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Finance Flashcards

Finance Final

This subarea of finance involves methods and techniques to make appropriate decisions about what kinds of securities to own, which firms’ securities to buy, and how to be paid back in the form that the investor wishes investments
The benchmark for the profitability index (PI) is the zero or anything larger than zero
Which of the following is NOT included when calculating the depreciable basis for real property? Financing fees
which of these ratios measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets? Debt management ratios
As residual claimants, which of these investors claim any cash flows to the firm that remain after the firm pays all other claims? Common stockholders
Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect: the relative sizes of the total market capitalizations for each kind of security that the firm issues.
Which of these statements is true? A high inventory turnover ratio or a low days’ sales in inventory is a sign of good inventory management.
Which of these can be used by interested parties to identify changes in corporate performance Common-size financial statements
Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring Expected return
Which of the following is a use of cash? The firm decreases its accrued wages and taxes
This subarea of finance is important for adapting to the global economy International finance
Which of these is the set of probabilities for all possible occurrences? Probability distribution
In the United States, which of these financial institutions arrange most primary market transactions for businesses? Investment banks
Regarding a bond’s characteristics, which of the following is the principal loan amount that the borrower must repay? Par or face value
Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock: the component cost will need to be integrated to figure project WACCs
When saving for future expenditures, we can add the ________ of contributions over time to see what the total will be worth at some point in time. future value
Which of these ratios measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets? Debt management ratios
The Sarbanes-Oxley Act requires public companies to ensure which of the following individuals have considerable experience applying generally accepted accounting principles (GAAP) for financial statements. Corporate boards’ audit committees
Which of the following is legal duty between two parties where one party must act in the interest of the other party Fiduciary
These are cash inflows and outflows associated with buying and selling of fixed or other long-term assets Cash flows from investing activities
These individuals help firms access capital markets and advise managers about how to interact with those capital markets Investment bankers
Which of these ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm? Profitability
Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects? Net present value
The practice generally known as double taxation is due to corporate incomes being taxed at the corporate level, then again at the shareholder level when corporate profits are paid out as dividends
For corporations, maximizing the value of owner’s equity can also be stated as maximizing the stock price.
Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC? One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction
Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows? Net present value
On which of the four major financial statements would you find the common stock and paid-in surplus? Balance sheet
Which of the following statements is incorrect Most sole proprietors raise money by borrowing from banks.
For publicly traded firms, which of these ratios measure what investors think of the company’s future performance and risk? Market value ratio
Many people who want to start investing for their future want to start today, which implies an annuity stream that is paid at the beginning of the period. Beginning-of-period cash flows are referred to as: annuities due
Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows Net present value
which of these statements answers why bonds are known as fixed income securities? Investors know how much they will receive in interest payments
which of these is the interest rate that is actually observed in financial markets Nominal interest rates
Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects? Net present value
The Rule of 72 is a simple mathematical approximation for he number of years required to double an investment.
Which of the following theories argues that individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate? Market segmaent theory
Which of the following is a true statement? Firms can quite possibly change their stocks’ risk level by substantially changing their business.
which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock he component cost will need to be integrated to figure project WACCs
Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation Security market line
Section 179 allows a business, with certain restrictions, to do which of the following Expense the asset immediately in the year of purchase
These individuals examine the firm’s accounting systems and comment on whether financial statements fairly represent the firm’s financial position. Auditors
Which of these is NOT considered a coverage ratio? Current ratio
An objective approach to calculating divisional WACCs would be done by: . computing the average beta per division, using these figures for each division in the CAPM formula, and then constructing divisional WACCs
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Finance Flashcards

Finance 325 test 2

Bonds are issued by which of the following? Corporations, Federal Government or its Agencies, State and Local Governments –> All of these
Which of these statements answers why bonds are known as fixed income securities? Many investors on fixed incomes buy them, Investors know how much they will receive in interest payments, and Investors will not receive their principal when the bond’s term is up –> All of these
Regarding a bond’s characteristics, which of the following is the principal loan amount that the borrower must repay? Par or face value
To compensate the bondholders for getting the bond called, the issuer pays which of the following? Call premium
Which of the following is NOT a factor that determines the coupon rate of a company’s bonds? The amount of uncertainty about whether the company will be able to make all the payments, The term of the loan, and The level of interest rates in the overall economy at the time–> All of these are factors that determine the coupon rate of a company’s bonds
Which of the following is a true statement? If interest rates fall, all bonds will enjoy rising values.
These investors earn returns from receiving dividends and from stock price appreciation. Stockholders
As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims. Common Stockholders
This will only be executed if the order’s price conditions are met. A limit order
Investors buy stock at the… Quoted ask price
We can estimate a stock’s value by… Discounting the future dividends and future stock price appreciation.
We often use the P/E ratio model with the firm’s growth rate to estimate? A stock’s future price
Value stocks usually have? Low P/E ratios and high growth rates
This is a measure summarizing the overall past performance of an investment. Average return
When people purchase a stock… They do not know what their return is going to be – either short term or in the long run.
This is defined as the volatility of an investment, which includes firm specific risk as well as market risk. Total Risk
This is defined as a combination of investment assets held by an investor. Portfolio
This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification. Firm specific risk
This is the portion of total risk that is attributable to overall economic factors. Market risk
This is the term for portfolios with the highest return possible for each risk level Efficient portfolios
This is a measurement of the co-movement between two variables that ranges between -1 and +1. Correlation
The larger the standard deviation… The higher the total risk.
This is the average of the possible returns weighted by the likelihood of those returns occurring. Expected Return
The set of probabilities for all possible occurrences. Probability Distribution
This is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium. Risk-Free Rate
This is the reward investors require for taking risk. Risk Premium
This is the reward for taking systematic stock market risk. Market Risk Premium
The asset pricing theory based on a beta, a measure of market risk. Capital Asset Pricing Model
A measure of the sensitivity of a stock or portfolio to market risk. Beta
Similar to the Capital Market Line except risk is characterized by beta instead of standard deviation. Security Market Line
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Finance Flashcards

