56 Free Test Bank for Principles of

Managerial Finance 13th Edition Gitman

Multiple Choice Questions
Which of the following serve as intermediaries channeling the savings of individuals, businesses and
governments into loans and investments?

  A) Financial Institutions

  B) Financial Markets

  C) Securities Exchanges

  D) OTC market

Trading is carried out in the Over-the-Counter (OTC) Exchange by

  A) the competitive bid process.

  B) the competitive bid process and the negotiation process.

  C) the auction process.

  D) an investment banker.

Which of the following is NOT a financial institution?

  A) A commercial bank.

  B) An insurance company.

  C) A pension fund.

  D) A newspaper publisher.

Trading is carried out on the floor of the New York Stock Exchange by

  A) the negotiation process.

  B) the auction process.

   C) a telecommunications network.

  D) investment bankers.

Which of the following assist companies in raising capital, advise firms on major transactions such as
mergers or financial restructuring, and engage in trading and market making activities?

  A) Investment Banks

  B) Securities Exchanges

  C) Mutual Funds

  D) Commercial Banks

The ________ stock exchange is a primary market where new public issues are sold.

  A) regional

  B) American

  C) New York

  D) over-the-counter

Firms that require funds from external sources can obtain them from

  A) private placement.

  B) financial institutions.

  C) financial markets.

  D) all of the above.

Which of the following are forums in which suppliers and demanders of funds can transact business
directly?
   A) Shadow banking system

  B) Financial Markets

  C) Commercial Banks

  D) Financial Institutions

By definition, the money market involves the buying and selling of

  A) stocks and bonds.

  B) short-term funds.

  C) funds that mature in more than one year.

  D) flows of funds.

Government usually

  A) is a net supplier of funds.

  B) is a net demander of funds.

  C) borrows funds directly from financial institutions.

  D) maintains permanent deposits with financial institutions.

The Glass-Steagall Act

  A) allowed commercial and investment banks to engage in the same activities.

  B) created the Securities Exchange Commission.

  C) created the Federal Deposit Insurance program and separated the activities of
commercial and investment banks.

  D) was intended to regulate the activities in the primary market.

The nonexclusive sale of either bonds or stocks to the general public is called
   A) private placement.

  B) public offering.

  C) organized selling.

  D) none of the above.

All of the following are examples of organized stock exchanges EXCEPT

  A) the New York Stock Exchange.

  B) the American Stock Exchange.

  C) the Pacific Stock Exchange.

  D) the over-the-counter exchange.

Securities exchanges create efficient markets that do all of the following EXCEPT

  A) ensure a market in which the price reflects the true value of the security.

  B) allocate funds to the most productive uses.

  C) control the supply and demand for securities through price.

  D) allow the price to be determined by supply and demand of securities.

The ________ is created by a financial relationship between suppliers and demanders of short-term
funds.

  A) stock market

  B) capital market

  C) financial market

  D) money market

The sale of a new security directly to an investor or a group of investors is called

   A) the secondary market

  B) the primary market

  C) the capital market

  D) the private placement market

Most money market transactions are made in

  A) common stock.

  B) marketable securities.

  C) stocks and bonds.

  D) preferred stock.

The ________ is created by a number of institutions and arrangements that allow the suppliers and
demanders of long-term funds to make transactions.

  A) financial market

  B) capital market

  C) money market

  D) credit market

The over-the-counter (OTC) market is

  A) the New York Stock Exchange.

  B) an organized stock exchange.

  C) a place where securities are bought and sold.

  D) an intangible market for unlisted securities.

The key participants in financial transactions are individuals, businesses, and governments. Individuals
are net ________ of funds, and businesses are net ________ of funds.

  A) demanders; suppliers

  B) users; providers

  C) suppliers; demanders

  D) purchasers; sellers

A competitive market that allocates funds to their most productive use is called a(n)

  A) liquid market.

  B) middleman's market.

  C) efficient market.

  D) investor's market.

Most businesses raise money by selling their securities in a

  A) public offering.

