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Finance Flashcards

Finance 3100 5-6 Chapter Test

A real rate of return is defined as a rate that has been adjusted for which one of the following? Inflation
The term structure of interest rates represents the relationship between which of the following? Nominal rates on Treasury Securities and time to maturity
Changes in interest rates affect Bond Prices. What compensates bond investors for this risk Interest rate risk premium
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? Default risk premium
Which one of the following premiums is paid on a corporate bond due to its tax status? Taxability premium
Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? Liquidity premium
Generally speaking, bonds issued in the US pay interest on an ___ basis? Semi-annual
An upward-sloping term structure of interest rates indicates: The nominal rate is increasing even though the real rate is constant as the time to maturity increases
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: Downward-sloping
Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? Interest rate risk premium
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected Default risk premium
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities? Maturity
If your nominal rate of return is 8.4% and your real rate of return is 3.2%, what is the inflation rate? 5.04%
Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? Real rate
You invest 15,000$ today, compounded monthly, with an annual interest rate of 8.25%. What amount of interest will you earn in one year? 1,285.38$
Which one of the following bonds is most apt to have the smallest or no liquidity premium? Treasury bill
T or F: Reducing principal at a faster pace increases the overall interest paid on a loan? False
T or F: Reducing principal at a faster pace reduces the overall interest paid on a loan? True
T or F: The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is higher True
T or F: Monthly interest on a loan is equal to the beginning balance times the periodic interest rate? True
What happens if you increase your monthly payment above the required loan payment? You can significantly reduce the number of payments needed to pay off the loan
Nominal interest rates are roughly speaking the sum of two major components. These components are ____ The real interest rate and expected inflation
The Fisher Effect tells us that the true nominal rate is actually made up of three components. These three components are ___ The real rate, the inflation rate, and the product of the real rate and inflation rate
T or F: The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands False
Which of the below is not a major component of the term structure of interest rates? Default risk premium
You have a 30 year fixed rate mortgage at an annual rate of 6.5%. Knowing that your mortgage payments are monthly, compute the effective annual rate that you are being charged on your mortgage 6.7%
Atlanta Markets has a semi-annual bond outstanding with a 9% annual coupon rate and a 9.57% yield to maturity. If the current rate of inflation is 2.3%, what is the real rate of return on this bond? 7.11%
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Finance Flashcards

Finance 3003Chapter 8

International Rate of Return The discount rate at which NPV equals zero
The discount rate used to value capital investments is often referred to as ________. Opportunity Cost of Capital
A positive NPV investment _______________ which a negative NPV investment ____________________ builds shareholder value; destroys shareholder value
Since a risky dollar is worth less than a safe one, returns for risky projects must be ____________ than those of a risk-free investment. higher
What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6%? (Be sure to record initial investment as a negative number.) $5.94
If two projects (investments) A and B are said to be mutually exclusive then we know that the firm ______________ must choose to invest in either A or B, but not both
When choosing mutually exclusive projects, choose the one that offers the ____________________ highest NPV
A project has an initial investment of $125,000 and cash flows of $50,000 per year for 3 years. What is the project’s internal rate of return (IRR)? 9.7%
A projects IRR measures the _________ whereas the opportunity cost of capital is equal to the _________________. profitability of a project; return offered by equivalent-risk investment in the capital market.
Under which situations should the IRR decision rule be avoided? Mutually Exclusive ProjectsMultiple Rates of ReturnA project NPV does not decline smoothly as discount rate increases
The NPV rule states that managers increase shareholder wealth by: accepting all projects with a positive NPV
A project with an initial investment of $5 million and cash flows for 6 years of $1.5 million per year. What is the project’s internal rate of return (IRR)? 19.9%
Profitability Index (PI) Formula NPV/Initial Investment
When the firm’s budget is limited, then the firm should select the project with the ______________ highest PI ratio
The limit set on the amount of funds available for investment is referred to as: capital rationing
Capital rationing that is imposed by top management of a firm is called ___________ rationing. _____________ rationing occurs when a firm cannot raise the money it needs from outside sources. Soft, Hard
In simple cases of capital rationing, the _____________ can tell a firm which projects to accept Profitability index (PI)
What are problems that managers may encounter when deciding between mutually exclusive projects? When equipment should be replacedThe choice between short and long-lived equipmentThe timing of investments
Making the choice to invest today or to postpone that investment to a future date is a choice between mutually exclusive projects. When making this choice, what is the correct criterion to use? Choose the investment date that produces the highest NPV today
The cash flow per period with the same present value as the cost of buying and operating a machine is called the: Equivalent annual annuity
Equivalent annual annuity formula (PV of costs)/(# of years annuity factor)
When comparing investments in assets with different lives you should: select the project with the lowest equivalent annual annuity of costs
A machine that costs $20,000 today has annual operating costs of $1,500, $1,600, $1,700, and $1,800 in each of the next four years. The discount rate is 10 percent. The PV of costs is _________ and the equivalent annual annuity is __________. $25,192.61; $7,947.53
what are the Investment criterion methods most used by firms NPVIRR
The IRR rule specifies that a firm should select any project whose IRR is ___________ the firm’s ____________ higher than; opportunity cost of capital
What are three limitations of the Payback Rule for accepting projects? Gives equal weight to all cash flows arriving before the cutoff period Biases the firm against long-term projects in favor of short-term onesDoes not consider cash flows after the payback period
What capital budgeting decision method finds the present value of each cash flow before calculating a payback period? Discounted payback period
True or False: the payback rule states that a project should be accepted if its payback period is greater than a specified cutoff period False: payback period is LESS than a specified cutoff period
The payback period for a project can best be defined as: the length of time before you can recover you initial investment
The rate of return rule states that a firm should invest in any project offering a rate of return that is higher than the: opportunity cost of capital
Which of the following is the capital investment decision criterion that will always lead management to make the value-maximizing choice? NPV
True or false: when choosing among mutually exclusive projects, choose the one that offers the highest NPV True
When evaluating a single project for acceptance, the NPV and IRR decision rules will give the same result when ______________ the graph of NPV versus discount rate declines smoothly as discount rate increases
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Finance Flashcards

