Second Level

Introduction to Finance
Tutorial 1
Chapter 1
 True or False:

1) Finance is concerned with the process institutions, markets, and instruments involved in the
transfer of money among and between individuals, businesses and government.
Answer: TRUE

2) Financial services are concerned with the duties of the financial manager.
Answer: FALSE

3) The corporate controller is the officer responsible for the firm's financial activities such as
financial planning and fund raising, making capital expenditure decisions, and managing cash,
credit, the pension fund, and foreign exchange.
Answer: FALSE

4) In partnerships, owners have unlimited liability and may have to cover debts of other less
financially sound partners.
Answer: TRUE

5) The sole proprietor has unlimited liability; his or her total investment in the business, but not
his or her personal assets, can be taken to satisfy creditors.
Answer: FALSE

6) The wealth of corporate owners is measured by the share price of the stock.
Answer: TRUE

7) The profit maximization goal ignores the timing of returns, does not directly consider cash
flows, and ignores risk.
Answer: TRUE

8) Marginal cost-benefit analysis states that financial decisions should be made and actions taken
only when added benefits exceed added costs.
Answer: TRUE

9) The financial manager must look beyond financial statements to obtain insight into developing
or existing problems since the accrual accounting data do not fully describe the circumstances
of a firm.
Answer: TRUE

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 10) The likelihood that managers may place personal goals ahead of corporate goals is called the
agency problem.
Answer: TRUE

11)The board of directors is responsible for managing day-to-day operations and carrying out the
policies established by the chief executive officer.
Answer: FALSE

 MCQ:
1) Finance can be defined as
A) the system of debits and credits.
B) the science of the production, distribution, and consumption of wealth.
C) the art and science of managing money.
D) the art of merchandising products and services.
Answer: C

2) The officer responsible for the firm's financial activities such as financial planning and fund
raising, making capital expenditure decisions, and managing cash, credit, the pension fund, and
foreign exchange is
A) treasurer.
B) controller.
C) foreign exchange manager.
D) none of the above.
Answer: A

3) Which of the following legal forms of organization is most expensive to organize?

A) Sole proprietorships.
B) Partnerships.
C) Corporations.
D) Limited partnership.
Answer: C

4) Under which of the following legal forms of organization, is ownership readily transferable?
A) Sole proprietorships.
B) Partnerships.
C) Limited partnership.
D) Corporation.
Answer: D

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 5) About 75 percent of all business firms are
A) sole proprietorships.
B) partnerships.
C) corporations.
D) S-corporations.
Answer: A

6) A major weakness of a partnership is

A) limited liability.
B) difficulty liquidating or transferring ownership.
C) access to capital markets.
D) low organizational costs.
Answer: B

7) All of the following are key strengths of a corporation EXCEPT

A) access to capital markets.
B) limited liability.
C) low organization costs.
D) readily transferable ownership.
Answer: C

8) The primary goal of the financial manager is

A) minimizing risk.
B) maximizing profit.
C) maximizing wealth.
D) minimizing return.
Answer: C

9) An ethics program is expected to have a ________ impact on the firm's share price.
A) positive
B) negative
C) no impact
D) undetermined
Answer: A

10)All of the following as considered stakeholders EXCEPT

A) consumers
B) suppliers
C) employees
D) competitors
Answer: D

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 11)A financial manager must choose between three alternative investments. Each asset is
expected to provide earnings over a three-year period as described below. Based on the wealth
maximization goal, the financial manager would

A) choose Asset 1.
B) choose Asset 2.
C) choose Asset 3.
D) be indifferent between Asset 1 and Asset 2.
Answer: A

12)If a company's managers are NOT owners of the company, then they are
A) dealers.
B) agents.
C) outsiders.
D) brokers.
Answer: B

13)The conflict between the goals of a firm's owners and the goals of its non-owner managers is
A) the agency problem.
B) incompatibility.
C) serious only when profits decline.
D) of little importance in most large U.S. firms.
Answer: A

14) The true owner(s) of the corporation is (are) the

A) board of directors.
B) chief executive officer.
C) stockholders.
D) creditors.
Answer: C

15)The accountant's primary function is

A) evaluating the financial statements.
B) making decisions based on financial data.
C) the collection and presentation of financial data.
D) planning cash flows.
Answer: C

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  Problem:

Ken Allen, capital budgeting analyst for Bally Gears Inc., has been asked to evaluate a proposal.
The manager of the automotive division believes that replacing the robotics used on the heavy
truck gear-line will produce total benefits of 560,000 (in today’s dollars) over the next 5 years.
The existing robotics would produce benefits of $400,000 (also in today’s dollars) over that same
period. An initial cash investment of $220,000 would be required to install the new equipment.
The manager estimates that the robotics can be sold for $70,000. Show how Ken would apply
marginal cost-benefit analysis techniques to the determine the following:
a) The marginal (ADDED) benefits of the new proposed robotics.
Marginal benefits of new robotics − Marginal benefits of original robotics = Marginal
benefits of proposed robotics
$560,000 − $400,000 = $160,000
b) The marginal (ADDED) cost of the new proposed robotics.
Marginal cost of new robotics – Sales price of current robotics = Marginal cost of proposed
robotics
$220,000 − $70,000 = $150,000
c) The net benefit of the new proposed robotics.
Net benefits of new robotics = Marginal benefits of proposed robotics − Marginal cost of
proposed robotics
$160,000 − $150,000= $10,000
d) What should Ken recommend the company do? Why?
Ken Allen should recommend the new robotics be used on the heavy truck gear line.
The marginal benefits exceed the marginal costs
e) What factors besides the costs and benefits should be considered before the final decision
is made?
Ken Allen should determine whether there will be additional training necessary with the
new robotics, whether even better robotics may be available in a short while, and what will
be the energy consumption of the new robotics.

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 Chapter 2
 T or F

1) A financial institution is an intermediary that channels the savings of individuals, businesses,

and governments into loans or investments.
Answer: TRUE

2) Primary and secondary markets are markets for short-term and long-term securities,
respectively.
Answer: FALSE

3) A public offering is the sale of a new security issue typically debt or preferred stock directly to
an investor or group of investors.
Answer: FALSE

4) The shadow banking system describes a group of institutions that engage in lending activities,
much like traditional banks, but these institutions do not accept deposits and are therefore not
subject to the same regulations as traditional banks.
Answer: TRUE

5) Capital markets are for investors who want a safe temporary place to deposit funds where they
can earn interest and for borrowers who have a short term need for funds.
Answer: FALSE

6) Money markets are markets for long term funds such as bonds and equity.
Answer: FALSE

 MCQ:
1) 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.
Answer: D

2) 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
Answer: A

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 3) 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
Answer: A

4) 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
Answer: D

5) 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
Answer: D

6) 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.
Answer: C

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