  B) private placement.

  C) direct placement.

  D) stock exchange.

Which of the following provide savers with a secure place to invest funds and offer both individuals and
companies loans to finance investments?

  A) Investment Banks

  B) Securities Exchanges

  C) Mutual Funds

  D) Commercial Banks

All of the following are functions of security exchanges EXCEPT

   A) allocating scarce capital.

  B) aiding in new financing.

  C) creating continuous markets.

  D) holding demand deposits.

The ________ market is where securities are initially issued and the ________ market is where pre-
owned securities (not new issues) are traded.

  A) primary; secondary

  B) money; capital

  C) secondary; primary

  D) primary; money

The major securities traded in the capital markets are

  A) commercial paper and Treasury bills.

  B) Treasury bills and certificates of deposit.

  C) stocks and bonds.

  D) bonds and commercial paper.

Firms that require funds from external sources can obtain them in one of the following ways EXCEPT

  A) financial institution.

  B) financial markets.

  C) government.

  D) private placement.

The tax liability of a corporation with ordinary income of $1,500,000 is

  A) $498,250.

  B) $510,000.

  C) $585,000.

  D) $690,000.

The Federal Deposit Insurance Corporation (FDIC)

  A) guarantees individuals will not lose any money held at a bank that fails.

  B) guarantees individuals will not lose any money, up to a specified amount, held at a bank
that fails.

  C) guarantees individuals will not lose any money held at any type of financial institution that
fails.

  D) guarantees individuals will not lose any money, up to a specified amount, held at any type
of financial institution that fails.

All of the following are true about mortgage-backed securities EXCEPT

  A) They represent claims on the cash flows generated by a pool of mortgages.

  B) All of the cash flows from these securities are guaranteed by the U.S. government.

  C) They can be purchased by individual investors, pension funds, and mutual funds.

  D) The primary risk associated with them is that homeowners may not be able or may not
choose to repay the loan.
All of the following are true EXCEPT

  A) Interest income received by a corporation is taxed as ordinary income.

  B) Corporations pay taxes on all dividends received from other corporations, no matter their
share of ownership.

  C) Corporations may pay taxes on only 30 percent of the dividends received from other
corporations, depending on their percentage of ownership.

  D) Capital gains is taxed as ordinary income.

If a corporation sells certain capital equipment for more than their initial purchase price, the difference
between the sale price and the purchase price is called a(n)

  A) ordinary gain.

  B) capital loss.

  C) capital gain.

  D) ordinary loss.

In efficient market is one where

  A) prices of stocks move up and down widely without apparent reason.

  B) prices of stocks remain steady for long periods of time.

  C) prices of stocks are unaffected by market news.

  D) prices of stocks incorporate new information quickly and adjust appropriately to their true
value.

The primary risk of mortgage-backed securities is

  A) that the prices of housing will go down.

  B) that the prices of housing will increase.

  C) that the government will not be able to meet the guarantees on the cash flows.

  D) that homeowners may not be able to, or choose not to, repay their loans.
An implication of the Efficient Market Hypothesis is that it is very hard for an actively managed mutual
fund to earn above average returns. This is true for all of the following reasons EXCEPT

  A) new information is predictable and therefore already incorporated into the stock prices.

  B) new information is by definition unpredictable, thus hard to incorporate into stock prices.

  C) actively managed mutual funds typically charge fees of about 1.5%.

  D) index funds make no attempt to analyze stocks.

In a ________ market, the buyer and seller are not brought together to trade securities directly but
instead have their orders executed on the ________.

  A) dealer; securities market

  B) broker; over-the -counter market

  C) broker; securities market

  D) dealer; over-the-counter market

The tax liability of a corporation with ordinary income of $105,000 is

  A) $42,000.

  B) $35,700.

  C) $23,950.

  D) $24,200.

The tax liability of a corporation with ordinary income of $1,100,000 is

  A) $362,250.
   B) $340,000.

  C) $374,000.

  D) $390,000.

