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Finance Flashcards

Finance Exam 2

Portfolio risk will _______ if more stocks that are negatively correlated with other stocks are added to the portfolio decline
T/F: the portfolio’s risk is the weighted average of the individual stocks’ standard deviations false
T/F: the market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio false
T/F: portfolio risk is likely to be smaller than the average of all stocks’ standard deviations true
_______ reduces firm-specific risk in the portfolio diversification
__________ measures standalone risk standard deviation
__________ measures a stock’s contribution to the risk of the portfolio beta
_______ measures the risk of a given security relative to the market beta
in a non-diversified portfolio, __________ measures market/systematic risk beta
Beta(portfolio)= sum((investment/total) x beta)
required rate of return for a portfolio= r*+(MRP x Bp)
when investors become risk-averse, they require ________ compensation, which leads to a _________ slope and high risk premium more; steeper
if investors become less risk-averse, the slope of the SML will become flatter
a discount bond’s price is less than par value, but ______ over time until maturity rises
the riskiest of all corporate bonds, and therefore have the highest yield subordinated debentures
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Finance Flashcards

Finance chapter 8

It is not difficult to find a credit card company that is eager to extend credit to you. true
Credit cards are commonly used for purchases such as clothing, car repairs, or the purchase of a new car. false
One advantage of credit cards is that you can receive free financing if you pay off your balance each month. true
A disadvantage to credit cards is that there is no way to keep track of individual expenditures. false
Advantages of using credit include the ability to make purchases when cash inflow is low and the convenience of not carrying cash or checks. true
Credit cards can eliminate the need for carrying large amounts of cash. true
When applying for a credit card, the amount of savings that you have will not be a factor in the credit card company’s decision. false
Because of the short-term nature of credit card lending, the condition of the economy is not considered. false
One of the disadvantages of credit cards is that they allow you to spend beyond your means. true
One advantage of using a credit card is that you receive a list of your purchases, which enables you to keep track of your spending. true
The easiest way to establish credit is toA) purchase a new car with a car loan.B) purchase a house with a mortgage.C) apply for a credit card.D) pay cash for all your purchases. c
In applying for a credit card, the potential creditor will look at which of the following as a source of future debt payments if necessary?A) Cash outflowsB) Credit historyC) Potential inheritancesD) Balances in savings accounts d
Credit cards are generally used for such purchases asA) cars.B) homes.C) meals, clothing, and groceries.D) stocks. c
Credit cards have all of the following advantages exceptA) they allow you to borrow cash interest free for 60 days.B) make purchases without carrying cash.C) obtain free financing until the bill is due.D) itemized monthly statement. a
Which of the following personal information would not be asked on a credit card application?A) Cash inflows B) Country of birthC) Capital and collateralD) Cash outflows b
Which of the following personal information should not be asked on a credit card application?A) Stocks and bonds ownedB) Income of parentsC) Employment historyD) Expenses and commitments b
In applying for a credit card, the potential creditor will look at your ________ to determine if you have funds to cover future debt payments if necessary. capital
It is good financial planning to pay only the minimum credit card payment and thus maintain a balance since interest rates are low on credit cards. false
To properly manage your money you should use a credit card only if you will have the cash to cover the payment when you receive your credit card statement. true
Because credit card interest rates are usually quite high, you should pay off your credit card balances before you invest funds anywhere else. true
even if you cannot pay your credit card bill in full, you should still attempt to pay as much as possible so that you can minimize finance charges. true
There is no cost to the merchant when you use a MasterCard or Visa. false
Financial institutions issuing MasterCards and Visas typically earn a high rate of interest on the credit extended. true
MasterCard and Visa are not accepted by gas stations such as Shell, which issue their own credit cards. false
Creditors are willing to extend credit when the economy is weak to stimulate purchases. false
MasterCard, Visa, and American Express credit cards all allow you to pay only a portion of your amount due and finance the remainder from month to month. false
An alternative to MasterCard, Visa, and American Express credit cards is a retail or proprietary card that is issued for use at a specific retail establishment. true
One disadvantage of a proprietary credit card is that it limits your purchases to a single merchant. true
Credit limits may be as high as $10,000 for those credit card holders who have an exceptional credit history. true
There are many incentives, such as discounts and bonuses, offered by credit card companies to get you to use their cards. true
Prestige cards (gold or platinum cards) always charge a higher annual fee, but offer extra benefits such as free insurance on rental cars or special warranties on purchases. false
If you pay your total credit card amount before the grace period, you are not normally charged any interest. true
The interest charged on purchases and cash advances on credit cards is computed in the same way. false
Cash advances on credit cards normally cost you interest from the date of the advance and also a transaction fee of 1 to 2 percent. true
Some credit cards offer card users cash rewards if they exceed a certain spending level each month. true
The annual percentage rate (APR) on credit is the simple interest rate after including any fees (such as an application processing fee) imposed by the creditor. true
The annual percentage rate (APR) is useful because it allows you to easily compare financing costs among various possible creditors. true
In comparing credit cards to other forms of credit, which of the following is true?A) Credit cards are generally the most expensive form of credit.B) You should invest funds before paying off your credit cards.C) It is prudent to borrow from some cards to pay off other credit cards.D) All of the above. a
In comparing credit cards to other forms of credit, which of the following is false?A) Credit cards are generally the most expensive form of credit.B) You should pay the most expensive debt off first.C) Credit cards can be viewed as a source of funds.D) A home equity loan is a way of combining credit card and other debt. c
or good financial management, you should treat a credit card asA) a source of funds.B) a means of convenience.C) a way to finance everything.D) an inexpensive form of financing. b
Credit has its advantages and disadvantages. Which of the following is false?A) Credit cards should be used with discipline.B) You should spend up to the limit on all your credit cards.C) Cash advances are available through a credit card.D) Bankruptcy is the worst-case scenario from poor credit management. b
Which of the following are good tips on the use of a credit card?A) Treat it as a means of convenienceB) Use it as a source of fundsC) Make the minimum required monthly paymentD) All of the above a
Some credit card companies will waive the annual fee on a credit card ifA) you use the card infrequently.B) you carry a large balance from month to month.C) you pay your bills in a timely manner.D) Credit card companies never waive annual fees. c
If a credit card has a provision allowing you to make purchases beyond the stated credit limit, it is referred to asA) purchase protection plan.B) overdraft protection.C) grace period.D) first forgiveness provision. b
A credit card whose interest rate changes as a specific market interest rate changes is said to have aA) variable rate.B) fixed rate.C) constant rate.D) tiered rate. a
Credit cards with a tiered interest rate charge cardholders whoA) carry large balances a lower rate.B) pay off their balance monthly a higher rate.C) make early payments a higher rate.D) make late payments a higher rate. d
