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Finance Flashcards

Chapter 9, Corporate Finance

Equity securities are certificates of ownership of a corporation. True
A large number of investors in equities actually own through pension or retirement funds. True
Companies raise capital in secondary markets by issuing new securities. False
The common stockholders of a company have unlimited liability. False
Preferred stockholders are not guaranteed any dividend payments and have the lowest-priority claim on the firm’s assets in the event of bankruptcy. False
In the general dividend-valuation model, the price of a share of stock is the present value of all expected future dividends. True
For a company that has no growth, dividends stay constant over time. True
The constant-growth stock has dividends growing at a constant rate over time. True
Whenever the constant-growth rate for dividends exceeds the required rate of return on the common stock, the constant-growth model provides invalid solutions. True
The bond valuation model can be used to value perpetual preferred stocks. False
Which of the following statements is true about secondary markets? In secondary markets, outstanding shares of stock are bought and sold among investors.
Which of the following statements is NOT true about common stock? Owners of common stock are guaranteed dividend payments by the firm.
Which of the following statements is true about common stock? Owners of common stock have the lowest-priority claim on the firm’s assets in the event of bankruptcy.
Which of the following statements is true? In order for the constant growth dividend model to properly value a firm’s common stock, R must be greater than g.
Which of the following statements about preferred stock is FALSE? Failure to pay dividends on preferred stocks will result in a default.
The dealer’s selling price of a given stock is also known as the ask price. True
Which of the following is a characteristic of common stock? Limited liability for owners
The value of a firm’s equity is calculated as the sum of the present value of all expected future cash flows. True
The bid price is the price that a dealer pays for a security. True
Preferred stock is legally a form of debt of a corporation. False
For the constant growth rate dividend model to work, which of the following assumptions must hold? The growth rate must be less than the required rate of return.
Growth stocks typically pay little or no dividends. True
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Finance Flashcards

Finance 101 Final

Convertible bond:Can be converted into common stock under certain conditions- usually at the owner’s option, for a specified number of shares of the corporation’s common stock.Generally, the coupon rate on a convertible bond is 100 percent lower than the rate paid on traditional bonds.The bond is trading at a high price, and the company wants to bring the price in line with a theoretical ideal range over 1000.All of the above Can be converted into common stock under certain conditions- usually at the owner’s option, for a specified number of shares of the corporation’s common stock.
Which of the following is not correct about investing in bonds?Secured bonds are issued by corporations and tied to physical asset such as real estate or equipment.Zero coupon bonds are issued at deep discount and redeemed at full face value.The junk bond market is very speculative and not for beginners.Bonds represent common stocks/equity and are extremely risky investments. Bonds represent common stocks/equity and are extremely risky investments.
An unsecured bond that is offered on the credit of the corporation and is backed only by the reputation of the issuing corporation is called a(n) ____________ bond.Debenture.Mortgage.Indenture.Preemptive. Debenture.
Which type of bonds have the following properties? These bonds are used to fund large projects such as new plants and equipment that has a long, useful life. Secured bonds and Debentures are two types of these bonds. Canada Treasury Bonds.Europe Agency Bonds.Municipal Township Bonds.Corporate Bonds. Corporate Bonds.
A bond backed by the taxing authority of the government and is considered less risky because taxes can be raised to cover bond repayment if necessary is called a ____________ bond. Debenture.Mortgage.Secured.General obligation bond. General obligation bond.
Bonds represent A debt owed by a governmental unit or a corporation.A defined contribution plan.An equity/common stock with tax-free features.All of the above. A debt owed by a governmental unit or a corporation.
Which of the following bonds are the most secure bonds and the most secured investment, and they are backed by the “full faith and credit” of the U.S. Government?Convertible Bonds and Callable Bonds.US Treasury Bonds.Junk Bonds.Zero Coupon Bonds. US Treasury Bonds.
Which of the following offers a flexible way to save for retirement and uses a wide variety of investment products to fund your account?IRAThe NASDAQ401 B Plan403 K Plan IRA
As investors approach retirement age, they are often more interested in ______ portfolios. Aggressive.International.Risky or equity mix.Conservative or fixed-income. Conservative or fixed-income.
