Business Finance – Midterm Exam

Name/Course: _________________________________________ D) Lending by financial intermediaries to ultimate

borrowers
Test I. True or False 2. Which method is NOT used in capital budgeting?
1. Direct finance involves lending by ultimate borrowers with no A) The payback method
intermediary. B) Discounted cash flow methods
2. The payback method is one of the discounted cash flow C) Average rate of return methods
methods used in capital budgeting. D) Net present value method
3. The secondary market is where newly issued primary and 3. Where are existing financial securities traded?
secondary securities are traded for the first time. A) Primary market
4. The foreign exchange market deals with loans on residential, B) Secondary market
commercial, and industrial real estate. C) Money market
5. Stock options are traded in the mortgage market. D) Capital market
6. Sensitivity analysis helps in determining the sensitivity of an 4. What does the foreign exchange market deal with?
investment to various changes. A) Buying and selling foreign currencies
7. Gross working capital is the total amount of a firm's current B) Buying and selling stocks
liabilities. C) Issuing bonds
8. The primary objective of liquidity management is to minimize D) Providing mortgage loans
profitability. 5. Where are stock options traded?
9. Idle cash earns high interest when kept in the bank. A) Bond market
10. Accounts receivable management is concerned with how a B) Stock market
firm handles its cash reserves. C) Mortgage market
11. Inventory management only focuses on the liquidity aspect. D) Options market
12. Short-term financing deals with the demand for and supply of 6. What does sensitivity analysis help in determining?
long-term funds. A) Market trends
13. Development banks are one of the components of the banking B) Investment opportunities
system. C) Sensitivity of an investment to various changes
14. Trade creditors extend credit to buyers for use in D) Economic indicators
manufacturing, processing, or reselling goods. 7. What does gross working capital represent?
15. The capital market is not subdivided into different parts. A) Total assets
B) Total liabilities
Test II. Identification C) Total current assets
1. Direct finance involves lending by ultimate borrowers with no D) Total current liabilities
__________. 8. What is the primary objective of liquidity management?
2. The payback method is one of the __________ used in capital A) Maximizing profitability
budgeting. B) Minimizing expenses
3. The secondary market is where existing __________ are C) Ensuring a firm can meet its current obligations
traded. D) Increasing market share
4. The foreign exchange market deals with buying and selling 9. What usually happens to idle cash kept in the bank?
foreign __________. A) It earns high interest
5. Stock options are traded in the __________ market. B) It earns minimal interest
6. Sensitivity analysis helps in determining the sensitivity of an C) It remains stagnant
investment to various __________. D) It depreciates
7. Gross working capital is the total amount of a firm's current 10. What is accounts receivable management concerned with?
__________. A) Managing inventory levels
8. The primary objective of liquidity management is to ensure a B) Handling cash reserves
firm can meet its current __________. C) Handling credit sales and collections
9. Idle cash usually earns __________ interest when kept in the D) Managing investments
bank. 11. What does inventory management focus on?
10. Accounts receivable management is concerned with how a A) Profitability aspect only
firm handles its __________. B) Liquidity aspect only
11. Inventory management focuses on both the __________ and C) Both liquidity and profitability aspects
profitability aspects of inventory. D) None of the above
12. Short-term financing deals with the demand for and supply of 12. What does short-term financing deal with?
__________ funds. A) Long-term funds
13. Development banks are one of the components of the B) Intermediate-term funds
__________ system. C) Short-term funds
14. Trade creditors extend credit to buyers for use in __________ D) Equity financing
goods. 13. Which is NOT a component of the banking system?
15. The capital market is subdivided into different parts, such as A) Commercial banks
the bond market, __________ market, and mortgage market. B) Savings banks
C) Development banks
banking credit sales and collections liquidity D) Stock exchanges
short-terming reselling stock 14. What do trade creditors extend credit for?
Assets obligations minimal A) Buying real estate
Intermediary discounted cash flow methods financial securities B) Purchasing stocks
Currencies options changes C) Reselling goods
D) Investing in bonds
1. What is direct finance? 15. What are the subdivisions of the capital market?
A) Lending by ultimate borrowers with intermediaries A) Primary and secondary markets
B) Lending by ultimate borrowers with no B) Money and capital markets
intermediaries C) Stock and bond markets
C) Lending by ultimate lenders to financial D) All of the above
intermediaries
True or False: Direct finance involves lending by ultimate borrowers with no intermediary.
True or False: The payback method is one of the discounted cash flow methods used in capital budgeting.
True or False: The secondary market is where newly issued primary and secondary securities are traded for the first time.
True or False: The foreign exchange market deals with loans on residential, commercial, and industrial real estate.
True or False: Stock options are traded in the mortgage market.
True or False: Sensitivity analysis helps in determining the sensitivity of an investment to various changes.
True or False: Gross working capital is the total amount of a firm's current liabilities.
True or False: The primary objective of liquidity management is to minimize profitability.
True or False: Idle cash earns high interest when kept in the bank.
True or False: Accounts receivable management is concerned with how a firm handles its cash reserves.
True or False: Inventory management only focuses on the liquidity aspect.
True or False: Short-term financing deals with the demand for and supply of long-term funds.
True or False: Development banks are one of the components of the banking system.
True or False: Trade creditors extend credit to buyers for use in manufacturing, processing, or reselling goods.
True or False: The capital market is not subdivided into different parts.
Answers and Explanations:

1. True - Direct finance involves lending directly by ultimate borrowers with no intermediary, such as through private
placements or investment brokers.
2. False - The payback method is not a discounted cash flow method; it focuses on the time it takes for an investment to
pay back its initial cost.
3. False - The secondary market is where existing financial securities are traded, not newly issued ones. This statement
refers to the primary market.
4. False - The foreign exchange market deals with buying and selling foreign currencies, not loans on real estate.
5. False - Stock options are traded in the options market, not the mortgage market.
6. True - Sensitivity analysis helps in understanding how changes in certain factors affect investment returns.
7. False - Gross working capital is the total amount of a firm's current assets, not liabilities.
8. False - The primary objective of liquidity management is to ensure a firm can meet its current obligations, not
minimize profitability.
9. False - Idle cash usually earns minimal interest when kept in the bank.
10. False - Accounts receivable management focuses on how a firm handles its credit sales and collections, not cash
reserves.
11. False - Inventory management focuses on both the liquidity and profitability aspects of inventory.
12. False - Short-term financing deals with short-term funds, not long-term funds.
13. True - Development banks are indeed one of the components of the banking system, alongside commercial banks,
savings banks, and rural banks.
14. True - Trade creditors extend credit to buyers for use in various business activities involving goods.
15. False - The capital market is subdivided into different parts, such as the bond market, stock market, and mortgage
market.
User

from the discussion above please make a 15 fill in the blanks by definition of important terms with the answer and
explanation separated after the questions
2/2

ChatGPT

Direct finance involves lending by ultimate borrowers with no __________.

The payback method is one of the __________ used in capital budgeting.
The secondary market is where existing __________ are traded.
The foreign exchange market deals with buying and selling foreign __________.
Stock options are traded in the __________ market.
Sensitivity analysis helps in determining the sensitivity of an investment to various __________.
Gross working capital is the total amount of a firm's current __________.
The primary objective of liquidity management is to ensure a firm can meet its current __________.
Idle cash usually earns __________ interest when kept in the bank.
Accounts receivable management is concerned with how a firm handles its __________.
Inventory management focuses on both the __________ and profitability aspects of inventory.
Short-term financing deals with the demand for and supply of __________ funds.
Development banks are one of the components of the __________ system.
Trade creditors extend credit to buyers for use in __________ goods.
The capital market is subdivided into different parts, such as the bond market, __________ market, and mortgage market.
Answers:

intermediary
discounted cash flow methods
financial securities
currencies
options
changes
assets
obligations
minimal
credit sales and collections
liquidity
short-term
banking
reselling
stock
User
from the discussion above please make a 15 multiple choice with the answer and explanation separated after the questions
ChatGPT

What is direct finance?