Which credit card requires full payment each month?A) MasterCardB) VisaC) American ExpressD) A proprietary card c
All of the following are disadvantages of having proprietary credit cards exceptA) your purchases are limited to a single merchant per card.B) you may need several credit cards.C) you receive several billing statements.D) it takes considerable time to process your application to allow you to begin obtaining credit. d
In securing a credit card you should try to obtainA) the highest maximum limit possible.B) a maximum limit high enough to cover necessary monthly purchases.C) a maximum limit high enough to cover anything you might wish to purchase.D) the lowest maximum limit possible to restrict your usage. b
Which of the following may not be a feature of some credit cards?A) Credit limitsB) Annual feesC) Grace periodsD) Cash advances b
Which of the following is not true about annual fees on credit cards?A) The fees are the same on all credit cards.B) The fees may be high, up to $70 per year.C) Many cards do not have annual fees.D) Some cards may waive the fees for individuals who pay their credit card bills in a timely manner. a
All of the following are true of prestige credit cards except theyA) always have considerably higher annual fees.B) are sometimes referred to as gold or platinum cards.C) provide extra benefits to cardholders.D) are given to individuals who have an exceptional credit standing. a
All of the following are true of the grace period on credit cards except itA) is usually about 20 days.B) applies only to cash advances.C) is the time in between the time the statement is “closed” and the time the bill is due.D) amounts to free credit time. b
Which of the following is not true regarding cash advances on credit cards?A) They are treated just like other charges on your credit card.B) There is a charge for interest from the time you take the advance to the time you pay it off.C) There is also a transaction fee on most cash advances.D) The grace period does not apply to cash advances. a
Cash advances areA) a good way to finance your purchases.B) cheaper than a line of credit.C) not shown on the credit card statement.D) easy to make at an ATM machine. d
Which of the following is not correct about cash advances?A) There is no grace period for cash advances.B) The interest rate for cash advances is higher than for purchases.C) A cash advance is like a loan.D) A transaction fee of 5% may be charged. d
In comparing credit cards, which of the following is false?A) Some cards are more widely accepted than others.B) Some cards offer a teaser interest rate.C) Some charge an annual fee and others do not.D) Some cards allow you to carry a balance from month-to-month with no interest d
A credit card that can only be used in establishments of the issuer is called a(n) ________ credit card. retail or proprietary
If you have an exceptional credit standing, the company issuing your credit card may upgrade you to what are called ________. prestige cards
The ________ is usually about 20 days after the credit card statement is closed. grace period
Finance charges apply only to balances that were not paid in full before their due date in the current billing period true
The previous balance method takes into account the time that you pay off any part of the outstanding balance. false
If you find yourself with an excessive credit card balance, the first thing you should do isA) borrow funds from family members.B) quit school and get a job.C) spend as little as possible.D) file for personal bankruptcy. c
Which of the following is not a method for computing interest on credit cards?A) Previous balance methodB) Average daily balance methodC) Present value of future payment methodD) Adjusted balance method c
On a credit card, a finance charge is applied toA) any purchase.B) any balance not previously paid.C) current purchases.D) future purchases. b
Which of the following methods of calculating finance charges on credit cards is least favorable to the cardholder?A) Previous balance methodB) Ending balance methodC) Average daily balance methodD) Adjusted balance method a
The ________ method charges interest based on the balance at the beginning of the new billing period.A) new cycleB) adjusted balanceC) average daily balanceD) previous balance d
The simple interest rate includes any fees charged by the creditor false
the interest you pay when using credit cards can have a major impact on the total amount you owe. true
If it takes you four years to pay off a loan, you have to pay the annual interest four times. true
The annual percentage rate (APR) is all of the following exceptA) a simple interest rate for borrowing money for a year.B) it requires a complex formula to compute. C) it includes fees such as application processing fees.D) it allows easy comparison of financing costs among various creditors. b
APR meansA) actual percentage rate.B) applied percentage rate.C) annual percentage rate.D) all-banks percentage rate. c
Jill just borrowed $6,000 and will be charged a simple interest rate of 12 percent. Jill will pay ________ interest for borrowing the money on September 1 and repaying the money on December 31.A) $240B) $420C) $720D) $1,200 a
If you borrowed $8,700 at 6% for one year, what would your total interest be if you are charged simple interest?A) $600 B) $9,222C) $522D) $600 c
If you include all fees charged by a lender and the simple interest rate, the result will be the ________. APR
A credit card statement lists purchases that were made with the credit card as well as any balance carried forward from the previous statement. true
A credit card statement will not show the method of calculating finance charges. false
If you discover an error on your credit card statement, you should not pay any portion of the balance until the matter has been resolved. false
A credit card statement does not contain which of the following?A) Previous balanceB) Current balanceC) Account numberD) Who purchased the item d
On your credit card statement, the amount that you owe the financial institution now is called theA) previous balance.B) minimum payment.C) new balance.D) payments. c
By reviewing your credit card statement, you can determine all of the following exceptA) total purchases made year-to-date.B) your available credit remaining.C) if a payment can be made that will avoid interest charges.D) how much time you have to make a payment. a
Congress has passed regulations that protect consumers who use credit card services. true
If your credit card company decides to increase your interest rate, they must notify you 30 days in advance. false
Your credit card statement must state how long it will take you to pay off the existing balance due when paying only the minimum amount each month. true
The Bureau of Consumer Financial Protection was created in 2010 to ensure that credit card companies are treated fairly. false
New regulations that provide clearer and more favorable financing rules for individual credit card users do all of the following exceptA) prohibit interest rate increases if you miss a payment on another credit card.B) cap the amount of any increase to 5%.C) require a 45 day notice of any credit card interest rate increase.D) prohibit the rate on existing credit card balances from being increased unless you are at least 60 days late on payments. b
Credit card companies’ fees cannot exceed ________of the initial credit limit.A) more than 5%B) more than 10%C) more than 50%D) more than 25% d
All of the following are provisions of the Credit Card Act of 2009 exceptA) cardholders must be given at least 21 days from the day in which the bill is mailed to make a payment.B) cardholders less than age 21 must show proof of their income.C) cardholders can spend beyond the limit imposed on the credit card.D) promotional interest rates must be offered for a period of at least six months. c
A self-imposed credit limit indicates that you will use a credit card only if you will have the cash to cover the payment when you receive your credit card statement. true
You should discontinue any credit card that is not sponsored by a company that sells necessities false
You should invest in risky investments instead of paying off your credit card debt because the return might be higher than the cost of financing. false
If you have credit problems, you should contact a credit repair service instead of trying to resolve the issues yourself. false
If you have exhausted all efforts to resolve an excessive credit card balance, personal bankruptcy may be your only option. true
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Finance Flashcards