International Finance Chapter 15

1 Under a 1981 Voluntary Trade Agreement Japanese automobile manufacturers were not allowed to increase their exports to the U.S. market. As a resulta) they exited the market.b) Honda was motivated to circumvent the trade barriers.c) Honda’s FDI may have been part of an overall corporate strategy designed to bolster their competitive position vis-à-vis their domestic rivals such as Toyota.d) both b) and c) D
2 Following Honda’s FDI in the U.S.,a) The U.S. government imposed a Voluntary Trade Agreement under which Japanese automobile manufacturers were not allowed to increase their exports to the U.S. market.b) Toyota and Nissan made direct investments in Americac) Sales of Hondas declinedd) none of the above B
3 Honda’s decision to build a plant in Ohioa) was welcomed by the United Auto Workers.b) was encouraged by assistance from the state of Ohio, including improved infrastructure around the plant and abatement of property taxes.c) involved setting up a special foreign trade zone that allowed Honda to import auto parts from Japan at a reduced tariff rate.d) all of the above D
4 In the early 1980s, Honda, the Japanese automobile company, built an assembly plant in Marysville, Ohio, and began to produce cars for the North American market. As the production capacity at the Ohio plant expanded, Honda began to export its U.S.-manufactured cars to Japan.a) Trueb) False A
5 FDI can take the form ofa) Greenfield investment.b) cross-border M&A.c) establishing new production facilities in a foreign country.d) all of the above D
6 The Ford Motor Company recently acquired Mazda, a Japanese auto maker, and Jaguar, a British auto maker.a) This is an example of cross-border M&A.b) This was a Greenfield investment.c) both a) and b)d) none of the above A
7 Firms become multinational a) when they undertake foreign direct investments (FDI).b) with the establishment of new production facilities in foreign countries such as Honda’s Ohio plant. c) when they become involved in mergers with and acquisitions of existing foreign businesses.d) all of the above D
8 According to a recent UN survey, the world FDI stock grew at what rate relative to worldwide exports of goods and services?a) The world FDI stock grew twice as fast as worldwide exports of goods and services.b) The world FDI stock grew at the same rate as worldwide exports of goods and services.c) The world FDI stock grew half as fast as worldwide exports of goods and services.d) None of the above A
9 Japan plays a major role as an exporter of FDI. As a recipient of FDI,a) Japan receives as much FDI as it exports, making it a major player on both fronts.b) Japan plays a relatively minor role, reflecting a variety of legal, economic, and cultural barriers to FDI.c) Japan’s receipts of FDI are third in the world.d) None of the above B
10 MNCs might have been lured to invest in China not only by lower labor and material costs but also a) by China’s lower labor and material costs.b) by the desire to preempt the entry of rivals into China’s potentially huge market.c) by the Kung Pao chicken.d) by the desire to see, if not buy, all the tea in China. B
11 MNCs have invested in Chinaa) by lower material costs.b) by lower labor costs.c) by a desire to preempt the entry of rivals into China’s potentially huge market.d) all of the above D
12 FDI stocksa) are the common shares of multinational companies that invest abroad.b) are mutual funds that invest in FDI. c) represent the accumulation of previous years’ FDI flows.d) at the sum total of current year FDI flows. C
13 The dominant source of FDI outflowsa) several developed countries.b) a few underdeveloped countries next to wealthy neighbors, like Mexico.c) Africa and China.d) none of the above A
14 Alternatives to firms locating production overseas includea) exporting from the home country.b) licensing production to a local firm in the host country.c) ignoring the foreign market.d) all of the above D
15 The key factors that are important in a firm’s decision to invest overseas area) Trade barriers, imperfect labor market, and intangible assets.b) vertical integration, product life cycle, and shareholder diversification services.c) profit maximization, global prestige, and competition.d) both a) and b) D
16 Why do firms locate production overseas rather than exporting finished goods?a) Shipping costsb) Firms seek to extend corporate control overseasc) Imperfect factor marketsd) All of the above D
17 Unlike the theory of international trade or the theory of international portfolio investment, a) we do not have a well-developed, comprehensive theory of FDI.b) the comprehensive theory of FDI focuses on mean-variance efficiency.c) the comprehensive theory of FDI is an arbitrage argument, like interest rate parity.d) none of the above A
18 While there is no comprehensive theory of FDI, many existing theories emphasizea) imperfections in product markets.b) imperfections in capital markets.c) imperfections in labor markets.d) all of the above D
19 Why do governments regulate international trade?a) To raise revenueb) Protect domestic industries c) Pursue other economic objectivesd) All of the above D
20 Governments regulate international trade a) to raise revenue (e.g. through tariffs).b) to protect domestic industries.c) to pursue other economic policy objectives (e.g. North Korea forgoing trade).d) all of the above D
21 A classic example for trade barrier-motivated FDI is a) Honda’s investment in Ohio.b) Bridgestone’s investment in Japan.c) NAFTA.d) None of the above A
22 Such products as mineral ore and cement that are heavy or bulky relative to their economic values a) may be suitable for exporting because high transportation costs will be overcome by high profit margins in oligopolistic industries.b) have high “value-to-weight ratios” that protect profit margins.c) may not be suitable for exporting because high transportation costs will substantially reduce profit margins.d) none of the above C
23 Trade barriers can arise naturally. Which of the following are natural barriers to trade?a) Transportation costsb) Quotasc) Tariffs d) Transactions costs A
24 In a push to serve the North American market Samsung, a Korean firm, chose to locate production facilities in Mexico, mainly becausea) of lower labor costs in Mexico.b) to circumvent trade barriers imposed by NAFTA.c) because of colder weather in Canada.d) none of the above A
25 Labor services in a country might be underpriced relative to productivity becausea) workers are not allowed to freely mover across national boundaries to seek higher wages.b) some countries do a bad job of educating their work force, consequently they are not very productive.c) in some countries there is a shortage of capital investment.d) all of the above are equally important A
26 Labor services in a country can be severely underpriced relative to its productivity a) because workers are not allowed to freely move across national boundaries to seek higher wages. b) because among all factor markets, the labor market is the most imperfect.c) because workers may choose to not move across national boundaries to seek higher wages due to the cultural differences.d) all of the above D
27 Severe imperfections in the labor market lead to persistent wage differentials among countries. Some explanations includea) because workers are not allowed to freely move across national boundaries to seek higher wages. b) because workers may choose to not move across national boundaries to seek higher wages due to the cultural differences.c) but these differences are offset by low productivity in low labor cost countries.d) both a) and b) D
28 Severe imperfections in the labor market lead toa) persistent wage differentials among countries.b) persistent exchange rate volatility among countries.c) persistent interest rate differentials among countries.d) none of the above A
29 Severe imperfections in the labor market arise from immobility of workers due to immigration barriers. As a response, firms should considera) moving to the workers.b) moving to countries where labor services are the lowest in absolute terms.c) moving to countries where labor services are underpriced relative to productivity.d) hiring illegal immigrants. C
30 Coca-Cola has invested in bottling plants all over the world rather than licensing local firmsa) because the foreigners can’t be trusted to follow the secret recipe.b) because Coca-Cola wanted to protect the formula for its famous soft drink.c) because of the internalization theory of FDI.d) both b) and c) B
31 The boomerang effecta) the possibility that if the secret formula of Coca-Cola were leaked, that other firms would come up with similar products and hurt Coca-Cola’s sales.b) the possibility that FDI in an undeveloped nation will lead to a group of workers who have enough money to afford the firm’s products, leading to an increase of sales and increase of workers and so on.c) the possibility that FDI in an undeveloped nation will lead to a group of domestic workers no longer have enough money to afford the firm’s products, leading to an decrease of sales.d) none of the above A
32 Examples of intangible assets includea) technological, managerial, and marketing know-how.b) superior R&D capabilities.c) brand names.d) all of the above D
33 MNCs may undertake overseas investment projects in a foreign country, despite the fact that local firms may enjoy inherent advantages. This implies thata) MNCs are making a mistake in this case and will have to eventually withdraw.b) MNCs should have significant advantages over local firms such as comparative advantages due to intangible assets.c) the local firms will not have to compete due to their inherent advantages over the foreigners.d) none of the above B
34 Intangible assets are often hard to package and sell to foreignersa) because they usually default on the contracts that they sign.b) As a result, there is more FDI than there might otherwise be.c) Because property rights in intangible assets are difficult to establish and protect, especially in foreign countries where legal recourse may not be readily available.d) both b) and c) D
35 What kind of integration is vertical integration?a) When the government outlaws discrimination against both short and tall people.b) When two firms join together in a conglomerate merger.c) When two firms related in the production process are owned by the same firm, as in a plywood manufacturer owning a logging company.d) All of the above C
36 The conflicts between the upstream and downstream firms can be resolved, a) if the two firms form a horizontally integrated firm.b) if the two firms form a vertically integrated firm.c) if the two firms form a linearly integrated firm.d) none of the above B
37 Also, MNCs often find it profitable to locate manufacturing/processing facilities neara) the home office to exploit their assets in place.b) the natural resources in order to save transportation costs.c) their competitor’s manufacturing plant to even out the playing field with regard to shipping costs.d) none of the above B
38 FDI vertical integration is backward a) when FDI involves an industry abroad that produces inputs for MNCs.b) when FDI involves an industry abroad that sells the MNC’s outputs.c) none of the above A
39 An example of forward vertical FDIa) U.S. car makers built their own network of dealerships in Japan to help sell their cars.b) U.S. car makers began to source parts in Japan to lower the cost of their cars.c) U.S. car makers entered into joint partnerships with car makers in Japan to help sell their cars.d) None of the above A
40 U.S. car makers were forced to build their own network of dealerships to enter the Japanese market. a) This is an example of backward vertical integration.b) This is an example of forward vertical integration.c) This is an example of sideways vertical integration.d) None of the above B