Personal Finance-Chapter 11

Emergency Fund an amt of money you can obtain quickly in case of immediate need
Line of Credit a short term loan that is approved before the money is actually needed
Seven steps to survive a financial crisis/make sure financial affairs are in order Establish a larger than usual emergency fundKnow what you oweReduce SpendingPay off credit cardsApply for a line of credit at your bank, credit union, or financial institutionNotify credit card companies and lenders if you are unable tomake paymentsMonitor the value of your investments and retirement accts
how long can a bankruptcy or going bankrupt remain on your credit report? Up to ten years
What are the employer sponsored retirement accounts? 401(k) or 403(b)
What does safety in an investment mean? Minimal risk or loss
Speculative investment high-risk investment made in the hope of earning a relatively large profit in a short amount of time
how should risk and investment be related? The potential return on any investment should be directly related to the risk the investor assumes
inflation rise in the general level of prices
If values of investments decrease overall interest rates increase pg 258
Interest rate risk is associated with preferred stocks or government/corporate bonds resulting in changes in the interest rates in the economy
how does the govt reduce interest rate risk inflation protected bonds
most conservative investments passbook savings, accounts, certificates of deposit, securities by u.s. govt
Liquidity ability to buy or sell an investment quickly w/o substantially affecting the investments value
Asset allocation process of spreading your assets amoung several different types of investments to lessen risk
government bond written pledge of a government or a municipality to repay a specified sum of money, along with interest
municipal bond debt security issued by a state or local government
general obligation bond bond backed by the full faith, credit, and unlimited taxing power of the government that issued it
revenue bond bond that is repaid from the income generated by the project it is designed to finance
Corporate bond corporations written pledge to repay a specified amt of money with interest
maturity date for a corporate bond, the date on which the corporation is to repay the borrowed money
bond indenture a legal document that details all of the conditions relating to a bond issue
trustee financially independent firm that acts as the bondholders representative
debenture bond that is backed only by the reputation of the issuing corporation
mortgage bond corporate bond secured by various assets of the issuing firm
convertible bond a bond that can be exchanged, at the owner’s option, for a specified numver of shares of the corporations common stock
call feature feature that allows the corporation to call in, or buy, outstanding bonds from current bondholders before the maturity date
sinking fund fund to which annual or semiannual deposits are made for the purpose of redeemng a bond issue
serial bonds bonds of a single issue that mature on different dates
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Finance Flashcards

Personal finance

The security deposit is an amount paid in advance to a landlord for normal wear and tear on rental property. false
A title to real property is the legal right of ownership interest. true
A lease typically protects the landlord but not the renter. false
When preparing a budget to buy a new home, you should add an additional ____ percent to the monthly payment on the loan for such things as homeowner’s insurance, property taxes, maintenance, and upkeep. 40
Subleasing means leasing the property from the original tenant to another tenant before the lease expires. true
A loan to purchase real estate in which the real estate itself serves as collateral is a ____ loan. mortgage
An original tenant who subleases to another tenant is automatically released from financial responsibility for future rent payments. false
Mortgage lenders generally prefer that total monthly debt does not exceed a 2:1 ratio of gross monthly income. false
____ is when the home is financially and legally transferred to the new owner. closing
Which of the following characteristics would cause a person to prefer renting over buying housing? Unknown job stability in the geographical area
____ mortgage insurance is generally required for any mortgage loan where the down payment is less than 20 percent private
When a tenant who wants to move before his or her lease is up and leases to another tenant, this is called subleasing
Buying a home represents the largest expenditure most people ever make true
Martha and Gordon purchased a home for $175,000 six years ago with a 5.5 percent, 30-year $140,000 mortgage. Their home now has a market value of $220,000 and they owe $124,000 on the mortgage. What is the equity in their home? $96,000
The escrow account is used to accumulate funds for both homeowner’s insurance premiums and real estate property taxes.
Which real estate agent works solely for the home buyer? Buyer’s agent
A renter may have to pay ____ when moving into an apartment. All of these
You should always obtain a prequalification from a lender before your search for a home to buy. true
Making a larger than required down payment on a given home will reduce the amount of the monthly payments.
The process in which the lender sues the borrower to prove default and asks the court to order the sale of real estate property to pay the mortgage debt is called foreclosure
The dollar value of the home in excess of the outstanding mortgage debt is called homeowner’s equity
When estimating monthly housing costs after the purchase of a home, add an additional 10 to 15 percent to your mortgage loan payment for such things as homeowner’s insurance, property taxes, maintenance, and upkeep. false
Carl has found an apartment that has monthly rent payment of $950 and requires a one month’s security deposit and a $500 damage deposit. In order to move in, Carl will probably be required to pay $1450
A loan origination fee, recording fee, and an appraisal fee are examples of miscellaneous expenses involved in buying a home true
Jillian wants to rent an apartment that has monthly rent payments of $850 and requires a $400 security deposit and a $500 damage deposit. In order to move in, Jillian will probably be required to pay $1750
Lenders in the sub-prime market offer loans to higher-risk applicants
________ clauses specify that certain conditions must be satisfied before a home purchase contract is binding Contingency
The typical required loan-to-value ratio today is no more than 80 percent
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Finance Flashcards

