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Finance Flashcards

Chapter 19 Per. Management

credit management following an individual plan for using credit wisely
20/10 Rule plan to limit the use of credit to no more than 20 percent of your yearly take-home pay, with payments of no more than 10 percent of monthly take-home pay
credit payment plan record of your debts and a strategy for paying them off
credit counseling service to help consumers manage their debt load and credit more wisely (no loans are given out though)
debt management plan (DMP) involves giving money each month to a credit counseling organization (this plan is for when you’re seriously in trouble); the org uses the money to pay your credit card debts etc.
debt negotiation program company you hire will call your creditors on your behalf and negotiate reductions in the amounts you owe
debt adjustment formal process of taking over your debt situation for a period of time, after which you will be free of debt
debt adjustment service plan finance company takes over your checkbook, paycheck, and bills and you are given only a small spending allowance
debt consolidation loan finance company loans you money to pay off your debts and then you make a monthly payment to the finance company instead of to your creditors. DEBTCEPTION.
foreclosure legal process where property used as collateral is sold to pay off a debt
credit repair process of reestablishing a good credit rating
bankruptcy legal process that relieves debtors of the responsibility of paying their debts or protects them while they try to repay
insolvent means you have insufficient income and assets to pay off your debts
secured loans backed by specific assets that the debtor pledged as collateral to assure payment
unsecured debt loan that is not backed by pledged assets
involuntary bankruptcy occurs when creditors file a petition with the court, asking the court to declare the debtor bankrupt
voluntary bankruptcy occurs when you file a petition with the federal court asking to be declared bankrupt
discharged debts debts erased by the court during bankruptcy proceedings
liquidation court sells the debtor’s assets and uses the proceeds to pay as much as the debt as possible
reorganization debtors may keep their property but must submit a payment plan to the court for repaying a substantial portion of their debts
Chapter 7 Bankruptcy aka straight bankruptcy; liquidation form of bankruptcy for individuals
Chapter 13 Bankruptcy reorganization (payment plan) form of bankruptcy for individuals; allows debtors to keep most of their property and use their income to pay a portion of their debts over three to five years
wage-earner’s plan some debts are totally discharged, while others are paid off as agreed within the payment period
reaffirmation agreement to pay debts that have been legally discharged
exempted property assets considered necessary for survival
Categories
Finance Flashcards

