Finance 301 flashcards

Balance Sheet They report, as of a certain point in time, the resources of a company, the obligations of a company, and the equity of the owners.
Income Statement They report, for a certain interval of time, the net assets generated, the net assets consumed, and the net income
Matching Principle Matches the expenses related to a sale in the same period
Revenue Recognition Revenue is recognized when a good or service is provided, not when the money is received
Cash Flow Statement Working capital changes are accounted for as cash flows from operating activities.
Cash Flow Statement The disposal or acquisition of plant, property & equipment is classified as an investing activity.
Cost of Goods Sold/Net Sales In order to calculate the amount of cost of goods sold on a common size income statement you would do the following:
Cash/Total Assets In order to calculate the amount of cash on a common size balance sheet you would do the following:
Inventory Which current asset is omitted when calculating the Quick Ratio?
Costs of Goods Sold On the income statement, which of the following line-items represents the amount the company’s suppliers receive?
Interest expense On the income statement, which of the following line-items represents the amount the company’s creditors receive?
Liquidity ratios If lenders want to assess the likelihood of borrowers being able to make interest payments, they would most likely look at which ratios?
Activity ratios If investors want to assess how efficient a company is at using its productive resources, they would most likely look at which ratios?
Shareholder Equity On the Balance Sheet, what reflects the owners’ residual interest in the firm?
Gross Margin On the Income Statement, what is the difference between revenues and cost of goods sold during a particular accounting period?
20% Calculate the ROE using the DuPont Model for a company with the following data:Profit margin= 15%Total Asset Turnover= 1.2Inventory Turnover= 1.8Equity Multiplier=1.1Current Ratio = 1.6
20% Calculate the ROE using the DuPont Model for a company with the following data:Profit margin= 5%Total Asset Turnover= 2.8Inventory Turnover= 2.5Equity Multiplier=1.4Current Ratio = .75
Dividends Received Which of the following activities is classified as Operating Activities on the Statement of Cash Flows?A. Dividends ReceivedB. Sale of PlantC. Proceeds from Stock IssuanceD. Sale of Long-Term AssetsE. Dividend Payments to Shareholders
Sale of Long-Term Assets Which of the following activities is classified as Investing Activities on the Statement of Cash Flows?A. Dividends ReceivedB. Payments to SuppliersC. Proceeds from Stock IssuanceD. Sale of Long-Term AssetsE. Dividend Payments to Shareholders
10K The annual report publicly traded companies must file with the SEC is the _______
10Q The quarterly report publicly traded companies must file with the SEC is the _______
It is less efficient in collecting cash from its customers. If a company has 44 days sales outstanding and the industry average is 32, which of the following is CERTAINLY true about the company relative to the industry?A. It is less efficient in collecting cash from its customers.B. It does not manage inventory as well.C. It is more profitable.D. It pays its suppliers more slowly.E. It is more highly leveraged.
It pays its suppliers more slowly. If a company has 56 days payable outstanding and the industry average is 41, which of the following is CERTAINLY true about the company relative to the industry?
Poison Pill The managerial defense mechanism that occurs when a company is targeted for hostile takeover and responds by selling new shares to friendly shareholders, thereby increasing the cost to the hostile acquirer is referred to as______.
Crown Jewels In which managerial defense does the target company sell off some of its major assets in order to discourage the takeover company from purchasing it?
Share Repurchase Which of the following events will increase Earnings per share?A. Increase in cost of goods soldB. Increase in number of shares outstandingC. Share repurchaseD. Decrease in net incomeE. Increased tax obligation
Issuance of new shares Which of the following events will decrease Earnings per share?
The 1990s involved more managerial stock ownership than the 1980s How was corporate governance in 1990s different from corporate governance in 1980s?
Increased importance placed on stock price and management performance. Which of the following describes the trend in corporate governance from 1980s to present?
CEOs must sign off on financial statements. Which of the following is an element of the Sarbanes Oxley Act of 2002?
The Board of Directors represents shareholders’ interests. Which of the following is true about the corporate governance model in the US?
The majority owner manages the company. Which of the following is true about the Rest of the World model of corporate governance?
Too many people wanted their money back too quickly. Why did Bernard Madoff’s Ponzi scheme fall apart?
He paid out higher returns than he earned. Bernard Madoff told his investors he had $50B in his fund but he really only had $15B. Why?