Which of the following is the top professional designation for financial planners?Certified Financial Planner (CFP)Chartered Financial Consultant (ChFC)Certified Public Accountant and Personal Financial Specialist (CPA and PFS)Charter Life Underwriter (CLU) Certified Financial Planner (CFP)
What does an IRA stand for?Investment Retirement Account.Investment Reduction Account.Income Reduction Account.Individual Retirement Account. Individual Retirement Account.
With the Roth IRA, you can withdraw your contributions at any time with no penalty or taxes to pay. After age of ______, you can make withdrawals of contributions and earnings tax-free.49 1/259 1/26770 1/2 59 1/2
The disadvantages of individual IRAs includeThe limits on the amount you can contribute each year.Income restrictions that reduce or eliminate the benefits for people in higher income brackets.Limit on IRA deduction if you are covered by a retirement plan at work.All of the above. All of the above.
Which of the following is correct about retirement accounts?The 401(k) plan is a salary-reduction plan with early withdrawals being always penalty free.The 401(k) and 403 (b) retirement plans are employer-sponsored programs that offer significant benefis.With the Roth IRA, you can withdraw your contributions at any time, but you always pay taxes and penalty.None of the above. The 401(k) and 403 (b) retirement plans are employer-sponsored programs that offer significant benefis.
Which of the following retirement account may be the best option for some people, where you get no current deduction from your income taxes, but your contributions and earnings grow tax-free and the withdrawals at retirements are tax free.Traditional Deductible IRA.408 (K) plan.Roth IRA.Self-Employed IRA. Roth IRA.
The IRS’s definition of financial hardship of withdrawing money early from your IRA without a penalty is (are)Extraordinary medical expenses.The purchase of a home (first-time home buyer).Emergency payments to stop foreclosure or eviction.All of the above All of the above
Which of the following is correct about retirement accounts?The IRS requires you to withdraw a specific minimum amount out of your 401 (k) beginning no later than April 1 the year you turn age 70 1/2.The IRS requires you to withdraw a specific minimum amount out of your 401 (k) beginning no later than April 1 the year you turn age 59 1/2.Roth IRA and traditional IRA are the same retirement accounts, where you can withdraw your contributions at any time without penalty or paying taxes.All of the above. The IRS requires you to withdraw a specific minimum amount out of your 401 (k) beginning no later than April 1 the year you turn age 70 1/2.
You want to convert equity in your home to cash with a reverse mortgage. What should your minimum age be to qualify?59626988 62
Which of the following provides a retirement benefit based on the number of years you have worked and contributed through payroll taxes to the system?Withholding taxSocial SecurityInflationAnnuity Social Security
Medicare is the federal health care program that provides basic services for people age ____ and older5059 1/26265 65
The main advantage of a 401(k) plan is that it:Provides a high rate of return with little risk.Allows you to shelter retirement savings from taxation.Provides a well diversified mix of investment assets.Has no early withdrawal fees. Allows you to shelter retirement savings from taxation.
Withholding tax isCash balance pensions plan that consists of longevity bonus for the number of years worked.An example of qualified retirement account.The Social Security, Medicare, and income tax withheld each payday by employer.401 (k) tax. The Social Security, Medicare, and income tax withheld each payday by employer.
Which of the following is not correctA retirement plan is a detailed plan for the administration and disposition of your property during your lifetime and at your death.Setting a time frame for retirement: both personal and financial decisions.Compounding is the mathematical means by which interest earned during one period adds to the principal, the next period interest is earned on the resulting principal plus interest.Diversified retirement portfolio reduces the risk by spreading investments dollars over numerous stocks and bonds to minimize the impact should one of the investments turn bad. A retirement plan is a detailed plan for the administration and disposition of your property during your lifetime and at your death.
