank qualifies as a "bank" under federal law if it offers:
A) Consumer installment loans, CDs
B) Savings deposits, commercial loans
C) Checking accounts, commercial loans
D) Security investments, inventory loans to business customers
E) Commercial deposit accounts, consumer savings plans
Q:
A large percentage of the total value of a growth stock comes from the growth opportunity.
Q:
T F 46. Life insurance companies, securities firms, and mortgage companies all compete with the traditional bank.
Q:
It is not possible to value a firm with supernormal (variable) growth rate for the first few years of its life.
Q:
The cost of equity equals the dividend yield minus the growth rate in dividends for a constant dividend growth stock.
Q:
A(n) offers loans to commercial enterprises (such as appliance dealers) or to individuals using funds borrowed in the open market or from other financial institutions. Examples of this type of financial service provider include GMAC Financial Services and Household Finance.
Q:
The constant growth formula for stock valuation does not work for firms with negative growth (declining) rates in dividends.
Q:
The only payoff to the owners of common stocks is in the form cash dividends.
Q:
When a local merchant sells the accounts receivables they hold against their customer to a bank this generally known as .
Q:
All securities in an equivalent risk class are priced to offer the same expected return.
Q:
A bank that offers its services only over the internet is known as a(n) .
Q:
The return that is expected by investors from a common stock is also called its market capitalization rate or cost of equity capital.
Q:
Banks which supply both debt and equity capital to businesses are known as _________ banks.
Q:
Banks which function under a federal charter through the Comptroller of the Currency in the United States are known as ____________ banks.
Q:
Most of the trading on the NYSE is in ordinary common stocks.
Q:
Banks which underwrite issues of new securities for their corporate customers are known as ________ banks.
Q:
The New York Stock Exchange is the only stock market in the US.
Q:
Banks that sell deposits and make loans to businesses and individuals are known as ______banks.
Q:
An increase in PVGO will almost always coincide with a decrease in dividends.
Q:
_____________ refers to the movement of businesses across industry lines in order to broaden its base.
Q:
It is more likely than not that a high tech growth company which reports record earnings and announces its first ever dividend will have the stock price of the firm drop.
Q:
A company forecasts growth of 6% for 5 years and 3% thereafter. Given last year's cash flow was $100, what is the horizon value if the company cost of capital is 8%?
A. $0
B. $1,672
C. $2,000
D. $2,676
Q:
A bank which spans regions, nations, and continents, offering the widest menu of financial services is known as a __________bank.
Q:
According to Congress a ____________ is defined as any institution that can qualify for deposit insurance administered by the FDIC.
Q:
A firm forecasts of cash flows ($millions) in years 1 thru 4 to be $120, $130, 135, and $137, respectively. If the project ends at the end of the fourth year, what is the horizon value given the company has historical growth of 3% and a discount rate of 10%? (answers in $millions)
A. $0
B. $1.37
C. $1.96
D. $4.87
Q:
Universal Air is a no growth firm and has two million shares outstanding. It is expected to earn a constant 20 million per year on its assets. If all earnings are paid out as dividends and the cost of capital is 10%, calculate the current price per share for the stock.
A. $200
B. $150
C. $100
D. $50
Q:
The following stocks are examples of growth stocks except:
A. Scottish Power
B. e2v Technologies
C. Microsoft
D. Starbucks