Finance Final Ch.11-16

2) Errors in capital budgeting decisions B) decrease the firm’s value.
3) Which of the following factors is least important to capital budgeting decisions? C) Net income based on accrual accounting principles
5) Which of the following is a typical capital budgeting decision? C) Replacement of manufacturing equipment with more modern and efficient equipment
6) Good capital investment opportunities are most likely to exist when D) a line of business is expensive to enter and uses proprietary technology.
10) Capital budgeting is the decision-making process with respect to investment in working capital. FALSE
11) Suppose you determine that the NPV of a project is $1,525,855. What does that mean? B) The project would add value to the firm.
12) Project January has a NPV of $50,000, project December has a NPV of $40,000. Which of the following circumstances could make it possible to choose December over January? C) The projects have unequal lives.
27) The equivalent annual cost (EAC) method is appropriate for evaluating accessibility projects mandated by the Americans With Disabilities Act. TRUE
28) The required rate of return represents the cost of capital for a project TRUE
29) The higher the discount rate, the greater the importance of the early cash flows. TRUE
30) The equivalent annual cost (EAC) method is helpful for mutually exclusive projects with unequal economic lives. TRUE
2) If a project has a profitability index greater than 1 A) the npv will also be positive.B) the irr will be higher than the required rate of return.C) the present value of future cash flows will exceed the amount invested in the project.
39) The payback method focuses primarily on the length of time required to recover the cost of the investment rather than estimating the total value the project will add to the firm. TRUE
41) When several sign reversals in the cash flow stream occur, the IRR equation can have more than one positive IRR. TRUE
43) The profitability index provides the same accept/reject decision result as the net present value (NPV) method but would not necessarily rank mutually exclusive projects the same way. TRUE
44) The internal rate of return (IRR) will increase as the required rate of return of a project is increased. FALSE
45) The IRR assumes that cash flows are reinvested at the cost of capital FALSE
2) Which of the following best explains the continuing popularity of the payback method? A) Mathematical simplicity and some insight into the riskiness of cash flows.
5) Which of the following techniques might be useful in situations where the economic life of a project is highly uncertain? D) Discounted payback
Currently, most firms use NPV and IRR as their primary capital-budgeting technique. TRUE
10) Most firms use the payback period as a secondary capital-budgeting technique, which in a sense allows them to control for risk. TRUE
2) Which of the following is NOT one of the categories for a project’s relevant after-tax cash flows? A) Financing flows
3) Which of the following is NOT part of a project’s initial cash outflow? C) A marketing survey completed last year to determine the project’s feasibility
4) Relevant incremental cash flows include A) sales captured from the firm’s competitors.B) retained sales that would have been lost to new competing products.C) incremental sales brought to the firm as a whole.
6) Which of the following cash flows should be included as incremental costs when evaluating capital projects? A) Investment in working capital that is directly related to a projectB) Expenses that are incurred in order to modify a firm’s production facility in order to invest in a projectC) Opportunity costs that are directly related to a project
8) Which of the following would be considered a termination cash flow? A) The expected salvage value of the assetB) Any tax payments or refunds associated with the salvage value of the assetC) Recapture of any investment in working capital that was included as an incremental cash outlay
7) Depreciation expenses affect tax-related cash flows by B) decreasing taxable income, thus reducing taxes.
9) How is interest expense that is associated with a project treated in the capital budgeting process? B) It is built into the discount rate.
10) Which of the following best describe why cash flows are utilized rather than accounting profits when evaluating capital projects? A) Deducting interest expense from income and also including it in the discount rate would result in double counting.B) Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
12) Which of the following is an example of a sunk cost? C) Market study expenses incurred in order to decide if a firm should accept a project
13) Which of the following cash flows should be included as incremental costs when evaluating capital projects? A) A new security system will reduce shoplifting losses by $50,000 per year.
14) The calculation of differential cash flows over a project’s life should include which of the following? A) Labor and material savingsB) Additional revenues attributable to the projectC) Investment in net working capital
15) Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital investment proposal? C) The cost of issuing new bonds if the project is financed by a new bond issue
17) When evaluating Capital Budgeting decisions, which of the following items should NOT be included in the construction of cash flow projections for purposes of analysis? A) Net salvage valueB) Changes in net working capital requirementsC) Shipping and installation costs
3) Incremental cash flows include all of the following EXCEPT A) research and development costs.
4) Which of the following are usually known with a high level of confidence at the beginning of a project? C) Tax rates and depreciation rates
1) The simulation approach provides us with C) a probability distribution of the project’s net present value or internal rate of return.
________ is a method of quantifying uncertainty without having to estimate probabilities. B) Sensitivity analys
3) The form of risk analysis intended to identify the most important forces for the success or failure of a project is known as B) sensitivity analysis.
4) Sensitivity analysis is the form of risk analysis D) that examines the impact of key variables such as sales or costs one at a time.
6) Scenario analysis is the form of risk analysis C) that examines the impact of key variables such as sales or costs in various combinations.
8) Which of the following results in a probability distribution for possible project outcomes rather than a dollar estimate? B) Simulation
31) If a project reaches the accounting break-even point in every year of its life, it must also have a positive NPV. FALSE
The NPV break-even point means that a company has covered its cost of capital. TRUE
1) Which of the following is a real option with respect to a capital budgeting decision? C) An option to expand the scale of the project.
2) Real options can have the effect of A) increasing a project’s NPV.B) reducing a project’s risk.C) gaining information about future opportunities.
4) Which of the following best describes a firm’s cost of capital? C) The rate of return that must be earned on its investments in order to satisfy the firm’s investors
7) For tax purposes, interest on corporate debt is B) deductible for the borrower, but not for the investor.
9) The cost of capital is A) the opportunity cost of using funds to invest in new projects.B) the rate of return the firm must earn on its investments in order to satisfy the required rate of return of the firm’s investors.C) the required rate of return for new capital investments which have typical or average risk.
10) Cost of capital is C) the rate of return that must be earned on additional investment if firm value is to remain unchanged.
14) When investors increase their required rate of return, the cost of capital increases simultaneously. TRUE
The firm should continue to invest in new projects up to the point where the marginal rate of return earned on a new investment equals the marginal cost of new capital. TRUE
6) The most expensive source of capital is usually B) new common stock.
41) A bond with a Moody’s rating of Aaa and an S&P rating of AAA will have a higher required return than a bond with a Moody’s rating of Aa1 and an S&P rating of AA+. FALSE
43) No adjustment is made in the cost of preferred stock for taxes since preferred stock dividends are not tax-deductible. TRUE
44) A firm can estimate its cost of debt by finding the yield on bonds issued by other firms with similar ratings and maturities. TRUE
49) It is not possible for a firm’s after-tax cost of common equity to be lower than its after-tax cost of debt. TRUE
1) The firm’s optimal capital structure is the mix of financing sources that C) maximizes the total value of the firm’s debt and equity.
3) A firm’s capital structure consists of which of the following? C) The amount of debt, preferred stock, and common stock that a firm uses
13) Which of the following should be excluded from a firm’s capital structure? B) Non-interest bearing debt
1) In its original form, the Modigliani and Miller Capital Structure Theorem A) uses unrealistic assumptions.B) provided important insights into capital structure policy.C) concludes that how a firm is financed is not important.
3) Which of the following is the most important factor that affects a firm’s financing mix? D) The predictability of cash flows
1) Which of the following factors favors the use of more debt in a company’s financial structure? A) High levels of taxable income
2) Which industry would you expect to have the highest Debt to Asset ratios? B) Electric utilities
3) In which countries would you expect companies to have the lowest leverage ratios? C) Countries where creditors have very strong legal protection
7) Companies faced with higher tax burdens are likely to use more debt. TRUE
1) In response to a temporary decline in earnings per share, most companies would B) not decrease their cash dividend.
2) The ex-dividend date is ________ the holder of record date. C) two days before
Assume that Home Depot’s annual dividend is $1.60 per share. This dividend would most likely be paid as D) $0.40 four times per year.
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Finance Flashcards