Which retirement plan may use tax-deferred annuities or mutual funds, and it is the retirement plan for religious, educational, and other non-profit groups.401(k) 403(b)401(t)403 (IRA) 403(b)
John and Jane are in their late 20s with two young children. Their near-term financial planning concerns would include all of the following, except:Asset acquisition and debt planning.Employee benefit and Insurance planning.Investment and tax planning.Estate planning. Estate planning.
A _____________ is a qualified defined contribution plan offered by employers. 301(a) account509(re) account401(k) accountNone of the above 401(k) account
Which of the following is not correct?Purchasing power is what your dollars will buy relative to another point in time.Social Security and Medicare were designed to provide a safety net so elderly citizens could count on some income and health care.Medicare insurance plan is only suitable for low-income and disabled people.All of the above. Medicare insurance plan is only suitable for low-income and disabled people.
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Finance Flashcards

Chapter 14 Quiz 1

Jackie Flynn bought a new boat for $16,000. She put a $3,000 down payment on it. The bank’s loan was for 60 months. Finance charges totaled $4,800. Her monthly payment is:
The APR represents the: True effective annual rate of interest charged by seller
The finance charge is equal to the total of all monthly payments: Less amount financed
The amount financed equals the cash price plus down payment. False
The average daily balance is equal to the sum of daily balances: Divided by number of days in billing cycle
Today most companies calculate finance charge on their credit card accounts as a percentage of the yearly balance. False
Ruth Sloan bought a new car for $20,000. She put down $6,000 and paid $280 for 60 months. The total finance charge to Ruth is: $2,800
Revolving charge accounts must be completely paid off by end of the month. False
The U.S. Rule can be applied to open credit payments. True
The Fair Credit and Charge Card Disclosure Act of 1988 is optional advice to credit card companies. False
Which one of the following statements is incorrect? The Truth in Lending Act regulates interest charges
APR cannot by calculated by use of tables. False
The APR represents the stated interest rate. False
The Truth in Lending Act regulates interest charges. False
The Truth in Lending Act requires the APR be accurately stated to nearest 1/4 of 1 percent. True
Amortization is not a payment process. False
Most companies calculate the finance charge on credit card accounts as a percentage of the: Average daily balance
Finance charge equals total of all monthly payments less amount financed. True
Amount financed is equal to: Cash price less down payment
The cost of credit reports is normally included in the amount financed. True
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Finance Flashcards

HEALTHCARE FINANCE QUIZ 4

Which of the following statements about managerial accounting is incorrect?Select one: a. Managerial accounting information is used primarily by managers within the organization. b. Managerial accounting information is prepared in accordance with rules established by outsiders (generally accepted accounting principles [GAAP]). c. Managerial accounting is primarily forward looking, as opposed to focusing on historical information. d. Managerial accounting information is used both at the organizational level and at the sub-unit (department) level. e. Budgets are an important managerial accounting tool. b. Managerial accounting information is prepared in accordance with rules established by outsiders (generally accepted accounting principles [GAAP]).
Which of the below statements about cost allocation is most correct?Select one: a. The direct method is conceptually best and least expensive to implement. b. The reciprocal method is most widely used in practice. c. The reciprocal method is conceptually best but typically the most expensive to implement. d. Both a. and b. above are correct. e. Both b. and c. above are correct. c. The reciprocal method is conceptually best but typically the most expensive to implement.
In general, the best way to allocate costs in a large organization is to assign all overhead expenses to a single cost pool with one cost driver. (T/F) FALSE
The relationship between costs and the volume of services provided is called cost behavior (or underlying cost structure). (T/F) TRUE
Which of the following statements about cost allocation is correct?Select one: a. The direct method of allocation recognizes services provided by support departments to one another. b. A cost driver is any grouping of overhead costs that must be allocated. c. The reciprocal method of allocation represents a compromise between the direct method and the step-down method. d. A cost pool is the total amount of direct costs incurred by one of the patient service departments. e. None of the above statements are correct. e. None of the above statements are correct.