Corporate Finance Final

The flotation cost for a firm is computed as:A. the arithmetic average of the flotation costs of both debt and equity.B. the weighted average of the flotation costs associated with each form of financing.C. the geometric average of the flotation costs associated with each form of financing.D. one-half of the flotation cost of debt plus one-half of the flotation cost of equity.E. a weighted average based on the book values of the firm’s debt and equity. the weighted average of the flotation costs associated with each form of financing.
Jones & Co. is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products. What is this type of funding called? Venture Capital
What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public? Registration Statement
What is an issue of securities that is offered for sale to the general public on a direct cash basis called? General Cash Offer
What is a seasoned equity offering? sale of newly issued equity shares by a firm that is currently publicly owned
D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this? Firm Commitment
The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period. Quiet
Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale. The underwriters sold a total of 53,000 shares to the public. The additional 3,000 shares were purchased in accordance with which one of the following?A. Green shoe provisionB. Red herring provisionC. quiet provisionD. lockup agreementE. post-issue agreement Green Shoe Provision
If an IPO is underpriced then the: issuing firm receives less money than it probably should have.
With Dutch auction underwriting: all successful bidders pay the same price.
Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering. The investment firm is serving as a(n): underwriter.
What is a prospectus? a document that describes the details of a proposed security offering along with relevant information about the issuer
Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called? Rights Offer
Soup Galore is a partnership that was formed three years ago for the purpose of creating, producing, and distributing healthy soups in a dried form. The firm has been extremely successful thus far and has decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called? Initial Public Offering
Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called: Tombstones
Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights offering by this firm. As a result, Roy will most likely be subject to: Dilution
The difference between the underwriters’ cost of buying shares in a firm commitment and the offering price of those securities to the public is called the: Gross Spread
Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best describes this underwriting? Best Efforts
Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock? ex-rights date
Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year. What type of registration was this? Shelf Registration
Franklin Minerals recently had a rights offering of 1,000 shares at an offer price of $10 a share. Isabelle is a shareholder who exercised her rights option by buying all of the rights to which she was entitled based on the number of shares she owns. Currently, there are six shareholders who have opted not to participate in the rights offering. Isabelle would like to purchase the unsubscribed shares. Which one of the following will allow her to do so? oversubscription privilege
Direct business loans typically ranging from one to five years are called: Term loans
Trevor is the CEO of Harvest Foods, which is a privately-held corporation. What is the first step he must take if he wishes to take Harvest Foods public? gain board approval
Which one of the following statements concerning venture capitalists is correct? A. Venture capitalists assume management responsibility for the firms they finance. B. Exit strategy is a key consideration when selecting a venture capitalist. C. Venture capitalists limit their services to providing money to start-up firms.D. Most venture capitalists are long-term investors in a firm. E. A venture capitalist normally invests in a new idea and finances that idea until the newly-formed firm can issue an IPO. Exit strategy is a key consideration when selecting a venture capitalist.
Miller & Chase is offering $4 million of new securities to the general public. Which SEC regulation governs this offering? Regulation A
Which one of the following is a preliminary prospectus? A. tombstoneB. green shoeC. registration statementD. rights offerE. red herring Red Herring
What is the definition of a syndicate? a group of underwriters sharing the risk of selling a new issue of securities
The date on which a shareholder is officially listed as the recipient of stock rights is called the: holder-of-record date.
A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting. standby
The amount paid to an underwriter who participates in a standby underwriting agreement is called a(n): standby fee.
A group of five private investors recently loaned $6 million to Henderson Hardware for ten years at 9 percent interest. This loan is best described as a: private placement.
Suzie is a chemist who has been experimenting with fragrances in her home laboratory and feels that she now has three viable perfumes that could be successfully marketed. She knows a venture capitalist who has offered to finance her business to the point where she would be ready to begin the manufacturing and marketing stage. Which type of financing is Suzie being offered? Seed Money
Which one of the following is probably the most successful means of finding venture capital? A. internet searchesB. Dutch auctionsC. newspaper advertisementsD. personal contactsE. personal letters to venture capital firms Personal Contacts
Which one of the following statements concerning venture capital financing is correct? A. Venture capitalists desire shares of common stock but avoid preferred stock.B. Venture capital is relatively easy to obtain.C. Venture capitalists rarely assume active roles in the management of the financed firm.D. Venture capitalists often require at least a forty percent equity position as a condition of financing.E. Venture capital is relatively inexpensive in today’s competitive markets. Venture capitalists often require at least a forty percent equity position as a condition of financing.
Which of the following should be considered when selecting a venture capitalist? I. level of involvement II. past experiences III. termination of funding IV. financial strength I, II, III, and IV
All new interstate security issues are regulated by the: Securities Act of 1933.
The Securities and Exchange Commission: is concerned only that an issue complies with all rules and regulations.
Underwriters generally: receive less compensation under a competitive agreement than under a negotiated agreement.
With firm commitment underwriting, the issuing firm: knows up-front the amount of money it will receive from the stock offering.
Which of the following have been offered as supporting arguments in favor of IPO underpricing? I. Underpricing counteracts the “winner’s curse”. II. Underpricing rewards institutional investors for sharing their opinions of a stock’s market value. III. Underpricing diminishes the underwriting risk of a firm commitment underwriting. IV. Underpricing reduces the probability that investors will sue the underwriters. I, II, III, and IV
An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when: an IPO is undersubscribed.
When a firm announces an upcoming seasoned stock offering, the market price of the firm’s existing shares tends to: decrease.
The total direct costs of underwriting an equity IPO: can be as high as 25 percent for small issues.
Existing shareholders: may or may not have a preemptive right to newly issued shares.
To purchase shares in a rights offering, a shareholder generally just needs to: submit the required number of rights along with the subscription price.
The value of a right depends upon: I. the number of rights required to purchase one new share. II. the market price of the security. III. the subscription price. IV. the price-earnings ratio of the stock. I, II, and III only
Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000 shares outstanding. After the seasoned offering, you still owned 7,500 shares but the number of shares outstanding rose to 625,000. Which one of the following terms best describes this situation? percentage ownership dilution
Which one of the following statements concerning dilution is correct? A. Dilution of percentage ownership occurs whenever an investor participates in a rights offer.B. Market value dilution increases as the net present value of a project increases.C. Market value dilution occurs when the net present value of a project is negative.D. Neither book value dilution nor market value dilution has any direct bearing on individual shareholders.E. Book value dilution is the cause of market value dilution. Market value dilution occurs when the net present value of a project is negative.
Which one of the following statements is correct concerning the issuance of long-term debt? A. A direct long-term loan has to be registered with the SEC.B. Direct placement debt tends to have more restrictive covenants than publicly issued debt.C. Distribution costs are lower for public debt than for private debt.D. It is easier to renegotiate public debt than private debt.E. Wealthy individuals tend to dominate the private debt market. Direct placement debt tends to have more restrictive covenants than publicly issued debt.
Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent: 2 years.
Aaron’s Sailboats has decided to take the company public by offering a total of 120,000 shares of common stock to the public. The firm has hired an underwriter who arranges a full commitment underwriting and suggests an initial selling price of $25 a share with a 7 percent spread. As it turns out, the underwriters only sell 97,400 shares. How much cash will Aaron’s Sailboats receive from its first public offering? Total cash received = 120,000 × $25 (1 – 0.07) = $2,790,000
Nelson Paints recently went public by offering 65,000 shares of common stock to the public. The underwriters provided their services in a best efforts underwriting. The offering price was set at $16 a share and the gross spread was $2. After completing their sales efforts, the underwriters determined that they sold a total of 57,500 shares. How much cash did Nelson Paints receive from its IPO? Total cash received = 57,500 × ($16 – $2) = $805,000
