Corporate Finance Test 2
Terms in this set (33)
A fractional reserve banking system might be in trouble if
all deposit customers wanted to withdraw their money at once
Which of the following scenarios could raise market interest rates, other things being the same?
The Fed sells more treasury securities in the open market
Which of the following is NOT a benefit associated with banking compared with direct transfers?
All of the above are benefits of banking
-it has economy of scale and expertise in transforming savings into loans
-it has flexibility in accommodating the size and maturity of loans
-it has the ability to diversify the risk of a variety of borrowers
-it reduces transaction cost by economies of scale and scope
An inverted yield curve could mean
inflation premiums are expected to drop faster than maturity risk premium to rise over time
You just sold 100 shares of ABC co. stock for 1150 which you bought 16 months ago for 1200. During this holding period you also received $150 dividends from the company. What is your holding period return?
What can be concluded about apollo inc. given the flooding performance data:
It has gotten better in managing its receivables but not the efficiency of its inventory
Brandon Inc has a target Roa of 10% and a Debt Ratio (total liability divided by total assets) of 40%. What will be its target ROE?
10% x 1/(1-40%)=16.7
A firms gross margin % improved but its operation margin % declined which of the following conclusions is most correct?
its operating expense (to sales) ratio has increased
Banks make money by borrowing short (low risk) and lending long (higher risk)(a process called asset transformation)
Banks can diversity its loan risks by borrowing from a wide variety of depositiors
Deposit insurance minimizes bank runs but not bank failures
If the Fed increases money supply then interest rate will rise
if inflation is zero then interest rates will be zero as well
unexpected inflation hurts lenders more than borrowers
if the real risk free rate is 2% and the expectation inflation rate for the coming year is 3% then the nominal risk free rate (such as the 1-year T-bill rate) should be approximately 5%
The price of a 10 year T-bond is more sensitive to interest rate movements than that of a 5 year T-bond. This is known as the interest rate risk.
A company can improve its return on equity by piling up debt, but by so doing it can also increase the company's chance of banruptcy
a company that has a higher inventory turnover ratio than its peers could mean that it is selling its products faster or it keeps a lean inventory, or both.
Which of the following is not an asset of a bank?
business deposits (liability)
the major regulator of investment companies is the
securities and exchange commission
all else equal, the money supply should decrease when
the Fed sells securities on the open market
The Federal Reserve system established
a source of liquiditiy for the banking system
Suppose the Federal Reserve increases deposits at financial institutions by $50 billion through its open market operations. If the reserve requirement for all deposits is 8%, what is the maximum impact the fed's actions can have on total deposits?
12.5 x 46 Bill=575 Billion increase
A small state bank currently has reserves equal to $300,000. If the state reserve requirement is 20% but the bank currently maintains a 30% reserve, how much are the excess reserves the bank currently has?
Which of the following is not a benefit associated with financial intermediaries?
Your uncle would like to restrict his interest rate risk and his default risk, but he still would like to invest in corporate bonds. which of the possible bonds listed below best satisfies your uncle's criteria?
AAA bond with 5 years to maturity
Assume the expectation theory holds and that liquidity and maturity risk premiums re zero. if the annual rate of interest on a 2 year treasury bond is 10.5 percent and the rate on a 1 year Treasury bond is 12 percent, what rate of interest should you expect on a 1 year treasury bond on year form now?
10.5=(12 + x)/2
the ___ premium is compensation for possibility that the borrower will not be able to debt's interest and principal on time.
If the United States is running a deficit trade balance with Great Britain, we would expect the value of th eBiritish pound to depreciate against the U.S. dollar
Which of the following DOES NOT support an inverted yield curve?
Inflation is expected to increase between now and the coming years.
Which of the following statements if most correct?
an example of a source of funds in determining the firm's cash flow is depreciation expense
The CFO recommends that the firm issues long term debt to finance the purchase of some real estate for future expansion purposes. The firm currently has a debt ratio that is about average for the industry but it s Net Profit Margin is very low. What can be said about the CFO's decision that is NOT TRUE?
The additional debt could reduce the chance of bankruptcy due to the raised funds.