Finance Flashcards

Finance Chapter 1

limited liability partnership Which of the following is considered a hybrid organizational form?Sole proprietorship Partnership Corporation Limited liability partnership
someone who has a claim on the cash flows of the firm A stakeholder is:someone geographically close to the firm’s headquarters. someone who has a claim on the cash flows of the firm. some government agency. all of the above.
residual cash flows Cash dividends are paid out of:residual cash flows. liquidated assets. long-term debt. all of the above.
a limited partner Which of the following cannot be engaged in managing the business? A sole proprietor A general partner A limited partner None of the above
a stakeholder If you have loaned capital to a firm, then you could be… a manager. a stakeholder. a partner. all of the above
must be paid within a year Current liabilities are liabilities that:will be converted to cash within a year. must be paid within a year. will be converted to equity within a year. none of the above.
public corporation Which organizational form best enables a firm to sell its securities to the market?Sole proprietorship Private corporation Partnership Public corporation
a manager expensing a lavish dinner on the company expense report An example of an agency cost is:a manager turning down a value-contributing project because of its risks. a manager expensing a lavish dinner on the company expense report. a manager using too little debt within the firm’s capital structure because of the additional risk associated with debt. all of the above.
CPA firm Which of the following is responsible for performing an independent audit of a firm’s financial statements? CPA firm CFO Audit committee CEO
a firm’s cash flows The value of any investment is determined by the cash flows it is expected to generate in the future. Therefore, investors will care about a firm’s cash flows the most. Which of the following matters most to investors when making an investment?A firm’s previous dividend payments A firm’s current ratio A firm’s retained earnings A firm’s cash flows
all of the above Which of the following is a stakeholder? An employee A lender The IRS All of the above
residual cash flows The cash remaining with the firm after paying its operating expenses, making payments to creditors, and taxes is called: capital contributed in excess of par. assets. residual cash flows. earnings per share.
both sole proprietorship and general partnership Which of the following business organizational form(s) subject(s) the owner(s) to unlimited liability? Sole proprietorship General partnership Corporation Both Sole proprietorship and General partnership
owner of a corporation Which of the following owners is protected by limited liability?A sole proprietor A general partner Owner of a corporation None of the above
board of directors Which of the following reports directly to the owners of a firm? (Assume that the firm is a public corporation.) Board of directors Audit committee CFO CEO
there is a significant degree of separation between management and ownership One reason for the existence of agency problems between managers and stockholders is that: there is a significant degree of separation between management and ownership. managers know how to manage the firm better than stockholders. stockholders have unreasonable expectations about managerial performance. none of the above.
a stockholders Who among the following is the principal in the agency relationship of a corporation?A company engineer The CEO of the firm A stockholders The board of directors
greater access to capital markets Shares in a corporation can be sold to raise capital from investors who are not involved in the business. This greatly increases the amount of capital that can be raised to fund the business. Which of the following is the advantage of the corporate form of organization?Reduced start-up costs. Greater access to capital markets.Unlimited liability. Single taxation.
how a firm’s day-to-day financial matters should be managed Working capital management decisions help to determine: how a firm’s day-to-day financial matters should be managed. how a firm should finance its assets. which productive assets a firm should purchase. all of the above.
one in which the benefits of the project are equal to the cost of the asset A good capital budgeting decision is: one in which the benefits of the project are equal to the cost of the asset. one in which the benefits of the project are less than the cost of the asset. one in which the benefits of the project are more than the cost of the asset. all of the above.
Finance Flashcards