Finance 311- Chapter 11

When we examine the risk associated with individual assets, we find that there are 2 types: unsystematic and systematic
To a diversified investor only systematic risk matters
Expected Returns -expected returns are based on the probabilities of possible outcomes-E(R)= sum (Pi * Ri)Pi= the probability of state “i” occurringRi= the expected return on an asset in state i
Calculating Variance of the returns of 2 stocks -determine the squared deviations from the expected returns -then multiply each possible squared deviation by its probability. -add these up–> SUM = VARIANCE
Calculating expected return on a security SUM OF POSSIBLE RETURNSX their PROBABILITIES
Variance and SD measure the volatility of returns -variance= weighted average of squared deviations -SD= square root of variance
Portfolio collection of assets -an asset’s risk and return impact how the stock affects the risk and return of a portfolio
The risk-return trade-off for a portfolio is measured by the portfolio expected return and SD, just as with individual assets
Portfolio Expected Returns the expected return of a portfolio is the weighted average of the expected returns of each asset in the portfolio
PORTFOLIO SD IS NOT A WEIGHTED AVERAGE OF THE SD OF THE COMPONENT SECURITIES’ RISK
Portfolio Variance -compute portfolio return for each stateRpi= w1R1i + w2R2i + …+ wmRmi-compute overall expected portfolio return using the same formula as for an individual asset-compute portfolio variance and SD using the same formula as for an individual asset
Announcements and news contain both expected and surprise components
the surprise component affects stock prices
efficient markets result from investors trading on unexpected news the easier it is to trade on surprises, the more efficient markets should be
efficient markets involve random price changes because we cannot predict surprises
RETURNS Total Return = Expected Return + Unexpected Return
Unexpected Return (U) = Systematic portion (m) + Unsystematic Portion (E)
Total Return = Expected Return E(R)+ Systematic Portion m+Unsystematic Portion E= E(R) + m + E
Systematic Risk Factors that affect a large number of assets-“Non diversifiable risk”-“Market Risk”-Ex: changes in GDP, inflation, interest rates, etc.
Unsystematic Risk = diversifiable risk-risk factors that affect a limited number of assets-risk that can be eliminated by combing assets into portfolios-“Unique risk”-“Asset-specific risk”ex: labor strikes, part shortages, etc.
Principle of Diversification -Diversification can substantially reduce risk without an equivalent reduction in expected returns -reduces the variability of returns-caused by the offset of worse- than- expected returns from one asset by better-than-expected returns from another-Minimum level of risk that cannot be diversified away= systematic portion
As more stocks are added, each new stock has a smaller risk- reducing impact on the portfolio
Forming well- diversified portfolios can eliminate about half the risk of owning a single stock
Total Risk = Stand-alone Risk total risk = systematic risk + unsystematic risk
For well-diversified portfolios, unsystematic risk is very small
Total risk for a diversified portfolio is essentially equivalent to the systematic risk
Systematic Risk Principle -there is a reward for bearing risk-there is NO reward for bearing risk unnecessarily -the expected return (market required return) on an asset depends ONLY on that asset’s systematic or market risk
Market Risk for Individual Securities -the contribution of a security to the overall riskiness of a portfolio-relevant for stocks held in well-diversified portfolios -measured by a stock’s BETA coefficient
BETA measures the stock’s volatility relative to the market
if Beta = 1.0 stock has average risk
If beta > 1.0 stock is riskier than average
if beta < 1.0 stock is less risky than average
Most stocks have betas in the range of 0.5 to 1.5
Beta of the market = 1.0
Beta of a T-Bill = 0
Security with more total risk = higher systematic risk
higher expected return? higher Beta
The SLOPE of the security market line = the market risk premium(the reward for bearing an average amount of systematic risk)
SML Security Market Line
the equation describing the SML can be written: E(Ri) = Rf + Bi X [E(Rm) – Rf]-which is the capital asset pricing model (CAPM)
Reward-to-Risk Ratio [E(Ri) – Rf] Bi = slope of the line on graph -in equilibrium, ratio should be the same for all assets-When E(R) is plotted against B for all assets, the result should be a straight line
Portfolio Beta weighted average of the Betas of the assets in the portfolio-weights (wi) = % of portfolio invested in asset i
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Finance Flashcards

Macroeconomics #11

1. All of the following are sources of federal tax revenue EXCEPT: B) sales taxes.
2. Social insurance programs are: A) government programs intended to protect families against economic hardships.
3. Which of the following is NOT an example of government purchases of goods and services? C) a surgeon’s bill reimbursed under the Medicare program
4. Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to: B) decrease taxes.
5. If the current level of real GDP lies below potential GDP, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____. D) increase government purchases; AD; right.
6. If the economy is at equilibrium above potential output: B) there is an inflationary gap, and contractionary fiscal policy is appropriate.
7. Government’s efforts to stabilize the business cycle through fiscal policy can destabilize the economy because of: A) lags in the process of crafting a budget appropriate to the circumstances.
8. Time lags associated with policy decision making and implementation suggest that: C) increases in spending to fight a recessionary gap may occur too late.
9. Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following would most likely result? B) The economy could move into a recession.
10. If the marginal propensity to save is 0.1, then the government spending multiplier has a value of C) 10.
11. When the economy expands, which of the following is true? D) Income tax receipts and sales tax revenues will both rise.
12. The fact that tax receipts fall during a recession: C) reduces the adverse effect of the initial fall in aggregate demand.
13. When the economy is in a recession: A) tax receipts decrease but unemployment insurance payments increase.
14. Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If current real GDP is $700 billion: B) there is a recessionary gap.
15. Expansionary fiscal policies: A) make the budget surplus smaller.
16. The government has a budget surplus if: C) its total revenues are greater than its total expenditures.
17. If the economy is operating well below potential output, which of the following is likely? A) The cyclically adjusted budget balance deficit is smaller than the actual budget balance.
18. Over the past few decades in the United States, large federal budget deficits have been most often caused by: C) a depressed economy.
19. When the government has a deficit, it will most likely finance the deficit by: C) borrowing the money.
20. The difference between a budget deficit and government debt is that: A) a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the amount the government owes.
21. When the government borrows funds in financial markets to pay for budget deficits: C) private investment spending may be crowded out.
22. The Social Security trust fund refers to the: B) government bonds held by the Social Security system.
23. Suppose the MPC = 0.8. If the government were to cut taxes by $100 billion, then real GDP would increase by $400. A) True
24. The effect of automatic stabilizers is to increase the size of the multiplier. B) False
25. Transfer payments are payments that: A) governments make to households even if the government did not receive a good or service from the household.
26. If the economy exhibited an inflationary gap, the government should follow: D) a contractionary policy, which would shift the AD curve to the left.
27. During a recessionary gap: A) holding everything else constant, the budget deficit would increase.
28. The government deficit: C) measures the difference between the amount government spends and the amount it collects in tax revenues in a given period.
29. If a government’s debt is increasing but its GDP is increasing faster, one will find the government’s: B) debt-GDP ratio falling.
30. The inclusion of a tax rate in the model results in a new multiplier that is: C) smaller than the original multiplier.
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Finance Flashcards

Finance Chapter 7 treasury bonds

Current yield coupon payment/ asked price
Yield to maturity asked yield
Bid-ask spread asked-bid
Discount or premium? Asked price/100 * par
Bid price in dollars Bid price/ 100 * par
Previous days price days asked price-change
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Finance Flashcards