ECO/372 – Public Finance, and Aggregate Supply and Demand

The surplus and/or deficit is a _____ because we measure the surplus or deficit at each fiscal year. National debt is a _____, showing how much the government owes at a particular point in time. flow, stock
The total level or amount of something at a particular point in time stock
the change to the stock of that something over a period of time flow
at the state government level, the main sources of income are: state individual and corporate income taxes.sales and excise taxes.
Revenue sources are different for federal, state, and local governments
Federal income taxes are progressive The more you earn the higher your tax rate, all things equal
Three types of taxes proportional, progressive, regressive
regressive tax A tax for which the percentage of income paid in taxes decreases as income increases
progressive tax A tax for which the percentage of income paid in taxes increases as income increases
proportional tax A tax in which the average tax rate is the same at all income levels.
The function of firms in the circular flow model is to _____ resources and _____ products. purchase, sell
circular flow model A model that concisely describes how goods, services, resource, and money flow back and forth in an economy
net taxes the difference between the taxes collected by the government from firms and households and the transfer payments and subsidies the government makes to them.
tax a payment made to the government that is the result of economic activity. taxes are generally collected from both individuals and businesses
transfer payment a payment made by the government that does not require an exchange of economic activity in return. transfer payments often take the form of payments to households
subsidy a payment made by the government that does not necessarily require an exchange of economic activity in return. subsidies most often take the form of payments to businesses
in the circular flow model, households sell resources to and buy products from ____ firms
households and firms receive public goods and services in exchange for the _____ taxes they pay net
monetary payments, in the form of net ____, flow to the government from households and businesses taxes
at the federal government level, the main source of income are: social insurance and retirement receiptspayroll taxes
which of the following is not an area of most federal spending education
more often than not, the federal government spends _____ than it receives in revenue, forcing it to borrow to finance its deficits. more
State sources of revenue vary widely true
the type of tax that is assessed is determined by using the average tax rate
the federal government finances its deficits via borrowings
most economists prefer measuring the deficit relative to GDP because it allows a comparison across countries.it allows a comparison across time.
when the government needs to borrow money, it _____ the demand for loanable funds in the economy. increases
if the demand for loanable funds increases, interest rates _____ which can have big effects on consumers increases
generally, the budge deficit is calculated and reported _____, and the national _____ is the accumulation of previous budget deficits and surpluses yearly, debt
the national _____ is the accumulation of deficits and surpluses over time debt
___ demand can be interpreted as the overall demand for real GDP from four different sources aggregate
Aggregate Demand A downward-sloping curve showing the relationship between the price level and the quantity of domestically produced goods and services all households, business firms, governments, and foreigners (net exports) are willing to purchase.
aggregate supply illustrates how the total amount of goods and services produced in an economy relates to the _____ level price
if the amount of output firms are willing to produce at each possible price level increases, that’s: a shift of the aggregate supply
indicate the likely effect of a wide-reaching increase in wages paid to workers on the AD-AS model aggregate supply decreases
the aggregate supply curve slopes _____ in the short run because input prices are sticky and take time to adjust
according to the real-balances effect, when the price level rises, the real value of saving _____, and people are less willing to buy goods and services, so _____ falls, and the quantity of real GDP demanded _____, resulting in a _____-ward sloping aggregate demand curve. falls,consumption,decreases,down
according to the interest rate effect, when the price level _____, people need more money to make the same number of purchases, so the demand for money _____. As a result, interest rates increase which lowers consumption and investment causing the quantity of real _____ demanded to _____. rises,rises,GDP,decrease
according to the foreign purchase effect, if prices in the United States rise and prices in other countries remain stable, without a corresponding adjustment in exchange rates: US consumers will buy more foreign goods and services, and imports will rise, foreigners will buy fewer goods and services produced in the United States, and exports will fall. The quantity of net exports will fall, reducing the quantity of real GDP demanded, resulting in a downward sloping aggregate demand curve.
one of the challenges of using government expenditures to stimulate the economy is that: eventually the spending must return to their previous levels which may adversely affect aggregate demand in the economy.
which of the following will cause government purchases to fall? decreased spending on airportsdecreased spending on defensedecreased spending on highways
which of the following will cause government purchases to rise? increased spending on airportsincreased spending on defenseincreased spending on highways
demand and aggregate demand We use demand to talk about the price and quantity of a single good or service produced in a specific market.We use aggregate demand to describe the overall, or total, demand for all final goods and services produced in an economy
Changes in government purchases and net exports directly affect the aggregate demand for real _____ GDP
aggregate demand can be interpreted as the overall demand for real GDP, Y, from four different sources: government purchases; gross investment; net exports; consumption
_____ from the US will tend to rise when foreign incomes increase. exportswhen foreign consumers have more (less) money, they tend to increase (decrease) spending on goods from ALL sources – including US markets
exchange rate the rate, or price, at which one currency can be exchanged for another
appreciation (of currency) an increase in the value, or price, of one currency relative to another
depreciation (of currency) a decrease in the value, or price, of one currency relative to another
consumption (C) all expenditures made by households on goods and service, like clothing, food, electronics, and recreation, during a given time period.
aggregate demand (AD) a schedule or curve that represents the relationship between the quantity of real GDP demanded in the economy and the price level, all else held constant
gross investment (I) The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a given time period. Gross investment is classified into three categories: business fixed investment, residential investment, and inventory investment. Sometimes referred to simply as investment.
increase of aggregate demand an increase in the quantity of real GDP demanded in the economy at every price level; graphically, an increase in aggregate demand is represented by a rightward shift of the aggregate demand curve
decrease in aggregate demand a decrease in the quantity of real GDP demanded in the economy at every price level; graphically, a decrease in aggregate demand is represented by a leftward shift of the aggregate demand curve
government purchases (G) all final goods purchased by federal, state, and local governments – such as tanks, police cars, fire engines, and office supplies – during a given time period, as well as all final services purchased from labor resources – such as airport security personnel, police officers, and teachers.
next exports (NX) the difference between exports (goods made domestically and purchased by foreign consumers) and imports (goods made in other countries and purchased domestically). Net exports equals exports minus imports (NX = X – M)
when we draw an aggregate demand curve, we’re assuming that the only thing that is changing as we move up and down the curve is: the overall price level
the relationship between the price level and the amount of real GDP supplied in the economy is called aggregate supplyshort-run aggregate supply
if consumers ____ the amount of goods and services they purchase, given constant prices, then aggregate ____ for real GDP increases increasedemand
if consumers ____ the amount of goods and services they purchase, given constant prices, then aggregate ____ shifts to the right, since goods and services are being purchased at every _____ level. increasedemandprice
According to the real balances effect, when the price level rises, the real value of savings: falls, consumption falls, the quantity of real GDP demanded decreases, resulting in a downward sloping aggregate demand curve
assume that an economy is initially in equilibrium, and is operating at point ‘D’ along the aggregate demand curve. if the level of investment rises, the economy will move towards point ‘B’
aggregate demand illustrates a(n) _____ relationship between the price level and the quantity of real GDP, or output, demanded. negative
a movement along the AD curve is due to changes in the price level
in the short run, a significant increase in saving may actually have harmful effects on the economy
if consumption or gross investment increase for any reason other than the price level, that’s a: shift of the aggregate demand
savings is important for long-run growth: when households save, that money is available for: firms to borrow for investment; that borrowing leads to more capital and higher production in the future
in consumers increase the amount of spending, aggregate demand shifts to the _____.
a movement along the AD curve is due to_____ changes in the price level
a shift in the aggregate demand (AD) curve is due to changes in the determinants of aggregate demand
which of the following will cause consumption to rise? lower personal taxes, rising wealth, increased borrowing
your state raises taxes on income, while holding fixed all other forms of taxation. this causes to , so that aggregate demand shifting to the
many people, excited by recent economic growth begin to relax, increasing spending and saving less this causes to , so that aggregate demand shifting to the
after reading reports of increased consumer confidence in the economy, firms anticipate higher expected returns on investments in the future this causes to , so that aggregate demand shifting to the
the explosion of robotics and remote applications causes firms in the economy to purchase new devices and software this causes to , so that aggregate demand shifting to the
interest rates in the economy decrease this causes to , so that aggregate demand shifting to the
a stock market boom dramatically increases the amount of wealth in the economy this causes to , so that aggregate demand shifting to the
existing home prices in the economy start to decline this causes to , so that aggregate demand shifting to the
this causes to , so that aggregate demand shifting to the
Real GDP Expenditures Real GDP (Y) = Consumption (C) + Gross Investment (I) + Government Purchases (G) + Net Exports (NX)Y = C + I + G + NX
Net Exports (NX) Net Exports = Exports – ImportsNX = X – M
Aggregate demand is _____ sloping (one word). downward