41 Which of the following statements is true about product life cycle theory?a) In the early stages of the product life cycle, the demand for the new product is relatively insensitive to the price and thus a pioneering firm can charge a relatively high price.b) It predicts that over time the U.S. switches from an exporting country of new products to an importing country.c) It has an “S” shaped curve when plotting “quantity sold” versus “time”.d) All of the above D
42 The product life-cycle theory predicts that a) over time the United States switches from an exporting country of new products to an importing country.b) over time the United States switches from a comparative advantage in R&D to a service economy.c) over time the United States education system maintains the country’s dominant position in the world economy.d) none of the above A
43 Which of the following statements is true about product life cycle theory?a) The theory was developed in the 1960s when the U.S. was the leader in R&D.b) The international system of production is becoming too complicated to be explained by a simple version of the product life cycle theory.c) It predicts that over time the U.S. switches from an exporting country of new products to an importing country.d) All of the above D
44 Since shareholders of MNCs may indirectly benefit from corporate international diversification, a) therefore firms are motivated to undertake FDI for the purpose of providing shareholders with diversification services.b) therefore firms are motivated to undertake FDI for the purpose of being part of the global minimum variance portfolio.c) therefore firms are motivated to undertake FDI for the purpose of staying on the efficient frontier.d) none of the above D
45 When a firm holds assets in many countries, a) the firm’s cash flows are internationally hedged. b) thus, shareholders of the firm can indirectly benefit from international diversification even if they are not directly holding foreign shares.c) thus, shareholders of the firm can directly benefit from international diversification even if they are not directly holding foreign shares.d) none of the above B
46 A “greenfield” investmenta) involves soybeans in the spring, corn in the summer.b) are generally less politically sensitive than the acquisition of an existing foreign firm.c) are generally more politically sensitive than the acquisition of an existing foreign firm.d) none of the above B
47 As a mode of entry into a foreign market, cross-border acquisitiona) involves building new production facilities in a foreign country.b) offer faster speed over greenfield investment.c) can offer access to proprietary assets.d) both b) and c) D
48 Cross-border acquisition involvesa) building new production facilities in a foreign country.b) buying existing foreign business.c) both a) and b)d) none of the above B
49 The rapid increase in cross-border M&A deals can be attributed to a) the end of the greenfield era—we are running out of land.b) the lack of domestic investment opportunity.c) the ongoing liberalization of capital markets and the integration of the world economy.d) none of the above C
50 As a mode of FDI entry, cross-border M&A offers two key advantages over greenfield investments: a) speed and access to proprietary assets.b) firms bolster their competitive positions in the world market by acquiring special assets from other firms or using their own assets on a larger scale.c) firms can better leverage their intangible assets and on a larger scale.d) none of the above A
51 Mergers and acquisitions are a popular mode of investment for firms wishing to protect, consolidate and advance their global competitive positions. Examples include,a) selling off divisions that fall outside the scope of their core competence.b) acquiring strategic assets that reduce their competitiveness.c) firms can better leverage their intangible assets and on a larger scale through licensing.d) none of the above A
52 Synergistic gains refers to:a) gains from hedging.b) gains obtained when the value of the acquiring and target firms, combined together, is greater than the stand-alone valuations of the individual firms.c) gains arising if the combined companies can save on the costs of production, marketing, distribution, and R&D. d) both b) and c) D
53 Whether or not cross-border acquisitions produce synergistic gains and how such gains are divided between acquiring and target firms a) are important issues from the perspective of shareholder welfare.b) are important issues from the perspective of public policy. c) are important issues from the perspective of stakeholders in the target firms.d) all of the above D
54 Imperfections in the market for intangible assets can also play a major role in motivating firms to undertake cross-border acquisitions. According to the internalization theory,a) cross-border acquisitions may also be motivated by the acquirer’s desire to acquire and internalize the target firm’s intangible assets. b) a firm with intangible assets that have a public good property such as technical and managerial know-how may acquire foreign firms as a platform for using its special assets on a larger scale and, at the same time, avoid the misappropriation that may occur while transacting in foreign markets through a market mechanism.c) the internalization thus may proceed forward to internalize the acquirer’s assets, or backward to internalize the target’s assets.d) all of the above D
55 True or false: cross-border acquisitions are generally found to be synergy-generating corporate activities.a) Trueb) False A
56 Synergistic gains a) are obtained when the acquiring firm is greater in value than the stand-alone valuations of the target firm(s). b) can only be obtained by increases in market power.c) are obtained when the value of the combined firm is greater than the stand-alone valuations of the individual (acquiring and target) firms. d) none of the above C
57 OPIC is thea) Overseas Pirate Investment Corporation.b) Overseas Private Investment Corporation.c) Organization Petroleum Importing Countries.d) None of the above B
58 Cross-border acquisitions of businesses are a politically sensitive issue, a) as most countries prefer to retain foreign control of domestic firms.b) as most countries prefer to retain local control of domestic firms.c) as most countries prefer to retain local control of foreign firms.d) none of the above B
59 Political risk refers to:a) the potential losses to the parent firm of an MNC resulting from adverse political developments in the host country.b) macroeconomic risks.c) microeconomic risks.d) bankruptcy or high inflation rates. A
60 Transfer risk refers to the risk which arises from the uncertainty abouta) the host’s country’s policies affecting the local operations of an MNC.b) the host’s country’s policy regarding ownership and control of local operations.c) cross-border flows of capital, payment, know-how, and the like.d) none of the above C
61 Operational risk refers to the risk which arises from the uncertainty abouta) the host’s country’s policies affecting the local operations of an MNC.b) the host’s country’s policy regarding ownership and control of local operations.c) cross-border flows of capital, payment, know-how, and the like.d) none of the above A
62 Countries may welcome greenfield investments, a) as they are viewed as representing new investment and employment opportunities.b) as they are viewed as substitutes for foreign firms’ bids to acquire domestic firms.c) but they are also often resisted and sometimes even resented by the local firms.d) none of the above A
63 Country risk refers toa) political risk.b) credit risk, and other economic performances.c) every risk except political risk.d) both a) and b) C
64 Some of the risks that a U.S. based MNC can encounter in its foreign investments are:(i)- an increase in the cost of borrowing due to a rise in interest rates(ii)- increase in inflation rates(iii)- dumping(iv)- unfair competition by local companies(v)- inconvertibility of foreign currencies(vi)- expropriation (vii)- destruction of properties due to war, revolution, and other violent political events in foreign countries(viii)- loss of business income due to political violenceIn the U.S., the Overseas Private Investment Corporation (OPIC) offers insurance against which of the above:a) (i), (ii), (iii), and (iv)b) (v), (vi), (vii), and (viii)c) a) and b)d) none of the abo B
65 The communist victory in China in 1949 is an example ofa) micro risk.b) macro risk.c) both a) and b)d) none of the above B
66 Examples of transfer risk include a) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments.b) unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities. c) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs.d) none of the above A
67 Examples of operational risk include a) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments.b) unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities. c) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs.d) none of the above B
68 Examples of control risk include a) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments.b) unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities. c) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs.d) none of the above C
69 Once a MNC decides to undertake a foreign project, it can take various measures to minimize its exposure to political risk. These includea) the MNC can form a joint venture with a local company. b) the MNC may also consider forming a consortium of international companies to undertake the foreign project. c) the MNC can use local debt to finance the foreign project.d) the MNC may purchase insurance against the hazard of political risk.e) all of the above D
70 One particular type of political risk that MNCs and investors may face is corruption associated with the abuse of public office for private benefits. a) Investors may often encounter demands for bribes from politicians and government officials for contracts and smooth bureaucratic processes. b) If companies refuse to make grease payments, they may lose business opportunities or face difficult bureaucratic red tape.c) They may risk violating laws or being embarrassed when the payments are discovered and reported in the media.d) All of the above D
71 In evaluating political risk, experts focus their attention on a set of key factors such as a) integration of the host country into the world political/economic system.b) the host country’s ethnic and religious stability.c) the host country’s regional security, and key economic indicators.d) all of the above D
72 When evaluating a foreign investment project, it is important for the MNC to consider the effect of political risk, as a sovereign country can change “the rules of the game”. To account for thisa) the MNC may adjust the cost of capital upward.b) the MNC may lower the expected cash flows from the foreign project. c) the MNC may purchase insurance policies against the hazard of political risks.d) all of the above D
73 In evaluating political risk for FDI, experts focus their attention on a set of key factors such as a) the host country’s political/government system.b) historical records of political parties and their relative strengths.c) integration of the host country into the world political/economic system.d) all of the above D
74 Country risk a) is a broader measure of risk than political risk.b) encompasses political risk, credit risk, and other economic performances.c) all of the aboved) none of the above C
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FINN 3222 Topic 1 HW questions