Miller Motors has decided to sell 1,800 shares of stock through a Dutch auction. The bids received are as follows: How much will Miller Motors receive in total from selling the 1,600 shares? Ignore all transaction and flotation costs. Total cash received = 1,800 × $20 = $36,000
Bakers’ Town Bread is selling 1,200 shares of stock through a Dutch auction. The bids received are as follows: How much cash will Bakers’ Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs. Total cash received = 1,200 × $10 = $12,000
Webster Electrics is offering 1,500 shares of stock in a Dutch auction. The bids include: How much cash will Webster Electrics receive from selling these shares? Ignore all transaction and flotation costs. Total cash received = 1,500 × $22 = $33,000
You are a broker and have been instructed to place an order for a client to purchase 500 shares of every IPO that comes to market. The next two IPOs are each priced at $25 a share and will begin trading on the same day. The client is allocated 500 shares of IPO A and 100 shares of IPO B. At the end of the first day of trading, IPO A was selling for $23.50 a share and IPO B was selling for $29 a share. What is the client’s total profit or loss on these two IPOs as of the end of the first day of trading? Total profit = [500 × ($23.50 – $25)] + [100 × ($29 – $25)] = -$350
Richard has an outstanding order with his stock broker to purchase 1,000 shares of every IPO. The next three IPOs are each priced at $30 a share and will all start trading on the same day. Richard is allocated 1,000 shares of IPO A, 400 shares of IPO B, and 100 shares of IPO C. On the first day of trading IPO A opened at $31.50 a share and ended the day at $28.25 a share. IPO B opened at $31 a share and finished the day at $32 a share. IPO C opened at $36.50 a share and ended the day at $38.75 a share. What is Richard’s total profit or loss on these three IPOs as of the end of the first day of trading? Total profit = [1,000 × ($28.25 – $30)] + [400 × ($32 – $30)] + [100 × ($38.75 – $30)] = -$75
Two IPOs will commence trading next week. Scott places an order to buy 300 shares of IPO A. Steve places an order to purchase 300 shares of IPO A and 300 shares of IPO B. Both IPOs are priced at $20 a share. Scott is allocated 100 shares of IPO A. Steve is allocated 100 shares of IPO A and 300 shares of IPO B. At the end of the first day of trading, IPO A is selling for $22.70 a share and IPO B is selling for $18.60 a share. What is the difference in the total profits or losses that Scott and Steve have as of the end of the first day of trading? Scott’s profit = 100 × ($22.70 – $20) = $270 Steve’s profit = [100 × ($22.70 – $20)] + [300 × ($18.60 – $20)] = -$150 Difference = $270 – (-$150) = $420
Wear Ever is expanding and needs $12.6 million to help fund this growth. The firm estimates it can sell new shares of stock for $35 a share. It also estimates it will cost an additional $340,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a 7 percent spread. How many shares of stock must Wear Ever sell if it is going to have $12.6 million available for its expansion needs? Total value of issue = ($12,600,000 + $340,000)/(1 – 0.07) = $13,913,978.49 Number of shares needed = $13,913,978.49/$35 = 397,542.24 shares
Mountain Teas wants to raise $11.6 million to open a new production center. The company estimates the issue costs including the legal and accounting fees will be $440,000. The underwriters have set the stock price at $17.50 a share and the underwriting spread at 9 percent. How many shares of stock does Mountain Teas have to sell to meet its cash need? Total value of issue = ($11,600,000 + $440,000)/(1 – 0.09) = $13,230,769 Number of shares needed = $13,230,769/$17.50 = 756,044 shares
Outdoor Living needs $7.5 million to finance modifications to its production equipment because the design of its all-season tents has changed dramatically. The underwriters estimate that the firm could sell additional shares of stock at $14.50 a share with a 7.5 percent underwriting spread. This would be a firm commitment underwriting. The estimated issue costs are $125,000. How many shares of stock will Outdoor Living need to sell to finance this project? Total value of issue = ($7,500,000 + $125,000)/(1 – 0.075) = $8,243,243.24 Number of shares needed = $8,243,243.24/$14.50 = 568,500 shares
High Mountain Mining wants to expand its current operations and requires $3.5 million in additional funding to do so. After discussing this with key shareholders, the firm has decided to raise the necessary funds through a rights offering at a subscription price of $18 a share. The current market price of the firm’s stock is $22 a share. How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans? $3.5m/$18 = 194,444 shares
Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase additional rail cars and upgrade its maintenance facilities. How many shares of stock will the firm need to sell through this offering if the current market price is $34 a share and the subscription price is $31 a share? $14.2m/$31 = 458,064.52 shares
The Motor Plant wants to raise $21.4 million through a rights offering so it can modernize its facilities. The subscription price for the offering is set at $11 a share. Currently, the company has 2.6 million shares of stock outstanding at a market price of $12.50 a share. Each shareholder will receive one right for each share of stock they own. How many rights will a shareholder need to purchase one new share of stock in this offering? Number of rights issued = 1 × 2.6m = 2.6m; Number of shares needed = $21.4m/$11 = 1,945,454.55; Rights needed for each new share = 2.6m/1,945,454.55 = 1.34 rights
Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $34.80. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $33 a share. How many rights will a shareholder need to purchase one new share of stock in this offering? Number of rights issued = 1 × 540,000 = 540,000; Number of shares needed = $8.6m/$33 = 260,606.06; Rights needed for each new share = 540,000/260,606.06 = 2.07 rights
Jefferson Refining is issuing a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares in this offering are priced at $19 plus 3 rights. The current market price of the stock is $23 a share. What is the value of one right? Value per share excluding right = [$19 + (3 × $23)]/(1 + 3) = $22.00 Value of one right = $23 – $22.00 = $1.00
The stock of Cleaner Home Products is currently selling for $26.40 a share. The company has decided to raise funds through a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares being offered are priced at $25 plus five rights. What is the value of one right? Cost per share = [$25 + (5 × $26.40)]/(1 + 5) = $26.17 Value of right = $26.40 – $26.17 = $0.23
Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering. The firm will issue one right for each share of stock outstanding. The offering consists of a total of 860,000 new shares. The current market price of the stock is $38. Currently, there are 5.16 million shares outstanding. What is the value of one right? Subscription price = $27.52m/860,000 shares = $32 a share Number of shares issued = 1 × 5.16m = 5.16m Number of rights needed = 5.16m/860,000 = 6
You currently own 8 percent of the 3.5 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $28. One right will be issued for each share of outstanding stock. This offering will provided $9 million of new financing for the firm, ignoring all issue costs. Assume that all rights are exercised. What will be your new ownership position if you opted to sell your rights rather than exercise them personally? Number of shares owned = 0.08 × 3.5m = 280,000 shares Number of shares offered = $9m/$28 = 321,428.57 shares New ownership position = 280,000/(3.5m + 321,428.57) = 7.33 percent
Jennifer owns 14,000 shares of Calico Clothing. Currently, there are 1.6 million shares of stock outstanding. The company has just announced a rights offering whereby 200,000 shares are being offered for sale at a subscription price of $14 a share. The current stock price is $16 a share. Assume that Jennifer sells her rights and that all rights are exercised. What percentage of the firm will Jennifer own after the rights offering? New ownership percentage = 14,000/(1.6m + 0.2m) = 0.78 percent
Underwater Experimental is considering a project which requires the purchase of $498,000 of fixed assets. The net present value of the project is $22,500. Equity shares will be issued as the sole means of financing the project. What will the new book value per share be after the project is implemented given the following current information on the firm? Current market value per share = $936,000/60,000 = $15.60 Number of new shares needed = $498,000/$15.60 = 31,923.08 shares New book value per share = ($720,000 + $498,000)/(60,000 + 31,923.08) = $13.25
Wagner Trucking is considering investing in a new project that will cost $13 million and increase net income by 6.5 percent. This project will be completely funded by issuing new equity shares. Currently, the firm has 1.25 million shares of stock outstanding with a market price of $42 per share. The current earnings per share are $1.82. What will the earnings per share be if the project is implemented? New earnings per share = ($1.82 × 1.25m × 1.065)/[1.25m + ($13m/$42)] = $1.55
The Huff Co. has just gone public. Under a firm commitment agreement, Huff received $21.50 for each of the 6 million shares sold. The initial offering price was $23.65 per share, and the stock rose to $31.42 per share in the first few minutes of trading. Huff paid $1,260,000 in direct legal and other costs, and $390,000 in indirect costs. The flotation costs were what percentage of the funds raised? Net amount raised = 6m ($21.50) – $1,260,000 – $390,000 = $127,350,000 Total direct costs = $1,260,000 + ($23.65 – $21.50) (6m) = $14,160,000 Total indirect costs = $390,000 + ($31.42 – $23.65) (6m) = $47,010,000 Total costs = $14,160,000 + $47,010,000 = $61,170,000 Flotation cost percentage = $61,170,000/$127,350,000 = 48.03 percent
Atlas Corp. wants to raise $4 million via a rights offering. The company currently has 450,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $24 per share and will charge the company a 7 percent spread. Assume that you currently own 7,200 shares of stock in the company and decide not to participate in the rights offering. How much can you get for selling all of your rights? Net proceeds to firm = $24 (1 – 0.07) = $22.32 New shares offered = $4m/$22.32 = 179,211.47 Number of rights needed per share = 450,000/179,211.47 = 2.511 PEx = [$24 + 2.511($40)]/(1 + 2.511) = $35.44 Right value = $40 – $35.44 = $4.56 Sale proceeds = $4.56 (7,200) = $32,811.16
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Finance Flashcards