Safer investments tend to have lower returns. Which of the following concerning the relationship between risk and return is correct?
Investors generally require a higher return as they take on more risk. Which of the following concerning the relationship between risk and return is correct?
25% Calculate the stock return from the following information.Beginning Price: $100.00Price 1 Year Later: $110.00Dividend: $15.00
30% Calculate the stock return from the following information.Beginning Price: $50.00Ending Price: $60.00Dividend: $5.00
Treasury bills Which type of investment has the least amount of risk?
Small company stock Which type of investment has the greatest amount of return?
Managing short and long term capital requirements Which of the following is part of the treasurer’s function?A. Auditing the company’s financialsB. Publishing financial statementsC. Managing short and long term capital requirementsD. Monitoring accounting systemsE. Filing the company’s taxes
Preparing financial statements and reports Which of the following is part of the controller’s function?A. Determining the feasibility of various projectsB. Financial planningC. Managing short and long term capital requirementsD. Working capital managementE. Preparing financial statements and reports
Current stock prices reflect all publicly available information According to the Theory of Efficient Capital Markets:A. Stock prices are not affected by new informationB. Current stock prices reflect all publicly available informationC. Stock prices adjust to new information slowly over timeD. Stock Prices only reflect instantly to positive financial informationE. Investors can easily beat the market
Stock prices react instantaneously to new information According to the Theory of Efficient Capital Markets:A. Stock prices do not reflect all publicly available informationB. Stock prices take a long time to capture new informationC. Stock prices react instantaneously to new informationD. Stock prices react positively to all new informationE. Investors can easily predict exact stock prices
Supply and demand In the short term, stock prices are driven by:
Corporate Earnings (fundamentals) In the long term, stock prices are driven by:
Raising capital is easier for corporations than for sole proprietorships Which of the following statements about Business Organizational Forms is true?A. Corporations are less difficult to start than partnershipsB. Transfer of ownership is more difficult for corporations than for sole proprietorshipsC. Raising capital is easier for corporations than for sole proprietorshipsD. Sole proprietorships have limited liabilityE. Partnerships are double taxed
Owners of corporations have limited liability Which of the following statements about Business Organizational Forms is true?A. Corporations are easier to start than sole proprietorshipsB. Owners of corporations have limited liabilityC. Partnerships are easier to transfer than corporationsD. It is easier for sole proprietorships to raise capital than corporationsE. Sole proprietorships are double taxed
today, tomorrow The time value of money implies that: A dollar _____ is worth MORE than a dollar _____
transaction costs Which of the following is an “enemy” of your investment plan?A. Strong market fundamentalsB. Strong company earningsC. Transaction costsD. Dividend payoutsE. Corporate governance
Inflation Which of the following is an “enemy” of your investment plan?A. Strong market fundamentalsB. InflationC. Strong company earningsD. Dividend payoutsE. Corporate governance
Managing a firm’s short-term financial position What is working capital management?
Determining the mixture of long-term debt and equity used to finance the company’s operations Which of the following is an example of a capital structure decision?A. Determining the mixture of long-term debt and equity used to finance the company’s operationsB. Determining how much cash a company should keep on handC. Determining how much in dividends to pay out per quarterD. Day-to-day management of accounts receivableE. Determining which investment project offers the best return for the company
2.95% The current 30 year Treasury Yield is closest to ______
$100 The current price of crude oil is closest to ______ per barrel
Management should have a stake in the company Which of the following is an element of good management according to Gordon Gekko?A. Managerial efficiency is not importantB. Management is not accountable to shareholdersC. Management should have a stake in the companyD. Shareholder value should be ignoredE. Managers should not think about increasing the stock price
Management must be accountable to the shareholders Which of the following is a principle held by Gordon Gekko:A. Management must be accountable to the shareholdersB. Management should not have a stake in the companyC. The maximization of shareholder value doesn’t matterD. Managerial efficiency is not importantE. Making money for the shareholders is not essential
$8.99 Billion Given the following information for Research In Motion, compute its market capitalization.Stock price: $17.47Earnings per share: $4.25Price/Earnings ratio: 5.92Shares outstanding: 515 MillionA. $3.05 BillionB. $2.18 BillionC. $5.23 BillionD. $8.99 BillionE. $5.24 Billion
$1.36 Billion Given the following information for IMAX Corporation, compute its market capitalization.Stock price: $20.91Earnings per share: $0.94Price/Earnings ratio: 19.91Shares outstanding: 65 MillionA. $61.10 MillionB. $1.29 BillionC. $416 MillionD. $1.36 BillionE. $20.91 Billion
Minimizing the company’s cost of capital Which activity is most likely to increase shareholder value?A. Minimizing the company’s cost of capitalB. Minimizing the amount of projects the company spends money onC. Financing the company’s business with expensive debtD. Maximizing the amount of corporate assetsE. Investing in projects that are always the least risky
