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Finance Flashcards

Foundations of Business Finance

A company’s balance sheet shows the value of assets, liabilities, and stockholders’ equity at a specific point in time.
On a balance sheet, retained earnings are not “unspent cash” because they have been used to finance the firm’s assets.
For both managers and external financial analysts, ______ is the single most important accounting number found on the income statement. net income (net profit after tax)
Earnings per share (EPS) is calculated by dividing earnings available for common stockholders by the number of shares of common stock outstanding.
Net working capital is a measure of a firm’s overall liquidity.
Why is the quick ratio a more appropriate measure of liquidity than the current ratio for a large-airplane manufacturer? It excludes inventory from the numerator of the ratio because it is difficult to convert inventory to cash and most sales are made on a credit basis.
The one fixed asset that is not depreciated is ________. land.
Return on total assets (ROA) is equal to _________. net profit margin x total asset turnover.the product of the components of the DuPont System.earnings available for common stockholders / total assets.all of the above.
When a firm has no “other income,” its operating profit and blank_____ are equal. EBIT
The firm’s _______ are primarily interested in ratios that measure the short-term liquidity of the company and its ability to make principal and interest payments. creditors
When evaluating financial ratios, analysts typically examine a firm’s ratio values compared to the firm’s previous years’ ratios
_______ ratios would provide the best information regarding total return to common stockholders. Profitability
The firm’s managers use ratios to ______________. generate an overall picture of the company’s financial health.monitor the firm’s performance from period to period.isolate developing problems.all of the above
The _________ flows result from debt and equity financing transactions. financing
Which of the following is an inflow of corporate cash? Depreciation charges
The bottom-up method for forecasting sales relies on the ability of sales personnel to assess future demand, usually without the aid of statistical models.
Following _______ financing strategy takes advantage of short-term interest rates but also increases refinancing risk. Following ______ financing strategy minimizes the risk of a liquidity crisis, but generally increases borrowing costs. Following _______ financing strategy results in the use of long-term funding for permanent assets and short-term financing for temporary or seasonal requirements. none of the above
The sustainable growth model gives managers a kind of shorthand projection that ties together blank_____ and _____. growth objectives; financial needs
The key input required to build a cash budget is ________. the firm’s sales forecast.
Which of the following are common cash disbursements? rent and lease paymentsinterest payments and taxespayments of accounts payable and wagesall of the above
Most pro forma statements begin with a sales forecast. One approach to deriving a sales forecast is the top-down approach. Top-down sales forecasts rely heavily on macroeconomic and industry forecasts.
A firm that employs an aggressive strategy to finance assets will finance a portion of long-term (permanent) growth in assets with short-term financing.
A strategic plan is a long-term guide driven by competitive forces.
A cash budget is a statement of a firm’s planned inflows and outflows of cash used to ensure that a firm has available cash to meet short-term financial obligations.
A speedup in _____ should _____ a firm’s financing needs; whereas, a slowdown in ______ should ______ financing needs for a firm. payments; increase; collections; increase
_________ are often used as the plug figure in pro forma projections. Cash balances
“Required total financing” figures in a cash budget show the additional amount a firm must borrow at the end of each month.
A long-term financial plan begins with blank___________. strategy.
When generating pro forma statements, most firms rely on a __________ approach to sales forecasts. blended
Most firms when planning for growth focus on meeting sales target growth rates.
The terms and conditions to which a bond is subject are set forth in its Indenture.
The preemptive right is important to shareholders because it Protects the current shareholders against dilution of ownership interests.
Companies can issue different classes of common stock. Which of the following statements concerning stock classes is correct? None of the above statements is necessarily true.
Pure options are instruments that are Created by investors outside the firm.Bought and sold primarily by investors and speculators.Of greater importance to investors than to financial managers.All of the above.
Your Aunt Agatha purchased a call option a few months ago. Today is the expiration date, so she must decide whether to exercise the option. Which of the following statements is correct? Do not consider brokers’ commissions in your answer. Aunt Agatha should exercise the option if the price of the stock is greater than the exercise, or strike, price.
Which of the following are generally considered advantages of term loans over publicly issued bonds? Lower flotation costs.Speed, or how long it takes to bring the issue to market.Flexibility, or the ability to adjust the bond’s terms after it has been issued.All of the above.
Eurodebt is the term used to designate Debt that is denominated in a currency that is different than the currency of the country in which it is sold.
An American Depository Receipt (ADR) represents Certificates representing ownership in stocks of foreign companies that are held in trust by a bank located in the country the stock is traded.
Which of the following statements is correct? Income bonds pay interest only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a company and this makes them riskier to investors than regular bonds.
