Homework answers / question archive / 1) The company that manufactures Screaming Chocolate Zonke's breakfast cereal finds that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a result of information on the filthy conditions in its factory, which had long been known to management, leaking out to the general public

1) The company that manufactures Screaming Chocolate Zonke's breakfast cereal finds that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a result of information on the filthy conditions in its factory, which had long been known to management, leaking out to the general public

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1) The company that manufactures Screaming Chocolate Zonke's breakfast cereal finds that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a result of information on the filthy conditions in its factory, which had long been known to management, leaking out to the general public. This incident is best thought of as an example of

A) symmetric information in the financial markets.

B) asymmetric information in the financial markets.

C) transaction costs in the financial markets.

D) the generally poor state of sanitation in the food-processing industry in the United States.

2) All of the following are consequences of adverse selection on good firms EXCEPT

A) the cost of external financing increases.

B) firms need to rely more on internal funds.

C) firms need to rely more on accumulated profits.

D) firms will only be able to attain financing from the government.

3) Acme Widget tells investors it wants to build a new widget factory and sell investors $10,000,000 in bonds to finance it. Once they have raised the $10,000,000 the owners of Acme Widget use the funds to finance a trip to Atlantic City to try out a new scheme they have devised to win at blackjack. This is an example of

A) the adverse selection problem in financial markets.

B) the moral hazard problem in financial markets.

C) the difficulty lenders have in distinguishing good from lemon firms.

D) the problems with using rational expectations in financial markets.

4) Moral hazard is not eliminated in debt financing because

A) borrowers have an incentive to assume greater risk than is in the interest of the lender.

B) firms with a great deal of debt often go bankrupt.

C) principal-agent problems are greater with debt financing than with equity financing.

D) the use of restrictive covenants tends to increase moral hazard.

5) The main reason why banks are the leading source of external finance for businesses is

A) the interest rates on bank loans are usually lower than interest rates on corporate bonds.

B) banks have an information-cost advantage in reducing adverse selection problems.

C) interest paid on bank loans is deductible against the corporate income tax, whereas interest paid on corporate bonds is not.

D) government regulators encourage small businesses to obtain funding from banks.

6) Why are corporations more likely to raise funds externally by debt instead of equity?

A) moral hazard is less of a problem with debt contracts

B) transactions costs tend to be higher in the stock market than bond market

C) to avoid paying dividends

D) interest rates tend to be lower than dividend rates

7) Which of the following is NOT a bank liability?

A) checkable deposits

B) CDs

C) mortgage loans

D) borrowings from the Federal Reserve

8) Federal funds are

A) the tax revenues of the Federal government.

B) loans by the Federal Reserve to banks.

C) loans by banks to the Federal Reserve.

D) short-term loans between banks.

9) Banks use repurchase agreements to

A) ensure that payments on consumer loans are made on time.

B) borrow funds from business firms or other banks.

C) guard against price fluctuations on long-term bonds.

D) ensure that they always have enough funds on hand to meet their federal tax liabilities.

10) If you deposit $300 in your bank and the required reserve ratio is 10%, your bank will have

A) an increase in required reserves of $300.

B) an increase in required reserves of $270.

C) an increase in required reserves of $3000.

D) an increase in required reserves of $30 and an increase in excess reserves of $270.

11) If a bank has a leverage ratio of 0.1 and a return on capital of 2%, what is its return on equity?

A) 0.2%

B) 2.1%

C) 5%

D) 20%

12) Which of the following statements about checking deposits is true?

A) It is a liability for both households and banks.

B) It is an asset for both households and banks.

C) It is an asset for households but a liability for a bank.

D) It is a liability for households but an asset for a bank.