1. What are the differences between equity and fixed-income securities? 1. Equity is a lower-priority claim and represents an ownership share in a corporation, whereas fixed-income (debt) security is a higher-priority claim but does not have an ownership interest. Fixed-income (debt) security pays a specified cash flow at pre-contracted time intervals until the last payment on the maturity date. Equity has an indefinite life.
5. What are the differences between real and financial assets? (LO 1-2) 5. Real assets are assets used to produce goods and services. Financial assets are claims on real assets or the income generated by them.
7. For each transaction, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transaction? (LO 1-2)a. Toyota takes out a bank loan to finance the construction of a new factory.b. Toyota pays off its loan.c. Toyota uses $10 million of cash on hand to purchase additional inventory of spare auto parts. 7. a. Toyota creates a real asset—the factory. The loan is a financial asset that is created in the transaction. b. When the loan is repaid, the financial asset is destroyed but the real asset continues to exist. c. The cash is a financial asset that is traded in exchange for a real asset, inventory.
8. Suppose that in a wave of pessimism, housing prices fall by 10% across the entireeconomy. (LO 1-2)a. Has the stock of real assets of the economy changed?b. Are individuals less wealthy?c. Can you reconcile your answers to ( a ) and ( b )? 8.a. No. The real estate in existence has not changed, only the perception of its value has.b. Yes. The financial asset value of the claims on the real estate has changed, and thus the balance sheet of individual investors has been reduced. c. The difference between these two answers reflects the difference between real and financial asset values. Real assets still exist, yet the value of the claims on those assets or the cash flows they generate do change. Thus, there is the difference.
9. Lanni Products is a start-up computer software development firm. It currently ownscomputer equipment worth $30,000 and has cash on hand of $20,000 contributedby Lanni’s owners. For each of the following transactions, identify the real and/orfinancial assets that trade hands. Are any financial assets created or destroyed in thetransaction? (LO 1-2)a. Lanni takes out a bank loan. It receives $50,000 in cash and signs a note promising to pay back the loan over three years.b. Lanni uses the cash from the bank plus $20,000 of its own funds to finance the developmentof new financial planning software.c. Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name. Lanni accepts payment in the form of 5,000 shares ofMicrosoft stock.d. Lanni sells the shares of stock for $25 per share and uses part of the proceeds to pay off the bank loan. 9. a. The bank loan is a financial liability for Lanni. Lanni’s IOU is the bank’s financial asset. The cash Lanni receives is a financial asset. The new financial asset created is Lanni’s promissory note held by the bank.b. The cash paid by Lanni is the transfer of a financial asset to the software developer. In return, Lanni gets a real asset, the completed software. No financial assets are created or destroyed. Cash is simply transferred from one firm to another.c. Lanni sells the software, which is a real asset, to Microsoft. In exchange Lanni receives a financial asset, 5,000 shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, this would constitute the creation of new financial asset.d. In selling 5,000 shares of stock for $125,000, Lanni is exchanging one financial asset for another. In paying off the IOU with $50,000, Lanni is exchanging financial assets. The loan is “destroyed” in the transaction, since it is retired when paid.
13. Why do financial assets show up as a component of household wealth, but not of national wealth? Why do financial assets still matter for the material well-being of aneconomy? (LO 1-2) 13. National wealth is a measurement of the real assets used to produce GDP in the economy. Financial assets are claims on those assets held by individuals. Financial assets owned by households represent their claims on the real assets of the issuers, and thus show up as wealth to households. Their interests in the issuers, on the other hand, are obligations to the issuers. At the national level, the financial interests and the obligations cancel each other out, so only the real assets are measured as the wealth of the economy. The financial assets are important since they drive the efficient use of real assets and help us allocate resources, specifically in terms of risk return trade-offs.
21. The average rate of return on investments in large stocks has outpaced that on investments in Treasury bills by about 7% since 1926. Why, then, does anyone invest inTreasury bills? (LO 1-1) 21. Treasury bills serve a purpose for investors who prefer a low-risk investment. The lower average rate of return compared to stocks is the price investors pay for predictability of investment performance and portfolio value.
22. You see an advertisement for a book that claims to show how you can make $1 millionwith no risk and with no money down. Will you buy the book? (LO 1-1) 22. You should be skeptical. If the author actually knows how to achieve such returns, one must question why the author would then be so ready to sell the secret to others. Financial markets are very competitive; one of the implications of this fact is that riches do not come easily. High expected returns require bearing some risk, and obvious bargains are few and far between. Odds are that the only one getting rich from this book is its author.
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Finance Flashcards