Personal Finance Final Exam

values beliefs and principles that a person considers important, correct, and desirable
future value the amount that your original deposit will be worth in the future based on a specific interest rate over a specific period of time
liquidity ability to easily convert financial resources into cash without loss of value
time value of money increase in an amount of money as a result of interest or dividends earned
demand amount of goods and services people are willing to buy
personal financial planning the way you spend, save, and invest your money to have the kind of life you want as well as financial security
principal amount of money deposited and on which interest is paid
economics study of the decisions that go into making, distributing, and using goods and services
inflation general rise in the level of prices for goods and services over time
present value amount of money you need to deposit now to attain a desired amount in the future
long-term goals Financial plans that are more than five years off are called ________________.
opportunity cost The trade-off made by making one choice instead of another is commonly referred to as a(n) _______________.
short-term goals Saving for vacation next summer or paying off small debts are examples of ______________.
personal financial planning Spending, saving, and investing to have the kind of life you want and financial security can be achieved by _______________.
the reason you want a particular job A cover letter gives a potential employer ______________.
retirement plan funded in part by employers A pension plan is a ______________.
Résumé a one- or two-page summary of your education, training, experience, and qualifications
Potential earning power the amount of money you may earn over time
standard of living a measure of the quality of life based on the amounts and kinds of goods and services a person can buy
networking a way of making and using contacts to get job information and advice
career a commitment to work in a field that you find interesting and fulfilling
down payment a portion of the total cost of an item that must be paid at the time of purchase
fraud dishonest business practices that is meant to deceive, trick, or gain an unfair advantage
mediation the attempt by a neutral third party to resolve a conflict between a customer and a business through discussion and negotiation
arbitration the process in which a conflict between a customer and a business is resolved by an impartial third party whose decision is legally binding
class-action suit a legal action on behalf of all the people who have suffered the same injustice
setting financial goals The first step in planning a budget is _______________.
inaccessibility A good budget has all the following characteristics EXCEPT _________________.
automobiles Products often purchased using price negotiation are _______________.
quantity and quality are basically the same The lowest price is generally the wisest choice when ________________.
impulse buying When shopping, avoid ______________.
personal financial statements documents that provide information about your current financial position and present a summary of your income and spending
net worth the difference between the amount you own and the debts you owe
liquid assets cash and items that can be quickly converted to cash
market value the price at which a property could be sold
safe-deposit box a small, secure storage compartment that can be rented in a bank
liabilities the debts that you owe
certificate of deposit (CD) a savings alternative in which money is left on deposit for a stated amount of time to earn a specific rate of return
surplus extra money that can be spent or saved
annual percentage yield the percentage of increase in the value of savings from earned interest
debit card a card issued by a financial institution that allows you to withdraw money from your account or pay for purchases by deducting funds directly from your account
certificate of deposit What financial services is best suited for saving money over a period of years?
borrow money for a short term Credit cards allow you to ______________.
$106.18 If you deposit $100 in an account with an annual interest rate of 6 percent compounded monthly, after 12 months you will have ____.
comparing checks in the check record with those on the statement The first step in balancing a checkbook is ___________________________________.
a credit card charge An example of open-end credit is a(n) ____________.
Notify the creditor in writing. How should a cardholder begin to correct a mistake on a credit card bill?
capital Which of the “five Cs of credit” require that a person’s assets exceed his or her liabilities?
policy A person joins an insurance company by purchasing a contract called _____.
risk In insurance, anything that may possibly cause a loss is known as a ______.
shifting Buying an insurance policy is an example of risk ______.
depreciation Which term refers to loss in value as an item gets older?
damage to the vehicle of the insured person no matter who is at fault Collision insurance covers ______________.
receives several traffic tickets A driver’s insurance premium will increase if he or she _______.
documentation of personal belongings A household inventory is ________.
Job A type of employment with a short term intentions and money as an end goal.
Career A long term form of employment with the fulfillment of life long goals as a motivation
Wages Hourly pay in exchange for labor
Salary Weekly-monthly pay typically for someone in a career setting
Degree A certification from a university or college in a specific field of study
High School Diploma Certification of completion of high school- typically makes half of what a degree earner makes over time
Associate’s Degree Certification from a college or university that typically takes 2 years to earn
Bachelor’s Degree Certification from a college or university that typically takes 4 years to earn
Master’s Degree Certification that follows a Bachelor’s and requires 2-7 years to complete
Doctorate Highest degree that one can obtain that may require up to 10 years of study
Grace Period Time period allowed for one to obtain employment following college graduation before one must begin repaying student loans
Organized Financial Documents The first step in successful money management
Budget A term used to describe a plan for spending and investing
Needs Food, water, and shelter
Wants Items or experience that are considered luxury and not necessarily mandatory for survival
Fixed expenses Expenses that cost one the same amount each month
Variable expenses Expenses that change month to month
Gross Pay The total amount of money given to an individual by an employer before anything is deducted
Net Pay The total amount of take home pay one is given after deductions are taken out
Income Tax Taxes that are required to be taken out of a person’s gross pay
SMART goal Specific Measurable Attainable Realistic and Time Sensitive
Deductions Anything from income tax, medicare, social security, insurance, and a retirement fund that is taken out of someone’s paycheck
Potential Earning Power The amount of money and opportunities that could be given to a person over a period of time in a specific career
Direct Deposit Payment that is automatically placed in a person’s bank account by their employer (no physical check)
Cost of Living A variable that changes city to city depending on the cost of everyday items
Cafeteria Style Benefits Benefits options that let an employee only take what they want or need
401(k) Retirement plan for a private sector employee
403(b) Retirement plan for a public sector employee
Educational reimbursement Payment given to an employee in order for them to obtain a higher level of education
Inflation Phenomenon that takes place every year and causes money to be worth less over time
IRS Internal Revenue Service
W-4 Tax withholding paper work that is filled out at the beginning of a job
W-2 Tax and payment information sheet that must be given to em employee by January 31st
1099 Tax form that is given to employees that work on project based employment
1040EZ A simplified tax form that citizens can file if they make under $100,000 and have no dependents
FDIC Federal Deposit Insurance Corporation
$250,000 Amount of money that the FDIC insures
Checking Account A bank account that can be accessed an unlimited number of times
Debit Card Payment card that is linked with a checking account
Automatic Draft Payment A bill that is automatically deducted from one’s banking account every month
Post-Date A check that is written for a future date- a form of check fraud
Bounce a Check The practice of overdrafting a checking account
Saving Putting money away over time in order to afford a tangible item or an experience
Investing Putting money into business ventures with more money being the end goal
Emergency Fund The minimum amount of savings that one should have put away in case unexpected emergencies arise
Savings Account A bank account that can only be accessed a few times a month without penalty
Credit Union A financial institution designed to serve its members and therefore provides the lowest interest rates to lenders
Commercial Bank Financial institution that provides basic checking and savings accounts to its members
Certificate of Deposit A savings account with a certificate that cannot be accessed for a certain number of years and has an average 1% return on investment
Money Market Account A savings account and an investment with a higher return rate and the ability to withdraw money if necessary a very limited number of times
Future Value The amount a given investment will be worth on a certain date after a certain amount of time
Simple Interest Interest on a loan that only affects the principle amount
Compound Interest Interest on a loan and interest that has accrued over time
Rule of 72 Rule stating that if you divide the interest rate for an investment by 72 then you will get how many years it will take the investment to double
IRA Individual Retirement Arrangement
Stock Shared ownership in a company
Bonds Money lent to a company in the form of an investment
Annuities Insurance policies that allow the policy holder to receive a fixed income after retirement until their death
Credit Card A form of payment that reflects money owed to a financial institution
Credit Money lent to a person for many small purchases or one large purchase
Finance Charges Additional charges such as interest applied to a lender who is receiving money from a financial institution
Convenience User A credit card user who avoids finance charges by paying their entire amount off each month
Credit Score A rating between 300-850 that reflects how reliable a person is as a lender
The 3 Credit Bureaus Equifax, Experian, Transunion- One free one per year
20-30% Down Payment The proper amount of a value for a house that should be put down before financing
Home Equity Loan A type of loan that can be taken out against the value of payments that have been made of one one’s home. The home is used as collateral.
Payday Lenders Predatory lenders that often charge very high interest rates
Debt Consolidation Combining all debts into one to make for easier monthly payments
Liability Auto Insurance The minimum insurance required by law in order to drive
Bankruptcy A legal status showing that one cannot afford to pay off debts- does not forgive student loans
Beneficiary The person who receives benefits once a life insurance policy pays out
Transfer Risk The main purpose of insurance
EPA Environmental Protection Agency- Agency responsible for the safety and health of the American people and the environment
FCRA Fair Credit Reporting Act- Make its so that all information in ones credit report is accurate
ECOP Equal Credit Opportunity Act- Makes it illegal discriminate access to credit based off of race, gender, marital status, disability level, etc.
Liquid Asset Assets such as a saving account, checking account, or cash that can be easily spent if necessary
Net Worth The value of all a person’s assets that can be raised by adding assets or paying off debts.
Win-Win Situation that should be created during any negotiation
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Finance Flashcards