Effective cost drivers should have which of the following characteristics?Select one: a. They should be perceived as being fair. b. They should create an incentive for cost reduction. c. They should create an allocation rate based on patient revenues. d. Both a. and b. above are correct. e. Both a. and c. above are correct. d. Both a. and b. above are correct.
The goal (purpose) of cost allocation is to assign all overhead costs to the activities (departments) that cause the costs to be incurred. (T/F) TRUE
Which of the following statements about activity based costing (ABC) is most correct?Select one: a. It uses a top down approach to cost allocation. b. It is most useful for assigning costs to departments. c. It is most useful for assigning costs to individual services. d. It is easy to apply because it ignores overhead costs. e. It is less costly to implement than traditional costing methods. c. It is most useful for assigning costs to individual services.
In economics, the situation in which average cost (per unit of output) declines as volume increases is known as economies of scope. (T/F) FALSE
Assume that Goodhealth Clinic has fixed costs of $1,000,000 and a total cost forecast of $1,500,000 at a volume of 20,000 patient visits. What is the clinic’s variable cost rate?Select one: a. $25 b. $20 c. $15 d. $10 e. $ 5 a. $25
The Housekeeping Department of Micanopy Hospital has direct costs of $500,000. The hospital’s four patient service departments utilize the following amounts of space:Department A 1,000 square feetDepartment B 2,000 square feetDepartment C 3,000 square feetDepartment D 4,000 square feetAssuming that the cost driver for housekeeping costs is the amount of occupied space, what is the allocation of housekeeping costs to Department A?Select one: a. $ 25,000 b. $ 50,000 c. $ 75,000 d. $100,000 e. $125,000 b. $ 50,000
The Housekeeping Department of Marshfield Clinic has direct costs of $1,000,000. The clinic’s four patient service departments utilize the following amounts of space:Department A 5,000 square feetDepartment B 10,000 square feetDepartment C 15,000 square feetDepartment D 20,000 square feetAssuming that the cost driver for housekeeping costs is the amount of occupied space, what is the allocation of housekeeping costs to Department B?Select one: a. $500,000 b. $400,000 c. $300,000 d. $200,000 e. $100,000 d. $200,000
Assume that Randal Clinic has fixed costs of $500,000 and a variable cost (per visit) rate of $20. What is the total cost forecast for a volume of 5,000 patient visits?Select one: a. $400,000 b. $500,000 c. $600,000 d. $700,000 e. $800,000 c. $600,000
Assume that Lexington Hospital has fixed costs of $10,000,000 and a variable cost (per inpatient day) rate of $200. What is the total cost forecast for a volume of 50,000 patient days?Select one: a. $12,500,000 b. $15,000,000 c. $17,500,000 d. $20,000,000 e. $25,000,000 d. $20,000,000
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Finance Flashcards

Finance chapter 10

The goal of the capital budgeting decisions is to select capital projects that will decrease the value of the firm.(True/False) False
When two projects have cash flows that are tied to each other, the projects may be classified as independent.(True/False) False
When two projects are independent, accepting one project implicitly eliminates the other.(True/False) False
When two projects are mutually exclusive, accepting one project implicitly eliminates the other.(True/False) True
The net present value technique is an approach that goes against the goal of shareholder wealth maximization.(True/False) False
The NPV method determines how much the present value of cash inflows exceeds the present value of costs.(True/False) True
The payback method is consistent with the goal of shareholder wealth maximization.(True/False) False
The discounted payback period calculation calls for the future cash flows to be discounted by a firm’s cost of capital.(True/False) True
The accounting rate of return is not a true return because it simply utilizes some average figures from a firm’s balance sheet and income statement.(True/False) True
The decision criterion for the accounting rate of return is consistent with the goal of shareholder wealth maximization.(True/False) False
The IRR and NPV decisions are consistent with each other when a project’s cash flows follow a conventional pattern.(True/False) True
Unconventional cash flow patterns could lead to conflicting decisions by NPV and IRR.(True/False) True
When mutually exclusive projects are considered, both NPV and IRR will always produce the same acceptance decision.(True/False) False
When evaluating two projects that require different outlays, the IRR does not recognize the difference in the size of the investments.(True/False) True
What is true of an independent project? cash flows are unrelated.