Excessive investment in an asset class Which of the following is a common element of financial crises?A. High growth in the US economyB. Excessive investment in an asset classC. Trade deficitD. Democrat PresidentE. Occurrence only once every 30 years
Easy financing Which of the following is a common element of financial crises?A. Easy financingB. Inefficient capital marketsC. Increase in value of dollarD. Trade deficitE. Excessive exports
Management invests in a project that serves the interests of management more than shareholders Which of the following is an example of the agency problem?A. Management pursues strategies that maximize shareholder valueB. Management invests in a project that serves the interests of management more than shareholdersC. The objectives of shareholders and management are alignedD. Management allocates corporate resources in a way that increases the value of the company’s sharesE. Management has stock options in the company, potentially providing large payouts if the company does well
Corporate Management invests in a negative ROI project because it will mean large bonuses and kickbacks for all Senior Executives. Which of the following is an example of the agency problem?A. Management acts in the best interest of shareholdersB. The objectives of shareholders and management are alignedC. Management invests in a project that serves the interests of shareholdersD. Corporate Management invests in a negative ROI project because it will mean large bonuses and kickbacks for all Senior Executives.E. The management has stock options in the company, potentially providing large payouts if the company does well.
Audited Financial Statements Which of the following is an example of an internal control mechanism used to ensure that management acts in shareholder interests?A. Shareholder ActivismB. Market for Corporate ControlC. Managerial Labor MarketD. Threat of Takeover by Private Equity InvestorsE. Audited Financial Statements
Shareholder Activism Which of the following is an example of an external control mechanism used to ensure that management acts in shareholder interests?A. Audited Financial StatementsB. Board of DirectorsC. Stock Ownership InterestsD. Shareholder ActivismE. Stock-Based Compensation
In the event of liquidation, they get paid after all other stakeholders. Which of the following is true of stockholders?A. It is typical of American companies that there are only one or two majority shareholders in a company.B. Stockholders are not considered stakeholders because they own the company.C. In the event of liquidation, they get paid after all other stakeholders.D. Stockholders are not permitted to work for the company.E. Stockholders are protected by contractual agreements.
Stakeholders are protected by contractual agreements. Which of the following is true of stakeholders?A. Stakeholders are all entitled to some money in the event of liquidation of the company.B. Stakeholders are protected by contractual agreements.C. Stakeholders are entitled to a residual claim of the firm’s cash flows.D.The Board of Directors represents all stakeholders.E. Good management works to maximize the value of the firm to the stakeholders
The CFO oversees the financial activities of an organization 37. Which of the following is TRUE about the CFO.A. The CFO reports to the head ControllerB. CFO is the head accountant for an organization.C. The CFO is prohibited from signing the Annual ReportD. The CFO oversees the financial activities of an organizationE. The CFO is expected to serve on the Board of Directors
The Controller and Treasurer report to the CFO Which of the following is TRUE about the CFO?A. The Controller and Treasurer report to the CFOB. The CFO is not responsible for risk managementC. The CFO is solely responsible for Treasury operationsD. The CFO is not expected to advise on corporate strategyE. The CFO takes a “hands off” approach to financial management
Institutionalization of markets Which one of the following is an element of the new corporate finance environment?A. Lower economic volatilityB. Excessive regulationC. Lack of complex financial instrumentsD. Institutionalization of marketsE. Decrease in international trade
Greater economic volatility and risk Which one of the following is an element of the new corporate finance environment?A. Greater economic volatility and riskB. Lack of complex financial instrumentsC. Decrease in international tradeD. Inflation no longer a factor in corporate financeE. No access to global markets
Commodity prices increase Which of the following is instantly evident in the market upon the announcement of a natural disaster such as Hurricane Irene?A. Insurance stock prices increaseB. Oil prices decreaseC. Commodity prices increaseD. Home goods retailers stock prices decreaseE. Construction stocks decrease
Companies that generate free cash flow As an investor, Warren Buffet prefers companies with which of the following characteristics:A. Industry with few and insignificant barriers to entryB. High Tech CompaniesC. Companies with low ROED. Companies that generate free cash flowE. Managers who do not think like owners
Insurance What kind of companies make up the majority of Berkshire Hatheway’s portfolio?A. AutomobileB. Investment BanksC. TextilesD. InsuranceE. Semi-Conductors
Prices reflect emotions and biases According to Behavioral Finance, which of the following statements are true:A. Markets are always efficientB. Decisions are based on rational expectationsC. Prices reflect valuesD. Prices reflect emotions and biasesE. Low risk equals high returns
Decisions are based on emotions and biases According to Behavioral Finance, which of the following statements are true:A. Markets are always efficientB. Prices reflect valuesC. Prices do not reflect emotions and biasesD. Decisions are based on emotions and biasesE. Low risk equals high returns
Finance involves the management of money -amount, time, risk
Corporate FinanceInstitutions and MarketsInvestments What are the three areas of finance?