ch. 9 Finance 122

1. Mortgage backed securities are commonly contained within collateralized debt obligations. true
2. Federally insured mortgages guarantee loan repayment to the lending financial institution
3. At a given point in time, the interest rate offered on a new fixedrate mortgage is typically ____ the initial interest rate offered on a new adjustablerate mortgage. above
4. An institution that originates and holds a fixedrate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates. increasing; decreasing
5. Rates for adjustablerate mortgages are commonly tied to the average treasury bill rate over the previous year
6. Caps on mortgage rate fluctuations with adjustablerate mortgages (ARMs) are typically 2 percent per year and 5 percent for the mortgage lifetime
7. From the perspective of the lending financial institution, interest rate risk is lower on a 15-year fixed-rate mortgage than on a 30 year fixed-rate mortgage
8. Mortgage companies specialize in originating mortgages and selling those mortgages
9. For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage. greater; lower
10. A financial institution has a higher degree of interest rate risk on a ____ than a ____. 30-year fixed-rate mortgage; 15- year fixed-rate mortgage
11. A balloonpayment mortgage requires interest payments for a 10 to 20year period, at the end of which the borrower must pay the full amount of the principal. false
12. Use an amortization schedule. A 15year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest. 1,014; 750
13. A mortgage that requires interest payments for a three to fiveyear period, then full payment of principal, is a(n) balloon payment mortgage
14. In an amortization schedule of monthly mortgage payments interest payments exceeds principal payments early on
15. A mortgage with low initial payments that increase over time without ever leveling off is a growing- equity mortgage
16. The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default. higher than; behind
17. Which of the following mortgages allows the home purchaser to obtain a mortgage at a below market interest rate throughout the life of the mortgage? shared-appreciation mortgage
18. A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off. graduated payment mortgage
19. Mortgage companies, commercial banks and savings institutions are the primary originators of mortgages. true
20. ____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on mortgages that meet specific criteria. Ginnie Mae
21. “Securitization” refers to the private insurance of conventional mortgages. false
22. A financial institution may service a mortgage even after selling it. true
23. The difference between the 30year mortgages rate and the 30year Treasury bond rate is primarily attributable to credit risk
24. Mortgage prices would normally be expected to ____ when the interest rates ____, holding other factors constant. increase; decrease
25. Collateralized mortgage obligations (CMOs) are generally perceived to have a high degree of prepayment risk
26. Mortgage prices are subject to interest rate risk, credit risk, and prepayment risk
27. During a weak economy, the credit risk to a financial institution from investing in mortgage backed securities representing subprime mortgages is ____ than that of mortgage backed securities representing prime mortgages. more than
28. ____ are backed by conventional mortgages. private-label pass-through securities
29. Which of the following is not a guarantor of federally insured mortgages? the Federal Deposit Insurance Corporation (FDIC)
30. ____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages. weak; decrease; increase
31. A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on. graduated payment
32. The adjustable rate mortgage creates uncertainty for the ____ profit margin, but reduces the uncertainty for the ____. borrowers; originator
33. When financial institutions originate residential mortgages, the mortgage contract should not specify the mortgage contract should specify all of the above
34. Which of the following is not a common type of mortgagebacked security according to your text? balloon payment mortgage certificates
35. ____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates. prepayment
36. Mortgage backed securities are assigned ratings by: rating agencies
37. In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes). tranches
38. The credit crisis is mostly attributed to the use of: liberal criteria applied by mortgage originators
39. Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they: invested heavily in subprime mortgages
40. ____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes. subprime
41. The secondary mortgage market that accommodates originators of mortgages who desire to sell their mortgages before maturity. true
42. Regardless of what happens to market interest rates, most adjustablerate mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life. true
43. Some adjustablerate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixedrate mortgage within a specified period. true
44. Mortgage lenders normally charge a higher initial interest rate on adjustable rate mortgages than on fixedrate mortgages. false
45. A balloonpayment mortgage requires interest payments for a three to fiveyear period. At the end of this period, full payment of the principal (the balloon payment) is required. true
46. During the early years of a mortgage, most of the monthly payment reflects principal. false
47. Mortgages are rarely sold in the secondary market. false
48. An increase in either the riskfree rate or the risk premium on a fixedrate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes mortgage prices to decrease. true
49. Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices. false
50. The higher the level of equity invested by the borrower, the higher the probability that the loan will default. false
51. Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages. true
52. Non U.S. financial institutions never hold mortgages on U.S. property. false
53. The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity. secondary
54. Financial institutions that hold fixed rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short term customer deposits to make long term mortgage loans. interest rate
55. From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____maturity mortgages. higher; longer and lower; shorter
56. During the early years of a mortgage, most of the monthly payment reflects interest
57. Which of the following will typically require homeowners to ultimately request a new mortgage? balloon- payment mortgage
58. Which of the following is not true with respect to a growingequity mortgage? it involves payment that level off after the first five to ten years of the mortgage
59. ____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages. weak; decrease; increase
60. The probability that a borrower will default (credit risk) is influenced by all of the following, except credit risk is affected by all the above
61. In a short sale of a home: the lender allows the homeowners to sell the home for less than what is owed on the mortgage; and the lender does not recover the full amount on the mortgage
62. An investor in interestonly collateralized mortgage obligations (CMOs) would not be concerned that homeowners will prepay the underlying mortgages. false
63. The valuation of mortgagebacked securities is difficult because of limited transparency. true
64. A(n) _________ problem occurs when a person or institution does not have to bear the full consequence of its behavior and therefore assumes more risk than it otherwise would. moral hazard
65. A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgagebacked securities. credit default swap
66. Speculators sell credit default swaps to benefit from the default of specific subprime mortgages. false
Finance Flashcards

