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FIN 534 Quiz1 Week 1
Question 1
You recently sold 100 shares of your new company, XYZ
Corporation, to your brother at a family reunion.  At the
reunion your brother gave you a check for the stock and you gave
your brother the stock certificates.  Which of the following
statements best describes this transaction?
 
1) This is an example of an exchange of physical assets.
2) This is an example of a primary market transaction.
3) This is an example of a direct transfer of capital.
4) This is an example of a money market transaction.
5) This is an example of a derivatives market transaction.
 
 
Question 2
Which of the following statements is CORRECT?
    
1) While the distinctions are blurring, investment banks
generally specialize in lending money, whereas commercial banks
generally help companies raise capital from other parties
2) A liquid security is a security whose value is derived from
the price of some other “underlying” asset
3) Money market mutual funds usually invest most of their money
in a well-diversified portfolio of liquid common stocks.
4) Money markets are markets for long-term debt and common
stocks.
5) The NYSE operates as an auction market, whereas the Nasdaq is
a dealer market
 
 
Question 3
 Which of the following statements is CORRECT?
 
1)  The NYSE does not exist as a physical location; rather
it represents a loose collection of  
          
dealers who trade stock electronically.
2)  An example of a primary market transaction would be
your uncle transferring 100 shares of 
          Wal-Mart
stock to you as a birthday gift.
3)  Capital market instruments include both long-term debt
and common stocks.
4)  If your uncle in New York sold 100 shares of Microsoft
through his broker to an investor in  
          Los
Angeles, this would be a primary market transaction.
 5)  While the two frequently perform similar
functions, investment banks generally specialize
in      lending money, whereas commercial
banks generally help companies raise large blocks
of          
capital from investors.
 
 
Question 4
Which of the following statements is CORRECT?
 
1) It is usually easier to transfer ownership in a corporation
than it is to transfer ownership in a sole proprietorship
2) Corporate shareholders are exposed to unlimited
liability.
3) Corporations generally face fewer regulations than sole
proprietorships.
4) Corporate shareholders are exposed to unlimited liability,
and this factor may be compounded by the tax disadvantages of
incorporation.
5) There is a tax disadvantage to incorporation, and there is no
way any corporation can escape this disadvantage, even if it is
very small
Question 5
Which of the following statements is CORRECT?
 
1) One disadvantage of operating as a corporation rather than as
a partnership is that corporate shareholders are exposed to more
personal liability than partners
2) There is no good reason to expect a firm’s stockholders and
bondholders to react differently to the types of new asset
investments a firm makes
3) Bondholders are generally more willing than stockholders to
have managers invest in risky projects with high potential returns
as opposed to safer projects with lower expected returns
4) Stockholders are generally more willing than bondholders to
have managers invest in risky projects with high potential returns
as opposed to safer projects with lower expected returns
5) Relative to sole proprietorships, corporations generally face
fewer regulations, and this makes it easier for corporations to
raise capital
 
 
Question 6
 Suppose the U.S. Treasury announces plans to issue $50
billion of new bonds.  Assuming the announcement was not
expected, what effect, other things held constant, would that have
on bond prices and interest rates?
 
1) Prices and interest rates would both rise.
2) Prices would rise and interest rates would decline.
3) Prices and interest rates would both decline.
4) There would be no changes in either prices or interest
rates.
5) Prices would decline and interest rates would rise.
 
Question 7
Which of the following statements is CORRECT?
 
1) Corporations are at a disadvantage relative to partnerships
because they have to file more reports to state and federal
agencies, including the Securities and Exchange Administration,
even if they are not publicly owned
2) In a regular partnership, liability for the firm’s debts is
limited to the amount a particular partner has invested in the
business
3) A fast-growth company would be more likely to set up as a
partnership for its business organization than would a slow-growth
company
4) Partnerships have difficulty attracting capital in part
because of their unlimited liability, the lack of impermanence of
the organization, and difficulty in transferring ownership
5) A major disadvantage of a partnership relative to a
corporation as a form of business organization is the high cost and
practical difficulty of its formation
 
 
Question 8
Which of the following statements is CORRECT?
 