Finance Ch 1

Supply and Demand The main economic influence that determines prices
Risk The uncertainty associated with decision making
liquidity risk Some savings and investment choices have the potential for higher earnings. however, these may also be difficult to convert to cash when you need the funds. This is a liquidity risk.
Present Value is also referred to as compounding false
Opportunity Cost example Saving money instead of taking a vacation
If a person deposited $50 a month for 6 years earning 8%, this would involve what type of computation? Future value of a series of deposits
developing and using a budget is part of the “obtaining” component of financial planning false
What causes prices to drop? increased production by business
one aspect of financial planning is to make wise decisions as you what you purchase and when to purchase it. which aspect of financial planning is this? spending
an example of a personal opportunity cost would be time comparing several brands of computers
If you put $1000 in a savings account and make no further deposits, what type of calculation would provide you with the value of the account in 20 years? Future value of a single amount
John Gleason is interested in purchasing a 46″ rear projection tv for his living room. John knows that right now the TV will cost approx $1500. He is not sure he can afford this TV right now but is worried that if he waits, the cost of the TV will rise to $1800. Which type of risk is he worried about? inflation risk
The Time Value of Money refers to increases in an amount of money as a result of interest
If you desire your money to double in 6 years, what rate of return would you need to earn? 12% [rule of 72, 72/x=6, 6x=72, 72/6=x
Lenders benefit more than borrowers in times of high inflation false
During ____, even though prices decline spending slows because consumers expect prices to continue to decline deflation
Lynn Roy’s goal has been to travel around the world. She has now been traveling for 6 months and has decided she is a little tired of living out of a suitcase. She has decided to go home, look for a part time job and take shorter trips to locations around the world that appeal to her. Which step in the financial planning process does this scenario most likely demonstrate Reviewing and revising her financial plan
Which type of computation would a person use to determine current value of a desired amount for the future? Present value of a single amount
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Finance Flashcards

personal finance chapter 14

Since 1926, stocks as measured by the Standard & Poor’s 500 Index have returned on average about 10 percent a year. true
A proxy is a legal form that lists the issues to be decided at a stockholders’ meeting and requests that stockholders transfer their voting rights to some individual or individuals true
Amy Farmer just received a legal form in the mail from a firm in which she owns stock. This form lists the issues to be decided at the annual stockholders’ meeting and asks her to give written permission for someone else to vote for her if she cannot attend. What form has she received in the mail? proxy
Jeff Goldblum has just purchased a security which has no maturity date and no promised payments. He can recoup his investment by either selling the security to another individual or to the issuer, if the issuer ever makes an offer to buy it. What type of security did Jeff purchase? Common stock
Christopher Pratt just bought shares of common stock. Which one of the following is he entitled to based on his ownership of these shares? Right to vote on major corporate issues
A blue-chip stock is too speculative for most investors. false
A cyclical stock is a stock that follows the business cycle of advances and declines in the economy. true
The federal government requires corporations selling new issues of securities to disclose information about itself in a prospectus. Which of the following must be disclosed? All of these must be disclosed.
A very safe investment that generally attracts conservative investors is called a(n) ____________ stock. blue chip
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. true
Which one of the following statements is false? To date, it is impossible to determine corporate earnings by using the internet.
Mellon Manufacturing has after-tax income of $3 million. It also has 2 million shares of stock outstanding. What is the firm’s earnings per share? $1.50
Barker Creek Clothing has after-tax income of $12.8 million. It also has 32 million shares of stock outstanding. What is the firm’s earnings per share? $0.40
A securities exchange is a marketplace where member brokers who are representing investors meet to buy and sell securities. true
A market order is a request that a stock be purchased or sold at the current market price. true
A market in which an investor purchases financial securities (via an investment bank or other representative) from the issuer of those securities is called the ____________ market. primary
A market for existing financial securities that are currently traded among investors is called the ____________ market. secondary
Most speculators use a buy and hold technique. false
A long-term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals in time is called: dollar cost averaging
Which one of the following statements is true? Investors buy on margin because doing so offers them the potential for greater profits.
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Finance Flashcards