Personal Finance Exam 2

The goal of monetary asset management is to maximize interest earnings and minimize fees while keeping funds safe and readily available. True
Liquidity is the speed and ease with which an asset can be converted to cash. True
A stock brokerage firm is a licensed financial institution that specializes in selling and buying stocks, bonds, and other investment alternatives. True
Checks mailed to the bank for deposit should always be endorsed with a restrictive endorsement. True
What is an example of monetary assets? Money market accounts, cash on hand, and certificates of deposit.
Tom and Mindy want to keep $420,000 in cash equivalents that are federally insured. They could accomplish this by: Dividing it equally into two different joint accounts in two different federally insured savings banks.
How can a person transfer money out of his or her checking account? Write a check, use an ATM, or make electronic funds transfers.
What is a reason why you should reconcile your bank accounts regularly? -You or your bank may have made a computational error-Checks you have written may not have cleared your account-Fees may have been assessed lowering your balance below what you think you have on deposit.
An individual checking or savings account can be set up to go automatically to another person when the depositor dies if it is set up as a(n): Payable at death account
Personal income taxes are paid only on ___. Taxable income
What are Progressive taxes? Tax rate increases as taxable income increases
What are regressive taxes? Tax demands a decreasing proportion of a person’s income
Calculate tax liability Applying the appropriate tax rate to the taxable event’s tax base
Calculate adjusted taxes Allowable subtractions from gross income that changes the amount of taxes an individual owes to the IRS
Calculate taxable income Income upon which income taxes are levied. Calculated by subtracting various exclusions, adjustments, exemptions, and deductions from total income.
Calculate adjusted gross income Gross income less any exclusions and adjustments
What are itemized deductions? Tax-deductible expenses/specific items that may be used to directly reduce income
What are exemptions? Legally permitted amount deducted from AGI based on the number of people that the taxpayer’s income supports
What is a tax credit? Dollar-for-dollar decrease in tax liability; also known as credit
What is tax avoidance? Reducing tax liability through legal techniques
What is tax evasion? Deliberately and willfully hiding income from the IRS, falsely claiming deductions, or otherwise cheating the government out of taxes owed; it is illegal
What is the penalty for tax evasion? Subject to forfeiture of property and/or jail time/Up to five years in prison and/or fines up to $250,000
If you itemize deductions, which type of deduction may you not take? Standard deductions
What is a tax shelter? Will it help you avoid taxes forever? A financial agreement made to avoid or minimize taxesNot forever, just for the current year
What is liquidity? Ease with which an asset can be converted to cash
Example of monetary assets Cash on hand, checking accounts, savings accounts and certificates of deposit, and money market accounts
The goal of monetary asset management is to maximize ___. Interest earnings and to minimize fees while keeping funds safe and readily available
Why should you reconcile your bank statement regularly? -You or your bank may have made a computational error-Checks you have written may not have cleared your account-Fees may have been assessed lowering your balance below what you think you have on deposit
What are various ways one can transfer money out of checking account? Write a check, use an ATM, or make electronic funds transfers
Interest earned from a bank saving account is taxable – will you pay federal and state taxes? Yes; both
Difference between a debit and a credit card when it comes to identity theft Protections offered for fraudulent use of debit cards are not as strong as when your credit card is used fraudulently
How does the FDIC insurance coverage work? Maximum paid per individual? Maximum paid per individual is $250,000.
Certified check A personal check drawn on your account on which your financial institution imprints the word certified, signifying that the account has sufficient funds to cover its payment.
Money order A checking instrument bought for a particular amount with a fee assessed based on the amount of order.
Cashier’s check Checks drawn on the account of the financial institution itself and, thus, backed by the institution’s finances
Traveler’s check Issued by large financial institutions
Chapter 13 Bankruptcy Wage earner or regular income plan whereby a portion of your debts are repaid over 3-5 years
Chapter 7 Bankruptcy Straight bankruptcy whereby most of your assets are sold and applied to your debts
What is credit? An arrangement in which goods, services, or money is received in exchange for a promise to repay at a future date
What is interest? The “rent” you pay for using credit
Advantages of using credit Convenience, emergencies, to make reservations, to own expensive products sooner, to take advantage of free credit, for protection against rip-offs and frauds, and to obtain an education
Disadvantages of using credit Use of credit reduces financial flexibility, it is very tempting to spend more money, avoid becoming a “financially overstretched” American, and interest itself is costly
How long can data on bankruptcy be included in your credit file? Chapter 7 and Chapter 13 may stay for 10 years, but it is customary for chapter 13 to be removed after 7 years
Your credit FICA score is made up of five factors. What are they? Payment history, amounts owed, length of credit history, taking on more debt, and types of credit used
Interpret your credit score. High or low—what does it mean for you? The higher the credit score, the better. Difference in rates is modest, except in those below 620. If you have a credit score below that, it is almost impossible to get a loan.
A lender can legally discriminate in granting credit based on age, credit history, marital status or sex? Credit history only
What is the price of credit? Interest – interest, finance charge, annual percentage rate
What is installment credit? Credit arrangement in which the borrower must repay the amount owed plus interest in a specific number of equal payments
What is non-installment credit? Single-payment, open-ended credit, and service credit
Secured loans require ___. A cosigner or collateral
What type of clause addresses you missing several payments and requiring you pay the entire debt in full in most installment loan contracts? Acceleration clause
What is open-ended credit? With open-ended credit, credit is extended in advance of any transaction so that the borrower does not need to reapply each time credit is desired. Credit card, cash advances, personal line of credit, home-equity line of credit, and service credit
Who should set your debt limit? You should
Signs of over-indebtedness? You are overindebted if the ratio is 15% or higher-Not knowing how much you owe-Running out of money-Paying only the minimum amount due-Exceeding debt limits and credit limits-Requesting new credit cards and increase in credit limits-Paying late or skipping credit payments-Taking add-on loans-Using debt-consolidation loans-Experiencing garnishment-Experiencing repossession or foreclosure
What can hurt your credit score? Not paying rent, utilities, etc on timeNot paying bills, credit cards, etc on time
Good uses of credit Convenience, emergencies, reservations, owning expensive items sooner, taking advantage of free credit, for protection against fraud, and to obtain an education.
Bankruptcy: Constitutionally guaranteed right that permits people (and businesses) to ask a court to find them officially unable to meet their debts
Garnishment: Court-sanctioned procedure by which a portion of debtors’ wages are set aside by their employers to pay debts
Debt consolidation: Taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan
Default: Failure to repay a loan
Your total liabilities excluding mortgage debt should not exceed what percentage of your net worth excluding the value of your home if you are to have a manageable level of debt? 33%
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Finance Flashcards