Finance Chapter 2 Cash Flow

The difference between the number of dollars that came in and the number that went out Cash Flow
Cash flow to Creditors + Cash flow to Stockholders =Cash Flow from Assets
Firm generates cash through activities and cash is either paid to creditors or paid out to owners of firm Cash Flow
Involves operating cash flow, capital spending, and change in net working capital Cash Flow from Assets
The total cash flow to creditors and cash flow to stockholders Cash Flow from Assets
Refers to cash flow that results from the firm’s day to day activities of producing and selling Operating Cash Flow
Expenses associated with firm’s financing of its assets not included Operating Cash Flow
Cash generated from a firm’s normal business operations Operating Cash Flow
Refers to the net spending on fixed assets Net Capital Spending
Purchases of fixed assets less sale of fixed assets Net Spending on Fixed Assets
The amount spent on net working capital The Change in Net Working Capital
Measured as the change in net working capital over the period being examined The Change in Net Working Capital
Represents the net increase or decrease in current assets over current liabilities The Change in Net Working Capital
Calculate Revenues minus Costs Operating Cash Flow
Do not include depreciation since it’s not a cash outflow Operating Cash Flow
Do not include interest because it’s a financing expense Operating Cash Flow
Do include taxes because they are paid in cash Operating Cash Flow
Add depreciation From Earnings before interest and taxes to get Operating Cash Flow
Subtract Taxes From Earnings before interest and taxes to get Operating Cash Flow
Tells us whether or not a firm’s cash inflows from business operations are sufficient to cover its everyday cash outflows Operating Cash Flow
Interest is deducted when net income is computed How the accounting definition differs from the finance definition of operating cash flow
Accounting’s definition of cash flow considers interest paid to be an operating expense, we treat as a financing expense How the accounting definition differs from the finance definition of operating cash flow
We do not subtract interest from Income How the accounting definition differs from the finance definition of operating cash flow
Money spent on Fixed Assets – Money received from sale of Fixed Assets =Net Capital Spending
Ending Net Fixed Assets -Beginning Net Fixed Assets+ Depreciation =Net Capital Spending
Net Investment in Fixed Assets is another name for it Net Capital Spending
Can be negative if the firm sold off more assets than it purchased Net Capital Spending
As firm changes its investment in current assets Its current liabilities will usually change as well
Ending Net Working Capital-Beginn Net Working Capital =Change in Net Working Capital
Operating cash flow less the amounts invested in fixed assets and net working capital Cash Flow from Assets
Operating Cash Flow-Net Capital Spending-Change in Net Working Capital =Cash Flow from Assets
Equals the sum of the firm’s cash flow to creditors and its cash flow to stockholders Cash Flow from Assets
Means that the firm raised more money by borrowing and selling stock than it paid out to creditors and stockholders Negative Cash Flow
Cash Flow from Assets Same as Free Cash Flow
Refers to cash that the firm is free to distribute to creditors and stockholders because it is not needed for working capital or fixed asset investments Free Cash Flow
Represents the net payments to creditors and owners during year Cash Flows to Creditors and Stockholders
Interest Paid -Net New Borrowing =Cash Flow to Creditors
Dividends Paid -Net New Equity Raised =Cash Flow to Stockholders
Current Long Term Debt-Previous Long Term Debt =Net New Borrowing
Sometimes called Cash Flow to Bondholders Cash Flow to Creditors
Current Common Stock & Paid in Surplus Account-Previous Common Stock &Paid in Surplus Account =Net New Equity Raised
Tells us how much stock the company has sold Common Stock and Paid in Surplus Account
Cash Flow from Assets should equal Cash Flow to Creditors and Stockholders To verify that the cash flow identity holds
The cash flow identity Cash Flow from Assets
Net Income is not the same bc depreciation and interest are subtracted out Operating Cash Flow
Negative means company raised more money in form of new debt and equity than it paid out for the year Cash Flow from Assets
When Net New Equity is positive Company issued new stock
When Net New Equity is negative Company repurchased stock
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Finance Flashcards

MBA Corporate Finance Quiz 2

A perpetuity differs from an annuity because:Select one:a. perpetuity payments vary with the rate of inflation.b. perpetuity payments vary with the market rate of interest.c. perpetuity payments are variable while annuity payments are constant.d. perpetuity payments never cease. e. annuity payments occur at irregular intervals of time. D. Perpetuity payments never cease.
Annuities where the payments occur at the end of each time period are called _____, whereas _____ refer to annuity streams with payments occurring at the beginning of each time period.Select one:a. ordinary annuities; early annuitiesb. late annuities; straight annuitiesc. straight annuities; late annuitiesd. annuities due; ordinary annuitiese. ordinary annuities; annuities due E. Ordinary annuities; annuities due
The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:Select one:a. cash period.b. net working capital period.c. payback period. d. profitability index.e. discounted payback period. C. Payback period
The net present value of a project is equal to the:Select one:a. present value of the future cash flows.b. present value of the future cash flows minus the initial cost. c. future value of the future cash flows minus the initial cost.d. future value of the future cash flows minus the present value of the initial cost.e. sum of the project’s anticipated cash flows. B. Present value of the future cash flows minus the initial cost.
Using the internal rate of return method, a conventional investment project should be accepted if the internal rate of return is:Select one:a. equal to the discount rate.b. greater than the discount rate. c. less than the discount rate.d. negative.e. positive. B. Greater than the discount rate.
What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent. Select one:a. -$1195.12 b. -$287.22c. -$1,350.49d. $204.36e. $797.22 A. -$1195.12
What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent?Select one:a. $6,395.31 b. $6,023.58c. $6,643.29d. $6,671.13e. $7,253.72 A. $6,395.31
Which one of the following statements is true?Select one:a. You must know the discount rate to compute the NPV but you can compute the IRR without having a discount rate. b. You must have a discount rate to compute, NPV, IRR, PI, and discounted payback.c. Payback uses the same discount rate as that applied in the NPV calculation.d. Financing projects can only ever have one IRR.e. Discounted payback is a better method than payback and is more frequently used in practice. a. You must know the discount rate to compute the NPV but you can compute the IRR without having a discount rate.
You are comparing two investment options, each of which will provide $15,000 of total income. Option A pays five annual payments starting with $5,000 the first year followed by four annual payments of $2,500 each. Option B pays five annual payments of $3,000 each. Which one of the following statements is correct given these two investment options?Select one:a. Both options are of equal value today.b. Given a positive rate of return, Option A is worth more today than Option B. c. Option B has a higher present value than Option A given a positive rate of return.d. Option B has a lower present value than Option A given a zero rate of return.e. Option A is preferable because it is an annuity due. b. Given a positive rate of return, Option A is worth more today than Option B.
You just won the lottery! As your prize you will receive $1,500 a month for 150 months. If you can earn 7 percent, compounded monthly, on your money, what is this prize worth to you today?Select one:a. $137,003.69b. $149,676.91 c. $137,962.77d. $148,104.26e. $150,723.76 B. $149,676.91
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Finance Flashcards