Which of the following statements concerning common stock and the investment banking process is false? Stockholders have the right to elect the firm’s directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management’s performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a margin call.
Which of the following statements is false? The term Eurobond specifically applies to any foreign bonds denominated in U.S. currency.
A(n) ____ is generally obtained from a bank or insurance company and the borrower agrees to make a series of payments consisting of interest and principal. term loan
A(n) ____ is a bond that pays no annual interest but is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation. zero coupon bond
A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid is called what? cumulative dividends
A ____ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period. put option
Which of the following is NOT an example of a financial asset? inventory
Which of the following is NOT a source of equity on a firm’s balance sheet? property, plant, and equipment
A ____ is an agreement between two firms where one firm agrees to sell some of its financial assets to another and then buy the financial assets back from that firm at a later time repurchase agreement
Bond ratings of ____ and higher are considered investment grade BBB
Which of the following statements is most correct? Other things held constant, the “liquidity preference theory” would generally lead to an upward sloping yield curve.
Your uncle would like to restrict his interest rate risk and his default risk, but he still would like to invest in corporate bonds. Which of the possible bonds listed below best satisfies your uncle’s criteria? AAA bond with 5 years to maturity.
If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond? The yield on the 10-year bond is less than the yield on a 1-year bond.
An inverted yield curve Exists when short-term rates exceed long-term rates.
If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement? Investors expect short-term rates to decrease in the future.
Which of the following statements is most correct? If the maturity risk premium were zero and the rate of inflation were expected to increase in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.
Which of the following statements is correct? Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
Which of the following is not one of the fundamental factors that affect the cost of money? Exchange rates
Most experts think that in the United States the real risk-free rate fluctuates between two to four percent.
Which of the following assets is the most liquid? Cash
During recessions the demand for funds typically ____. decreases
As the demand for funds increase, the demand curve will shift to the ____ resulting in ____ market clearing interest rate. right; higher
The ____ premium is compensation for possibility that the borrower will not be able to pay the debt’s interest and principal on time. default risk
When a project’s NPV exceeds zero, The project should be accepted without any further consideration, assuming we are confident that the cash flows and the required rate of return have been properly estimated.
The underlying cause of ranking conflicts between the NPV and IRR methods is differing Reinvestment rate assumption.
Which of the following statements is correct? The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the IRR.
Which of the following statements is most correct? Sunk costs should be ignored in capital budgeting.
Which of the following statements is correct? The incremental operating cash flow for capital budgeting includes return on invested capital, which is net income, and return of part of invested capital, which is depreciation.
Which of the following statements is correct? In estimating incremental operating cash flows for the purpose of capital budgeting, interest payments should not be included since the effects of these payments are already included in the rate of return the firm is required to earn from its investments.
A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should Increase the required rate of return used to evaluate the project to reflect the higher risk of the project.
Which of the following statements is correct? The NPV and IRR methods use the same basic equation, but in the NPV method the discount rate is specified and the equation is solved for NPV, while in the IRR method the NPV is set equal to zero and the discount rate is found.
Which of the following statements is correct? Large costs occur at the end of nuclear power plants’ lives because these plants have to be closed down, and shutdown costs are high due to the difficulty of handling radioactive materials. For this reason, it is possible that a nuclear plant project could have two IRRs.
Which of the following rules are essential to successful cash flow estimates, and ultimately, to successful capital budgeting? Only incremental cash flows are relevant to the accept/reject decision.
Which of the following methods involves calculating an average beta for firms in a similar business and then applying that beta to determine the beta of its own project? Pure play method.
Which of the following statements is correct? Capital budgeting has long-term effects on a firm leading the firm to lose some decision-making flexibility.Because asset expansion is fundamentally related to future sales, the decision to buy an asset involves an implicit sales forecast.Timing is important in capital budgeting. All of the above are correct.
____ are decisions about whether to purchase capital projects and add them to existing assets so as to increase existing operations. Expansion decisions
____ projects are a set of projects where the acceptance of one project means that other projects cannot be accepted. Mutually exclusive
A(n) ____ is a cash outlay that already has been incurred and that cannot be recovered regardless of whether the project is accepted or rejected. sunk cost
Which of the following capital budgeting techniques does not adjust for the riskiness of the cash flows? Payback
Uncertainty regarding the domestic flows that result from converting foreign cash flows is what type of risk? Exchange Rate

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