Two projects are considered to be mutually exclusive if both selecting one would automatically eliminate accepting the other and the projects perform the same function.
The cost of capital is minimum return that a capital project must earn to be accepted
Capital rationing implies that a firm has constraint to fund all of the available projects.
Advantage of the payback method Both the technique is simple for managers to compute and interpret and it is a good measure of liquidity risk.
disadvantage of the payback method? -It is inconsistent with the goal of maximizing shareholder wealth.-It ignores cash flows beyond the payback period.-It ignores the time value of money.
Which of the following statements about IRR is NOT true? The IRR is the discount rate that makes the NPV greater than zero.
The internal rate of return is discount rate that makes the NPV equal to zero.
When evaluating capital projects, the decisions using the NPV method and the IRR method will agree if both the projects are independent and the cash flow pattern is conventional.
Which of the following cash flow patterns is NOT an unconventional cash flow pattern? A negative initial cash flow is followed by positive future cash flows.
Which of the following rates should be used to calculate a project’s net present value? Cost of capital
One of the main reasons why the discounted payback period is not widely used by managers is that: it ignores all cash flows that occur after the arbitrary cutoff period
The IRR is the discount rate that makes the NPV positive(True/False) False*The IRR is the discount rate that makes the NPV equal to zero.
Which of the following capital budgeting techniques, is the most appropriate one for evaluating projects? Net present value
A weakness of the accounting rate of return technique is, it: does not distinguish between revenue and cash flows.
The IRR and NPV methods always rank projects in the same order.(True/False) False*The IRR and NPV methods can give conflicting results
If a project’s IRR exceeds its _____, the project should be _____. cost of capital; accepted
The NPV and IRR methods will always agree when you are evaluating _____ projects and the project’s cash flows are _____. independent; conventional
The cost of capital for a project is its return on equity.(True/False) False*The cost of capital is the rate of return that a capital project must earn to be accepted by management.
key disadvantage of the IRR method? With mutually exclusive projects, the IRR method can lead to incorrect investment decisions.
Capital investments large cash outlays, long-term commitments, not easily reversed, and primary factors in a firm’s long-run performance
Capital budgeting techniques help management systematically analyze potential opportunities in order to decide which are worth undertaking
Independent Projects Projects for which the decision to accept or reject is not influenced by decisions about other projects being considered by the firm
Mutually exclusive projects Projects for which the decision to accept one project is simultaneously a decision to reject another project
Contingent projects Projects for which the decision to accept one project depends on acceptance of another project
Basic Capital Budgeting -Capital rationing-Capital Asset-Cost of Capital
Capital rationing firm with limited funds chooses the best projects to undertake
Capital Asset long-term assets
Cost of Capital rate of return that a project must earn to be accepted by management
Net Present Value (NPV) -goal of maximizing shareholder wealth-compares the present value of expected benefits and cash flows from a project to the present value of the expected costs; if the benefits are larger, the project is feasible
Valuation of Real Assets 1.Estimate future cash flows2.Estimate cost of capital/required-rate-of return3.Calculate present value of future cash flows
Practical difficulties in valuing real assets -Cash flow estimates must be prepared in-house and are not as readily available as those for financial assets with legal contracts-Estimating required-rates-of-return for real assets is more difficult than estimating required return for financial assets because no market data is available
Advantages of NPV 3 1.uses discounted cash flow valuation technique to adjust for time value of money.2.Provides direct (dollar) measure of how much a capital project will increase the value of the firm.3.Consistent with the goal of maximizing stockholder value.
Disadvantage of NPV Can be difficult to understand without an accounting and finance backround.
