FINC 341- FINAL EXAM THEORY QUESTIONS &
ANSWERS
A benefit of focusing on ROE is that it ensures that all profitable projects will be
accepted so that the average ROE of the firm will be boosted. - Answers - False
Since ROE is an important measure of performance, financial managers should try to
maximize the company's ROE. - Answers - False, maximizing ROE means maximizing
debt financing, and this is not good
EVA is different from Net Income because EVA reflects the cost of equity as well as the
cost of debt - Answers - True
When two mutually exclusive projects are being considered, the one with the higher
ROE should be chosen, regardless of project size. - Answers - False, project size
matters
A firm's EPS is highly correlated with its stock price. - Answers - False
While the NASDAQ trades more dollar volume than the NYSE, the NYSE has a higher
share volume traded than the NASDAQ - Answers - False
In 1792, 68 brokers created the New York Stock & Exchange Board under the
Buttonwood Agreement. - Answers - False, # brokers
In a dutch auction, stocks are sold at the highest bid price that would sell all of the
shares in the offering. - Answers - True
When a company puts out a bond issue and then two years later puts out another bind
issue, the second bond is being sold on the secondary market. - Answers - False, the
first bond is being sold on the secondary market.
A dealer's profit is the bid-ask spread, and this spread generally becomes larger when
the stock is traded more often. - Answers - False, ?
When interest rates are low, an investor should consider buying bonds and then selling
them once interest rates go back up nil they want to make capital gains on bonds. -
Answers - False, buy when high, sell when low.
As U.S. rates go up, the dollar should strengthen and help U.S. companies that import
goods - Answers - True
The repeal of the Glass Steagall Act of 1933 under President Clinton's administration
has been partially blamed for the 2008-09 crisis. - Answers - True
, Upper corporate managers are highly motivated to give their stockholders an
appropriate return on the stock because if the stockholders start selling the stock, the
company's stock price will decrease and the company can become a takeover target. -
Answers - True
Stock prices have increased significantly since President Trump was elected due to
expectations that the US economy will gain strength in the future from lower corporate
tax rates, repatriation of corporate cash from abroad, and some deregulation of
business. - Answers - True
The spread between yield curves of corporate bonds and Treasury bonds is larger the
longer the maturity because the corporate bonds are considered riskier if they have a
long time to maturity, and because of this extra risk, they are less liquid. - Answers -
True
If the Fed lowers rates, it could cause foreigners to sell their US bonds. They would be
paid in dollars, which they would then sell, raising the value of the dollar and helping US
manufacturers export goods. - Answers - False, selling dollars makes more of a supply,
lower the price of the dollar
The US had large trade surpluses for about 25 years following World War II, but has
had trade deficits since the mid-1970s. - Answers - True
When the Fed fights a recession by reducing the interest rate, that is known as "firing
the gun," to protect the economy. - Answers - True
If a corporations owns real estate for 10 years or more and then sells it, the tax on the
profit would be capped at 20%. - Answers - False, corporations don't get a tax cap
If an individual has $12,000 of capital gains and $19,000 of capital losses this year, that
person will pay no tax on the capital gains, and will be able to keep $3,000 of his salary
from being taxed this year and then carry the other $7,000 of capital loss forward for up
to 15 years. - Answers - False, $4,000 is the amount that will be rolled forward.
Individuals' capital losses are allowed to be carried forward for up to 15 years. -
Answers - False
A man buys a house for $340,000. He passes away 36 years later when his house is
worth $740,000. His heir sells the house and owes tax on only 30% of the capital gain of
$400,000. - Answers - False, his heir doesn't;t have to pay taxes if they sell the house
right away
Anyone who purchases more than 5 percent of a public company must file a Schedule
13D. - Answers - True
ANSWERS
A benefit of focusing on ROE is that it ensures that all profitable projects will be
accepted so that the average ROE of the firm will be boosted. - Answers - False
Since ROE is an important measure of performance, financial managers should try to
maximize the company's ROE. - Answers - False, maximizing ROE means maximizing
debt financing, and this is not good
EVA is different from Net Income because EVA reflects the cost of equity as well as the
cost of debt - Answers - True
When two mutually exclusive projects are being considered, the one with the higher
ROE should be chosen, regardless of project size. - Answers - False, project size
matters
A firm's EPS is highly correlated with its stock price. - Answers - False
While the NASDAQ trades more dollar volume than the NYSE, the NYSE has a higher
share volume traded than the NASDAQ - Answers - False
In 1792, 68 brokers created the New York Stock & Exchange Board under the
Buttonwood Agreement. - Answers - False, # brokers
In a dutch auction, stocks are sold at the highest bid price that would sell all of the
shares in the offering. - Answers - True
When a company puts out a bond issue and then two years later puts out another bind
issue, the second bond is being sold on the secondary market. - Answers - False, the
first bond is being sold on the secondary market.
A dealer's profit is the bid-ask spread, and this spread generally becomes larger when
the stock is traded more often. - Answers - False, ?
When interest rates are low, an investor should consider buying bonds and then selling
them once interest rates go back up nil they want to make capital gains on bonds. -
Answers - False, buy when high, sell when low.
As U.S. rates go up, the dollar should strengthen and help U.S. companies that import
goods - Answers - True
The repeal of the Glass Steagall Act of 1933 under President Clinton's administration
has been partially blamed for the 2008-09 crisis. - Answers - True
, Upper corporate managers are highly motivated to give their stockholders an
appropriate return on the stock because if the stockholders start selling the stock, the
company's stock price will decrease and the company can become a takeover target. -
Answers - True
Stock prices have increased significantly since President Trump was elected due to
expectations that the US economy will gain strength in the future from lower corporate
tax rates, repatriation of corporate cash from abroad, and some deregulation of
business. - Answers - True
The spread between yield curves of corporate bonds and Treasury bonds is larger the
longer the maturity because the corporate bonds are considered riskier if they have a
long time to maturity, and because of this extra risk, they are less liquid. - Answers -
True
If the Fed lowers rates, it could cause foreigners to sell their US bonds. They would be
paid in dollars, which they would then sell, raising the value of the dollar and helping US
manufacturers export goods. - Answers - False, selling dollars makes more of a supply,
lower the price of the dollar
The US had large trade surpluses for about 25 years following World War II, but has
had trade deficits since the mid-1970s. - Answers - True
When the Fed fights a recession by reducing the interest rate, that is known as "firing
the gun," to protect the economy. - Answers - True
If a corporations owns real estate for 10 years or more and then sells it, the tax on the
profit would be capped at 20%. - Answers - False, corporations don't get a tax cap
If an individual has $12,000 of capital gains and $19,000 of capital losses this year, that
person will pay no tax on the capital gains, and will be able to keep $3,000 of his salary
from being taxed this year and then carry the other $7,000 of capital loss forward for up
to 15 years. - Answers - False, $4,000 is the amount that will be rolled forward.
Individuals' capital losses are allowed to be carried forward for up to 15 years. -
Answers - False
A man buys a house for $340,000. He passes away 36 years later when his house is
worth $740,000. His heir sells the house and owes tax on only 30% of the capital gain of
$400,000. - Answers - False, his heir doesn't;t have to pay taxes if they sell the house
right away
Anyone who purchases more than 5 percent of a public company must file a Schedule
13D. - Answers - True
