Intro to finance exam 1

The Goal of firm should be maximization of shareholder wealth
In finance, we assume that investors are generally adverse to risk
The true owners of the corporation are the common stockholders
Revenues are taxed for economic stabilization, to achieve socially desirable goals and to provide revenue for the government.
What are the requirements of a sub chapter S-Corporation 1) Must be a domestic corporation2) Must not have more than 100 shareholders3) Must include only eligible shareholders4) Must have only one class of stock
A corporation’s capital losses can be carried back three years and if any loss till remains carried forward: 5 years
Name one tax deductible expenses for a business interest
How much of the dividends can be excluded from a corporations taxable income? 70%
What categories enjoy limited liability? a) general partners in a limited partnershipb)shareholders(common stock) of a corporation
What are the characteristics of a limited partnership 1)It allows one or more partners to have limited liability2)It requires one or more of the partners to be a general partner for whom the privilege of limited liability does not apply3)It prohibits the limited partners from participating in the management of the partnership
What is a tax deductible item for a corporation a) interest expenseb) marketing expense
Money market instruments are: U.S. Treasury BillsRepurchase AgreementsCertificates of DepositFederal FundsBankers AcceptanceCommercial Paper
Capital market instruments include: U.S. Treasury Bonds U.S. Agency BondsState or Local BondsMortgage BondsCorporate BondsCorporate Stocks
Benefits of an organized security exchange include: Helping companies raise new capitalestablishing and publicizing fair security pricesproviding a continuous market
Activities of the investment banker include assuming the risk of selling a security issueselling new securities to the ultimate investor providing advice for firms issuing securities
Financial intermediaries offer indirect securities
The SEC requires registration of a public issue if: if an issue is $5,000,000
According to the SEC the correct sequence of events for a security issue is: SEC registrationred herring final prospectus
The telecommunications system that provides a national information linkup among brokers and dealers operating in the over-the-counter market is called: NASDAQ
An example of a primary market transaction is: a new issue of common stock by AT&T
Savings are generally transferred to the business firms by: indirect transfer using the investment bankerindirect transfer using the financial intermediary
The U.S. System favors what as a means of raising capital? debt
Insurance companies invest in the “long-end” of the securities market. In which instrument would an insurance company be least likely to invest most of its assets: commercial paper
In a direct sale the issuing firm sells the security: directly to the investing public
The investment banker performs three basic functions: underwriting, distributing, and advising
What refers to all institutions and procedures that provide for transactions in short term debt instruments generally issued by borrowers with very high credit ratings? money market
The opportunity cost is defined as the rate of return available in the financial markets
If you were given current assets and current liabilities what ratio would you compute? current ratio
current ratio current assets/current liabilities
quick ration would be unaffected by: purchase of equipmentfinance by long term debt
quick ratio (current Assets- inventories)/ Current liabilitiesor(cash and equivalents + marketable securities + accounts receivable)/ current liabilities
What financial statement explains the changes that took place in the firm’s cash balance? Statement of cash flows
How to calculate funds provided by operations current Net earnings+ (current retained earnings – previous years retained earnings )
Calculate the dividends paid: Net income – (current retained earnings – previous years retained earnings )
Debt Ratio Total Liability/Total Assets
Average Collection Period AccountsReceivable/(sales/365)
Inventory Turnover ratio Cost of revenue/Inventory
Return on total assets Net Income/ Total Assets
Total Asset Turnover Sales/ Total assets
Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management? Return on investment
If a company’s average collection period is higher than the industry average, then the company may be Allowing its customers too much time to pay their bills
Why is the quick ratio a more refined liquidity measure than the current ratio? Inventories are generally the least liquid of the firm’s current assets.
The percent of sales method can be used to forecast expenses, assets and liabilities
A firm’s cash position would most likely be helped by establishing longer credit terms, and retiring outstanding debt
What is found in the cash budget Sales, Cash Sales, Collected in 30 days, Collected in 60 days and Total Cash In
Physical Budgets include budgets for all of the following except production cost
The primary purpose of a cash budget is to provide a detailed plan of future cash flows
What is an example of a non-cash expense? Depreciation
The first step involved in predicting financing needs is project the firm’s sales revenues and expenses over the planning period
The cash budget consists of all the following factors except net income
The firm’s cash flow is a continuous process
The rate that a subsidiary or parent of the MNC charges other divisions of the firm for its products is called A transfer price
Some complexities of conducting international business include Multiple currencies, differing legal requirements and internal control problems
Which of the following is a reason for international investment? To reduce portfolio risk
A spot transaction occurs when Once currency is immediately exchanged for another currency
Buying and selling in more than one market to make a risk-less profit is called arbitrage
Which of the following is true? Only the forward rate is known, the actual spot rate that will prevail in the future is not known today
Forward rates are quoted in both direct and indirect form, quoted at a premium or discount and beneficial to risk-reduction
interest rate parity theory states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity.
What is true regarding the correct price of the forward contract? if the quote is less than the computed price, the forward contract is undervalued; and if the quote is greater than the computed price, the forward contract is overvalued
exchange rate risk arises from the fact that the spot exchange rate on a future date is a random variable
Elimination of all foreign exchange risk should be analyzed on a cost benefit basis
Leading and lagging are important risk-reduction techniques, are useful when hedging is not available and can be successfully applied for an MNC
Problems of multinationals include cash management and positioning of funds, managing receivables and global control
I.T. Canwait, Inc., a U.S.-based multinational, has just sold cans to a west German company, I.C. Spots, Inc. Spots will pay for the order in 60 days. I.T. Canwait is now exposed to which kind of risks transaction
Which type of exposure is generally considered just a paper gain or loss translation
Firms generally do not hedge against which type of exposure translation
An important (additional) consideration for a direct foreign investment is political risk

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