Economics Chapter 11 Study Guide

To finance the building of a new police station, a local government is most likely to issue a:Junk bondTreasury bondMunicipal bondMoney Market bond municipal bond
All of the following are low-risk investments EXCEPT:Junk bondsTreasury bondsMunicipal bondsSavings bonds junk bonds
The interest rate the bond issuer pays to the bondholder is called the:Coupon rateMaturity rateDiscount rateValue rate coupon rate
The main advantage of diversification as an investment policy is that it:Reduces risk to investorsIncreases investors’ access to their moneyOffsets the effects of inflation on investmentsGuarantees a fixed rate of return on an investment reduces risk to investors
You do not have to pay state taxes on interest earned on:corporate bondsTreasury billsMoney Market Mutual fundsJunk bonds money market mutual funds
When you invest in a mutual fund __________________________________Your money is invested in a variety of insurance policiesYou have easier access to your money than in a savings accountYour money is invested in a variety of stocks and bondsYou are guaranteed a fixed return on your investment your money is invested in a variety of stocks and bonds
An example of equity is:A treasury bondA share of stockA treasury billA long-term certificate of deposite a share of stock
Investing in a money market mutual fund is a higher risk that investing in a certificate of deposit because unlike CDs, money market funds _____________________________________________Are not insured by the FDICAre not protected by the Securities and Exchange CommissionDo not earn a fixed interest rateMust be held for a preset amount of time are not insured by the FDIC
Savings bonds differ from most other bonds in that:They provide a higher rate of returnThey are held for a shorter timeThe buyer does not receive periodic interest payments in exchange for a lower purchase priceThey are issued in fairly large denominations in exchange for a lower purchase price the buyer does not receive periodic interest payments in exchange for a lower purchase price
All of the following are basic components of bonds EXCEPT:MaturityLiquidityPar ValueCoupon rate liquidity
An accurate statement about bonds would be that ________________________________They are insured by the FDICThey are generally held for 3 or 6 monthsThey are usually a low-risk investmentThey entitle the holder to a share of ownership in a corporation they are usually a low-risk investment
The Dow Jones Industrial Average consists of ________________________________________500 different stocks that change annuallyThe top-selling 250 stocks over a 10-year preiod30 stocks that are considered representative of the market as a whole60 stocks selected from the NYSE, the NASDAQ-AMEX, and the OTC markets 500 different stocks that change annually
A stock that reinvests its earnings in the business instead of paying regular dividends is called:An income stockCommon stockPreferred stockA growth stock a growth stock
An example of blue chip stock might be __________________________________A new start-up firmA foreign-owned company that operates in another countryAn established company that is traded over the InternetA large, well-known company traded on the NYSE a large, well-known company traded on the NYSE
A stock split is most likely to occur when __________________________________________A company is losing moneyStockholders demand higher dividendsThe price of a stock becomes too highThe stock market as a whole is doing poorly the price of a stock becomes too high
All of the following are examples of financial intermediaries EXCEPT:A credit unionA stock certificateA finance companyA life insurance company a finance company
The most trades are made __________________________________________On the New York Stock ExchangeAt the Chicago Board of TradeOn the NASDAQ-AMEXOn the OTC market on the OTC market
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Finance Flashcards

Chapter 8 – ERP

Which of the following is an extended ERP component? A. Business intelligenceB. E-businessC. Customer relationship managementD. All of the above D. all of the above
What is the key word in ERP?A. EnterpriseB. ResourceC. PlanningD. All of the above A. Enterprise
What is enterprise resource planning? A. The analysis and redesign of workflow within and between enterprisesB. A standardized set of activities that accomplish as specific task, such as processing a customer’s orderC. Integrates all departments and functions throughout an organization into a single IT system so that employees can make decisions by viewing enterprisewide information on all business operationsD. Involves managing all aspects of a customer’s relationship with an organization to increase customer loyalty and retention and an organization’s profitability C. integrates all departments and functions throughout an organization into a single IT system so that employees can make decisions by viewing enterprise wide information on all business operations
Which of the following is not one of the three most common core ERP components focusing on internal operations? A. Accounting and financeB. Production and materials managementC. Business intelligenceD. Human resources C. business intelligence
Which activities do accounting and finance components perform? A. Track employee information including payroll, benefits, compensation, performance assessment, and assumes compliance with the legal requirements of multiple jurisdictions and tax authorities.B. Handle the various aspects of production planning and execution such as demand forecasting, production scheduling, job cost accounting, and quality control.C. Manage accounting data and financial processes within the enterprise with functions such as general ledger, accounts payable, accounts receivable, budgeting, and asset management.D. None of the above. C. manage accounting data and financial processes within the enterprise with functions such as general ledger, accounts payable, accounts receivable, budgeting, and asset management
Which activities do production and materials management components perform? A. Track employee information including payroll, benefits, compensation, performance assessment, and assumes compliance with the legal requirements of multiple jurisdictions and tax authorities.B. Handle the various aspects of production planning and execution such as demand forecasting, production scheduling, job cost accounting, and quality control.C. Manage accounting data and financial processes within the enterprise with functions such as general ledger, accounts payable, accounts receivable, budgeting, and asset management.D. None of the above. B. handle the various aspects of production planning and execution such as demand forecasting, production scheduling, job cost accounting, and quality control
which component includes of Extra components that meet the organizational needs not covered by the core components and primarily focus on external operationsA. human resource componentsB. Core ERP componentC. accounting and finance componentD. Extended CRP component D. extended CRP component
which component includes of traditional components that are included in most ERP systems and they primarily focus on internal operations?A. human resource componentsB. Core ERP componentC. accounting and finance componentD. Extended CRP component B. core erp component
Which activities do human resource components perform? A. Track employee information including payroll, benefits, compensation, performance assessment, and assumes compliance with the legal requirements of multiple jurisdictions and tax authorities.B. Handle the various aspects of production planning and execution such as demand forecasting, production scheduling, job cost accounting, and quality control.C. Manage accounting data and financial processes within the enterprise with functions such as general ledger, accounts payable, accounts receivable, budgeting, and asset management.D. None of the above. A. track employee information including payroll, benefits, compensation, performance assessment, and assumes compliance with the legal requirements of multiple jurisdictions and tax authorities
Which component is a credit-management feature typically included in? A. Accounting and finance componentsB. Production and managerial management componentsC. Human resource componentsD. Production and materials management components A. accounting and finance component
Which component can help an organization determine such things as the identification of individuals who are likely to leave the company unless additional compensation or benefits are provided? A. Accounting and finance componentsB. Production and managerial management componentsC. Human resource componentsD. Production and materials management components C. human resource components
Which extended ERP component collects information used throughout an organization, organizes it, and applies analytical tools to assist managers with decisions? A. Business intelligenceB. E-businessC. Customer relationship managementD. Supply chain management A. business intelligence
What are two of the primary features of e-business components? A. E-procurementB. E-logisticsC. E-procurement and e-logisticsD. None of the above C. e-procurement and e-logistics
Which of the following describes an ERP system? A. ERP systems provide a foundation for collaboration between departmentsB. ERP systems enable people in different business areas to communicateC. ERP systems have been widely adopted in large organizations to store critical knowledge used to make the decisions that drive the organization’s performanceD. All of the above D. all of the above
Who are the primary users of ERP systems? A. Sales, marketing, customer serviceB. Accounting, finance, logistics, and productionC. Customers, resellers, partners, suppliers, and distributorsD. All of the above B. accounting, finance, logistics, and production
What are the primary business benefits of an ERP system? A. Sales forecasts, sales strategies, and marketing campaignsB. Market demand, resource and capacity constraints, and real-time schedulingC. Forecasting, planning, purchasing, material management, warehousing, inventory, and distributionD. All of the above C. forecasting, planning, purchasing, material management, warehousing, inventory, and distribution
Which ERP benefit creates a framework for integrating and improving a company’s internal business processes that results in significant improvements in the quality and efficiency of customer service, production, and distribution?A. quality and efficiencyB. enterprise agilityC. decision supportD. decreased costs A. quality & efficiency
Which ERP benefit has significant reductions in transaction processing costs, supply chain costs, inventory, and IT costs?A. quality and efficiencyB. enterprise agilityC. decision supportD. decreased costs D. decreases cost
Which ERP benefit provides vital cross-functional information on business performance quickly to managers to significantly improve their ability to make better decisions in a timely mannerA. quality and efficiencyB. enterprise agilityC. decision supportD. decreased costs C. decision support
Which ERP benefit breaks down many former departmental and functional walls of business processes, information systems, and information resources?A. quality and efficiencyB. enterprise agilityC. decision supportD. decreased costs B. enterprise agility
What costs does ERP include of? Software, consulting fees, hardware expenses, and training fees
Hiring external experts to help implement the system correctly is which ERP risk?A. software costB. consulting feeC. process reworkD. customization B. consulting fee
Redefining processes in order to ensure the company is using the most efficient and effect processes is which ERP risk?A. software costB. consulting feeC. process reworkD. customization C. process rework
If the software package does not meet all of the company’s needs, it may need required to edit the software is which risk?A. software costB. consulting feeC. process reworkD. customization D. customization
Moving data from an old system into a new ERP system is which type of rick?A. software costB. trainingC. data warehouse integration and data conversionD. customization C. data warehouse integration & data conversion
Ensuring all software products, including disparate systems not part of the ERP systems, are working together is an example of which risk?A. customizationB. software costC. integration & testingD. training C. integration & testing
Business managers and IT professionals underestimate the complexity of? Planning, development, and training needed
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Finance Flashcards