1) In a regular partnership, liability for other partners’
misdeeds is limited to the amount of a particular partner’s
investment in the business
2) Partnerships have more difficulty attracting large amounts of
capital than corporations because of such factors as unlimited
liability, the need to reorganize when a partner dies, and the
illiquidity (difficulty buying and selling) of partnership
interests
3) A slow-growth company, with little need for new capital,
would be more likely to organize as a corporation than would a
faster growing company
4) In a limited partnership, the limited partners have voting
control, while the general partner has operating control over the
business.  Also, the limited partners are individually
responsible, on a pro rata basis, for the firm’s debts in the event
of bankruptcy.
5) A major disadvantage of all partnerships relative to all
corporations is the fact that federal income taxes must be paid by
the partners rather than by the firm itself
 
 
Question 9
Which of the following statements is CORRECT?
 
1) If you purchase 100 shares of Disney stock from your
brother-in-law, this is an example of a primary market
transaction.
2) If Disney issues additional shares of common stock through an
investment banker, this would be a secondary market
transaction.
3) The NYSE is an example of an over-the-counter market.
4) Only institutions, and not individuals, can engage in
derivative market transactions.
5) As they are generally defined, money market transactions
involve debt securities with maturities of less than one year
 
 
Question 10
Which of the following factors would be most likely to lead to
an increase in interest rates in the economy?
 
1) Households reduce their consumption and increase their
savings
2) The Federal Reserve decides to try to stimulate the
economy.
3) There is a decrease in expected inflation
4) The economy falls into a recession
5) Most businesses decide to modernize and expand their
manufacturing capacity, and to install new equipment to reduce
labor costs
 
 
Question 11
Which of the following statements is CORRECT?
 
1) Hedge funds are legal in Europe and Asia, but they are not
permitted to operate in the United States
2) Hedge funds have more in common with commercial banks than
with any other type of financial institution
3) Hedge funds have more in common with investment banks than
with any other type of financial institution
4) Hedge funds are legal in the United States, but they are not
permitted to operate in Europe or Asia
5) The justification for the “light” regulation of hedge funds
is that only “sophisticated” investors with high net worths and
high incomes are permitted to invest in these funds, and such
investors supposedly can do the necessary “due diligence” on their
own rather than have it done by the SEC or some other regulator
 
 
 
Question 12
Which of the following statements is CORRECT?
 
1) The New York Stock Exchange is an auction market with a
physical location
2) Capital market transactions involve only the purchase and
sale of equity securities, i.e., common stocks
3) If an investor sells shares of stock through a broker, then
this would be a primary market transaction.
4) Consumer automobile loans are evidenced by legal documents
called “promissory notes,” and these individual notes are traded in
the money market
5) Consumer automobile loans are evidenced by legal documents
called “promissory notes,” and these individual notes are traded in
the money market
 
 
Question 13
Which of the following statements is CORRECT?
 
1) The corporate bylaws are a standard set of rules established
by the state of incorporation.  These rules are identical for
all corporations in the state, and their purpose is to ensure that
the firm’s managers run the firm in accordance with state laws
 
2) The corporate charter is a standard document prescribed by
the state of incorporation, and its purpose is to ensure that the
firm’s managers run the firm in accordance with state laws. 
Procedures for electing corporate directors are contained in
bylaws, while the declaration of the activities that the firm will
pursue and the number of directors are included in the corporate
charter.
3) Companies must establish a home office, or domicile, in a
particular state, and that state must be the one in which most of
their business (sales, manufacturing, and so forth) is
conducted
4) Attorney fees are generally involved when a company develops
its charter and bylaws, but since these documents are voluntary, a
new corporation can avoid these costs by deciding not to have
either a charter or bylaws
5) The corporate charter is concerned with things like what
business the company will engage in, whereas the bylaws are
concerned with things like procedures for electing the board of
directors
 
 
Question 14
Which of the following statements is CORRECT?
 
1) If expected inflation increases, interest rates are likely to
increase
2) If individuals in general increase the percentage of their
income that they save, interest rates are likely to increase
3) If companies have fewer good investment opportunities,
interest rates are likely to increase
4) Interest rates on all debt securities tend to rise during
recessions because recessions increase the possibility of
bankruptcy, hence the riskiness of all debt securities
5) Interest rates on long-term bonds are more volatile than
rates on short-term debt securities like T-bills
 
 
 
 
 
Question 15
The primary operating goal of a publicly-owned firm interested
in serving its stockholders should be to _________
 
1) maximize its expected total corporate income
2) maximize its expected EPS
3) minimize the chances of losses
4) maximize the stock price per share over the long run, which
is the stock’s intrinsic value
5) maximize the stock price on a specific target date

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