Finance Quiz #10

Francisco and Maria have three children and want to complete a detailed worksheet to determine the amount of life insurance they need to purchase. They will consider factors such as Social Security and liquid assets. Which method are they using to determine their life insurance needs? Family need method
Which of the following is NOT a type of permanent insurance? Term life
If you have a multiyear level term policy, Your premium will be the same for the duration of your policy.
If you have a conversion term policy, You can convert your term policy to a permanent policy.
This term life insurance policy will guarantee that you will pay the same premium for the duration of your policy. Multiyear level term
Which of the following is NOT a feature of whole life insurance? The policy will return all premiums if you survive to the end of the policy.
Of the following, which one is the most positive feature of whole life insurance for a person who wants a more structured way to save? It builds cash value.
Megan wants to purchase a type of whole life insurance policy that will allow part of her premium to be invested in stock, bonds, or money market funds. Which of the following policies should she buy? Variable life
Molly is thinking about buying a type of whole life insurance policy, but she is not sure about how much she will need in the next few years. She may need to change her coverage as her needs change. Which of the following policies would meet her needs? Adjustable life
Polly wants the opportunity to change the amount she pays for her annual premium through the life of her insurance policy without changing her coverage. Which of the following types of whole life policies would meet her needs? Universal life
Pam just started working at XYZ Widget Company and finally wants to get insurance coverage through her employer. She does not want to take a medical exam to get coverage, because she has some underlying health conditions and is concerned that she might not qualify for a policy. Which of the following life insurance policies should she apply for? Group life
This life insurance is used to pay off certain debts, such as auto loans, in the event that you die before the debts are paid in full. Which of the following is not the best buy for the amount of protection offered for an individual? Credit life
Which of the following provisions requires the policyholder to again qualify as an acceptable risk and pay overdue premiums with interest in order to put a lapsed policy back in force? Policy reinstatement
Fred bought life insurance when he was 47, although he told the insurance company that he was 42. He has since died. Which of the following provisions will affect the amount of money his beneficiaries will receive? Misstatement of age provision
Georgia was supposed to pay her premium by the 15th of the month. Which of the following provisions allows her to keep her coverage if she is a couple of weeks late with paying her premium (without penalty)? The grace period
Fred bought life insurance five years ago. He forgot to tell them that he had a heart condition, and, as a result of that condition, he recently died. Which of the following provisions prevents the life insurance company from refusing to pay his beneficiaries because of his original fraudulent misrepresentation? Incontestability clause
Amy bought a life insurance policy and named Ben as her beneficiary. Amy still lives with her parents who provide some of her living expenses. She has since died. Who will receive the benefits from her policy? Ben.
Bonnie is most concerned about being able to buy additional insurance without undergoing medical exams. Which of the following riders should she consider? Guaranteed insurability option
Bill is worried about being able to pay his premium if he is totally and permanently disabled before age 60. Which of the following riders should he consider? Waiver of premium disability benefit
Frank, age 38, was killed in a car accident. Which of the following riders provided an additional benefit for his heirs? Accidental death benefit
A young employee is buying individual life insurance and is worried about the impact inflation will have on his life insurance coverage. Which of the following riders should he consider? Cost-of-living protection
Mildred was diagnosed with terminal cancer and knows that she doesn’t have long to live. Which of the following riders would allow her to receive cash now? Accelerated benefits
The settlement option that pays the life insurance proceeds in equal periodic installments for a specified number of years after your death is called Limited installment payment.
The settlement option that pays the life insurance proceeds to the beneficiary for as long as she or he lives is called Life income option.
The settlement option in which the company acts as trustee and pays interest to the beneficiary is called Proceeds left with the company.
Which of the following annuities is purchased with a lump-sum payment and allows an individual to receive income payments beginning now? Immediate annuity
Which of the following statements is incorrect? An annuity is more advisable for people in poor health than for those who are likely to live longer than average.
Which of the following allows an individual to receive a fixed amount of income over a certain period of time, or over his or her life? Fixed annuity
When considering why to buy annuities, which of the following statements is correct? It is better to fully fund your IRA, Keogh, or 401(k) before buying an annuity.
Which of the following is a charge you will pay when you purchase a variable annuity? All of these.
Stephanie is the wage earner in a “typical family” with $40,000 gross annual income. Use the easy method to determine how much insurance she should carry. $196,000
Holly and Matt want to use the “nonworking” spouse method to determine the amount of life insurance coverage they need. If their two children are ages 9 and 5 years old, how much do they need? $130,000
Marianne and Roger are in good health and have reasonably secure careers. Each earns $45,000 annually. They own a home with a $125,000 mortgage; they owe $25,000 for their car loans and have $22,000 in student loans. If one should die, they think that funeral expenses would be $12,000. What is their total insurance need using the DINK method? $98,000
Finance Flashcards