Corporate Finance The activities involved in managing money in a business environment.
Institutions and Markets Examines the structure of capital markets, the role of financial institutions, the process of financial intermediation and how money flows into the economy
Investments focuses on the valuation techniques and how to value alternative investment opportunities that are provided primarily through financial markets and institutions
Capital Markets financial markets where issuers and investors buy and sell debt and equity securities
Debt obligation to repay borrowed money
Stock represents ownership in the company
Effects of Technology made cost of transactions lower more transactions made creation of new financial instruments sophisticated hedging and investing practices
Maximize the Value of the Firm The objective function is to ______________.
Basic Corporate Financial Decisions 1) The Investment Decision: Allocating scarce resources acrosscompeting uses?2) The Financing Decision: Raising funds to finance theseFinancial Decisions and the Financial Tool Boxprojects?3) The Dividend Decision: Returning Funds to investors?
The four common elements of financial crises are ______.
Revenue Principle Requires the recognition of revenues in accordance with the accrual basis accounting principles.
Earnings Per Share Computation of net income after taxes divided by the amount of shares of outstanding common stock.
Debt Covenant A provision in a loan agreement that requires the firm to maintain a minimum financial ratio.
Liquidity Ratios Ratios used to indicate the ability of a company to pay its bills on time.
Activity-Efficiency Ratios Ratios used to assess the effectiveness in which a firm is managing assets and liabilities to generate sales.
Leverage Ratios Ratios indicating the extent to which a firm has financed its assets with debt financing.
Profitability Ratios Ratios that serve as an overall measurement of firm performance and the effectiveness of the firm’s management.
Valuation Ratios Ratios used to compare accounting numbers to the current market price.
Fundamentals This is the driver of stock prices in the long-run.
Traditional Finance Expected utility maximization, rational expectations, efficient markets.
Markets affected by Disasters -Commodity Markets -Stock/Bond Markets -Currency Markets
Corporate Stakeholders -Employees -Customers -Community -Lenders -Suppliers -Government
Ponzi Scheme Fraud where invested money is pocketed by a schemer and investors are paid out of proceeds from new investors.
Crown Jewels The target company will sell off some of it’s major assets to discourage the takeover company from acquisition.
Poison Pills These provide target shareholders with the rights to purchase additional shares or sell shares to the target on very attractive terms making it harder for the acquirer to take over.
Pac-man Defense Target company employs a counter-takeover bid for the aggressor, announces they are acquiring the aggressor and makes necessary advances to do so.
shareholders Owners of the common stock of a corporation.
stakeholders Any entities with legitimate claims on a firm.
Financial Toolbox -Financial Statements and Ratio Analysis -Present Value Concepts -Models or risk and return -Spreadsheet modeling methods
Investment Decision How corporate managers should allocate funds of the company to buy or build projects and investments that will be worth more than they cost.
Financing Decision How corporate managers raise money from institutional and individual investors through the sale of debt and equity claims for the company to finance the investment projects of the firm.
Dividend Decision The percentage of company’s profits and cash from operations that the company should reinvest in the business and how much should be returned to the stockholders.
401K Allows tax-deferred investments to a retirement account. May be matched by employer.
Partnership Company formed by two or more individuals -can be general or limited -in general, each partner is liable for the debts of the partnership, shares in the profits and losses. -in limited, the liability to the amount of cash contributed by each partner -not taxed on their income -pay income tax on their share of the partnership.