Which of the following statements is true? we use demand to talk about the price and quantity of a single good or service produced in a specific marketwe use aggregate demand to describe the overall, or total, demand for all final goods and services produced in an economy.
inflation is caused by expansions – an increase in AD can cause inflationrecessions – a decrease in AS can cause inflation
changing one of the determinants of aggregate supply will cause the aggregate supply curve to shift
generally, changes to social institutions that inhibit production decrease aggregate supply
the long-run aggregate supply curve is a vertical line originating at the full-employment level of real GDP because all input prices are flexible in the long run.
a ___ shock causes aggregate demand or supply to fall. at every price level negative
positive shocks or changes to aggregate supply include an abrupt decrease in oil pricesan unexpected increase in productivity
aggregate ____ illustrates how the total amount of goods and services produced in an economy relates to the price level supply
sticky wages the idea that nominal wages tend to adjust slowly (be sticky) in response to changes in the market.are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages
aggregate supply (AS) A schedule or curve that represents the relationship between the quantity of real GDP supplied in the economy and the price level.Also called short-run aggregate supply.The relationship between the price level and the quantity of goods and services supplied in an economy. AS curve looks different in the long run and short run. In the long run, it is a vertical line, as output is dictated by the factors of production alone. In the short run, it is upward sloping.
aggregate supply illustrates the relationship between the price level and the amount of real GDP supplied in the economy
in the short run when wages are fixed, output (GDP) will expand if the price level increases because profit margins increase and increasing production is profitable
the supply curve for an individual good or service is upward-sloping because: marginal costs are increasingthis explains why an individual supply curve is upsloping
Which of the following transactions best represents the government playing the role of provider of a good or service? The state government pays for police to patrol the state and federal roadways.
Which of the following transactions best represents the government making a transfer payment to a household or business? The federal government’s Supplemental Nutritional Assistance Program assists low-income families with purchasing food.
A public debt that is owed to foreigners can be burdensome because the payment of interest reduces the volume of goods and services available for domestic uses.
Many states in the U.S. acquire significant amounts of funds from the following, except property taxes
Which of the following is not a significant source of revenue for the U.S. federal government? Property taxes
Which of the following is the largest expenditure item of state governments? Education
Public finance is the subdiscipline of economics that studies the various ways in which governments raise and expend money.
Which one of the following is not an excise tax of the federal government? General sales tax
Which is the most important source of tax revenue for local governments? Property taxes
The Social Security tax is regressive because no Social Security tax is collected for incomes in excess of a “cap” income level.
A federal budget deficit exists when federal government spending exceeds tax revenues in a given year.
Which of the following is not a government activity that is involved in public finance? Regulating the activities of firms in the financial sector of the economy.
To track the public debt over time and understand its significance to the economy, it is best measured relative to the gross domestic product.
One important reason why the United States government is not likely to go bankrupt even with a large public debt is that it has the power to print money to finance the debt.
Which of the following is the largest expenditure item of local governments? Education
How is the public debt calculated? By summing the annual difference between tax revenues and government spending over the years
A budget surplus means that Government revenues are greater than expenditures in a given year
Which of the following statements about payroll taxes is false? They are lump-sum taxes not based on wages/salaries.
A tax is regressive if it Takes a smaller percentage of income as income increases
The largest proportion of the U.S. public debt is held by the U.S. public (individuals, businesses, financial institutions, and government).
a. In the short run, when the price level increases, the quantity of real GDP supplied will increase and the aggregate supply curve will not shift . b. In the short run, some input prices are said to be sticky. This means that: some input prices will remain constant even as the price level changes.
a. There is an unexpected decrease in oil prices. This causes: an increase in aggregate supply, shifting the aggregate supply curve to the right. Correct b. The government increases the amount that all producers are required to contribute to health insurance coverage. This causes: a decrease in aggregate supply, shifting the aggregate supply curve to the left. Correct
a. Point B is referred to as a trough . b. The movement from point A to point E is called a business cycle . c. Point D is referred to as a peak . d. The movement from point B to point D is called an expansion .
a. As a result of an increase in the price level, the cost of borrowing increases, which causes people to buy fewer cars. Interest-rate effect b. When the price level decreases, restaurants become busier as more people purchase restaurant meals. Real-balances effect
All European countries experience an economic expansion, raising incomes in each of the European countries. This causes:an increase in aggregate demand, shifting the aggregate demand curve to the right. Correct The government decides to decrease the amount it spends on the military. This causes:a decrease in aggregate demand, shifting the aggregate demand curve to the left. Correct
Aggregate demand is best described as the relationship between the: quantity of real GDP demanded in the economy and the price level.
The short-run equilibrium for this economy is at point g
The intersection of the aggregate demand and aggregate supply curves determines the _____. equilibrium level of real domestic output and prices
If aggregate supply shifts from AS1 to AS2, then the price level will _____. increase and real domestic output will decrease
If the price level increases from 150 to 250, the real output demanded will _____. decrease by $200 billion
An economy is in both short- and long-run equilibrium at point C only
If current output is Q1 and full-employment output is Q2, then in the long run the short aggregate supply schedule is _____. AS2
If current output is Q1 and full-employment output is Q3, then in the long run the short aggregate supply schedule is _____. AS3
The foreign purchases, interest rate, and real-balances effects explain why the aggregate demand curve is downward-sloping
A decrease in expected returns on investment will most likely shift the AD curve to the _____. left because Ig will decrease
Which would most likely increase aggregate supply? An increase in productivity
An increase in personal income taxes will cause a(n) decrease (or shift left) in aggregate demand
The economy’s long-run aggregate supply curve is vertical
An expected increase in the prices of consumer goods in the near future will _____. increase (or shift right) in aggregate demand now
A decrease in labor costs will cause aggregate _____. supply to increase
If at a particular price level, real output from producers is greater than real output desired by purchasers, then there will be a general _____. surplus and the price level will fall
If AD1 shifts to AD2, then the equilibrium output increases from _____. Q1 to Q2 while the price level rises from P1 to P2
Which of the following would not shift the aggregate demand curve? Productivity rates
In the diagram, the economy’s short-run AS curve is line _____ and its long-run AS curve is line _____. 2; 1
The short-run version of aggregate supply assumes that product prices are flexible while resource prices are fixed
In the aggregate demand-aggregate supply model, the economy’s price level is assumed to be variable, unlike in the aggregate expenditures model
The labels for the axes of the aggregate demand graph should be _____. real domestic output on the horizontal axis and the price level on the vertical axis
The aggregate supply curve (short run) _____. slopes upward and to the right
A decrease in government spending will cause a(n) decrease in aggregate demand
An increase in expected future income will _____. increase aggregate demand
Social Security contributions are part of payroll taxes.
The circular flow model with government included would show that government provides goods and services to businesses and households and pays for them with net taxes.
Most economists believe that property taxes are regressive.
The long-run aggregate supply curve is vertical because: all input prices are flexible in the long run.
In order to reduce the deficit, the government decides to increase the level of taxes in the economy. This causes: a decrease in aggregate demand, shifting the aggregate demand curve to the left. Correct
he economy experiences a sustained expansion in stock prices for the majority of companies in the country. This causes: an increase in aggregate demand, shifting the aggregate demand curve to the right. Correct
A shift from AD2 shifts to AD1 would be consistent with what economic event in U.S. history? Great Recession of 2007-2009
Which of the following factors does NOT explain a movement along the AD curve? The expenditure multiplier effect
An increase in expected future income will increase aggregate demand
The long-run aggregate supply curve is vertical
The labels for the axes of an aggregate supply curve should be real domestic output for the horizontal axis and price level for the vertical axis
An expected increase in the prices of consumer goods in the near future will increase (or shift right) in aggregate demand now
The economy’s long-run AS curve assumes that wages and other resource prices eventually rise and fall to match upward or downward changes in the price level
If AD1 shifts to AD2, then the equilibrium output increases from 1 to Q2 while the price level rises from P1 to P2
An aggregate supply curve represents the relationship between the price level and the production of real domestic output
Which of the following factors does not explain the inverse relationship between the price level and the total demand for output A substitution effect
Which would most likely shift the aggregate supply curve? A change in the prices of resources
When the price level decreases, the demand for money falls and the interest rate falls
Which of the following events would most likely reduce aggregate demand An increase in real interest rates.
If current output is Q1 and full-employment output is Q3, then in the long run the short aggregate supply schedule is AS3
The two largest sources of tax revenue for the U.S. federal government are personal income taxes and payroll taxes.
Which of the following descriptions is most representative of the mix of revenues and expenditures of a local government Revenue is predominantly from property taxes but may include sales taxes or income taxes. Expenditures include investments in education and public welfare.
In the diagram, the economy’s relevant aggregate demand and long-run aggregate supply curves, respectively, are lines 4 and 1
The aggregate demand curve or schedule shows the relationship between the total demand for output and the price level
proportional tax
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Finance Flashcards