Payback Period -The Payback Period is the amount of time it takes for the sum of the net cash flows from a project to equal the project’s initial investment*Projects with shorter payback periods are more desirable
Negatives about Payback rule There is no economic rationale that makes the payback method consistent with shareholder wealth maximization-It ignores the time value of money-Does not account for differences in the overall risk of projects-Cash flows occurring after the payback period are not considered
ARR Flaws -is not a true rate of return; it is generated from the income statement and balance sheet-It ignores the time value of money-There is no economic rationale that makes it consistent with the goal of maximizing shareholder wealth
What method should be used when dealing with unconventional cash flows, IRR or NPV? NPVBecause,With unconventional cash flows, the IRR technique may provide more than one rate of return. This makes the calculation unreliable and it should not be used to determine whether a project should be accepted or rejected
Advantages of IRR Method 1.Intutive and easy to understand2.Based on discounted cash flow technique
Disadvantages of IRR 1.with non-conventional cash flows, IRR approach can yield no usable answer or multiple answers.2.A lower IRR can be better if a cash inflow is followed by cash outflows3.With mutually exclusive projects, IRR leadto incorrect investment descisions4.IRR calculation assumes cash flows are reinvested at the IRR.
Profitability Index (PI) The PI provides a measure of the value of project generates for each dollar invested in that project
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Personal Finance Exam 2

the cash value of a whole life insurance policy can be used as a source of loan collateral T
borrowing to pay for a college education is a legitimate use of credit T
commercial banks are generally more selective in granting loans than finance companies T
if a loan has a prepayment penalty, there will be an additional cost to repay the loan early T
the basic purpose of insurance is to protect you from the results of accidental losses T
spreading risk among a large number of people is a major principle of insurance T
Avoiding alcoholic beverage while driving is an example of risk reduction T
the needs approach to evaluate the right amount of life insurance is the most accurate method to determine the proper amount of death benefits T
term insurance is generally the most economical form of line insurance for young families T
when you stop making premium payments on a whole life policy, the protection is immediately fortified. F
whole life policies typically provides a high investment rate of return F
one should typically name both primary and contingent beneficiares for life insurance policies T
you may reinstated your lapsed life insurance policy without answering health related questions again F
all types of life insurance offer a cash surrender value F
life insurance death benefits are not subject to income taxes T
in the long run stocks typically have a higher return rate than that of bonds T
a no load, low expense mutual fund is not a smart choice for investing F
stafford loans amy be subsidized or unsubsidezed T
investing is considered a short-term activity that involves the buying and selling of securites F
a personal consumer loan could be used to consolidate several loans into one, purchase a car, covers temporary cash shortfall, buy a mobile home
which of the following is accurate concerning 529 college savings plan earnings are tax-free when used for qualifying educational expenses
a loan from the cash value of your life insurance policy would be characterized by no specific repayment date
bob shockey borrowed $25k from his $250k cash value life insurance policy to send to his daughter to private college. assuming he pays interest as it accrues, if bob died before the debt is repaid his beneficiary will receive $225k
besides the financial charge, you should also consider ___ when you shop for a consumer loan loan maturity, total cost of the loan, collateral, and repayment penalties
when the simple interest method is used to determine financial charges, the interest is calculated based on the actual balance of the loan
annual percentage rate is equivalent to simple interest method
the annual percentage rate (APR) on a single payment loan for $1000 at a simple interest rate of 12% is 12%
you want to borrow $1000 at an interest rate of 10%. the most expensive method of calculating the collar cost of the interest on this installment loan will be the add-on method
the monthly payment on a 8%, 36 moth, add-on loan for $10,000 would be $344
sometimes it may be better to use savings rather than borrow to make a purchase. this would be recommended when the cost of borrowing is greater than the interest earned on the savings
underwriting is the determination of which exposures to insure
in the short run, stocks compared to bonds generally have much more risk
the risk/return concept is high risk/high return, low risk/low return
the difference between stafford’s subsidized and unsubsidized loans is subsidized loans do not accrue interest while in school. unsubsidized loans accrue interest while in school