POLI 2500 Part 5: Global business, finance

Conditionality is the controversial practice of the __________, by which generally liberalizing political and economic reforms are required of countries agreeing to new loans. IMF
Trade in services includes ___________. Banking and insurance
A ________ would agree that a government’s most useful role is to interfere in economics only to regulate markets in order to help them function efficiently. That is, politics should serve the interests of economic efficiency liberal
Which groups oppose free trade because of its negative impacts? Labor and environmental groups (have had really sustained reasons for opposing free trade and its tied up with globalization more broadly; having to do with where MNCs set up, types of regulatory labor environments they looks for, natural resource extraction)
Explain what’s meant by the term interdependence w/ respect to world trade. Less likely to engage in conflict w/ states that they’re dependent on; much more costly to get the things they need through conflict than if they would just cooperate w/ each other
__________ think it is mutually beneficial for states to be interdependent and believe the goal is diminished or eliminated borders and a global system liberals
___________ believe power and economics are fundamentally entwined and economic classes determine power of the state marxists
_______________ believe that state retains primacy, sets economic structure and policy, and seeks to make gains. Views Interdependence as a negative mercantilists
__________ think interdependence is a good thing and that market should determine a lot of outcomes. liberals
_____________________ feel that global inequality is going to be the outcome of more global integration. They don’t think you can separate power and economics so wealthier people will also control economy. marxists, econ structuralists
nearly every state prints its own money and currency is a hallmark of ______________ state sovereignty
Because of the nature of sovereignty, the international economy is based on _____________, not a world currency. national currency
The rate at which one state’s currency can be exchangedfor the currency of another state exchange rate
The official rates of exchange for currencies set by governments; not a dominant mechanism in the international monetary system since 1973 fixed rate
The rates determined by global currency markets in which private investors and governments alike buy and sell currencies. floating
Most exchange rates are expressed in terms of the world’s most important . currencies
Some inflation is expected, even in a _________ economy healthy
A little _________ means people are getting jobs and wage increases so people are rising prices of goods, which indicates a healthy economy. Small levels of inflation can be handled and are probably good. inflation
If a state has inflation, currency buys __________ than it once didbecause prices for goods are high at a sustained level less
An extremely rapid, uncontrolled rise in prices (meaning very large, yet constantly changing, amounts of currency are needed to buy things, including day-to-day goods) hyperinflation
Hyperinflation can easily get out of control and there is not much government can do besides_________________. Indicative of major issues in economy. print more money
Private investors may buy and sell global currency, which can push up the value of it but if a lot of people are selling it, it can go down. They have some blame for 2008 recession. More regulations have been placed since. short term speculation
States may want to manipulate the value of their currencies. this is called de-valuation
A unilateral move to reduce the value of a currency by changing a fixed or official exchange rate de-valuation
devaluation is at the heart of US-____________ econ conflict recently China
An institution common in industrialized countries whose major tasks are to maintain the value of the state’s currency and to control inflation. central bank
hard currency stockpiles kept by states reserves
The first wave of globalization took place during what time period? 1870-1914
Liberalists’ goals include diminished or ______________ borders between states and a move toward a global economic system eliminated
The _______ was designed to be a forum for dialogue and display of unity among major industrialized states on economic issues G7
The _________ is the central bank of the United States. federal reserve
the idea of a central bank is to divorce the institution from the government toallow decisions not to be influenced by politics
central banks set the discount rate, or the ___________ the government charges when it loans money to private banks interest rate
Central banks control sizable reserves of _____________, but are constrained by the limited share of the world’s money they own. currency
______________ provides loans, credits, grants, technical assistance, and policy advice to developing states to promote economic development the world bank
_____________ coordinates currency exchange, balance of international payments, and national accounts of states IMF
Which of the following best characterizes the “new phase” or “third wave” of globalization that has been proposed by some? Increasing trade in digital goods and services, such as e-commerce and movement of data
The head of the World Bank is always ____________, while the head of the IMF is always ______________. American, European
Regimes and institutions have developed to create and implement norms of behavior in international ___________ interactions economic
Both were dedicated to post war reconstruction after WW2. world bank, IMF
The Bretton Woods system created __________________ and ______________ and set up the dominance of the US dollar backed by ____________ World bank, IMF, gold
goal of world bank eradicate extreme poverty, promote incomegrowth
two components of world bank IDA (International Development Agency), IBRD (International Bank for Reconstruction and Development)
The IMF looks after the stability of the international monetary system
The IMF created the closest thing to _____________. world currency
The IMF coordinates ___________ exchange, balance of internationalpayments, and national accounts. it also gives _________ and assists with capacity development currency, loans
The __________ Consensus has been suggested as a possible replacement for the Washington Consensus, which is a model of market-oriented, liberalizing reform for development assistance traditionally followed by global financial institutions such as the IMF and World Bank. Beijing
How have the IMF and the World Bank changed over the last decade? Developing states are now more represented in terms of quotas and policy priorities in these organizations.
The G20 represents what portion of the world economy or global economic output: 85%
_________ are companies based in one state with affiliated branches of subsidiaries operating in other states. MNCs
the legal avenue for MNCs to pursue grievances against states for breaking agreements. investor state dispute settlement
Investment in tangible goods such as factories and office buildings (including ownership of a sizable fraction of a company’s total stock). foreign direct investment
Many MNCs may fear _____________ by host states, in which the companies’ assets and wealth are taken by the state in violation of the investment agreement with their host states. nationalization
How does the IMF assist countries in balancing their economies? By allowing states to borrow against their deposits of financial reserves and repay the loans in subsequent years
.In recent years, China has maintained a low currency value, relative to other states, in order to ____. Promote exports and boost export-related industries
The IMF looks at states’ ___________ to determine the monetary position of state balance of payments
Building a factory in a foreign country is an example of __________. Foreign direct investment (want a physical footprint in another country)
What is the international business environment most conducive to the creation of wealth by MNCs? Stable international security so investments aren’t threatened
Industrialized states turn __________ policy over to semiautonomous central banks to ensure discipline in printing money monetary
Some multinational corporations sell goods, whereas others, such as McDonald’s sell _________. services
What institutions were created at Bretton Woods? What was Bretton Woods designed to do? brought states together, sets up post war international economic system, creation of IMF and World Bank, and was designed to regulate currency/markets, give out loans for war devastated countries now for developing countries
In the world-system, the regions that mostly manufacture goods are the __________. Industrialized regions
A lack of technical and administrative skill levels was one challenge faced by former colonies ______. Upon their winning independence
Both IMF and world bank have been criticized as being part of Washington consensus
in the ___________, you invest in capital stock and that gives you more votes. Its all based on how much you invest in these institutions, the more you invest the greater your quota will be and more of a vote you will have. world bank
summary of all the flows of money into and out of a country balance of payments
The ______ is the biggest vote share in both institutions. Agenda for these institutions will favor wealthy states, reforms on vote share system have been brought up because developing states need a say too. US
Investment in tangible goods such as factories and office buildings (including ownership of a sizable fraction of a company’s total stock) FDI
stocks and bonds portfolio investment
capital flows FDI, portfolio investment
World bank and IMF both based in DC and have __________ voting system weighed
3 types of balance of payments current account, flows of capital, changes in reserve
The Washington consensus tales a ____________ approach to helping developingstates market-oriented
IMF and World Bank scorecards since creation 1) create stability, access to capital for WWII states- Success2) promote economic development- Mixed success3) integrate economies into capitalism- Mostly success
Liberalizing reforms often tied to agreements for assistance in Washington consensus Privatization, Floating currency, Ending subsidies, Opening economy to trade, investment
Individual states and _______ can have great influence overglobal economy IGOs
types of MNCs Industrial (most common; US dominance; ExxonMobil)Financial corporations (banks most often; Visa)Services (US dominance; McDonalds, airlines)
A world currency created by the International Monetary Fund (IMF) to replace gold as a world standard. Valued by a “basket” of national currencies, the SDR has been called “paper gold.” special drawing right
a standardized set of economic and political reforms asked of states in return of their financial aid. Washington consensus
FDIs represent long term investments in a state
controversy over MNCs centered around MNC power is increasing and Many MNCs are larger than the economies of entire states
______________________ feel MNCs generate wealth across the globe and should be welcomed by states liberalists
_______________ feel MNCs will increase regulatory “race to the bottom,” inequality between Global North-Global South econ-structuralists
MNCs must follow laws of host states
The _______ has never lost a Investor-State Dispute Settlement (ISDS) US
National govts must comply with rulings of the Investor-state dispute system
printing and circulating money monetary policy
taxation, spending (federal government) fiscal policy
monetary policy orgs are ______ and _____. Fiscal policy orgs are _____ and _____ IMF, central banks. G7, G20
major industrialized economies G7
The G7 used to be G8 but ___________ got yeeted Russia
G7 is a conference for heads of state/government, and is more of a __________ for dialogue than governance. It is intended to show unity among developed economies towards global ______________. forum, economic issues
world’s most powerful developed anddeveloping economies G20
Since 2008, G20 meet as heads of state in annual summits, where most work gets done on ___________ and in informal meetings sidelines
G20 meetings produce “_______________” that focus on economic growth, trade, and social, political issues Action plans
G7 meetings focus on _________ states developing
Globalization is characterized by greater levels of _____________ and cooperation. integration
Last meeting in Germany showed strain in ______ and was characterized by a split between protectionist, anti-protectionist states and a split between liberal, illiberal states G20
The last G20 meeting had more ________ leaders, and the agenda was refocused to address that. populist
At G20 meeting, the US was isolated on climate change
China, Germany filling US leadership void in G20. China would like to lead IMF
Financial integration has advantages, but carries risks as well: an economic crisis in one state can spread to another and another.
Globalization has led to momentous changes in many areas of international relations.Global financial markets and institutions are as ____________ as they have ever been. integrated
because of globalization, some industries will not be able to compete with foreign competitors, people will lose jobs and economies may be depressed as a result. When people look to blame someone for this, _____________ can be sparked and populist rhetoric- makes states want to focus on only themselves. This can manifest in resentment against immigrants (xenophobia) and the states where jobs seem to be going. nationalism
We are in the _____ wave of globalization and have already seen tremendous changes in economy, politics, etc. 2nd
looking at globalization negatively, while it may benefit some states it does not and cannot benefit everyone, has bad impact of state sovereignty, you should try to withdraw from greater integration. Protect yourself from drawbacks drawbridge up
net benefit is bigger than any of the downsides. Globalization on average benefits states and cannot be reversed. drawbridge down
globalization provides economic benefits drawbridge down
globalization has hurt states’ economies drawbridge up and its own the rise
New players in 3rd wave Digital technology (Estonia) Rise of China, emerging economies Small business competing with MNCs
benefits of 3rd wave Innovation, productivity
drawbacks of 3rd wave if moving into e commerce there will still be people who will lose jobs, some potential economic depression, states who cannot create digital footprint will fall behind, developed states most likely to offer higher educated workers
If a multinational corporation such as General Motors were to make an agreement with the developing state of Guatemala to lease land for an initial term of 15 years and build a manufacturing facility for automotive production, this would be an example of what type of investment? FDI
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Finance Flashcards