Corporate Finance Test #1

Annual Report Is Issued once a year by a corporation and contains basic financial statements and an analysis of past performance and future prospects.
Balance Sheet Provides a quantitative summary of a company’s assets, liabilities, and net worth at specific point in time.
Statement of Cash Flows Give details about the company cash at the beginning of the year and what is left at the end of the year, including some details about where the cash was generated and where was used during the course of the year.
Statement of Retained Earnings Detailed changes in the capital receipt from investors in exchange for stock (paid-in capital), donated capital, and retained earnings
Income Statement Is divided into two important parts: operating and non-operating sections; also known as the profit and loss statement
What financial statement shows how profitable a firm has been? Income Statement
What financial statement shows how how much of the firm earnings are left as balance after the firm pays out dividends to its shareholders? Statement of Retained Earning
If compensation for senior management is based on short-term performance of a firm, in the short run the firm is likely to: Overstate its earnings
How do you calculate the book value per share of common stock? Total Common Stockholder’s Equity / Number of Common Shares
Free cash flow (EBIT (1 – Tax rate) + Depreciation and amortization) – (Capital expenditures + Change in net operating working capital)
Market value added (MVA) Market value of common stock outstanding – Book value of common stockholders’ equity
Economic value added (EVA) (EBIT (1 – Tax rate)) – (Total invested capital X After-tax cost of capital)
If a firm has a lot of net cash flow, does that mean the firm’s balance sheet cash account musth be high? No
Operating Activity Operating activities are the functions of a business related to the provision of its offerings. These are the company’s core business activities, such as manufacturing, distributing, marketing and selling a product or service. Operating activities should generally provide the majority of a company’s cash flow and largely determine whether a company is profitable.
Investing Activity Cash flow from investing activities is an item on the cash flow statement that reports the aggregate change in a company’s cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries and changes resulting from amounts spent on investments in capital assets such as plant and equipment.
Financing Activity A category in a company’s cash flow statement that accounts for external activities that allow a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans or issuing more stock. Cash flow from financing activities shows investors the company’s financial strength. A company that frequently turns to new debt or equity for cash, for example, could have problems if the capital markets become less liquid.
Financial Management Financial management, also called corporate finance, focuses on decisions relating to how much and what types of assets to acquire, how to raise the capital needed to purchase assets, and how to run the firm so as to maximize its value. The same principles apply to both for-profit and not-for-profit organizations; and as the title suggests, much of this book is concerned with financial management.
Capital Market Capital markets relate to the markets where interest rates, along with stock and bond prices, are determined. Also studied here are the financial institutions that supply capital to businesses. Banks, investment banks, stockbrokers, mutual funds, insurance companies, and the like bring together “savers” who have money to invest and businesses, individuals, and other entities that need capital for various purposes. Governmental organizations such as the Federal Reserve System, which regulates banks and controls the supply of money, and the Securities and Exchange Commission (SEC), which regulates the trading of stocks and bonds in public markets, are also studied as part of capital markets.
Investment Investments relate to decisions concerning stocks and bonds and include a number of activities: (1) Security analysis deals with finding the proper values of individual securities (i.e., stocks and bonds). (2) Portfolio theory deals with the best way to structure portfolios, or “baskets,” of stocks and bonds. Rational investors want to hold diversified portfolios in order to limit risks, so choosing a properly balanced portfolio is an important issue for any investor. (3) Market analysis deals with the issue of whether stock and bond markets at any given time are “too high,” “too low,” or “about right.” Included in market analysis is behavioral finance, where investor psychology is examined in an effort to determine whether stock prices have been bid up to unreasonable heights in a speculative bubble or driven down to unreasonable lows in a fit of irrational pessimism.
Market price Perceived investor cash flows, perceived risk
Intrinsic value True investor cash flows, true risk
Undervalued Intrinsic value > Market price
Overvalued Intrinsic value < Market price
Managers vs. stockholders – Compensation packages for managers should be sufficient to attract and retain able managers, but they should not go beyond what is needed. Compensation policies need to be consistent over time. Also, compensation should be structured so that managers are rewarded on the basis of the stock’s performance over the long run, not the stock’s price on an option exercise date. This means that options (or direct stock awards) should be phased in over a number of years so that managers have an incentive to keep the stock price high over time. When the intrinsic value can be measured in an objective and verifiable manner, performance pay can be based on changes in intrinsic value. However, because intrinsic value is not observable, compensation must be based on the stock’s market price—but the price used should be an average over time rather than on a specific date.- It has long been recognized that managers’ personal goals may compete with shareholder wealth maximization. In particular, managers might be more interested in maximizing their own wealth than their stockholders’ wealth; therefore, managers might pay themselves excessive salaries.- Effective executive compensation plans motivate managers to act in their stockholders’ best interests. Useful motivational tools include (1) reasonable compensation packages, (2) firing of managers who don’t perform well, and (3) the threat of hostile takeovers.
Stockholders vs. bondholders (creditors) Conflicts can also arise between stockholders and debt-holders. Debt-holders, which include the company’s bankers and its bondholders, generally receive fixed payments regardless of how well the company does, while stockholders do better when the company does better. This situation leads to conflicts between these two groups, to the extent that stockholders are typically more willing to take on risky projects.
Stockholders vs. society Higher level Pollution rates or Lay offs in order to raise stock price.
Difference between stakeholder and stockholder – Stakeholders are creditor’s- Stockholder can be stakeholder
Direct transfer Direct transfers of money and securities, as shown in the top section, occur when a business sells its stocks or bonds directly to savers, without going through any type of financial institution. The business delivers its securities to savers, who, in turn, give the firm the money it needs. This procedure is used mainly by small firms, and relatively little capital is raised by direct transfers.Not Common
Financial Markets People and organizations wanting to borrow money are brought together with those who have surplus funds in the financial markets. Note that markets is plural; there are many different financial markets in a developed economy such as that of the United States. We describe some of these markets and some trends in their development.
Physical asset vs. financial asset markets Physical asset markets versus financial asset markets. Physical asset markets (also called “tangible” or “real” asset markets) are for products such as wheat, autos, real estate, computers, and machinery. Financial asset markets, on the other hand, deal with stocks, bonds, notes, and mortgages. Financial markets also deal with derivative securities whose values are derived from changes in the prices of other assets. A share of Ford stock is a “pure financial asset,” while an option to buy Ford shares is a derivative security whose value depends on the price of Ford stock.
Spot vs. futures markets Spot markets versus futures markets. Spot Markets are markets in which assets are bought or sold for “on-the-spot” delivery (literally, within a few days). Future Markets are markets in which participants agree today to buy or sell an asset at some future date. For example, a farmer may enter into a futures contract in which he agrees today to sell 5,000 bushels of soybeans 6 months from now at a price of $9.75 a bushel. To continue that example, a food processor that needs soybeans in the future may enter into a futures contract in which it agrees to buy soybeans 6 months from now. Such a transaction can reduce, or hedge, the risks faced by both the farmer and the food processor
Money vs. capital markets Money markets versus capital markets. Money Markets are the markets for short-term, highly liquid debt securities. The New York, London, and Tokyo money markets are among the world’s largest. Capital Markets are the markets for intermediate- or long-term debt and corporate stocks. The New York Stock Exchange, where the stocks of the largest U.S. corporations are traded, is a prime example of a capital market. There is no hard-and-fast rule, but in a description of debt markets, short-term generally means less than 1 year, intermediate-term means 1 to 10 years, and long-term means more than 10 years.
Primary vs. secondary markets Primary markets versus secondary markets. Primary Markets are the markets in which corporations raise new capital. If GE were to sell a new issue of common stock to raise capital, a primary market transaction would take place. The corporation selling the newly created stock, GE, receives the proceeds from the sale in a primary market transaction. Secondary Markets are markets in which existing, already outstanding securities are traded among investors. Thus, if Jane Doe decided to buy 1,000 shares of GE stock, the purchase would occur in the secondary market. The New York Stock Exchange is a secondary market because it deals in outstanding, as opposed to newly issued, stocks and bonds. Secondary markets also exist for mortgages, other types of loans, and other financial assets. The corporation whose securities are being traded is not involved in a secondary market transaction and thus does not receive funds from such a sale.
Private vs. public markets Private markets versus public markets. Private Markets, where transactions are negotiated directly between two parties, are differentiated from Public Markets, where standardized contracts are traded on organized exchanges. Bank loans and private debt placements with insurance companies are examples of private market transactions. Because these transactions are private, they may be structured in any manner to which the two parties agree. By contrast, securities that are traded in public markets (for example, common stock and corporate bonds) are held by a large number of individuals. These securities must have fairly standardized contractual features because public investors do not generally have the time and expertise to negotiate unique, non-standardized contracts. Broad ownership and standardization result in publicly traded securities being more liquid than tailor-made, uniquely negotiated securities.
Behavioral finance theory Behavioral finance has been studied in both the corporate finance and investments areas.
Efficient market hypotheses (EMH) The efficient markets hypothesis (EMH) remains one of the cornerstones of modern finance theory. It implies that, on average, asset prices are about equal to their intrinsic values. The logic behind the EMH is straightforward. If a stock’s price is “too low,” rational traders will quickly take advantage of this opportunity and buy the stock, pushing prices up to the proper level. Likewise, if prices are “too high,” rational traders will sell the stock, pushing the price down to its equilibrium level. Proponents of the EMH argue that these forces keep prices from being systematically wrong
Types of stock market transactions – Secondary market- Primary market- Initial public offering (IPO) market
Financial institutions 1. Investment banks (underwriters)2. Commercial banks3. Financial services corporations4. Credit unions5. Pension funds6. Life insurance companies7. Mutual funds8. Exchange traded funds9. Hedge funds10. Private equity companies
Net working capital Current Assets – Current Liabilities
Net Operating Working Capital (NOWC) Current assets – (Current liabilities – Notes payable)
Working capital Working Capital = Current assets
Stockholders Equity Paid-in Capital + Retained Earnings
Sales for Target Profit Total Fixed Expenses + Target EBT / Cont. Margin Percentage
Target EBT Target Net Income / (1 – Tax Rate)
Variable Cost Cost the change
Fixed Cost Cost that are fixed
Statement of cash flows – Operating activities- Investing activities- Financing activities- Non-cash investing and financing activities
Statement of stockholders’ equity – Common stock- Additional paid-in capital- Retained earnings- Treasury stock
Finance Flashcards