which of the following is not a smart negotiating technique? letting the dealer know how much you like the car, telling the dealer what your bottom line is, sticking to your guns regardless of the facts, attaching yourself to only one car
during a bull market prices go up
you have been offered an opportunity to buy shares of a diversified collection of securities. you will be investing in mutual funds
suppose a person has a healthy insurance policy with a $500 calendar year deductible, a $2000 out-of-pocket cap, and a 80% coinsurance provision. if this person suffers a $600 covered loss, how much will the insurance company pay? $80
given a $250 annual deductible, a $5000 lid on a coinsurance 80/20 coinsurance, and a $250k policy limit, how much of a $27,500 medical bill will be paid by the insured? $5,250
which of the following best describes the personal articles floater? `an endorsement providing coverage for items of expensive personal property not adequately covered under the standard homeowners policy
the deductible on a standard home owners policy applies to coverage on the house, coverage on personal property, and liability coverage
homeowners insurance premiums are determined by policy limits, perils covered, and deductibles chosen
your son left his skateboard at the bottom of the basement stairs. while going downstairs to change a broken lightbulb, you step on the skateboard and break your ankle during the fall .medical damages total $1,455. how much will your $140k homeowners insurance policy pay for this accident? the policy has a $100,000 comprehensive liability coverage and medical payments of $1,000/person $0
which of the following losses is most likely to be covered under your auto liability insurance? a legal bill incurred by your insurer defending you from a claim related to an accident caused by your negligence
your auto liability insurance shows policy limits of $100k/$300k. this means $100k limit per individual with $300k limit per accident
collision protection pays for damage to auto of insured
your car is damaged by fire while parked in your garage. protection would be provided by comprehensive auto coverage
after packing up to return home for the holidays after the fall semester, Tex stopped at Double T bookstore to sell textbooks. after collecting $25, he headed back to his pickup to only find a broken window, the truck broken into, and all his suitcases and personal property gone. the loss of his personal property and suitcases would be covered by personal property off premises (homeowners’ coverage)
auto insurance premiums would be affected by auto body type, auto engine size, business usage, and commuting over 50 miles daily.
if you have an outstanding loan on your car, the contract will require you to carry ___ insurance collision and comprehensive insurance
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Finance 425 Chapter 1

Financial markets allow for all but which one of the following?a. shift consumption through time from higher-income periods to lowerb. price securities according to their riskinessc. channel funds from lenders of funds to borrowers of fundsd. allow most participants to routinely earn high returns with low risk d. allow most participants to routinely earn high returns with low risk
Asset allocation refers to _________.a. the allocation of the investment portfolio across broad asset classesb. the analysis of the value of securitiesc. the choice of specific assets within each asset classd. none of the options a. the allocation of the investment portfolio across broad asset classes
Active trading in markets and competition among securities analysts helps ensure that: I. Security prices approach informational efficiency. II. Riskier securities are priced to offer higher potential returns. III. Investors are unlikely to be able to consistently find under- or overvalued securities.a. I onlyb. I and II onlyc. II and III onlyd. I, II, and III d. I, II, and III
____ is not a derivative security.a. A share of common stockb. A call optionc. A futures contractd. None of the options (All of the answers are derivative securities.) a. A share of common stock
Real assets in the economy include all but which one of the following?a. landb. buildingsc. consumer durablesd. common stock d. common stock
type of asset- income generating, tangible assets used to produce goods/services- ex. land, buildings, machinery, gold/diamonds, real estate, art real assets
concerned with the acquisition, management, and financing of real assets- commonly called the “investing decision” corporate finance
real/financial assets? – generate net income to the economy real assets
real/financial assets?- define the allocation of income/wealth among investors financial assets
type of asset- claims on the real assets or the income generated by them- define the allocation of income/wealth among investors- ex. stocks, bonds, deposits, debt securities, etc- no more than sheets of paper or computer entries financial assets
what are the three broad types of financial assets? debtequityderivatives
type of financial asset – promise either a fixed stream of income or a stream of income that is determined according to a specific formula- – ex. bonds, PS, money market instruments (CDs, treasury bills) fixed income/debt securities