Finance Final Exam

Financial Statements and reports Is Issued once a year by a corporation and contains basic Financial Statements and an analysis of past performance and future prospects annual report
Financial Statements and reports Provides a quantitative summary of a company’s assets, libs, and net worth at a specific point in time balance sheet
Financial Statements and reports Details changes in the capital received from investors in exchange for stock (paid-in-capital), donated capital, and retained earnings Statement of retained earnings
Financial Statements and reports gives details about the firm’s sales, costs, and profits for the past accounting period income statement
Financial Statements and reports Gives details about company’s cash at the beginning of the year and what is left at the end of the year, including some details about where cash was generated and where it was used during the course of the year statement of cash flows
How much cash is a firm generating through operating, investing, and financing activities? on balance sheet or statement of cash flows? statement of cash flows
How much debt and equity has the firm issued to finance its assets? on balance sheet or statement of cash flows? on balance sheet
if compensation for senior management is based on short-term performance of the firm, in the short run the firm is likely to: A) overstate its earningsB) understate its earnings A) overstate its earnings
Financial Statements and reports required by the SEC and includes the audited document that shows the company’s financial results for the past year and management’s discussion about the future outlook and plans annual report
Financial Statements and reports divided into two important parts: operating and non operating sections; also known as the profit and loss statement Income statement
Financial Statements and reports explains the changes in a company’s retained earnings over the accounting year statement of retained earnings
Financial Statements and reports provides details about the flow of funds from operating, investing, and financing activities statement of cash flows
Financial Statements and reports has three segments that when analyzed together give an idea of what the company owns and what it owes balance sheet
Financial Statements and reportsIs published once a year and provides stockholders with details about the company’s performance and financial condition Annual Report
Financial Statements and reports
How profitable has the firm been? on income statement or statement of retained earnings? Income statement
How much the firm’s earnings are left as balance after the firm pays out dividends to its shareholders? on income statement or statement of retained earnings? statement of retained earnings
T/F As long as the info reported follows the generally accepted accounting principles (GAAP) guidelines, accountants in a firm have the liberty to use personal judgment to report transactions in the firm’s financial statements. true
Does the firm generate enough internal funds to support anticipated investment, or does additional outside capital need to be raised? on balance sheet or statement of cash flows? statement of cash flows
Can the firm meet all its short-term obligations using its current assets?on balance sheet or statement of cash flows? on balance sheet
The annual report is very important for investors, because the info contained in the annual report: A) shows the price at which each investor purchased the company’s stock and bonds B) helps investors forecast expected earnings and dividends B) helps investors forecast expected earnings and dividends
A cost that has been incurred and may be related to a project but should not be a part of the decision to accept/reject a project sunk cost
the cash flows that the asset of project is expected to generate over its life incremental cash flows
the cost of not choosing another mutually exclusive project by accepting a particular project opportunity cost
the effects on other parts of the firm externalities
the specific cash flows that should be considered in a capital budgeting decision relevant cash flows
in general, is the U.S federal tax system progressive or regressive? progressive
You bought 1,000 shares of a stock for $75 per share and sold it for $77.25 per share within the same year. how will your gain or loss be treated when you file your taxes and how much is it? you have a capital gain of $2,250because it was bought and sold in the same year, it will be treated as short-term capital gain.• AS A CAPITAL gain taxed at the current ordinary income tax rate
Depreciation expenses directly affect a company’s taxable income.1) an increase in depreciation expense will lead to a ________ taxable income 2) it will ________ tax deducted from a company’s earnings, thus leading to a __________ operating cash flow Lower Decrease HigherOCF= EBIT + Depreciation – Taxes
Taxpayers must pay the _______ of the Alternative minimum tax (AMT) or regular tax higher
The applicable tax rate for S corporation is based on the: A) stockholders individual tax rate B) corporate tax rate A) stockholders individual tax rate
Which source of investor income is susceptible to double taxations? A) interest earnedB) dividends B) dividends
You bought 1,000 shares of a stock for $60.59 per share and sold it for $82.35 per share after a few year. how will your gain or loss be treated when you file your taxes and how much is it? Capital gain is $21,760Because you sold a stock that you bought more than 12 months ago, it will be treated as long term capital gainAs a capital gain taxed at the long term tax rate
To offset taxable income in a given year, ordinary corporate operating losses can be: a) carried back for 2 years and carried forward for 20 years b) carried back for 5 years and carried forward for 10 years carried back for 2 years and carried forward for 20 years
From a corp point of view, does the tax treatment of dividends and interest paid favor the use of debt financing or equity financing? debt financing
Suppose a firm in the 40% tax bracket needs to pay $1 in dividends to its shareholders. What is the pretax income it should have to pay this dividend? $1/ (1-.4) = 1.67
How are assets supposed to be listed on the balance sheet based on the GAAP? in the order in which they are to be converted into cash
How are debts supposed to be listed on the balance sheet based on the GAAP? in the order in which they are to be repaid
A firm has 100 million in revenues. Does that mean it has generated a cash flow of 100 million dollars? noRevenue of $100 mill could include sales made on credit so it doesn’t mean the comp made that much money
op, invest, or finance a company records a decrease in its total raw materials inventory from the previous year operating
op, invest, or finance a company buys common stock in its suppliers firm with its extra cash investing activity
op, invest, or finance ruth enterprises distributes a holiday bonus to all its employees Operating
op, invest, or finance Yum co uses cash to repurchase 10% of its common stock finance
op, invest, or financeearns revenue from its cash receipts from royalties operating activity
op, invest, or finance day to day actions needed to conduct business operating activity
op, invest, or finance affect a firms cash position operating activity
op, invest, or finance purchase or sale of investment investing activity
op, invest, or finance cash inflow or outflows to repay or obtain capital financing activity
op, invest, or finance distributing dividends to its common stockholders for the first time finance
op, invest, or finance Loss of 70000 dollars on sales of its outdated inventory op
Which of the following is true for the statement of cash flows?a) it reflects revenues when earnedb) it reflects cash generated and used during the reporting period b) it reflects cash generated and used during the reporting period
op, invest, or finance earns revenue from its cash receipts from royalties op
op, invest, or finance buys marketing rights to sell a drug exclusively in East Asain markets investing
op, invest, or finance company reports 10% increase in its accounts payable from the last month operating
op, invest, or finance chain of restaurants conducts an initial public offering to raise funds for expansion financing
If a firm has a lot of net cash flow, does that mean the firm’s balance sheet cash account must be high? no
shareholder’s equity equity is the sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years
shareholder’s equity equity is the difference between the companies assets and liabilities
shareholder’s equity equity is the sum of shareholders capital provided by shareholders and retained earnings
Free cash flow:a) residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working capital expendituresb) cash flows generated by operating the business a) residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working capital expenditures
which is NOT a use of FCF? a) acquiring operating assetsb) retiring debt- that is, to pay off debtc) repurchasing common stock a) acquiring operating assets
can a company have negative FCF? yes
Free cash flow:a) the cash flow available for distribution to all investors after the company has made all investments in fixed assets and working capital necessary to sustain a firm’s ongoing operations b) the excess cash generated by revs less all operating exp a) the cash flow available for distribution to all investors after the company has made all investments in fixed assets and working capital necessary to sustain a firm’s ongoing operations
Free cash flow: a) the amt of firms avail cash that can be used without harming op or the ability to produce future cash flows
evaluates to what extent managers perform their primary task- to create shareholder wealtha)Market Value addedb) economic value added a)Market Value added
evaluates the amt by which profits exceed or fall short of the cost of capital in any one perioda)Market Value addedb) economic value added b) economic value added
MVA = Difference between market value andbook value of a firm’s common equity.(P0 x Number of shares) – Book value.
EVA= Estimate of a business’ true economicprofit for a given year.
Corporate and Personal Taxes Both have a progressive structure (the higher the income, the higher the marginal tax rate).
Dividends are paid out of —- are paid out of net income which has already been taxed at the corporate level, this is a form of “double taxation”.
carry losses back to offset profits in previous years or forward to offset profits in the future. Tax Loss Carry-Back and Carry-Forward – since corporate incomes can fluctuate widely, the Tax Code allows firms to
Which of the following actions are most likely to directly increase cash as shown on a firm’s balance sheet? Explain and state the assumptions that underlie your answer. a.It issues $8 million of new common stock.b.It buys new plant and equipment at a cost of $3 million.c.It reports a large loss for the year.d.It increases the dividends paid on its common stock. Statements (b) and (d) will decrease the amount of cash on a company’s balance sheet. Statement (a) will increase cash through the sale of common stock. Selling stock provides cash through financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year.
personal judgment is allowed when as long as the information follows the GAAP
Business Risk riskiness of the firm’s assets if no debt is used
financial risk the additional risk placed on the common stockholders as a result of using debt
what is the break-even analysis similar too? sensitivity analysis
financial leverage concentrates firms business risk on stockholders
will changes in debt effect ROIC no
optimal capital structure at a debt ratio that…. both maximizes its stock price ANDminimizes its WACC
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Finance Flashcards