Jenks Personal Finance Chapter 3 Volcabulary

Money management is planning how to get the most from your money.
safe-deposit box a small, secure storage compartment that you can rent in a bank, usually for $100 a year or less.
personal financial statement is a document that provides information about an individual’s current financial position and presents a summary of income and spending.
personal balance sheet also called a net worth statement, is a financial statement that lists items of value owned, debts owed, and a person’s net worth.
net worth is the difference between the amount that you own and the debts that you owe. Net worth is a measure of your current financial position.
Assets are any items of value that an individual or company owns, including cash, property, personal possessions, and investments.
Wealth is an abundance of valuable material possessions or resources.
Liquid assets are cash and items that can be quickly converted to cash.
real estate land and any structures that are on it, such as a house or any other building that a person or family owns.
market value or the price at which property would sell.
liabilities or the debts that you owe.
Insolvency is a financial state that occurs if liabilities are greater than assets.
cash flow The money that actually goes into and out of your wallet and bank accounts.
income Cash inflow is the money you receive.
take-home pay or net pay, is the amount of income left after taxes and other deductions are taken out of your gross pay.
discretionary income the money left over after paying for the essentials, such as food, clothing, shelter, transporta- tion, and medication.
surplus extra money that can be spent or saved, depending on a person’s financial goals and values.
deficit is the financial situation that occurs when more money is spent than is earned or received.
budget is a plan for using money to meet wants and needs.
consumer price index (CPI) which is a measure of the changes in prices for commonly purchased goods and services in the United States.
budget variance is the difference between the budgeted amount and the actual amount that you spend.
Finance Flashcards

Finance Chapter 12

Corporate ownership of an investor is evidenced by: common stocks held in a corporate.
When evaluating a stock as a possible investment, one must consider:
Bonds are issued: by corporations and state, local, and federal governments.
Stocks whose earnings have increased at an above average level over time are called: growth stocks
To most stockholders, the main advantages of common stock investments are: attractive returns and active trading
A bond selling below par value is selling at: discount
If you are looking for a guaranteed steady stream of income, you should invest in __________. bonds
When the market interest rate decreases, the bond: Decreases
The business risk faced by an investor when investing in a company is related to: the firm’s ability to meet operating expenses in a timely manner.
Changes in the general level of prices within an economy produce: purchasing power risk.
What is the effect of an increase in the current price of an investment?
The _____ of a stock reflects stockholders’ confidence. price/earnings ratio
__________ dividends are the most common form of dividends. cash
Cash dividends on common stock are most often paid: quarterly
Positive aspects about bonds include: low risk as compared to equity.
__________ is a measure of stock investors’ confidence in a corporation. price/earnings ratio
__________ risk results from the behavior of investors in the securities markets that may cause security prices to fluctuate. market
One of the advantages of common stock investments is:
If an investor wants a higher level of return on an investment, he or she should expect __________. a higher risk exposure
An investor receives return from an investment due to: capital gains on sale of an investment
Which of the following investments have the highest liquidity risk? corporate bonds
When interest rates rise, bond prices will: fall
Stock profitability is often measured by return on equity
Which of the following statements about risk is correct? The higher the risk, the higher the expected return
An investor receives return from an investment due to:
Finance Flashcards