In a ________ market, the buyer and seller are brought together to trade securities in an organization
called ________.

  A) dealer; securities market

  B) broker; over-the -counter market

  C) broker; securities market

  D) dealer; over-the-counter market

The Gramm-Leach-Biley Act

  A) does not allows business combinations between commercial banks, investment banks
and insurance companies.

  B) allows business combinations between commercial banks and investment banks, but not
insurance companies.

  C) allows business combinations between commercial banks, investment banks and
insurance companies.

  D) was signed during the Great Depression because of the financial crisis.

The dividend exclusion for corporations receiving dividends from another corporation has resulted in

  A) a lower cost of equity for the corporation paying the dividend.

  B) a higher relative cost of bond-financing for the corporation paying the dividend.

  C) stock investments being relatively less attractive, relative to bond investments made by
one corporation in another corporation.

  D) stock investments being relatively more attractive relative to bond investments made by
one corporation in another corporation.
In general, most corporate capital gains are taxed at ________ tax rate.

  A) a 46 percent

  B) the ordinary

  C) a 28 percent

  D) a 30 percent

In an efficient market if a company announced sales of a new product are lower than expected, what
would you expect to happen to the stock price?

  A) It would not change.

  B) It would increase.

  C) It would decrease.

  D) It would move it the same direction as the market in general.

Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is the average tax rate
for Jennings, Inc.?

  A) 34 percent

  B) 46 percent

  C) 25 percent

  D) 40 percent

Long-term debt instruments used by both government and business are known as

  A) stocks.

  B) bills.
   C) bonds.

  D) equities.

Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 10 percent, or
preferred stock at an annual cost of 7 percent. If the corporation has a 40 percent tax rate, the after-tax
cost of each is

  A) debt: $100,000; preferred stock: $70,000.

  B) debt: $60,000; preferred stock: $42,000.

  C) debt: $60,000; preferred stock: $70,000.

  D) debt: $100,000; preferred stock: $42,000.

A crisis in the financial sector often spills over into other industries because when financial institutions
________ borrowing, activity in most other industries also ________.

  A) increase; slows down

  B) contract; slows down

  C) increase; increases

  D) contract; increases

Corporation A owns 15 percent of the stock of corporation B. Corporation B pays corporation A $100,000
in dividends in 2002. Corporation A must pay tax on

  A) $100,000 of ordinary income.

   B) $ 30,000 of ordinary income.

  C) $ 70,000 of ordinary income.

  D) $ 70,000 of capital gain.

The tax deductibility of various expenses such as general and administrative expenses ________ their
after-tax cost.

  A) increases

  B) reduces

  C) has no effect on

  D) has an undetermined effect on

The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is

  A) 46 percent.

  B) 23 percent.

  C) 34 percent.

  D) 15 percent.

Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other
corporations. Congress did this to

  A) encourage corporations to invest in each other.

  B) avoid double taxation on dividends.

   C) eliminates most of the potential tax liability from the dividends received by the second and
any subsequent corporations.

  D) lower the cost of equity financing for corporations.

Which of the follow regulates the secondary market and created the Securities Exchange Commission
(SEC)?

  A) The Securities Act of 1933

  B) The Gramm-Leach-Biley Act

  C) The Securities Exchange Act of 1934

  D) The Glass--Steagall Act

Which of the follow regulates the primary market in which securities are originally issued to the public?

  A) The Securities Act of 1933

  B) The Gramm-Leach-Biley Act

  C) The Securities Exchange Act of 1934

  D) The Glass-Steagall Act

The two key financial markets are

  A) primary market and secondary market.

  B) primary market and money market.

  C) money market and capital market.

  D) capital market and secondary market.

The process of pooling mortgages or other types of loans and selling the claims or securities against that
pool in the secondary market is called

  A) refinancing

  B) securitization
   C) private placement

  D) pooling

When home prices are falling we would expect

  A) high mortgage default rates.

  B) low mortgage default rates.

  C) unchanged mortgage default rates.

  D) a higher percentage of owner home equity.