Tutorial 1 Choose ONE Correct Answer ONLY

TUTORIAL 1
Choose ONE correct answer ONLY.
1. What is(are) the function(s) of the financial system?

a. Smoothing consumption over time
b. Smoothing consumption in different ‘states of the world’
c. Screening and monitoring
d. All the above
2. You are considering putting all your savings of £1,000 into a saving account with Bank
XYZ. The bank offers an interest of 5% interest rate per year. A businessman offers to borrow
your money to invest in his growing but risky business. What is the interest rate that you will
require if you are to lend to the businessman?
a. 5%
b. Above 5%
c. Below 5%
d. No interest at all
3. If you put £100 into a saving account for which the bank is offering a 5% interest rate per
year, what is the total amount of money do you expect to have in your account next year?
a. £100
b. £95
c. £105
d. None of the above
4. A business created as a distinct legal entity composed of one or more individuals or entities
is called a:
a. corporation.
b. sole proprietorship.
c. general partnership.
d. limited partnership.
e. unlimited liability company.
5. Which of the following are disadvantages of a partnership?

I. limited life of the firm
II. personal liability for firm debt
III. greater ability to raise capital than a sole proprietorship
IV. lack of ability to transfer partnership interest
a. I and II only
b. III and IV only
c. II and III only
d. I, II, and IV only
e. I, III, and IV only
TUTORIAL 2
1. A conflict of interest between the shareholders and management of a firm is called:

a. shareholders’ liability.
b. corporate breakdown.
c. the agency problem.
d. corporate activism.
e. legal liability.
2. Which one of the following actions by a manager creates an agency problem?

a. refusing to borrow money when doing so will create losses for the firm
b. refusing to lower selling prices if doing so will reduce the net profits
c. agreeing to expand the company at the expense of shareholders’ value
d. agreeing to pay bonuses based on the market value of the company stock
e. increasing current costs in order to increase the market value of the stockholders’ equity
3. Which of the following help convince managers to work in the best interest of the
shareholders?
I. compensation based on the value of the stock
II. stock option plans
III. threat of a takeover
IV. threat of conversion to a partnership
a. I and II only
b. II and III only
c. I, II and III only
d. I and III only
e. I, II, III, and IV
4. Which form of business structure faces the greatest agency problems?

a. sole proprietorship
b. general partnership
c. limited partnership
d. corporation
e. limited liability company
5. Shareholders have a claim on returns after the following obligations are met:
a. obligations to suppliers
b. obligations to employees
c. obligations to creditors
d. A and B.
e. All A, B and C.
TUTORIAL 3
1. The excess return you earn by moving from a relatively risk-free investment to a risky
investment is called the:
a. geometric average return.
b. inflation premium.
c. risk premium.
d. time premium.
e. arithmetic average return.
2. Which one of the following types of securities has tended to produce the lowest rate of
return for the period 1926 through 2005?
a. U.S. Treasury bills
b. long-term government bonds
c. small company stocks
d. large company stocks
e. long-term corporate bonds
3. A portfolio is:
a. a group of assets, such as stocks and bonds, held as a collective unit by an investor.
b. the expected return on a risky asset.
c. the expected return on a collection of risky assets.
d. the variance of returns for a risky asset.
e. the standard deviation of returns for a collection of risky assets.
4. Risk that affects at most a small number of assets is called _____ risk.
a. portfolio
b. undiversifiable
c. market
d. unsystematic
e. total
5. Which one of the following is a correct statement concerning risk premium?

a. The greater the volatility of returns, the greater the risk premium.
b. The lower the volatility of returns, the greater the risk premium.
c. The lower the average rate of return, the greater the risk premium.
d. The risk premium is not correlated to the average rate of return.
e. The risk premium is not affected by the volatility of returns.
TUTORIAL 4
1. The mixture of debt and equity used by a firm to finance its operations is called:
a. working capital management.
b. financial depreciation.
c. cost analysis.
d. capital budgeting.
e. capital structure.
. 2. Debt is a contractual obligation that:

a. requires the payout of residual flows to the holders of these instruments.
b. requires a repayment of a stated amount and interest over the period.
c. allows the bondholders to sue the firm if it defaults.
d. Both A and B.
e. Both B and C.
3. The assets that the debtholders can claim in the event of the issuing firm’s default are
called:
a. Coupon.
b. Interest rate.
c. Collateral.
d. Covenants.
e. Principal.
4. The original sale of shares by corporations to the general public occurs in the:
a. primary market.
b. secondary market.
c. private placement market.
d. proprietary market.
e. liquidation market.
5. Shareholders usually have which of the following right(s)?

a. To vote on important issues such as electing board members, issuing new securitities and
corporate restructuring.
b. To receive dividends.
c. To receive residual returns after all the obligations to other stakeholders are met.
d. All of the above.
e. None of the above.

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TUTORIAL 1

Choose ONE correct answer ONLY.

1. What is(are) the function(s) of the financial system?

5. Which of the following are disadvantages of a partnership?

Choose ONE correct answer ONLY.

1. A conflict of interest between the shareholders and management of a firm is called:

2. Which one of the following actions by a manager creates an agency problem?

4. Which form of business structure faces the greatest agency problems?

Choose ONE correct answer ONLY.

5. Which one of the following is a correct statement concerning risk premium?

Choose ONE correct answer ONLY.

. 2. Debt is a contractual obligation that:

5. Shareholders usually have which of the following right(s)?

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