Dave Ramsey Foundations in Personal Finance – Chapter 3 Video Terms

active Money is ______.
cash flow, month You must do a written ____ ____ plan every _____.
straitjacket It has a ___________ connotation.
abuse A budget has been used to _____ them.
worked They’ve never had a budget that ______.
fear Paralysis from ____ of what they will find.
balanced You must keep your checking account ________.
Overdrafts, money __________ are a sign of crisis living and sloppy, lazy money habits.
duplicate Use _________, or carbon check, if necessary to keep up with your check register.
debit If not managed and made to behave, the _____ card is certain to become a budget buster.
leave, out You _____ things ___.
overcompensate You ______________
do it You don’t actually __ __.
live You don’t actually ____ on it.
crisis A written plan removes the “management by crisis” from your finances.
Managed _______ money goes further.
money fights A written plan, if actually lived and agreed on, will remove many of the _____ ______ in a relationship.
guilt, shame, food A written plan, if actually lived and agreed on, will remove much of the _____, _____ and ____ that may be part of buying necessities such as food or clothing.
overdrafts, stress A written plan, if actually lived and agreed on, will remove much of the __________ from your life, consequently removing a lot of _____.
overspending A written plan, if actually lived and agreed on, will show if you are ____________ in a certain area.
before The zero-based budget gives every dollar a name on paper, on purpose, ______ the month begins.
zero Income minus outgo equals exactly ____.
envelope system The ________ ______ works great for managing money on things that don’t normally have a fixed monthly expense.
money You’ve got some _____.
job, work If you have a part-time ___ after school or even if your parents give you a commission for doing ____ around the house, you’ve got some money.
dollars If your parents buy you clothes or give you money to go out with your friends, pay for a club or athletic fees, or put gas in your car, all of those represent _______ that are flowing right through your fingers.
plan, before All we want you to do is ____ how you’re going to spend that money ______ you actually spend it.
bank Instead of having your parents pay for stuff, ask if they’ll figure out how much money they’d end up giving you for the month and then put it in your ____ account.
manage If your folks go along with this, then you’ll have a pile of money to ______ every month.
student We’ve developed a _______ budget form just for you.
excuses So no more _______!
Finance Flashcards


What is capital as a factor of production?A) The work people do to produce goodsB) The tangible goods created by laborC) The raw materials used to produce goodsD) The plan companies make to sell goods B
What is demand?A) The amount of something available to consumersB) The amount of something that consumers wantC) The amount of producers it takes to make a productD) The amount of a product that consumers asked producers to make B
The teenage market is a market that is categorized in what way?A) By commodityB) By consumerC) By locationD) By price B
A store that sells books and a store that sells tools are what type of competitors?A) Direct competitorsB) Indirect competitorsC) Partial competitorsD) Noncompetitors D
Which of the following is a feature of capitalism?A) A high level of government controlB) Competition between businessesC) Discouraging small business ownersD) Excessive monopolies B
A company that is most motivated to make money has a __________.A) Enterprise motiveB) Government motiveC) Sales motiveD) Profit motive D
Which of the following might financial planning help you do?A) Understand economic systemsB) Tell the difference between competition typesC) Stay aware of inflation ratesD) Keep track of earning and spending D
What might happen to a product when supply is low?A) The price will go up.B) The price will go down.C) The price will stay the same.D) The price will change very quickly. A
What is scarcity?A) The study of how people decide what they wantB) The study of the types of products available in an economyC) When people want more of something than is availableD) When people do not want the products that are available C
Which of the following is NOT something that money does in an economy?A) Measure the value of commoditiesB) Store the value of commoditiesC) Keep the rate of inflation lowD) Allow producers and consumers to trade commodities C
Finance Flashcards

