Q&A Hero

Q: When a bank sells all or part of the cash stream from a specific loan, A) it removes the loan from its balance sheet. B) it usually does so at a loss. C) it usually does so at a profit. D) both A and B of the above occur. E) both A and C of the above occur.

Q: Alliance agreements must be flexible enough to be revised when necessary and contain mechanisms for breaking deadlocks, transferring ownership interests, and dealing with the potential for termination. True or False

Q: The danger of banks engaging in activities such as trading in financial futures and interest-rate swaps is that these activities allow banks to A) increase profits. B) decrease risks. C) avoid bank regulations. D) engage in speculation.

Q: Empirical studies show that the business alliance announcements seldom have any impact on the market value of their parent firms. True or False

Q: Examples of off-balance-sheet activities include A) loan sales. B) extending loans to depositors. C) borrowing from other banks. D) all of the above.

Q: The number of business alliances established each year is usually much smaller than the number of mergers and acquisitions. True or False

Q: Examples of off-balance-sheet activities include A) loan sales. B) foreign exchange market transactions. C) trading in financial futures. D) all of the above. E) only A and B of the above.

Q: The success rate among business alliances is usually much higher than for mergers and acquisitions. True or False

Q: An argument that supports a regulated minimum capital requirement is that banks that hold too little capital A) are unprofitable. B) impose costs on other banks because they are more likely to fail. C) have an unfair competitive advantage over savings and loans. D) includes all of the above.

Q: Termination provisions in the alliance agreement should not include buyout provisions enabling one party to purchase anothers ownership interests. True or False

Q: In the absence of regulation, banks would probably hold A) too much capital, reducing the efficiency of the payments system. B) too much capital, reducing the profitability of banks. C) too little capital, increasing the return on equity. D) none of the above.

Q: In partnerships, the allocation of profits and losses among partners will normally follow directly from the allocation of shares or partnership interests. True or False

Q: For a given return on assets, the lower the bank capital is, A) the lower the return for the owners of the bank will be. B) the higher the return for the owners of the bank will be. C) the lower the credit risk for the owners of the bank will be. D) both A and C of the above will happen.

Q: JVs established as partnerships typically raise capital through increased contributions from existing partners or through the issuance of limited partnership interests to investors, with the sponsoring firms becoming the general partners. True or False

Q: The amount of assets per dollar of equity capital is called the A) asset ratio. B) equity ratio. C) equity multiplier. D) asset multiplier. E) return on equity.

Q: Equity owners or partners usually make contributions of cash or assets in direct proportion to their ownership or partnership interests. If one party chooses not to make a capital contribution, the ownership interests of all the parties are adjusted the changes in their cumulative capital contributions. True or False

Q: Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return after taxes.

Q: Who receives rights to distribute, manufacture, acquire or license technology, or purchase future products or technology is an issue usually resolved in defining the scope of the alliance. True or False

Q: Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A) return on assets. B) return after taxes. C) return on equity. D) equity multiplier.

Q: How ownership interests will be transferred in a business alliance is a relatively unimportant deal structuring issue. True or False

Q: On a bank's income statement, the amount available to keep as retained earnings or pay to the stockholders in dividends is the bank's A) net income. B) net operating income. C) net extraordinary items. D) net interest margin.

Q: Failure to define scope adequately can result in situations in which the alliance may be competing with the products or services offered by the parent firms. True or False

Q: On a bank's income statement, the provision for loan losses is an ________ item and represents the amount of ________ in the bank's loan loss reserves. A) income; decrease B) income; increase C) expense; decrease D) expense; increase

Q: In terms of important deal structuring issues, scope outlines how broadly the alliance will be applied in pursuing its purpose. True or False

Q: The largest operating expense for a bank is A) salaries and employee benefits. B) interest paid on discount loans. C) interest paid on federal funds borrowed from other banks. D) interest paid on deposits.

Q: In setting up business alliances, the initial focus of the parties involved should be on determining the appropriate legal structure. True or False

Q: The largest source of bank income is A) interest on loans. B) interest on securities. C) service charges on deposit accounts. D) noninterest income.

Q: In limited liability companies, owners must also be active participants. True or False

Q: A bank failure is more likely to occur when A) a bank holds less in U.S. government securities. B) a bank suffers large deposit outflows. C) a bank holds less equity capital. D) all of the above occur. E) only A and B of the above occur.

Q: Strategic alliances often make use of written contracts rather than more formal legal structures such as a corporation. True or False

Q: Bank failure is less likely to occur when a bank A) holds less in U.S. government securities. B) suffers large deposit outflows. C) holds more excess reserves. D) has less bank capital.

