Financial Management - Study Mode
[#106] Financial intermediaries exist because small investors cannot efficiently ________.
Correct Answer
diversify their portfolios
Explanation
Solution: Financial intermediaries exist because small investors cannot efficiently diversify their portfolios, gather all relevant information, assess credit risk of borrowers and advertise for needed investments.
[#107] The use of preference share capital as against debt finance.
Correct Answer
(A) Reduces DFL
Explanation
Solution: The use of preference share capital as against debt finance reduces DFL. A degree of financial leverage (DFL) is a leverage ratio that measures the sensitivity of a company's earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure.
[#108] Firms that specialize in helping companies raise capital by selling securities are called ________.
Correct Answer
(B) investment banks
Explanation
Solution: Firms that specialize in helping companies raise capital by selling securities are called investment banks. An investment bank (IB) is a financial intermediary that performs a variety of services.
[#109] The Degree of Financial Leverage (DFL)
Correct Answer
(A) Measures financial risk of the firm
Explanation
Solution: The Degree of Financial Leverage (DFL) measures financial risk of the firm. The degree of financial leverage (DFL) measures the percentage change in EPS for a unit change in operating income, also known as earnings before interest and taxes (EBIT).
[#110] Financial assets ______.
Correct Answer
(A) directly contribute to the country's productive capacity
Explanation
Solution: Financial assets directly contribute to the country's productive capacity. A financial asset is a liquid asset that gets its value from a contractual right or ownership claim.