Chapter 3 business finance

Closely held corporations a corporation that is owned by a few individuals who are typically associated with the firms management
balance sheet which shows what assets the company owns and who has claims on those assets as of a given date—for example, December 31, 2014.
annual report A report issued annually by a corporation to its stockholders. It contains basic financial statements as well as management’s analysis of the firm’s past operations and future prospects.
annual report is the most important report that corporations issue to stockholders, and it contains two types of information.
verbal section of the annual report describes the firm’s operating results during the past year and discusses new developments that will affect future operations the
the annual report provides these four basic financial statements: balance sheet, income statement, statement of cash flows, the statement of stock holders equity
income statement which shows the firm’s sales and costs (and thus profits) during some past period—for example, 2014.
The statement of cash flows which shows how much cash the firm began the year with, how much cash it ended up with, and what it did to increase or decrease its cash.
.The statement of stockholders’ equity, which shows the amount of equity the stockholders had at the start of the year, the items that increased or decreased equity, and the equity at the end of the year.
management’s verbal statements attempt to explain why things turned out the way they did and what might happen in the future.
firm’s financial statements report what has actually happened to its assets, earnings, and dividends over the past few years,
annual report can be used to help forecast future earnings and dividends
balance sheet a “snapshot” of a firm’s position at a specific point in time
left side of the balance sheet statement shows the assets that the company owns
right side of the balance sheet statement shows the firm’s liabilities and stockholders’ equity, which are claims against the firm’s assets.
Current assets consist of assets that should be converted to cash within one year; and they include cash and cash equivalents, accounts receivable, and inventory.
Long-term assets are assets expected to be used for more than one year; they include plant and equipment in addition to intellectual property such as patents and copyrights
net of accumulated depreciation Plant and equipment is generally reported as
Allied’s long-term assets consist entirely of net plant and equipment, and we often refer to them as “net fixed assets.”
“net fixed assets.” net plant and equitpment
Book value per share total common equity/shares outstanding
preferred stock generally like debt because it pays a fixed amount each year
preferred stock it is like common stock because a failure to pay the preferred dividend does not expose the firm to bankruptcy.
liabilities (or money the company owes to others) and stockholders’ equity The claims against assets are of two basic types
Current liabilities consist of claims that must be paid off within one year, including accounts payable, accruals (total of accrued wages and accrued taxes), and notes payable to banks and other short-term lenders that are due within one year.
Long-term debt includes bonds that mature in more than a year.
stockholders’ equity it is the amount that stockholders paid to the company when they bought shares the company sold to raise capital, in addition to all of the earnings the company has retained over the years:
stock holders equity formula paid in capital plus retained earnings
retained earnings are not just the earnings retained in the latest year—they are the cumulative total of all of the earnings the company has earned during its life.
stockholders equity as residential total assets-total liabilities
If Allied had invested surplus funds in bonds backed by subprime mortgages and the bonds’ value fell below their purchase price, the true value of the firm’s assets would have declined, liabilities would not change, common equity declines, reduction in retained earnings and equity, assets = liabilities, sheet would balance
bonds common stock is more risky than
Assets on the balance sheet are are listed by the length of time before they will be converted to cash (inventories and accounts receivable) or used by the firm (fixed assets).
hey must be paid: claims are listed in the order in which
within a few days Accounts payable must generally be paid
promptly accruals must be paid
one year notes payable to banks must be paid within
ownership and need never be “paid off.” stockholders’ equity accounts represent
Pay income tax to the government Hold profits within the firm Pay them to shareholders corporations can do these with their profits
Assets must, of course equal liabilities and equity; otherwise, the balance sheet does not balance.
only the cash and equivalents account represents actual spendable money
dollar terms, assets are reported in
Accounts receivable represent credit sales that have not yet been collected.
raw materials, work in process, and finished goods Inventories show the cost of
Net fixed assets represent the cost of the buildings and equipment used in operations minus the depreciation that has been taken on these assets.
The noncash assets should generate cash over time, but they do not represent cash in hand.
working capital Current assets are often called
working capital these assets “turn over
turn over they are used and then replaced throughout the year
The total of accounts payable, accruals, and notes payable represent current liabilities on its balance sheet.
net working capital If we subtract current liabilities from current assets, the difference is called
net working capital formula current assets- (current liabilities-notes payable)
Current liabilities include accounts payable, accruals, and notes payable to the bank
free” liabilities (accruals and accounts payable
interest-bearing notes payable which incur interest expense that is included as a financing cost on the firm’s income statement
net operating working capital Current assets minus non-interest-bearing current liabilities.
net operating working capital formula current assets- (current liabilities-notes payable)
A company’s total debt includes its short-term and long-term interest-bearing liabilities.
Total liabilities equal total debt plus the company’s “free” (non-interest bearing) liabilities.
total debt formula short term debt + long term debt
total liabilities formula total debt + (accounts payable + accruals)
“hybrid” securities such as preferred stock, convertible bonds, and long-term leases
Preferred stock is a hybrid between common stock and debt,
convertible bonds are debt securities that give the bondholder an option to exchange their bonds for shares of common stock.
Internal Revenue Service (IRS) rules is used to calculate taxes
two sets of financial statements Internal Revenue Service (IRS) rules, the other is based on GAAP and is used for reporting to investors.
straight-line depreciation for stockholder reporting
net operating working capital (NOWC) formula (current assets- excess cash)-(current liabilities-notes payable)
balance sheet. Every entity—including state and local governments, nonprofit agencies, and individual households—has
The balance sheet summarizes the assets that the firm owns and the debt and equity capital that was used to finance those assets. The assets are divided into those expected to be used within a year and those expected to be used for more than one year. liabilities and capital are divided into those items that must be paid off within a year and those that have longer maturities
paid-in capital, retained earnings Stockholders’ equity consists of
paid-in capital which is the amount of money the firm has raised by issuing newly created shares to stockholders,
retained earnings which is the sum of all past earnings minus all past dividends.
500 firm has current assets consisting of $100 cash, $300 of accounts receivable, and $400 of inventories. Its current liabilities include $200 of accounts payable, $100 of accrued wages and taxes, and $200 of notes payable to its bank. The cash balance is not considered “excess” cash. What is its NOWC?
income statements A report summarizing a firm’s revenues, expenses, and profits during a reporting period, generally a quarter or a year.
the bottom line,” Earnings per share (EPS)
Earnings per share (EPS) net income/common shares outstanding
dividends per share dividends paid to common stockholders/ common shares outstanding
book value per share total common equity/common shares outstanding
operating income Earnings from operations before interest and taxes (i.e., EBIT).
operating income is derived from the firm’s regular core business—in Allied’s case, from producing and selling food products. Moreover, it is calculated before deducting interest expenses and taxes, which are considered to be non-operating costs
EBIT earnings before interest and taxes
operating income sales revenues-operating costs
depreciation The charge to reflect the cost of assets depleted in the production process. is not a cash outlay.
depreciation is an annual charge against income that reflects the estimated dollar cost of the capital equipment and other tangible assets that were depleted in the production process
amortization amounts to the same thing except that it represents the decline in value of intangible assets such as patents, copyrights, trademarks, and goodwill
costs depreciation and amortization are reported as
ebitda Earnings before interest, taxes, depreciation, and amortization
18,000 Last year Firm X had sales of $100,000, labor costs of $30,000, material costs of $30,000, and depreciation of $10,000. Assume that labor and material costs were paid in cash. The tax rate on its net income was 40%. What was the firm’s net income?
“cash is king.” in finance
statement of cash flows A report that shows how items that affect the balance sheet and income statement affect the firm’s cash flows
statement of cash flows is the accounting report that shows how much cash the firm is generating. The statement is divided into four sections
statement of cash flows sections operating activities, long term investing activities, financing activities, and summary
operating activities This section deals with items that occur as part of normal ongoing operations
Depreciation and amortization The first adjustment relates to depreciation and amortization. Allied’s accountants subtracted depreciation (it has no amortization expense), which is a noncash charge, when they calculated net income. Therefore, depreciation must be added back to net income when cash flow is determined.
Increase in inventories. To make or buy inventory items, the firm must use cash. It may receive some of this cash as loans from its suppliers and workers (payables and accruals); but ultimately, any increase in inventories requires cash
annual report contains both verbal and quantitative information.
quantitative information consists of four financial statements 1) Balance Sheet, (2) Income Statement, (3) Statement of Cash Flows, and (4) Statement of Stockholders’ Equity.
balance sheet shows the firm’s assets and claims against those assets, assets are equal to liabilities and equity
when they must be paid claims are listed in the order of
Current assets include cash and their equivalents, accounts receivable, inventory
their liquidity Assets are shown in order of
long-term assets exceed one year
current liabilities and long term debt Liabilities are divided into
total debt and total liabilities We differentiate between
its short-term and long-term interest bearing liabilities A company’s total debt includes both
total debt plus the companys free liabilities total liabilities equal
the difference between current assets and current liabilities net working capital formula