A) Lending by ultimate borrowers with intermediaries
B) Lending by ultimate borrowers with no intermediaries
C) Lending by ultimate lenders to financial intermediaries
D) Lending by financial intermediaries to ultimate borrowers

Answer: B) Lending by ultimate borrowers with no intermediaries

Explanation: Direct finance involves direct lending between savers and borrowers without the involvement of intermediaries.

Which method is NOT used in capital budgeting?

A) The payback method
B) Discounted cash flow methods
C) Average rate of return methods
D) Net present value method

Answer: C) Average rate of return methods

Explanation: While the payback method, discounted cash flow methods, and net present value method are used in capital
budgeting, the average rate of return method is not commonly used.

Where are existing financial securities traded?

A) Primary market
B) Secondary market
C) Money market
D) Capital market

Answer: B) Secondary market

Explanation: Existing financial securities are traded in the secondary market after they have been issued in the primary
market.

What does the foreign exchange market deal with?

A) Buying and selling foreign currencies
B) Buying and selling stocks
C) Issuing bonds
D) Providing mortgage loans
Answer: A) Buying and selling foreign currencies
Explanation: The foreign exchange market deals with the exchange of different currencies.

Where are stock options traded?

A) Bond market
B) Stock market
C) Mortgage market
D) Options market

Answer: D) Options market

Explanation: Stock options are traded in the options market, where investors can buy or sell options contracts.

What does sensitivity analysis help in determining?

A) Market trends
B) Investment opportunities
C) Sensitivity of an investment to various changes
D) Economic indicators

Answer: C) Sensitivity of an investment to various changes

Explanation: Sensitivity analysis helps in understanding how changes in certain factors affect investment returns.

What does gross working capital represent?

A) Total assets
B) Total liabilities
C) Total current assets
D) Total current liabilities

Answer: C) Total current assets

Explanation: Gross working capital represents the total amount of a firm's current assets.

What is the primary objective of liquidity management?

A) Maximizing profitability
B) Minimizing expenses
C) Ensuring a firm can meet its current obligations
D) Increasing market share
Answer: C) Ensuring a firm can meet its current obligations
Explanation: Liquidity management focuses on ensuring that a firm has enough cash or liquid assets to meet its short-term
obligations.

What usually happens to idle cash kept in the bank?

A) It earns high interest
B) It earns minimal interest
C) It remains stagnant
D) It depreciates

Answer: B) It earns minimal interest

Explanation: Idle cash kept in the bank typically earns minimal interest, if any.

What is accounts receivable management concerned with?

A) Managing inventory levels
B) Handling cash reserves
C) Handling credit sales and collections
D) Managing investments

Answer: C) Handling credit sales and collections

Explanation: Accounts receivable management focuses on managing the credit sales made by a firm and collecting payments
from customers.

What does inventory management focus on?

A) Profitability aspect only
B) Liquidity aspect only
C) Both liquidity and profitability aspects
D) None of the above

Answer: C) Both liquidity and profitability aspects

Explanation: Inventory management focuses on managing inventory levels to balance both liquidity (turnover) and
profitability.

What does short-term financing deal with?

A) Long-term funds
B) Intermediate-term funds
C) Short-term funds
D) Equity financing
Answer: C) Short-term funds
Explanation: Short-term financing deals with the demand for and supply of short-term funds to meet immediate needs.

Which is NOT a component of the banking system?

A) Commercial banks
B) Savings banks
C) Development banks
D) Stock exchanges

Answer: D) Stock exchanges

Explanation: Stock exchanges are not components of the banking system; they are separate entities where securities are
bought and sold.

What do trade creditors extend credit for?

A) Buying real estate
B) Purchasing stocks
C) Reselling goods
D) Investing in bonds

Answer: C) Reselling goods

Explanation: Trade creditors extend credit to buyers for use in manufacturing, processing, or reselling goods.

What are the subdivisions of the capital market?

A) Primary and secondary markets
B) Money and capital markets
C) Stock and bond markets
D) All of the above

Answer: C) Stock and bond markets

Explanation: The capital market is subdivided into different parts, including the stock market and the bond market.