Chapter 1

1. Vocabulary Check. Choose the term within the parentheses that best matches each of the following descriptions. (LO1-1–LO1-7) a. Expenditure on research and development (financing decision / investment decision) b. A bank loan (real asset / financial asset) c. Listed on a stock exchange (closely held corporation / public corporation) d. Has limited liability (partnership / corporation) e. Responsible for bank relationships (the treasurer / the controller) f. Agency cost (the cost resulting from conflicts of interest between managers and shareholders /

the amount charged by a company’s agents such as the auditors and lawyers)

2. Financial Decisions. Which of the following are investment decisions, and which are financing decisions? (LO1-1) a. Should we stock up with inventory ahead of the holiday season? b. Do we need a bank loan to help buy the inventory? c. Should we develop a new software package to manage our inventory? d. With a new automated inventory management system, it may be possible to sell off our Birdlip warehouse. e. With the savings we make from our new inventory system, it may be possible to increase our dividend. f. Alternatively, we can use the savings to repay some of our long-term debt.

3. Financial Decisions. What is the difference between capital budgeting decisions and capital structure decisions? (LO1-1) 4. Real versus Financial Assets. Which of the following are real assets, and which are financial? (LO1-2) a. A share of stock b. A personal IOU c. A trademark d. A truck e. Undeveloped land f. The balance in the firm’s checking account g. An experienced and hardworking sales force h. A bank loan agreement

5. Real and Financial Assets. Read the following passage and fit each of the following terms into the most appropriate space: financing, real, bonds, investment, executive airplanes, financial, capital budgeting, brand names. (LO1-2) Companies usually buy _____ assets. These include both tangible assets such as _____ and intangible assets such as _____. To pay for these assets, they sell _____ assets such as _____. The decision about which assets to buy is usually termed the _____ or _____ decision. The decision about how to raise the money is usually termed the _____ decision.

6. Corporations. Choose in each case the type of company that best fits the description. (LO1-3) a. The business is owned by a small group of investors. (private corporation / public corporation) b. The business does not pay income tax. (private corporation / partnership) c. The business has limited liability. (sole proprietorship / public corporation) d. The business is owned by its shareholders. (partnership / public corporation)

Chapter 2:

1. Corporate Financing. How can a small, private firm finance its capital investments? Give two or three examples of financing sources. (LO2-1)

2. Financial Markets. The stock and bond markets are not the only financial markets. Give two or three additional examples. (LO2-1)

3. Financial Markets and Institutions. True or false? (LO2-1) a. Financing for public corporations must flow through financial markets. b. Financing for private corporations must flow through financial intermediaries. c. Almost all foreign exchange trading occurs on the floors of the FOREX exchanges in New York and London. d. Derivative markets are a major source of finance for many corporations. e. The opportunity cost of capital is the capital outlay required to undertake a real investment opportunity. f. The cost of capital is the interest rate paid on borrowing from a bank or other financial institution.

4. Corporate Financing. Financial markets and intermediaries channel savings from investors to corporate investment. The savings make this journey by many different routes. Give a specific example for each of the following routes: (LO2-1) a. Investor to financial intermediary, to financial markets, and to the corporation b. Investor to financial markets, to a financial intermediary, and to the corporation c. Investor to financial markets, to a financial intermediary, back to financial markets, and to the corporation

5. Financial Intermediaries. You are a beginning investor with only $5,000 in savings. How can you achieve a widely diversified portfolio at reasonable cost? (LO2-2)

6. Financial Intermediaries. Is an insurance company also a financial intermediary? How does the insurance company channel savings to corporate investment? (LO2-2)