Corporation Main characterisitcs -limited liability -corporate taxes in addition to personal income taxes -easily transferable subject to double taxes
White Knight company finds a friendly merger candidate
Greenmail target company purchases the acquirer’s shares at a premium over the market price to avoid a takeover – forces company to pay out to the acquirer
Golden Parachute Target company provides compensation to top-level executives in the event of a change of corporate control.
7% In US Long term growth is approx. _____ %
22 S&P 500 = ____
2,750 NASDAQ = ______
76 ____ yen/dollar
1.28 _____ $/Euro
1,650 Price of gold
3% 30 yr treasury Yield = _________
12,500 DIJA = ______ (Dow Jones)
Beta A measure of volatility or systematic risk of a security or a portfolio in comparison to the markets as a whole. Also known as “beta coefficient”
Stakeholders _____ interests are protected by contracts.
corporations ____ are the most complex form of business organization to start up.
Madoff’s Scheme _____ require new investment dollars on an ongoing basis to continue.
100,000 A share trades for over ____ per share. (Berkshire)
stockholder Danny Devito exposes the _____ philosophy.
stakeholder The federal government is a corporate _____. (taxes)
return on assets (Ratio) Derives the most net income from every dollar of assets = __________
Asset Diversification ________ is used to reduce exposure to firm-specific risk.
profitability ratios Management’s overall performance is best gauged by looking at _________.
Debt/Equity ratio If you are looking for the ratio that shows the highest leverage use ______.
Price/Earnings Ratio Ratio with the greatest growth prospect is ______.
agency problem Mgmt decides to acquire another firm at a much higher value than its worth is an example of __________.
Liquidy ratios Ratios that reflects paying bills is _______.
Inventory Turnover Ratio that shows least efficient at turning over inventory is __________.
stockholders ________ have a residual claim on the cash flows of a corporation.
inflation The current financial crisis does not show an increase in the _______ rate.
Return on Equity Ratio that earns the most profit for every dollar of equity is ______.
Days Sales Outstanding Ratio that is most efficient at collecting payments from customers is _________.
15% On average, companies earn a return on equity of _____ in the U.S.
7% The average growth rate in the U.S. is _______.
(# of shares) x (price per share) How do you calculate market capitalization?
Profit Margin x Asset Turnover x Leverage How do you calculate Return on Equity?
Leverage Ratios Ratios that deals with Debt to company is __________.
stakeholders _______ have a claim on the firm’s cash flows prior to debt holders and suppliers.
(change in stock price +dividends) / original stock price How do you calculate stock return?
Berkshire Hathaway Inc. Warren Buffet’s company is called __________.
20% Warren Buffet promises a ___ annual return.
Warren Buffet _______ : this person….- prefers companies to stocks- no tech companies- perfers manangers to act like owners- generators of cash flow- barriers to entry
risk and return two words that describe finance are _____________.
positive there is a _______ relationship between risk and return.
Efficient capital markets According to the theory of ________ (ECM) the stock market is brutally efficient.
adverse (meaning = prefer less risk) Rational investors are risk ______.
Less Small deviation is _____ risky.
corporate managers _______ should make decisions that maximize shareholder value.
enemies of finance ______:- transaction costs- taxes- inflation
Asset Allocation (related to portfolio approach) _____ is a very important decision. To achieve the highest level of return for the amount of risk we can absorb, we should diversify our investment holdings over an array of asset classes.
low 1. = _____ risk1.Gov’t Bond2. Corp Bonds3. Large Value 4. Large Growth5. Small Capital6. International
lower more stocks = ____ deviation
1.0 Average Beta = _____.
low Low beta = _____ returns
high high beta = ____ returns
traditional finance ________ = – expected utility maximization- rational expectations- expected outcomes- prices reflect values and #s- arbitrageurs correct mispricing
behavioral finance ______ = – flaws in utility- not rational- reflect emotions- not efficient in market- limits to arbitrage
______ roles = – corporate strategist- financing and capitalization- risk management- growth and acquisitions
Facebook ______ is the most hated company in the US
3% Real GPD sales profits EPS = _____
7% Nominal GPD sales proftis EPS = _____
activity ratios ________ – measures how well firms use productive resources- related to receivables, inventory, total assets
Profit Margin x Asset Turnover x Return on Equity The Dupont Model = ____________

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