Finance Ch. 4 True/False

Starting to invest early for retirement increases the benefits of compound interest. True
Starting to invest early for retirement reduces the benefits of compound interest. False
A time line is meaningful even if all cash flows do not occur annually. True
A time line is not meaningful unless all cash flows occur annually. False
Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly. True
Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. False
Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. True
Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods. False
Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts. True
Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts False
If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series. False
If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series. True
Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value. True
Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value. False
If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate. False
If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate. True
A “growing annuity” is a cash flow stream that grows at a constant rate for a specified number of periods. True
A “growing annuity” is any cash flow stream that grows over time. False
The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date. False
The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date. True
Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.) True
Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.) False
The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant. True
The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant False
All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases. True
All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases. False
If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year. True
If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year. False
As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan). True
As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan). False
When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment’s percentage declines in the loan’s later years. False
When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment’s percentage increases in the loan’s later years. True
The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan’s life, the greater the percentage of the payment that will be a repayment of principal. True
The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan’s life, the smaller the percentage of the payment that will be a repayment of principal. False
Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal. This is true regardless of the original life of the loan or the interest rate on the loan. False
Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal. The proportions depend on the original life of the loan and the interest rate. True
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Finance Flashcards

FINANCE

The tax savings generated as a result of a firm’s depreciation expense is called the: depreciation tax shield
You are considering the purchase of new equipment. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. You should select the machine which has the: lowest equivalent annual cost
Wiley Electric just purchased some MACRS 5-year property at a cost of $118,000. Which one of the following will correctly give you the book value of this equipment at the end of year 3?MACRS 5-year propertyYear Rate1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76% $118,000 x (1 – .20 – .32 – .192)
A project’s operating cash flow will increase when: depreciation expense increases
Shelly’s Boutique is evaluating a project which will increase annual sales by $70,000 and annual costs by $40,000. The project will initially require $100,000 in fixed assets which will be depreciated straight-line to a zero book value over the 5-year life of the project. The applicable tax rate is 34 percent. What are the operating cash flows for this project from years 1-5 and what is the NPV of the entire project if the WACC is 7%?
Superior Manufacturers is considering a 3-year project with an initial cost of $846,000. The project will not directly produce any sales but will reduce operating costs by $295,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $30,000. The tax rate is 34 percent. The project will require $31,000 in extra inventory for spare parts and accessories. Should this project be implemented if Superior Manufacturing requires an 8 percent rate of return? Why or why not? No; The NPV is -$87,820.48.
A project is expected to create operating cash flows of $35,000 a year for four years. The initial cost of the fixed assets is $100,000. These assets will be worthless at the end of the project. An initial $5,000 of net working capital will be required at the project’s start. What is the project’s net present value if the required rate of return is 11 percent? $6,879.25
The Furniture Makers purchased some fixed assets three years ago for $52,000. The assets are classified as 5-year property for MACRS. The company is considering selling these assets now so they can buy some newer fixed assets which utilize the latest in technology. The company has been offered $15,500 for these old assets. What is the net cash flow from the salvage value if the tax rate is 34 percent?MACRS 5-year propertyYear Rate1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76% $15,321.84
Allied Partners just purchased some fixed assets that are classified as 3-year property for MACRS. The assets cost $2,400. What is the amount of the depreciation expense in year 4?MACRS 3-year propertyYear Rate1 33.33%2 44.44%3 14.82%4 7.41% $177.84
A firm is considering a project that will increase sales by $135,000 and cash expenses by $105,000. The project will cost $120,000 and be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 34 percent. What is the value of the depreciation tax shield? $10,200
The Clothing Co. is looking at a project that will require and initial increase of $40,000 in net working capital and $100,000 in fixed assets. The project is expected to produce annual sales of $90,000 with associated costs of $60,000. The project has a 10-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What are the operating cash flows for this project and what is the IRR for this entire project? $23,000; 12.45%
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Finance Flashcards

