Copyright 2016 Pearson Education, Inc.

1 Copyright © 2016 Pearson Education, Inc.

Financial Management: Core Concepts, 3e (Brooks)

Chapter 1 Financial Management

1.1 The Cycle of Money

1) At its most basic level, the function of financial intermediaries is to ________.

• track and report interest rates
• move money from lenders to borrowers and back again
• report all financial transactions to the federal government
• effect a transfer of wealth in society

Answer: B

Diff: 1

Topic: 1.1 The Cycle of Money

AACSB: 3 Analytical Thinking

LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending.

2) Which of the following is NOT an example of a financial transaction?

• Your parents use their credit card to pay this term's college tuition.
• You use the ATM to withdraw British pounds so you can fly to London.
• Your roommate lends you $20 and you repay it in one week.
• All of the above are financial transactions.

Answer: D

Diff: 2

Topic: 1.1 The Cycle of Money

AACSB: 3 Analytical Thinking

LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending.

3) The movement of money from lender to borrower and back again is known as ________.

• the circle of life
• corporate finance
• the cycle of money
• money laundering

Answer: C

Diff: 1

Topic: 1.1 The Cycle of Money

AACSB: 3 Analytical Thinking

LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending.Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.

(Financial Management Core Concepts, (Global Edition), 3e Raymond Brooks) (Test Bank all Chapters) 1 / 4

2 Copyright © 2016 Pearson Education, Inc.4) The common objective of borrowing and lending is to ________.

• make all parties better off
• gain a profit at the other's expense
• make a firm or individual appear more liquid than is really the case
• thwart regulatory authority

Answer: A

Diff: 1

Topic: 1.1 The Cycle of Money

AACSB: 3 Analytical Thinking

LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending.5) Which of the following is NOT a function of a financial intermediary in the lending/borrowing process?

• To help establish terms of the lending/borrowing agreement
• To match the borrower and the lender
• To bear the risk that the borrower will not repay
• All of the above are functions of a financial intermediary.

Answer: D

Diff: 1

Topic: 1.1 The Cycle of Money

AACSB: 3 Analytical Thinking

LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending.

6) You place $500 into your checking account at First Bank and earn 1% APR on your deposit. Your professor borrows money at a rate of 8% from the same bank for a tuition loan for her son. Which of the following statements is true?

• The bank is criminally liable to you for paying an interest rate lower than the expected rate of

inflation.

• You and your professor have an obvious conflict of interest because you have accounts at the same

financial institution.

• You benefit from earning interest on your deposit, safety for your funds, and having a recognizable

means for paying for your financial obligations without having to hold cash.

• Your professor is the only party to be made worse off by this example because she is the only party

paying net interest.

Answer: C

Explanation: C) Both you and your professor are using services typically provided by banks. There is no conflict of interest.

Diff: 2

Topic: 1.1 The Cycle of Money

AACSB: 3 Analytical Thinking

LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending.

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3 Copyright © 2016 Pearson Education, Inc.7) The basic function of financial intermediaries is to move advice from lenders to borrowers and back to lenders.

Answer: FALSE

Explanation: The basic function of financial intermediaries is to move MONEY from lenders to borrowers and back to lenders.

Diff: 1

Topic: 1.1 The Cycle of Money

AACSB: 3 Analytical Thinking

LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending.

8) In the lending/borrowing process, a financial intermediary function is to bear the risk that the borrower will not repay.

Answer: TRUE

Diff: 1

Topic: 1.1 The Cycle of Money

AACSB: 3 Analytical Thinking

LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending.9) All financial transactions have a buyer and a seller.

Answer: TRUE

Diff: 1

Topic: 1.1 The Cycle of Money

AACSB: 3 Analytical Thinking

LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending.

10) Give three examples of a financial transaction.Answer: (1) Your parents use their credit card to pay some of your college expenses.(2) You use the ATM to withdraw funds so you can buy your best friend a birthday gift.(3) Your roommate lends you $20 and you repay it back when you get your next pay check.

Diff: 2

Topic: 1.1 The Cycle of Money

AACSB: 3 Analytical Thinking

LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending.

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4 Copyright © 2016 Pearson Education, Inc.

1.2 Overview of Finance Areas

1) Which of the following best identifies the four main areas of finance?

• Exchange rate management, investments, financial institutions and markets, international finance
• Corporate finance, investments, capital structure, international finance
• Corporate finance, investments, financial institutions and markets, international finance
• Corporate finance, capital budgeting, financial institutions and markets, regulation

Answer: C

Explanation: C) Exchange rate management, capital structure, and capital budgeting are activities within the functional areas of finance.

Diff: 2

Topic: 1.2 Overview of Finance Areas

AACSB: 3 Analytical Thinking

LO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activities that each represents.

2) Of the following, which is NOT one of the four main areas of finance?

• International finance
• Corporate finance
• Investments
• All are considered main areas of finance.

Answer: D

Diff: 1

Topic: 1.2 Overview of Finance Areas

AACSB: 3 Analytical Thinking

LO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activities that each represents.3) The set of financial activities that support the OPERATIONS of a business is best described by which main area of finance?

• Corporate finance
• Investments
• Financial institutions and markets
• International finance

Answer: A

Diff: 1

Topic: 1.2 Overview of Finance Areas

AACSB: 3 Analytical Thinking

LO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activities that each represents.

4) ________ is the area of finance concerned with activities such as borrowing funds to finance projects such as plant expansions or new product launches.

• Working capital management
• International finance
• Investments
• Corporate finance

Answer: D

Diff: 2

Topic: 1.2 Overview of Finance Areas

AACSB: 3 Analytical Thinking

LO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activities that each represents.

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