Personal Finance

Do corporations issue stock because it is a form of debt capital? No, it is a form of equity.
Is the most important priority that an investor in preferred stock enjoys is receiving cash dividends before common stockholders are paid any cash dividends? Yes
The most important priority that an investor in preferred stock enjoys is receiving cash dividends before common stockholders are paid any cash dividends. Yes
Do corporations issue preferred stock because it provides an alternative to financing through corporate bonds or common stock? Yes
Is a blue-chip stock is too speculative for most investors? No
A stock that pays higher than average dividends is called an income stock. Yes
A defensive stock is a stock that typically sells for less than $l. No, it is a stock that remains stable during declines in the economy.
Today, it is possible for investors to use the Internet to access a corporation’s home page in order to evaluate an investment in its stock. Yes
It is common for professional advisory services like Mergent’s, Standard & Poor’s, and Value Line to charge for more detailed financial information than provided on other Internet Web sites. Yes
The federal government requires corporations selling new issues of securities to disclose information about corporate earnings, assets and liabilities, products or services, and the qualifications of top management in a prospectus. Yes
Many investors and analysts believe that a corporation’s ability or inability to generate earnings in the future may be one of the most significant factors that account for an increase or decrease in the value of a stock. Yes
If a corporation’s earnings decline, the stock’s value usually increases. No, the stock’s value will decrease.
An increase in a corporation’s earnings per share is a healthy sign. Yes
The current yield for a stock investment is calculated by dividing annual income amount by the investment’s current market value. Yes
The secondary market is a market for existing financial securities that are current traded among investors. Yes
As a rule of thumb, the more active the investor is, the more sense it makes to use computers to trade online. Yes
What investment had the best return since 1900? common stocks
What are dividends are paid out of? profits, and dividend payments must be approved by the firm’s board of directors.
The following statements are true: Corporations are required by law to distribute annual reports. Stockholders must approve any major changes to corporate policies. Stockholders usually cast one vote per share at the corporation’s annual meeting. Stockholders may vote in person or by proxy.
Which of the following statements are true: Most board members like to keep stockholders happy. Few things will unite stockholders into a powerful opposition force more rapidly than omitted or lowered dividends. Intelligent investors must be concerned about future after-tax profits. If a cash dividend is declared by the board of directors, each stockholder by law receives an equal amount per share.
When the board of directors approves a two for one stock split, the price for each share of stock: decreases in value.
The par value for a share of preferred stock is: an assigned dollar value that is printed on a stock certificate.
What is a callable preferred stock? The type of stock in which stockholders are assured that omitted dividends will be paid to them before other dividends are paid
Who makes the decision to convert preferred stock to common stock? the stockholder
What is convertible preferred stock preferred stock that can be exchanged for common stock
A very safe investment that generally attracts conservative investors is what kind of stock. A blue-chip
What is a stock that pays higher than average dividends? income stock
What is a stock that remains stable during declines in the economy? defensive stock
What is stock that follows the business cycle of advances and declines in the economy? cyclical stock
What is a stock issued by a corporation that has the potential of earning above-average profits when compared to other firms in the economy? growth stock
What is a stock that sells for less than $l a share? A penny stock
What is a prospectus? The federal government requires that a corporation selling a new issue of securities must disclose information about the company and its finances.
What can you do by using projected earnings? You can calculate a projected price per share of stock.
How is book value determined? By deducting liabilities from assets and dividing the remainder by the number of shares of stock outstanding.
What is a primary market? A market in which an investor purchases financial securities (via an investment bank or other representative from the issuer of those securities.
What is a secondary market? A market for existing financial securities that are currently traded between investors.
What is the excessive buying and selling of securities to generate commissions called? churning
Generally, your retirement will last only about 15 years. No, it will last much longer
Saving just a little bit regularly today for your retirement will help. Yes, any little bit will help in the long run.
Your first step in retirement planning is to analyze your current assets and liabilities. Yes
You can depend on social Security and your company pension to pay for your basic living expenses. No, you need to have some other savings also
Is your net worth is equal to your assets minus liabilities? Yes
Do your assets include everything you own that has value? Yes
Your liabilities are everything you owe. Yes
Can the exact amount of money you will need in retirement be predicted accurately? No, you can only estimate
With more free time, many retirees spend more money on recreational activities. Yes
Social Security is an important source of retirement income for most Americans. Yes
Most people can qualify for reduced Social Security retirement benefits at age 62. Yes
In a Roth IRA, contributions are not tax-deductible, but earnings accumulate tax free. Yes
Social Security is a package of protection, providing retirement, survivors’, and disability benefits. Yes
With employer pension plans, your employer contributes to your retirement benefits, and sometimes you contribute too. Yes
The two most popular personal retirement plans are individual retirement accounts (IRAs) and Keogh accounts.
You can convert your tradition IRA to a Roth IRA. Yes
An annuity is a contract from an insurance company that provides an income for life. Yes
You can buy an annuity with a single payment or with periodic payments. Yes
The first step in stretching your retirement income is to make sure you are receiving all the income to which you are entitled. Yes
Dipping into savings during your retirement isn’t wrong, but you must do so with caution. Yes
Estate planning is an essential part of retirement planning. Yes
Every adult should have a written will. Yes
If you die without a valid will, you die intestate. Yes
A standard will costs between $50 and $100. No, it costs between $300 and $400.
A simple will leaves everything to the spouse. Yes
Probate is a legal procedure of proving a valid or invalid will. Yes
You should avoid probate because it is expensive, lengthy, and public. Yes
A formal will is usually prepared with an attorney’s assistance. Yes
A living will provides for your wishes to be followed if you become so physically or mentally disabled that you are unable to act on your own behalf. Yes
A power of attorney is a legal document authorizing someone to act on your behalf. Yes
An estate tax is a federal tax levied on the right of a deceased person to transmit his or her property and life insurance at death. Yes
What is a true statement regarding retirement living expenses? The exact amount of money you’ll need is impossible to predict.
What expenditures for retirees is likely to increase? health insurance
Your first step in retirement planning is to… Analyze your current assets and liabilities.
What expenditures for retirees is likely to decrease? clothing expenses
Stock bonus plans, profit sharing plans, and 401(k) pension plans are examples of a defined-contribution plan.
What are the two most popular personal retirement plans? Personal retirement plans and individual retirement accounts
Possible sources of income for many retirees include… Social Security, other public pension plans, employer pension plans, and personal retirement plans and annuities.
Estate planning involves: handling your property while you are alive, dealing with what happens to that property after your death, your family’s financial security in the event of your death, and your family’s financial security in the event of your spouse’s death. 399
Estate planning has two phases. The first phase consists of: acquiring and accumulating money.
What is a will? the legal declaration of a person’s mind as to the disposition of his or her property after his or her death.
What happens if you die without a valid will? The state’s law of descent and distribution becomes your will.
What type of will leaves everything to your spouse? A simple will
What will is sufficient for smaller estates? A simple will
What type will leaves one half of your adjusted gross estate to your spouse outright as a marital share? A traditional marital share will
What is a handwritten will called? A holographic will.
What is an executor or executrix? A person who will follow your instructions specified in your will
What is a guardian? A person who accepts the responsibilities of providing the children with personal care and managing the estate for them
What is a trustee? A person or institution that holds or generally manages property for the benefit of someone else under a trust agreement
What is a testamentary trust? A trust established by your will that becomes effective upon your death
What is an estate tax? A federal tax levied on the right of a deceased person to transmit his or her property at death-
What is an inheritance tax? A state tax levied on the right of an heir to receive all or part of the estate and life insurance proceeds of a deceased person
How many months after your death is the federal estate tax due and payable in cash? 9 months
Finance Flashcards