Q: The major disadvantages of a sub-chapter S corporation are that the number of shareholders is limited, corporate shareholders are excluded, it must distribute all of its earnings, the liability of shareholders is limited, and it can issue only one class of stock. True or False

Q: A bank fails when the value of its ________ falls below the value of ________, causing the bank to become insolvent. A) reserves; required reserves B) loans; secondary reserves C) securities; deposit liabilities D) assets; liabilities

Q: Unlike other legal structures, a corporate structure does not have to be dissolved because of the death of the owners or if one of the owners wish to liquidate their ownership position. True or False

Q: Banks fail when the value of bank ________ falls below the value of ________, causing the bank to become insolvent. A) reserves; required reserves B) loans; secondary reserves C) assets; liabilities D) income; expenses

Q: A corporate legal structure is seldom used in implementing business alliances, because it may be subject to double taxation and significant set up costs. True or False

Q: Which of the following statements is an accurate description of modern liability management? A) Greater flexibility in liability management has allowed banks to increase the proportion of their assets held in loans. B) New financial instruments enable banks to acquire funds quickly. C) The introduction of negotiable CDs have significantly reduced the percentage of funds that banks borrow from one another to finance loans. D) All of the above have occurred since 1960. E) Only A and B of the above have occurred since 1960.

Q: Poorly defined roles and responsibilities are an important factor contributing to the failure of many alliances to achieve their objectives. True or False

Q: A bank can reduce its total amount of loans outstanding by A) "calling in" loans; that is, by not renewing some loans when they come due. B) selling loans to other banks. C) selling loans to the Federal Reserve. D) doing all of the above. E) doing only A and B of the above.

Q: U.S. antitrust regulatory authorities generally view the creation of R&D alliances among businesses in the same industry as anticompetitive, even if the alliance shares its research with all alliance participants. True or False

Q: The ________ the costs associated with deposit outflows are, the ________ excess reserves banks will want to hold. A) lower; more B) higher; less C) higher; more D) none of the above, since deposit outflows cannot be anticipated

Q: Parent firms sometimes contribute a subsidiary to a partnership as a prelude to eventually exiting that business. True or False

Q: Foreign companies having a minority ownership position in international business alliances rarely have control over the alliance even though they may possess much of the expertise required to manage the alliance. True or False

Q: Which is the least costly way for a bank to handle deposit outflows? A) Hold excess reserves. B) Borrow from other banks. C) Sell securities. D) Call in loans.

Q: The riskiness of highly leveraged transactions declines overtime due to which of the following factors? a. Debt reduction assuming nothing else changes b. Increasing discount rates c. A rising unlevered beta d. An unchanging cost of equity e. An unchanging weighted average cost of capital

Q: Which of the following do banks hold as insurance against the high cost of deposit outflows? A) excess reserves B) secondary reserves C) bank equity capital D) all of the above E) only A and B of the above

Q: An LBO can be valued from the perspective of which of the following? a. Equity investors b. Lenders c. All those supplying funds to finance the transaction d. A and B only e. A, B, and C

Q: In general, banks would prefer to meet deposit outflows by ________ rather than ________ A) selling loans; selling securities. B) selling loans; borrowing from the Fed. C) borrowing from the Fed; selling loans. D) "calling in" loans; selling securities.

Q: Which of the following is not true about the cost of capital method of valuation? a. It does not adjust the discount rate for risk as debt is repaid. b. It requires the projection of future cash flows c. It requires the projection of future debt-to-equity ratios. d. It requires the calculation of a terminal value e. None of the above

Q: Banks can protect themselves from the disruption caused by deposit outflows by A) holding excess reserves. B) selling securities. C) "calling in" loans. D) doing all of the above. E) doing only A and B of the above.

Q: Which of the following is true of the adjusted present value method of valuation? a. Calculates the present value of tax benefits separately b. Calculates the present value of the firms cash flow without debt c. Adds A and B together d. A, B, and C e. A and B only

Q: If a bank has $10 million of deposits, a required reserve ratio of 10 percent, and $2 million in reserves, then it does not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) either A or B of the above.

Q: If a bank has $200,000 of deposits, a required reserve ratio of 20 percent, and $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000. B) $40,000. C) $30,000. D) $25,000.

Q: Which of the following is true of the cost of capital method of valuation? a. It is generally more tedious to calculate than alternative methodologies b. It requires the separate estimation of the present value of future tax savings c. It adds the present value of the firm without debt to the present value of tax savings d. It does not adjust the discount rate as debt is repaid e. All of the above

Q: Which of the following are often viewed as disadvantages of the adjusted present value method? a. Ignores the effects of leverage on the discount rate as debt is repaid b. Requires estimation of the cost and probability of financial distress c. It is unclear how to define the proper discount rate d. A and B only e. A, B, and C

Q: If a bank has $100,000 of deposits, a required reserve ratio of 20 percent, and $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $25,000. C) $20,000. D) $10,000.