Personal Finance Unit 2

Which of the following is not true concerning Income Tax Refunds? It is advantageous to receive a large sum of money in the form of a refund so that you can use the money to pay down debt.
Relatives can be claimed as dependents on your tax return as long as they meet the following two guidelines. Select the two correct answers. -The dependent must earn less than $4,150 per year.-The dependent must not have provided over half of his or her support for the entire year.
If you opt to put money in a medical flexible spending account rather than trying to amass enough medical expenses to itemize on your tax return, you are taking advantage of _____. An exclusion.
A form of taxation in which everyone pays an equal rate of taxes is called a _____. Flat tax.
A form of taxation in which the highest income earner pays the largest percentage of taxes is called a _____. Progressive tax.
A form of taxation in which the lowest income earners pay the largest percentage of taxes is called a _____. Regressive tax.
Which of the following is not considered part of your gross income? Money your employer pays for your medical insurance.
Which of the following is not true about your adjusted gross income? It is your income plus your deductions.
Which of the following is true about standard deductions? They are tax breaks that you can claim without having to itemize.
A dollar-for-dollar reduction in your tax payment is called a _____. Credit.
An arrangement by which a company gives customers financial protection against loss or harm in return for payment. Insurance.
Determining , minimizing, and preventing accidental loss in a business, for example, by taking safety measures and buying insurance. Risk management.
The company that sells insurance. Insurer
The amount of money charged for a certain amount of insurance coverage. Premium.
The amount an insured person must pay before making a claim against an insurance policy before the insurer will pay any compensation. Deductible.
The amount or type of protection provided by a insurance policy. Coverage.
A statistician who calculates insurance premiums, risks, dividends, and annuity rates Actuary.
A fixed dollar amount of coverage for damages that an insured becomes legally liable to pay due to an accident or other negligence. Liability.
An application for payment under an insurance policy. Claim.
A contract of insurance. Policy.
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Finance Flashcards