Personal finance consumer purchasing housing decisions

Express What type of warranty is specific agreement created by the seller or manufacturer
Intended use of a Howard recently became aware of implied warranty that exists for consumer purchases and implied warranty exists as a result of
High cost and low chance of need A major criticism of service contract is
Returning to Most consumer complaints are resolved
Pam is playing to you the service of the Better Business Bureau a major purpose of the Better Business Bureau is to Result consumer complaints
Mediation The process of resolving consumer complaints of the use of a third party who suggested solution to discussion in the goshi ation
Legally binding Arbitration differs from mediation in that arbitration is
, class action suit A group of people to be paid out of legal action
The Federal Trade CommissionRequires Used cars be informed if the vehicle comes with a warranty
Maintenance It’s considered a variable operating expense of an automobile
Lease payments An advantage of leasing a vehicle is that the lease payments are likely to be lower than the finance payments
Property taxes
Lower initial cost Brenda plans to rent instead of buying her house what advantage of renting will burn during counter
Increase property value A common financial benefit of homeownership is
Increased family income Would increase the amount that a person could afford on spending at home
25 Todd is applying for a hundred thousand mortgage he can get a 600 monthly payment for principal and interest at no points or a 520 monthly payment would do. How many months will it take Todd to cover the cost of the discount. If it takes a lower monthly payment
Tax benefits What is one of the advantages of buying a home
Security deposit The costs associated with renting
Title An example of a closing cost
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finance 300 exam 3