Finance Ch. 6 – T/F

1. A bond’s payment at the maturity is referred to as its face value. t
2. When the market interest rate exceeds the coupon rate, bonds sell for less than face value to provide enough compensation to investors. t
3. Current yield overstates the return of premium bonds since investors who buy a bond at a premium face a capital loss over the life of the bond. t
4. A bond’s rate of return is equal to its coupon payment divided by the price paid for the bond. f
5. A Treasury bond’s bid price will be lower than the ask price. t
6. A long-term investor would more likely be interested in current yield than internal rate of return. f
7. Bonds selling at a premium price offer a higher current yield (which overstates the true return)than bonds selling at par value. t
8. Speculative-grade bonds have default risk; investment grade bonds do not. f
9. TIPS are unlike most bonds in that their cash flows increase when the national unemployment rate increases. f
10. “Ask Yields” can be guaranteed only to investors who buy a bond and hold it until maturity. t
11. It would be realistic to read an “Ask Price” listed as 100:16 and a “Bid Price” of 100:18. f
12. Indexed bonds were completely unknown in the United States till 1997 when the U.S. Treasury began to issue inflation-indexed bonds known as Treasury Inflation-Protected Securities, or TIPS. f
13. The current yield measures the bond’s total rate of return. f
14. When a financial calculator or spreadsheet program finds a bond’s yield to maturity, it uses a trial-and-error process. t
15. Even when the yield curve is upward-sloping, investors might rationally stay away from long-term bonds. t
16. Bonds with a rating of Ba or below by Moody’s are referred to as speculative grade, high-yield, or junk bond. t
17. Bonds rated BBB or above by Standard & Poor’s are called investment grade. t
18. Bonds rated Ba by Moody’s are of the same safety of the bonds rated BB by Standard & Poor’s. t
19. Zero-coupon bonds are issued at prices considerably below face value, and the investor’s return comes from the difference between the purchase price and the payment of face value at maturity. t
20. Catastrophe bonds (or Cat bonds) promise relatively high returns, and the payments on the bond are increased if a specified type of disaster occurs. f
21. Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield. t
22. Bond ratings measure the bond’s credit risk. t
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Finance Flashcards

FINANCE MIDTERM T/F

On the balance sheet, total assets must always equal the sum of total liabilities plus equity. TRUE
Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books. TRUE
The income statement shows the difference between a firm’s income and its costs–i.e., its profits–during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm’s reported profits and its actual cash flow for the same period. TRUE
EBIT stands for earnings before interest and taxes, and it is often called “operating income.” TRUE
Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing TRUE
Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm’s taxes. FALSE
The statement of cash flows has four main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year. TRUE
The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders’ equity. TRUE
The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows. TRUE
Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement. FALSE. Balance sheet, income statement, statement of cash flows, and statement of stockholder’s equity
The amount shown on the December 31, 2011 balance sheet as “retained earnings” is equal to the firm’s net income for 2011 minus any dividends it paid. FALSE
If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot. TRUE
EBITDA stands for earnings before interest, taxes, debt, and assets. FALSE
Typically, the statement of stockholders’ equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet. TRUE
Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations. TRUE
The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance. TRUE
If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow. FALSE
The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date. FALSE
The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant. TRUE
A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership. FALSE
Because the U.S. tax system is a progressive tax system, a taxpayer’s marginal and average tax rates are the same FALSE
Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value FALSE
In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price on a specific target date. FALSE
If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a slideshow while the balance sheet is more like a snapshot. TRUE
The statement of cash flows has three main sections, one each for operating, investing, and financing activities; plus one that shows a summary of the cash and cash equivalents at the end of the year. TRUE
In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price in the long run, or the stock’s “intrinsic value”. TRUE
In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the expected EPS. FALSE
Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value. TRUE
The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date. TRUE
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Finance Flashcards