Finance 341

What is the fundamental goal of a business? Create value for the company’s shareholders or “maximize shareholder wealth”
What are the 5 principles that form the Foundation of Finance? 1) Cash flow is what really matters2) Money has a time value3) Risk requires a Reward4) Market prices are generally right5) Conflicts of interest cause agency problems
What are cash flows? Money that can be spent.Usually determines the value of a business.
What is incremental cash flow? The difference between the cash flows a company will produce both with and without the investment it is thinking about making.
What is opportunity cost? the cost of making a choice in terms of the next best alternative that must be foregone.
Which 2 requirements do investors feel need to be satisfied when investing in a company? 1) A return for delaying consumption2) An additional return for taking on risk
What is an efficient market? a market in which the prices of the assets traded in that market fully reflect all available information at any instant time.
What is an agency problem? Problems and conflicts resulting from the separation of the management and ownership of the firm.
What is securitization? Why is it useful? 1) The process of packaging mortgages2) for increasing the supply of new money that can be lent to new homeowners.
What are the 3 basic types of issues in finance and what do they mean? 1) Capital Budgeting: the decision making process with respect to investments in fixed assets.2) Capital Structure Decision: the decision making process with funding choices and the mix of long term sources of funds.3) Working Capital Management: management of the firm’s current assets and short term financing.
What are financial markets? institutions and procedures that facilitate financial transactions.
What is sole proprietorship? an business owned by a single individual
What is a partnership? What are the 2 kinds of partnerships? 1) an association of 2 or more individuals joining together as co-owners to operate a business for profit1) General and Limited Partnership
What is the difference between a general and limited partnership? 1) General: each partner is fully responsible for the liabilities incurred by the partnership2) Limited: one or more partners has limited liability, restricted to the amount of capital he or she invests in the partnership.
What are the conditions that qualify one to be a limited partner? 1) one general partner must have unlimited liability2) the names of limited partners may not appear in the name if the firm3) limited partners may not participate in the management of a business.
What is the definition of a corporation? an entity that legally functions separate and apart from its owners.
What is an S-corporation? a corporation that, because of specific qualifications, is taxed as though it was a partnership.
What is a Limited Liability Company? (LLC) A cross between a partnership and corporation under which the owners retain limited liability but the company is run and taxed like a partnership.
What does maximizing shareholder wealth mean? It means to maximize the market value of the firm’s common stock.
What are some advantages of having a corporation? 1) Transferability of ownership2) Ability of the corporation to raise capital
What are some disadvantages to a Partnership? 1) lack of permanence2) unlimited liability
Why is it hard to find extremely profitable projects? 1) To find high profit projects, the product or service must be differentiated and/or have a cost advantage over the competition.2) To find high profit projects, you must locate imperfections in the market that are not currently being taken advantage of.3) If an industry is generating large profits, then new entrants are attracted, driving down profits.
What are some benefits of organizes security exchanges? 1) They provide a continuous market.2) Establish and publicize fair security prices.3) They help businesses raise new financial capital
What is meant by the “NASDAQ system”? 1) National Association of Security Dealers Automates Quotation System2) it is a telecommunications system that provides a national information link among the brokers and dealers operating in the over the counter markets.3) The final trade is still consumated by direct negotiation between traders.
What are 3 major functions of that an investment banker performs? 1) Advising2) Distributing3) Underwriting
What is underwriting? the purchase and subsequent resale of a new security issue. the risk of selling the new issue at a satisfactory (profitable) price is assumed (underwritten) by the investment banker.Assuming a risk
What is the underwriter’s spread? The difference between the price the corporation raising money gets and the public offering price of a security.
What is an investment banker? A financial specialist who underwrites and distributes new securities and advises corporate clients about raising new funds.
What are the 2 major categories of flotation costs? 1) Underwriter’s spread (Larger of the two)2) Issuing Costs
What are flotations costs the highest on? Common Stock
What is the maturity-risk premium? the additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuations on those securities caused by interest rate changes
What is the liquidity risk premium? the additional return required by investors in securities that cannot be quickly converted into cash at a reasonably predictable price.
What are two major reasons why underdeveloped countries remain underdeveloped? 1) They lack effective financial market systems.2) They lack political stability.
What are Capital Markets? All financial institutions that help businesses raise long term capital
What are 3 ways to Transfer Capital into the Economy? 1) Direct Transfer of Funds2) Indirect Transfer using the investment banker3) Indirect Transfer using the financial intermediary
What happens in a direct transfer of funds? The firm seeking cash sells its securities directly to savers (investors) who are willing to purchase them in hopes of earning a large return.
What is an angel investor? a wealthy private investor who provides capital for a business start-up.
What is a venture capitalist? An investment firm (or individual investor) who provides money to business start-ups.
What happens in an Indirect Transfer using the investment banker? Investment bankers work with other investment bankers to increase capital, the syndicate will buy the entire issue of security from the firm in need of capital and then sell them to investors at a higher cost than they bought them.
What happens in an Indirect Transfer using the financial intermediary? 1) This is the type of system insurance companies, mutual finds, and pension funds operate within.2) The financial intermediary collects the savings of individuals and issues its own (indirect) securities in exchange for these savings. The intermediary then uses the funds collected from the individual savers to acquire the business firm’s (direct) securities, such as stocks and bonds.
What is the difference between public offering and private placement? 1) Public offering: a security offering where all investors have an opportunity to acquire a portion of the financial claims being sold. An impersonal market.2) Private Placement: a security offering limited to a small number of potential investors. More personal
What are two ways a corporation can obtain external capital? A public offering or private placement
What is a primary market? A market in which securities are offered for the first time for sale to potential investors.
Why are venture firms unappealing to the broader public markets? 1) small absolute size2) very limited or no historical track record of operating results3) Obscure growth prospects4) inability to sell stock easily or quickly
What is an initial public offering? (IPO) the first time a company issues stock the public
What is a seasoned equity offering? (SEO) the sale of additional stock by a company whose shares are already publicly traded.
What is a secondary market? a market in which currently outstanding securities are traded.
What is a money market? all institutions and procedures that facilitate transactions for short term issued by borrowers with very high credit ratings.Short term: 1 year or less maturity
Who regulates the primary and secondary markets? the Security and Exchange Commission (SEC)
What are spot markets? Cash Markets (where something sells today, right now, on the spot)
What are Futures Markets? Markets where you can buy or sell something at a future date.
What are organized security changes? Formal organizations that facilitate the trading of securites
What are over the counter markets? all security markets except organized exchanges.ex:) Money Market, Corporate Bonds
What is the oldest organized exchange? The New York Stock Exchange (NYSE) also called the “Big Board”
What is a syndicate? A group of investment bankers who contractually assist in the buying and selling of a new security issue.
What is a privileged subscription? Which 3 markets are involved? 1) The process of marketing a new security issue to a select group of investors.2) Current stockholder (most prevalent) , Employees, and customers of the firm
What is a Dutch Auction? A method of issuing securities (common stock) by which investors place bids indicating how many shares they are willing to buy and at what price. The price the stock is then sold for becomes the lowest price at which the issuing company can sell all the available shares.
What is a Direct Sale? the sale of securities by a corporation to the investing public without the services of an investment banking firm
What are the 3 most important investing groups? (Regarding private placements) 1) Life Insurance Companies2) State and Local Retirement Funds3) Private Pension Funds
What are 2 things firms can do while arranging private placements? 1) avoid the use of an investment banker and work directly with the investing institutions2) engage the services of an investment banker
What are the advantages to private placement? Disadvantage? 1) Speed, Reduced Cost, Financially Flexibility2) Interest Costs, Restrictive Covenants, the possibility of future SEC registration
What are flotation costs? the transaction cost incurred when a firm raises funds by issuing a particular type of security.
What is the difference between Underwriter spread and Issuing Cost? 1) US: the difference between the gross and net proceeds from a given security issue expressed as percent of the gross proceeds.2) IC: Printing and engraving of security certificates, legal fees, accounting fees, trustee fees, several other miscellaneous components
When was the Sarbanes Oxley Act passed? (SOX) 2002
What is the real risk free interest rate? the required rate of return on a fixed income security that has no risk in an economic environment of zero inflation.
What is the term structure of interest rates?What is yield to maturity? 1) the relationship between the interest rates and the term to maturity, where the risk of default is held constant.2) the rate of return a bondholder will receive if a bond is held to maturity.
What are the three basic financial statements? 1) the income statement2) the balance sheet3) the statement of cash flows
What are the purposes of financial analysis? 1) Restating accounting data in relative terms so that comparisons can be made with firms of different sizes and with the same firm over time.2) To identify some of the financial strength and weaknesses of a company
In which scenarios might financial ratios be used? 1) Major suppliers to decide whether or not to grant terms to a company2) Credit Rating agencies to determine the firm’s creditworthiness3) Firm managers to evaluate a firm’s performance4) Investors or decide whether or not to invest in a company5) Lenders to decide whether or not to make a loan to the company
Which differences in the accounting practices of firms limit the usefulness of financial ratios? 1) Different methods to depreciate their fixed assets.2) Different methods to allocate their inventory.
Why should you be careful when comparing a firm with industry norms? 1) sometimes it is difficult to identify the industry to which your firm belongs, so you must select you peers and construct your own norm.2) Accounting practices differ widely among firms. These differences can make the computes ratios of different firms difficult to compare3) an industry average is not necessarily a desirable target ratio or norm, you may want to be in the top 10%4) many firms experience seasonal changes in their operations5) Publishes peer or group industry averages are only approximations
How do you calculate the default risk premium in bonds? 1) Nominal Interest rate = real risk free interest rate +inflation premium +default risk premium + maturity risk premium + liquidity risk premium2) For treasury bonds, drp and lrp are 0.3) Corporate bond yieldings – treasury bond yield – liquidity risk premium
How do you calculate the (inferred) real rate of interest? nominal rate of interest – inflation rate
How do you calculate the nominal rate of interest? real rate of interest + inflation rate +product of the real rate of interest and inflation rate
How do you calculate maturity risk premium? How do you calculate the nominal risk free interest rate? 1) Treasury note yield – nominal risk free interest rate2) real risk free interest rate + inflation rate
How do you calculate tax liability? 1) Compute taxable income (operating income – depreciation expense – interest expense)2) Operating income= sales – cost of goods sold – operating expenses
how do you calculate savings? initial investment x (1 + amount security pays) ^ end of wanted year
How do you calculate the required interest rate? additional saving/savings in 1 year security (note that this is problem specific)
What are 2 ways financial ratios make meaningful comparisons of a firm’s financial data? 1) We can examine ratios across time to compare the firm’s past and present performance2) We can compare firm’s ratios with that of other firms
How do managers use financial ratios? 1) Identify deficiencies in the firm’s performance and take corrective actions2) Evaluate employee performance and determine incentive compensation.3) Compare financial performance in the firm’s different divisions.4) Prepare financial projections5) Understand competitor’s financial performance6) Evaluate financial condition of major supplier
How are financial ratios used outside of the company? 1) lenders decide whether or not to make a loan to the company2) credit ranging agencies determine firm’s credit worthiness3) Investors decide whether or not to invest in company4) Major suppliers decide whether or not to grant credit terms to company
What 2 things are analyzed when discussing the liquidity of a firm? 1) the amount of current assets relative to current liabilities (Current Ratio)2) the quality of the individual current assets that will be used in meeting current debt payments
What are limitations of financial ratio analysis? 1) It is sometimes difficult to determine which industry a firm belongs to when they engage in multiple line of business2) Published peer group or industry averages are only approximations3) An industry average is not necessarily a desirable target ratio or norm.4) Accounting practices differ widely among firms making it difficult to compare5) Financial Ratios can be too high or too low 6) Many firms experience seasonal changes in operations as a result balance sheets and ratios may vary with time of year