total dollar return dividend income + capital gain (or loss)
total cash if stock is sold initial investment + total return
historical records on 5 important types of financial investments 1. large company stocks 2. small company stocks3. long term corporate bonds 4. long term US government bonds 5. US treasury bills
large company stocks – common stock portfolio based on S&Ps 500 index- contains 500 of the largest companies (in terms of total market value of outstanding stock) in the US
small-company stocks – portfolio composed of stock corresponding to the smallest 20% of the companies listed on the NYSE- measured by market value of outstanding stock
long-term corporate bonds high quality bonds with 20 years to maturity
long term US government bonds US government bonds with 20 years to maturity
US treasury bills treasury bills (t bills) with a one-month maturity
risk premium the excess return required from an investment in a risky asset over that required from a risk free investment EX:- take the average return on risk free asset (treasury bill) and subtract it from the average return on your investment investment average return: 12.1% US treasury bill average return: 3.5% Risk premium on investment = 12.1 – 3.5 = 8.6%”Risky assets, on average, earn a risk premium”
variance – the average squared difference between actual return and the average return – measure of volatility
standard deviation – the positive square root of variance – measure of volatility
geometric average return – the average compound return earned per year over a multiyear period – what you actually earned per year on average, compounded annually- short-run projected wealth levels are probably pessimistic EX:- you buy stock for $100 – first year, it falls to $50 – second year, it grows to $100 Geometric average return: 0%
arithmetic average return – the return earned in an average year over a multiyear period – what yo earned in a typical year- long-run projected wealth levels are probably optimistic `EX:- you buy stock for $100 – first year, it falls to $50 – second year, it grows to $100 Arithmetic average return: 25% (-50% +100%) / 2 = 25%
calculating geometric average return ((1+R1) (1+R2) (1+RT)) ^1/T – 1
blume’s formula – combining arithmetic average return and geometric average return R(T) = (T-1)/(N-1) geo average + (N-T)/(N-1) arithmetic average******supposedly useless according to LEPLANT
efficient capital market – a market in which security prices reflect available information – when current market prices fully reflect available information
efficient markets hypothesis (EMH) – the hypothesis that actual capital markets, such as the NYSE, are efficient – although inefficiencies may exist, they are relatively small and not common
three forms of market efficiency – weak form efficient – semi-strong form efficient – strong form efficient the difference between these forms relates to what information is reflected in prices
strong form efficient (form of market efficiency) (category 3) – ALL information of EVERY kind is reflected in stock price – extreme case – in this market there is no such thing as inside information- if strong form efficient, then investors could not earn abnormal returns regardless of info they possess- empirical evidence indicates that markets are NOT strong form efficient and that insiders could earn abnormal returns
semi-strong form efficient (form of market efficiency) (category 2) – the most controversial form – all PUBLIC information is reflected in the stock price (it instantaneously adjusts) – investors cannot earn abnormal returns by trading on public info – implies that fundamental analysis (publicly traded info) will not lead to abnormal returns
weak form efficient (form of market efficiency) (category 1) – at a minimum, the current price of a stock reflects the stock’s own past prices and volume – if weak form efficient, investors cannot earn abnormal returns by trading market info (because everyone has the same info)- implies that technical analysis (price and volume) will not lead to abnormal returns – empirical evidence indicates that markets are generally weak from efficient
the geometric average will be less than the arithmetic average unless all the returns are equal – when they differ, the geometric average will be lower than the arithmetic average – the arithmetic average is overly optimistic for long term horizons
the importance of financial markets slide from lecture (laplante loves this slide) Financial markets allow companies, governments and individuals to increase their utility – savers have the ability to invest in financial assets so that they can defer consumption and earn a return to compensate them for doing so – borrowers have better access to the capital that is available so they can invest in productive assets Financial markets also provide us with information about the returns that required for various levels of risk
fisher equation (1+r) = (1+R)(1+h) h = forward looking
risk premia risk premia = ri – rf
properties of an efficient market 1. prices respond to new information instantaneously 2. prices adjust to their correct value
overreaction and correction: reactions to new information – when people overestimate how good the “news” is – you want to dump your stock as soon as you realize it to avoid a price drop
delayed reaction: reactions to new information – takes a while to get info, figure out what it means, and process it and calculate the new stock price – you want to execute a trade during this time
if you’re strong from, you’re also weak form and semi strong form if you’re semi-strong form, you’re also weak form
misconceptions about EMH – efficient markets do no mean that you can’t make money – they do mean that, on average, you will earn a return that is appropriate for the risk undertaken and there is not a bias in prices that can be exploited to earn abnormal returns – market efficiency will not protect you from wrong choices if you do not diversify: you still dont want to put all your eggs in one basket- you get rewarded for the risk you bear that has nothing to do with the info you have (stock > t bills)
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Consumer Finance Chapter 9: Disability and long-term care insurance

who needs disability insurance anyone who relies on income from a job
why are so many people without disability insurance price
most policies define people as disabled if what? they cant perform the duties of their own occupation or perform the duties of any occupation for which they are reasonably suited
short-term disability (STD) a disability policy that provides benefits over a given period, generally from 6 months to 2 years
long-term disability (LTD) a disability policy that provides benefits until the indiv. reaches an age specified in the contract, generally 65 or 70, or for the insured’s lifetime
waiting or elimination period the period after the disability during which no benefits occurequivalent to a deductible in a health care insurance policy-1 month to 6 month waiting period-longer the period, the cheaper
waiver of premium provision a disability insurance provision that allows your insurance to stay in force should you become unable to work because of disability or illness
rehabilitation coverage a disability insurance provison that allows payments for vocational rehabilitation, allowing the policyholder to be retrained for employment
long-term care insurance insurance that’s aimed at covering the costs associated with long-term nursing home care, commonly associated with victims of stroke, alzheimer’s disease, or those who can simply no longer manage to live on their own
long-term care insurance is generally not available for who? those under 40 years of age
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Finance Flashcards

Finance Chapter 9 Quiz

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the: payback period.
The length of time required for a project’s discounted cash flows to equal the initial cost of the project is called the: discounted payback period.
An investment’s average net income divided by its average book value defines the average: accounting return.
The discount rate that makes the net present value of an investment exactly equal to zero is called the: internal rate of return.
A situation in which accepting one investment prevents the acceptance of another investment is called the: mutually exclusive investment decision.
The internal rate of return (IRR): I. rule states that a project is acceptable when the IRR exceeds the required rate of return.II. ignores the initial investment in a project.III. is the rate that causes the net present value of a project to equal zero.IV. can effectively be used to analyze all investment scenarios. I and III only
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: accepted because the NPV is greater than 0.
Courtney is analyzing two mutually exclusive projects of similar size and has compiled the following information based on her analysis. Both projects have four year lives. Courtney has been asked for her best recommendation given this information. Her recommendation should be to accept: project B and reject project A based on their net present values.
You are considering the following two mutually exclusive projects. The required rate of return is 10.75 percent for project A and 12 percent for project B. Which project should you accept and why? project A; because its NPV is about $796 more than the NPV of project B
An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 14 percent? Why or why not? Yes; The IRR exceeds the required return by about 1.08 percent.
A project produces annual net income of $11,500, $13,700, and $16,900 over the three years of its life, respectively. The initial cost of the project is $257,000. This cost is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 6.75 percent? 10.92 percent
It will cost $3,500 to acquire a small hot dog cart. Cart sales are expected to be $1,500 a year for three years. After the three years, the cart is expected to be worthless as that is the expected remaining life of the cart. What is the payback period? 2.33 years
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Finance Flashcards

