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Chapter01OverviewSolutions

Chapter01OverviewSolutions - Overview of Financial...

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Overview of Financial Management - Solutions 1. A reasonable compensation package sufficient to attract and retain able managers will encourage management to act in their stockholders’ best interest, while direct intervention by the shareholders will have the opposite effect. A. True * B. False 2. The degree of liability to which corporate owners and managers are exposed, as well as the difficulty in transferring ownership, are significant disadvantages to the corporate form of organization. A. True * B. False 3. In the United States, we have a number of specialized financial institutions, but, according to the text, the trend is toward larger, more diversified institutions that offer broad arrays of financial services. * A. True B. False 4. In theory, derivatives should allow companies to manage risk better, but, according to your text, it is not clear whether recent innovations have increased or decreased the inherent stability of the financial system. * A. True B. False 5. Globalization of the financial markets has resulted in a much more efficient, internationally linked market, and one that is less complex and easily coordinated with the structures of the different nations' banking and securities industries. A. True * B. False The following information is for Questions 6 and 7. You may consider this initial information to be true: On October 19, 1987, the Dow Jones Industrial Average lost 508 points (22.6 percent). This day became known as “Black Monday” and it was nearly twice as bad as the crash of 1929, which started the Great Depression. 6. In retrospect, some people believe that Black Monday was one of the greatest buying opportunities of a lifetime. In fact, even most people who followed a buy and hold strategy did okay, since the market was actually up a little by the end of the year. Old Exam Questions - Overview of Financial Management - Solutions Page 1 of 6 Pages
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* A. True B. False 7. The main cause of Black Monday was the un-monitored use of program trading (computer-directed trading programs) by institutional investors, where computer programs were making trades, based on falling prices, without the knowledge or approval of the institution. Because of this, Congress passed a law shortly after Black Monday that prohibited the use of computers to track positions, prices, and arbitrage opportunities by institutional investors. A. True * B. False 8. One of the mistakes that led to Amaranth Advisors’ multibillion-dollar losses on natural- gas investments is a common one in fast-shifting energy markets: confusing paper trading gains with cash profits. * A. True B. False 9. Commodities trades require more margin money – collateral to be surrendered in case of losses – upfront than other markets. On the main exchanges, traders typically post 50%-80% of their position’s value, whereas in the stock market, 5%-10% is common.
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