net operating working capital is equal to current assets less the difference between current liabilities and notes payable.
net worth is capital supplied by common stockholders and represents ownership
income statement reports on operations over a period of time
earnings per share bottom line of income statement
the balance sheet through the retained earnings account The income statement is tied to
retained earnings for the year net income minus dividends paid
retained earnings for the year this amount is added to the cumulative retained earnings from prior years to obtain the year-end retained earnings balance.
the cash flow the asset is expected to produce The value of any asset, including a share of stock, is based on
statement of cash flows shows how much cash a firm generates
statement of stockholders’ equity Changes in stockholders’ equity during an accounting period are reported in the
Changes in stockholders’ equity can come from new stock issues, stock repurchases, net income, and dividends paid
depreciation must be added back to net income when cash flow is determined.
repayment of long term debt Which of the following does NOT increase cash and cash equivalents during the year
net operating work capital NOWC
net operating work capital formula current assets – (current liabilities-notes payable)
accounting data rather than cash flow The focus on traditional financial statements is
investors, managers, and stock analysts. cash flow is important to
The equation for free cash flow is: FCF = [EBIT(1 – T) + Depreciation and amortization] – [Captial expenditures + ΔNet operating working captial]
free cash flow is the cash flow actually available for payments to all investors (stockholders and debtholders) after the company has made investments in fixed assets, new products, and operating working capital
bad Negative FCF is not always
negative FCF means that the company does not have means the company doesnt have sufficient internal funds to finance its investments in fixed assets and working capital, and that it will have to raise new money in the capital markets to pay for these investments.
bad, because the company is probably experiencing operating problems If FCF is negative because after-tax operating income is negative this is
market values The financial statements reflect historical data, but managers’ performance must be evaluated on the basis of
Market Value Added represents the difference between the money stockholders have invested in the firm versus the cash they could receive if the firm were sold.
The equation for MVA is: MVA = (Shares outstanding × Stock price) – Total common equity
the difference is maximized Shareholder wealth is maximized when
the higher the firms MVA, the better the job management is doing for its shareholders.
economic value added is sometimes called “economic profit and it is closely related to MVA
The equation for EVA is: = EBIT(1 – T) – (Total investor-supplied operating capital × After-tax percentage cost of capital)
Note that total invested capital is equal to the sum of notes payable, long-term debt, and total common equity
a deduction for the cost of equity EVA differs from net income because EVA has
EVA useful for establishing reasonable compensation for divisional managers as well as top company officers.
Taxable income is defined as gross income less a set of exemptions and deductions.
a long term capital gain is taxed at a maximum rate of 15%,
short term capital gain is taxed as ordinary income
dividend and interest income investment income consists of
ordinary income Interest income (except interest on state and local government debt which is exempt from federal taxes) is taxed as
long term capital gains dividends are taxed at the same rate as
home mortgage interest payments are not tax deductible for individuals except for interest on
Balance SheetIncome StatementStatement of Stockholders’ EquityStatement of Cash Flows Key Financial Statements
balance sheet provides a snapshot of a firm’s financial position at one point in time.
Income statement – summarizes a firm’s revenues and expenses over a given period of time. summarizes a firm’s revenues and expenses over a given period of time.
Statement of stockholders’ equity shows how much of the firm’s earnings were retained, rather than paid out as dividends.
Statement of cash flows reports the impact of a firm’s activities on cash flows over a given period of time.
what is D’Leon Inc. Snack food company that underwent major expansion in 2013. So far, expansion results have been unsatisfactory.
D’Leon Inc. unsatisfactory because Company’s cash position is weak.Suppliers are being paid late.Bank has threatened to cut off credit.Board of Directors has ordered that changes must be made!
AT operating income= = EBIT(1 – Tax rate)
What effect did the expansion have on net operating working capital? NOWC= Current assets-(current liabilities-notes payable)
do not reflect market values. Accounting statements insufficient for evaluating managers’ performance because they
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 economic profit for a given year.
Shareholder wealth has been destroyed! 2014 MVA IS -$267,5922013 mva IS = $186,232
.If EVA is positive AT operating income > cost of capital needed to produce that income.
to ensure MVA is positive. Positive EVA on annual basis helps
MVA is applicable to entire firm while EVA can be calculated on a divisional basis as well.
AR would increase and Cash would decrease What if D’Leon’s sales manager decided to offer 60-day credit terms to customers, rather than 30-day credit terms?If competitors match terms, and sales remain constant…A/R would .Cash would .
If competitors don’t match, and sales double…Short-run: . Inventory and fixed assets to meet increased sales. A/R , Cash . Company may have to seek additional financing.
Collections increase and the company’s cash position would improve. If competitors don’t match, and sales double…long run:
What happens if D’Leon depreciates fixed assets over 7 years (as opposed to the current 10 years)? No effect on physical assets.Fixed assets on the balance sheet would decline.Net income would decline.Tax payments would decline.Cash position would improve.
Federal Income Tax System Individual TaxesCorporate Taxes
Corporate and Personal Taxes Both have a progressive structure (the higher the income, the higher the marginal tax rate).
CorporationsRates begin at 15% and rise to 35% for corporations with income over $10 million, although corporations with income between $15 million and $18.33 million pay a marginal tax rate of 38%.Also subject to state tax (around 5%).
individuals Rates begin at 10% and rise to 39.6% for single individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000.May be subject to state tax.
Interest paid: tax deductible for corporations (paid out of pre-tax income),but usually not for individuals (interest on home loans being the exception).
Interest earned: usually fully taxable (an exception being interest from a “muni”).
Dividends paid: paid out of after-tax income.
Dividends received: most investors pay 15% taxes.Investors in the 10% or 15% tax bracket pay 0% on qualified dividends.
20% taxes on dividends. Single individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000 pay
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”.
tax excludable, in order to avoid “triple taxation.” A portion of dividends received by corporations is
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
capital gains – defined as the profits from the sale of assets not defined as the profits from the sale of assets not normally transacted in the normal course of business, capital gains for individuals are generally taxed as ordinary income if held for a year or less, and at the capital gains rate if held for more than a year.
long-term capital gains.. Most taxpayers pay 15% taxes on
20% taxes on long-germ capital gains Single individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000 pay
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.
annual report issued once a year by a corporation, contains basic financial statements, analysis of past performances, and future prospects
balance sheet provides a quantitative summary of a companys assets, liabilities, and net worth at a specific point in time
income statement gives details about the firms sales costs and profits for the past accounting period
statement of retained earnings explains the changes in a companies retained earnings over the accounting year
statement of cash flows provides details about the flow of funds from operating, financing, and investing activities
statement of cash flows how much cash is a firm generating through operating, financing and investing activities?
balance sheet how much debt and equity has the firm issued to finance its assets
personal judgment is allowed when as long as the information follows the GAAP
will decrease the amount of cash on a company’s balance sheet. b.It buys new plant and equipment at a cost of $3 million.d.It increases the dividends paid on its common stock.
It issues $8 million of new common stock. a. will increase cash through the sale of common stock. Selling stock provides cash through financing activities.
.c.It reports a large loss for the year. would decrease cash; however, it is also possible that it would increase cash, if the firm receives a tax refund for taxes paid in a prior year
inventory increased net collection of inventory items increased by more than the firm sold between year one and year two because
the cash and cash equivalent had 200 to spend the firm had 200 of actual money to spend because the balance sheet said that
decrease if everything else on a balance sheet remains the same then the cash and cash equivalents will
the statement of cash flow helps determine helps determine if the company is generating enough cash and if it will need to generate more cash by selling dividends or issuing new debt
cash flow of 1,000,000 $1,000,000 in revenues does not mean the same thing as
revenues could mean collections that still need to be made
operating activity a company records a loss of money on the sale of its outdated inventory
financing activity uses cash to purchase 10% of its common stock
investing activity a company buys common stock in its suppliers firm with its extra cash
operating activity earns revenue from its cash receipts from royalties
operating activity day to day actions needed to conduct business
operating activity affect a firms cash position
investing activity purchase or sale of investment
financing activity cash inflow or outflows to repay or obtain capital
equity sum of what initial stockholders paid when they bought company shares and the earnings that the company has retained over the years
free cash flow analyze the companys real cash postiosn
free cash flow residual cash flow after taking into account, operating cash flows, including fixed asset acquisitions, asset sales and working capital expenditures.
market value added and economic value added performance measures
MVA evaluates shareholder wealth
net operating profit after taxes NOPAT means
progressive the US federal tax system is
capital gain taxed at the current ordinary income tax you sell shares you bought for more than you bought them for, how will it be treated when taxed?
lower taxable income, decrease tax deducted from earnings and lead to higher operating cash flow. an increase in depreciation expense leads to
alternative minimum tax (amt) tax payers must pay the higher of the
pretax if pay a 1$ IN income pay a dollar in
NWC=currents assets-current liabilitiesNOWC= current assets-(AP+accruels)Triangle NOWC= current assets-(current liabilities-notes payable) formula differences between NWC, NOWC, and triangle NOWC
net plant – net plant + depreciationnotes payable+Long Term debt+ total common equity capital expenditure formula
common stock plus retained earnings formula for total common equity
EBIT(1-T)- ( total invested capital*WACC) formula for EVA