CIS 243- Ch. 3

False Customer service falls under the category of supporting activities in a value chain.
Firm infrastructure ________ includes general management, finance, accounting, legal, and government affairs.
True According to Porter, all information systems in the organization must facilitate the organization’s competitive strategy to be effective.
False According to Porter’s five forces model, a company is profitable if all the five forces are strong.
True Business processes implement value chains or portions of value chains.
accumulates costs Each stage of the value chain not only adds value to the product but also ________.
False Firm infrastructure excludes general management, finance, accounting, legal, and government affairs.
Customers are likely to switch to competitors’ products Which of the following is true if the threat from a substitute is strong?
True The support activities in the generic value chain facilitate the primary activities and contribute only indirectly to the production, sale, and service of the product.
False Procurement falls under the category of primary activities in a value chain.
True Establishing alliances with other organizations promotes product awareness.
True Value chain analysis has a direct application to manufacturing businesses.
False The strength of bargaining power of the customer does not depend on the availability of substitutes.
False A business that selects a differentiation strategy will always structure itself around least-cost activities.
True Value chains exist in service-oriented companies.
True The availability of substitutes plays a role in determining the bargaining power of suppliers for industrial clients.
True The threat of substitution in Porter’s model concerns the danger of customers taking their business elsewhere.
False An information system can be part of a product, but it cannot provide support for a product or service.
False Receiving, storing, and disseminating inputs to a product is an operations management activity.
False Each stage of the generic value chain reduces the value of the product.
the lack of internal technical expertise Substitutions may not be viable options for some industrial clients due to ________ or physical distance limitations.
False Porter originally developed the five forces model in order to understand organizations’ workforce.
True An organization can choose to either minimize cost or maximize differentiation to gain a competitive advantage.
strategy According to Porter, to be effective, an organization’s goals, objectives, culture, and activities must be consistent with the organization’s ________.
True If the costs of switching to another vendor are high, then the bargaining power of the customer is low.
False It is easier to calculate the margin of supporting activities than primary activities.
True A company uses the outbound logistics activity to deliver the finished product to a customer.
False Manufacturing systems avoid linkages to reduce inventory costs.
True Organizations analyze the structure of their industry and use that analysis to formulate a competitive strategy.
outbound logistics Which of the following primary activities describes collecting, storing, and physically distributing products to buyers?
True Each value chain is supported by one or more business processes.
False Enhancing existing products and services is a competitive advantage created by the implementation of business processes.
False Porter’s definition of technology is narrow because it includes only research and development.
customers The bargaining power of ________ is one of the five competitive forces in Porter’s five forces model.
True If a value chain’s margin is negative, the company must reduce the cost of the value chain.
False Porter identified the bargaining power of competitors as one of the forces in his five forces model.
False Two companies with the same value chain activities will have the same business processes.
True Competitive strategy determines an organization’s value chain.
True A business with a differentiation strategy will add cost to an activity only as long as the activity has a positive margin.
True Surplus of a product serves as an example of weak force for the bargaining power of suppliers.
The availability of raw materials is limited Which of the following statements describes a scenario in which the bargaining power of a supplier is strong?
True Porter’s model of business activities includes linkages, which are interactions across value activities.
focusing on product differentiation within an industry-segment Which of the following competitive strategies does a company follow if it produces a uniquely formulated anti-aging face cream targeted at women above the age of forty?
enhance existing products or services Which of the following is a product implementation principle of competitive advantage?
False Inbound and outbound logistics are the primary value generators in a service-oriented company.
False Focused differentiation is a strategy in which a product is unique and is used by a wide range of consumers.
False Typically, as an individual, a customer has substantial bargaining power over a large manufacturing industry.
False The difference between the value that an activity generates and the value of its competitor is called the margin.
False Support activities are business functions that relate directly to the production of the organization’s products or services.
sales and marketing Which of the following primary value chain activities induce buyers to purchase a product and provide a means for them to do so?
False Raising barriers to market entry is a product implementation principle.
assisting customers with the use of the product Which of the following statements describes a customer service activity?
True Value chain activities are not dependent on the competitive strategies used by organizations.
??? Which of the following statements is true of business processes?
threat from the substitute is strong If the price of an alternative is lower than the price of an existing product, and customers perceive similar benefits from both the products, then the ________.
competitive An organization responds to the structure of its industry by choosing a ________ strategy.
adds cost to an activity, provided it has a positive margin A business that selects a differentiation strategy ________.
structure The competitive strategy followed by an organization is derived from the ________ of its industry.
create sufficient value to cover their costs According to Porter, the processes and systems in an organization pursuing differentiation strategy must ________ to avoid negative margins.
margin The difference between the value that an activity generates and the cost of the activity is called the ________.
enhance existing products or services Which of the following is a product implementation principle of competitive advantage?
delivering products to consumers Which of the following is a primary activity in the value chain?
bargaining Porter’s five competitive forces can be grouped into forces related to competition and forces related to supply chain ________ power.
the threat posed by Roger’s Landscapes, a new competitor e’s Lawn Services decides to offer two free mowing services for all customers who booked garden landscaping in the fall. Which of the following forces is Simpson’s Lawn Services addressing?
value chain The competitive strategy of an organization determines its ________.
potential profitability of an industry Porter developed the five forces model to help organizations determine the ________.
increment of purchasing costs Which of the following is least likely to be an outcome of organizations forming alliances with each other?
when switching costs are high In which of the following situations is the strength of competitive forces low?
establishing alliances with other organizations Which of the following is a process implementation principle of competitive advantage?
It is a network of value-creating activities. Which of the following is true of a value chain?
??? A manufacturing system uses sales forecasts to plan production. It uses the production plan to determine raw material needs and then uses the material needs to schedule purchases. This ultimately leads to reduced inventory costs. Which of the following is being used to reduce the inventory cost?
linkages Porter’s model of business activities includes ________, which are interactions across value activities.
value Porter defined ________ as the amount of money that a customer is willing to pay for a resource, product, or service.
the availability of a substitute is limited The bargaining power of a customer is weak if ________.
focused low cost A firm introduces a new range of laptops that concentrate on delivering good graphics performance. Which of the following competitive strategies has the firm adopted if these laptops have relatively low prices?
launching a unique product targeted at a section of consumers Which of the following is an example of a competitive strategy employed by a firm?
Negotiation of prices is considered as a supporting activity. Which of the following is true of supporting activities?
how sustainable that profitability will be In Porter’s five forces model, the intensity of each of the five forces determines the characteristics of the industry, how profitable it is, and ________.
saving the delivery addresses Jupiter Shop is an online store. Customers have to create an online account to purchase products. The purchased products are delivered free of cost. The address of delivery is stored, so that customers can choose the same address for future purchases. Jupiter Shop features seasonal discounts and exchange offers. It also accumulates redeemable points for regular shoppers. Which of the following statements describes the use of information systems (IS) by Jupiter Shop to lock in customers?
locking in customers Which of the following strategies is also called establishing high switching costs?
They can capture the market with new and innovative services. Which of the following is true of new entrants?
coffee planters during a season of frost that decreases production Which of the following describes suppliers in a position of strong bargaining power?