Q: If a bank has $1 million of deposits, a required reserve ratio of 20 percent, and $300,000 in reserves, it need not rearrange its balance sheet if there is a deposit outflow of A) $50,000. B) $75,000. C) $150,000. D) either A or B of the above.

Q: Which of the following is not true about LBO models? a. They rarely use IRR calculations b. Borrowing capacity is relatively unimportant c. The financial sponsors equity contribution is determined before the target firms borrowing capacity d. A, B, and C e. A and B only

Q: When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but instead makes loans, then in the bank's final balance sheet, A) the assets at the bank increase by $800,000. B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000.

Q: Which of the following are steps often found in developing a LBO model? a. Cash flow projections b. Determining a firms borrowing capacity c. Determining a financial sponsors equity contribution d. A, B, and C e. A and C only

Q: When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but instead makes loans, then in the bank's final balance sheet, A) the assets at the bank increase by $200,000. B) the liabilities of the bank increase by $200,000. C) reserves increase by $200,000. D) all of the above occur.

Q: Using the cost of capital method to value an LBO involves all of the following steps except for which of the following? a. Adjusting the discount rate to reflect changing risk. b. Adding the present value of future tax savings to the present value of annual free cash flows to equity. c. Calculating a terminal value. d. Projecting annual debt-to-equity ratios. e. Projecting annual cash flows.

Q: Bankers' concern regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of A) liability management. B) liquidity management. C) managing interest-rate risk. D) none of the above.

Q: Using the cost of capital method to value an LBO involves which of the following steps? a. Projection of annual cash flows b. Projection of annual debt-to-equity ratios c. Calculation of a terminal value d. Adjusting the discount rate to reflect changing risk. e. All of the above

Q: Which of the following are primary concerns of a bank manager? A) maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) extending loans to borrowers who will pay high interest rates, but who are also good credit risks C) acquiring funds at a relatively low cost, so that profitable lending opportunities can be realized D) all of the above

Q: The most important calculation to the financial sponsor in an LBO analysis is the IRR. True or False

Q: A bank manager has which of the following concerns? A) to acquire funds at low cost B) to minimize risk by diversifying asset holdings C) to have enough ready cash to meet deposit outflows D) all of the above

Q: An LBO analysis usually starts with the determination of cash available for financing a target firms future debt obligations and the sources of such debt. True or False

Q: Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in process of collection fall by the amount of the check. B) bank assets remain unchanged. C) bank liabilities decrease by the amount of the check. D) all of the above occur. E) only A and B of the above occur.

Q: Financial buyers often will attempt to determine the highest amount of debt possible (i.e., the borrowing capacity of the target firm) to maximize their equity contribution in order to maximize the IRR. True or False

Q: Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in process of collection fall by the amount of the check. B) bank assets increase by the amount of the check. C) bank liabilities decrease by the amount of the check. D) all of the above occur.

Q: While the DCF approach often is more theoretically sound than the IRR approach (which can have multiple solutions), IRR is more widely used in LBO analyses since investors often find it more intuitively appealing, that is, the higher an investments IRR, the better the investments return relative to its cost The IRR is the discount rate that equates the projected cash flows and terminal value with the initial equity investment. True or False

Q: The DCF analysis solves for the present value of the firm, while the LBO analysis solves for the discount rate or internal rate of return. True or False

Q: When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then A) the liabilities of the First National Bank decrease by $10. B) the liabilities of the Second National Bank increase by $10. C) the reserves of the First National Bank increase by $10. D) all of the above occur. E) only A and B of the above occur.

Q: When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then A) the liabilities of the First National Bank decrease by $10. B) the reserves of the First National Bank increase by $10. C) the liabilities of the Second National Bank decrease by $10. D) the assets of Second National Bank decrease by $10.

Q: LBO analyses are similar to DCF valuations in that they require projected cash flows, present values, and discount rates; however, LBO models do not require the estimation of terminal values. True or False

Q: An LBO model helps define the amount of debt a firm can support given its assets and cash flows. True or False

Q: When you deposit $50 in currency at the Old National Bank, A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities increase by $50. D) only A and B of the above occur.

Q: When you deposit $50 in currency at the Old National Bank, A) its assets increase by $50. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities decrease by $50. D) only A and B of the above occur.

Q: An LBO model is used to determine what a firm is worth in a highly leveraged transaction and is applied when there is the potential for a financial buyer or sponsor to acquire the business. True or False