finance 6

the coupon rate of a bond equals:a. its yield to maturity b. a percentage of its price c. the maturity value d. a percentage of the par value d. a percentage of the par value
periodic receipts of interest by the bondholder are known as:a. the coupon rate b. a zero-coupon c. coupon payments d. the default premium c. coupon payments
which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond’s:a. face value increases b. current price decreasesc. interest payments increase d. maturity date is extended c. interest payments increase
what happens when a bonds expected cash flows are discounted at a rate lower than the bonds coupon rate?a. the price of the bond increases b. the coupon rate of the bond increases c. the par value of the bond decreasesd. the coupon payments will be adjusted to the new discount rate a. the price of the bond increases
the face value of a bond is received by the bondholder:a. at the time of purchase b. annuallyc. whenever coupon payments are maded. at maturity d. at maturity
which of the following statements is correct for a 10% coupon bond that has a current yield of 13%?a. the face value of the bond is decreased b. the bonds maturity value exceeds the bonds price c. the bonds internal rate of return is 13%d. the bond has few years remaining until maturity b. the bonds maturity value exceeds the bonds price
if an investor purchases a bond when its current yield is less than the coupon rate, then the bonds price will be expected to:a. decline over time, reaching per value at maturity b. increase over time, reaching par value at maturity c. be less than the face value at maturityd. exceed the face value at maturity a. decline over time, reaching par value at maturity
the current yield of a bond can be calculated by:a. multiplying the price by the coupon rate b. dividing the price by the annual coupon payments c dividing the price by the par value d. dividing the annual coupon payments by the price d. dividing the annual coupon payments by the price
what is the current yield of a bond with a 6% coupon, four years until maturity, and a price of $750?a. 6%b. 8%c. 12%d. 14.7% b. 8%
a bond’s face value can also be called its:a. coupon payment b. present valuec. default valued. par value d. par value
a bonds yield to maturity takes into consideration:a. current yield but not price changes of a bond b. price changes but not current yeild of a bond c. both current yeild and price changes of a bond d. neither current yield nor price changes of a bond c. both current yield and price changes of a bond
the discount rate that makes the present value of a bond’s payments equal to its price is termed the:a. rate of return b. yield to maturity c. current yield d. coupon rate b. yield to maturity
what is the coupon rate, for a bond with 3 years until maturity, a price of $1053.46, and a yield to maturity of 6%?a. 6% b. 8%c. 10%d. 11% b. 8%
which of the following factors will change when interest rates change?a. the expected cash flows from a bond b. the present value of a bonds payments c. the coupon payment of a bond d. the maturity value of a bond b. the present value of a bonds paymnets
what happens to the coupon rate of a bond that pays $80 annually in interest if interest changes from 9% to 10%?a. the coupon rate increase to 10% b. the coupon rate remains at 9%c. the coupon rate remains at 8%d. the coupon rate decreases to 8% c. the coupon rate remains at 8%
which of the following is fixed (cannot change) for the life of a given bond?a. current price b. current yield c. yield to maturity d. coupon payment d. coupon payment
which of the following is correct when a bond investors rate of return for a particular period exceeds the bonds coupon rate?a. the bond increased in price during the period b. the bond decreased in price during the period c. the coupon payment increased during the period d. it is not possible for a bondholders rate of return to exceed the bonds coupon rate a. the bond increased in price during the period
what is the realtionship between an investment an investments rate of return and its yield to maturity for an investor that does not hold a bond until maturity?a. rate of return is lower than yeild to maturity b. rate of return is higher than yeiled to maturity c. rate of return equals yield to maturity d. there is no predetermined relationship d. there is no predetermined relationship
if the coupon rate is lower than current interest rates, then the yield to maturity will be:a. lower than current interest ratesb. equal to the coupon ratec. higher than the coupon rated. lower than the coupon rate b. equal to the coupon rate
How does a bond dealer generate profits when trading bonds?a. by maintaining bid prices lower than ask prices b. by maintaining bid prices higher than ask prices c. by retaining the bonds next coupon payment d. by lowering the bonds coupon rate a. by maintaining bid prices lower than ask prices
which of the following is correct for a bond priced at $1100 that has 10 years remaining until maturity, and a 10% coupon, with semi-annual payments?a. each payment of interest equals $50b. each payment of interest equals $55 c. each payment of interest equals $100 d. each payment of interest equals $110 a. each payment of interest equals $50
the yield curve depicts the current relationship between:a. bond yields and default risk b. bond maturity and bond ratings c. bond yields and maturity d. promised yields and default premiums c. bond yields and maturity
when the yield curve is upward-sloping then:a. short-maturity bonds offer high coupon rates b. long-maturity bonds are priced above par value c. short maturity bonds yield less than long maturity bonds d. long maturity bonds increase in price when interest rates increase c. short maturity bonds yield less than long maturity bonds
Canada bond yields do not contain a:a. coupon interest payment b. nominal interest ratec. default premium d. yield to maturity c. default premium
when riskier corporations issue bonds that include a default premium, the promised yield will sometimes be:a. less than the actual yield b. greater than the actual yield c. less than the yield on a default-free bond d. greater than the face value of the bond b. greater than the actual yield
the purpose of a floating-rate bond is to:a. save interest expense for corporate issuers b. avoid making interest payments until maturity c. shift the yield curved. offer rates adjusted to current market conditions d. offer rates adjusted to current market conditions
which of the following would not be associated with a zero coupon bond?a. yield to maturityb. discount bond c. current yieldd. interest rate risk c. current yield
which of the following bonds would be likely to exhibit a greater degree of interest-rate risk?a. a coupon-paying bond with 5 years until maturity b. a coupon-paying bond with 20 years until maturity C. a floating-rate bond with 20 years until maturity d. a zero coupon bond with 30 years until maturity d. a zero coupon bond with 30 years until maturity
where does a “convertible bond” get its name?a. the option of converting into shares of common stock b. the option of increasing its coupon payments when interest rates increase c. the option of converting the zero-coupon to coupon paying bond d. the option of increasing yielding without decreasing price a. the option of converting into shares of common stock
which one of the following identifies the distinction between a Canada bond and a corporate bond?a. canada bonds make coupon payments; corporate bonds do notb. corporate bonds have default risk, canada bonds do notc. corporate bonds have longer terms d. canada bonds have higher yeilds b. corporate bonds have default risk; canada bonds do not
which of the following is correct for a bond currently selling at a premium to par?a. its current yield is higher than its coupon rate b. its current yield is lower than its coupon rate c. its yield to maturity is higher than its coupon rate d. its default risk is extremely low b. its current yield is lower than its coupon rate
Capital losses will automatically be the case for bond investors who buy:a. discount bonds b. premium bonds c. zero coupon bonds d. junk bonds b. premium bonds
investors who own bonds having lower credit ratings should expect:a. lower yields to maturity b. higher default possibilities c. lower coupon payments d. higher present value of cash flows b. higher default possibilities
if a bond is priced at par value, then:a. it has a very low level of default risk b. its coupon rate equals its yield to maturity c. it must be a zero coupon bond d. the bond is quite close to maturity b. its coupon rate equals its yield to maturity
the existence of an upward-sloping yield curve suggests that:a. bonds should be selling at a discount at par value b. bonds will not return as much as common stocks c. interest rates will be increasing in the future d. real interest rates will be increasing soon c. interest rates will be increasing in the future
which one of the following will not happen for an investor who owns a Canada bond during a period of inflation?a. the coupon payment will increase in nominal terms b. the maturity value will remain constant in nominal terms c. the investors capital gain will rise d. the bond price will fall a. the coupon payment will increase in nominal terms
which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?a. the bond is selling at a discount to par value b. the bond has a high default premium c. the promised yield is not likely to materialize d. the security must be a Canada bond a. the bond is selling at a discount to par value
Assume that a bond has been owned by 4 different investors during its 20 year history. Which of the following is not likely to have been shared by these different owners?a. coupon rate b. cash flows c. par value d. yield to maturity d. yield to maturity
Which of the following is correct concerning real interest rates?a. real interest rates are constant b. real interest rates must be positive c. real interest rates must be less than nominal interest rates d. real interest rates, if positive, indicate increased purchasing power d. real interest rates, if positive, indicate increased purchasing power
Which of the following will reduce the yield to maturity from what the investor calculated at time of purchase?a. increasing interest rates; bonds held to maturity b. decreasing interest rates; bonds held to maturity c. stable interest rates; bonds sold before maturity d. increasing interest rates; bonds sold before maturity d. increasing interest rates; bonds sold before maturity
When market interest rates exceed a bonds coupon rate, the bond will:a. sell for less than par value b. sell for more than par value c. decrease its coupon rate d. increase its coupon rate b. sell for more than par value
Which of the following is likely to be correct for a CCC-related bond, compared to a BBB-related bond?a. the CCC bond will sell for a higher price b. the CCC bond will sell for a lower price c. the CCC bond will offer a higher promised yield to maturity d. the CCC bond will offer a lower promised yield to maturity c. the CCC bond will offer a higher promised yield to maturity
What causes bonds to sell for premium compared to face value?a. the bonds have high ratings b. the bonds have a long period until maturity c. the bonds have a higher than market coupon rate d. the bonds are of sepculative grade c. the bonds have a higher than market coupon rate
the current yield tends to overstate a bonds total return when the bond sells for a premium because:a. the bonds price will decline each year b. coupon payments can change at any time c. bonds selling for a premium have low default risk d. taxes must be paid on the current yield a. the bonds price will decline each year
the current yield tends to understate a bonds total return when the bond sells for a discount because:a. increases in interest rates will increase the current yield b. the bonds price will increase each year c. current yields only show nominal returns d. the bond may have a higher face value a. increases in interest rates will increase the current yield
the value of a callable bond:a. is unlimited b. is limiteed by its face valuec. is limited by its call price d. is limited by high interest rates c. is limited by its call price
a bond is currently trading at par, has an annual coupon of $100, and matures at a face value of $100. Therefore, the _____ is 10%.a. coupon rate b. current yield c. yield to maturity d. all of the above terms d. all of the above terms