Economics Personal Finance Test

Checking Account A bank account where money can be withdrawn or deposited at any time.
Savings Account A bank account used to keep money for a long period of time that gains interest.
Certificate Deposit Stating money has been deposited for a specific time
Bonds Certificates of debt that carry a promise to buy back the bonds at a higher price
Stocks shares of ownership in a company
Federal Deposit Insurance Corporation the government agency that insures customer deposits if a bank fails
Principal The money originally invested or loaned, on which basis interest and returns are calculated
Annual Percentage Rate – The rate you pay on your debts- The percent rate does not consider the effects of compounding- However, the money is still compounded
Annual Percentage Yield – Yield you get on your savings/investments- Takes into consideration the effects of compounding
Stafford and Perkins Loans – Subsidized Loans: Government Pays Interest While in College- Unsubsidized Loans: Interests Accumulates While in School
Standard Repayment – Usually pay back within 10 years with a fixed payment each month
Loan Fee – Upfront cost of taking out a loan, usually 1-4% of the principal
Income Based Repayment – A series of plans that allows you to pay different amounts each year of your income, usually 10-15% of your yearly income
Student Loan Forgiveness – After 10 years at a nonprofit or 20 years for everyone else
Amortization – Table summarizing debt decrease
Negative Amortization – Monthly payments do not cover monthly accrued interest
Federal Direct Student Loan Program Federally sponsored loan programs, which include the Stafford Loan and Parent PLUS Loan.
Subsidized Loans – Government pays the interest on the loan
Unsubsidized Loans – $3500 subsidized, $5500-7500 total
Insurance Premium The payment to an insurance company by a policyholder to purchase and maintain an insurance policy.
Deductible Amount you must pay before you begin receiving any benefits from your insurance company
Liability A debt; something disadvantageous
Collision Insurance Provides coverage for damages sustained by your vehicle
Comprehensive Insurance covers your car for reasons other than a collision, such as theft, fire, vandalism
Term Insurance Life insurance coverage for a specified period of time, less expensive than whole
Coinsurance – The percentage of health services you are requited to pay for, the insurance company will cover the rest
Copay – A required payment for medical services set by a beneficiary before insurance starts to kick in
Credit Score a number assigned to a person that indicates to lenders their capacity to repay a loan.
Pension A sum of money paid regularly as a retirement benefit; money paid under given conditions to a person following retirement or to surviving dependents.
Defined Benefit Plan A pension plan in which the amount of benefits paid to an employee after retirement is fixed in advance in accordance with a formula given in the plan.
Defined Contribution Plan A pension plan wherein a certain amount or percentage of money is set aside each year (by either the company and/or the employee) for the benefit of the employee. There are restrictions as to when and how you can withdraw these funds without penalties.
401(k) A type of defined contribution retirement account funded through pre-tax payroll deductions. The funds in the account can be invested in a number of different stocks, bonds, mutual funds or other assets, and are not taxed until they are withdrawn. The retirement savings vehicle gets its name from the section of the Internal Revenue Code that describes it: Section 401(k).
Health Benefits Benefits (compensation in addition to salary) that may be provided to employees for sickness, accidental injury, or accidental death. These benefits generally include payment of hospital and medical expenses. Employers are not obligated to provide health benefits to their workers. When employers do not provide health benefits, increasing numbers of people either cannot afford or choose not to purchase them.
Social Security A federal benefits program developed in 1935, Social Security is funded through a tax levied on employers and employees. The program includes retirement benefits, disability income, veteran’s pension, public housing, and even the food stamp program.
Medicare A federal program that provides some level of health benefits for people over age 65 or who collect Social Security for disability.
IRA A special type of account that allows investors to make tax-deductible contributions. The money can be invested in stocks, bonds, mutual funds, etc., and the earnings grow tax-free until the account’s owner turns 59 1/2 years old. At this time, the account holder is allowed to begin withdrawing money from the account to fund their retirement.
Roth IRA Roth IRAs allow investors who do not exceed a specific income level to contribute a limited amount of money toward retirement annually. Unlike the traditional IRA, the contributions are not tax deductible. However, Roth IRA account holders are not taxed when they begin withdrawing money at or before retirement (subject to certain rules and regulation.