type of financial asset – represents an ownership share in the corporation- ownership stake in an entity, residual cash flow- can be risky- performance is tied directly to the success of the firm and its real assets common stock (equity)
type of financial asset – provide payoffs that are determined by the prices of other assets such as bond/stock prices- values derive from the price of other assets- one primary use is to hedge risks or transfer them to other parties- allow firms to adjust their exposure to various business risks- ex. contract, value derived from underlying market condition derivative securities
why dont people put all of their money in stocks? – because if a company goes out of business, the stockholders lose everything
conflicts of interest between managers and stockholders agency problems
collection of investment assets investor’s portfolio
the choice among broad asset classes- top down- ex. stocks, bonds, real estate, commodities –> individual who holds all of his money in a bank account would decide what proportion of his overall portfolio should be moved into stocks/bonds asset allocation
– choice of securities within each asset class- looking for a good deal (look @ fundamentals)- “bottom up”- investor might ask whether Merck or Pfizer is more attractively priced security selection
type of management- calls for holding highly diversified portfolios without spending effort or other resources attempting to improve investment perf through security analysis passive management
type of management- attempt to improve performance of broad asset classes active management
what are the three major players in financial markets? 1. firms –> net demanders of capital2. households–> suppliers of capital (purchase securities)3. governments –> can be borrowers or lenders
Institutions that “connect” borrowers and lenders by accepting funds from lenders and loaning funds to borrowers.- bring together the suppliers of capital with the demanders of capital- ex. banks, investment companies, insurance companies, credit unions financial intermediaries
market for new issues of securities primary market
previously issued securities are traded among investors secondary market
money invested to finance a new firmex. angel investors, pension funds venture capital
investments in a company that are not traded on a stock exchange private equity
what did the financial crisis of 2008 show? the importance of systematic risk
The material wealth of society is determined by the economy’s _________, which is a function of the economy’s _________.a. productive capacity; financial assetsb. productive capacity; real assetsc. investment bankers; financial assetsd. investment bankers; real assets b. productive capacity; real assets
Which of the following is not a money market security?a. U.S. Treasury billb. Bankers’ acceptancec. Common stockd. 6-month maturity certificate of deposit c. Common stock
__________ assets generate net income to the economy, and __________ assets define allocation of income among investors.a. Real, realb. Financial, financialc. Financial, reald. Real, financial d. Real, financial
Which of the following are financial assets?I. Debt securitiesII. Equity securitiesIII. Derivative securitiesa. II and III onlyb. I, II, and IIIc. I and II onlyd. I only b. I, II, and III
__________ are examples of financial intermediaries.a. Insurance companiesb. Investment companiesc. Commercial banksd. All of these options d. All of these options
Which one of the following best describes the purpose of derivatives markets?a. Earning interest incomeb. Investing for retirementc. Investing for a short time period to earn a small rate of returnd. Transferring risk from one party to another d. Transferring risk from one party to another
Security selection refers to the ________.a. allocation of the investment portfolio across broad asset classesb. choice of specific securities within each asset classc. top-down method of investingd. analysis of the value of securities b. choice of specific securities within each asset class
__________ is (are) real assets.a. Bondsb. Stocksc. Production equipmentd. Commercial paper c. Production equipment
__________ portfolio construction starts with selecting attractively priced securities.a. Bottom-upb. Upside-downc. Top-downd. Side-to-side a. Bottom-up
In a market economy, capital resources are primarily allocated by ____________.a. governmentsb. investment bankersc. financial marketsd. the SEC c. financial markets
The value of a derivative security _________.a. can be integrated only by calculus professorsb. affects the value of a related securityc. depends on the value of another related securityd. is unrelated to the value of a related security c. depends on the value of another related security
Commodity and derivative markets allow firms to adjust their _________.a. management stylesb. focus from their main line of business to their investment portfoliosc. exposure to various business risksd. ways of doing business so that they’ll always have positive returns c. exposure to various business risks
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Finance Flashcards

Personal Finance Exam 2 Chapter 9

to lower the cost of long term care insurance, bobbi can cover the costs of nursing home care through a combination of self-insurance and long-term care insurancebuy a long term care policy as soon as possible before costs increase due to advancing ageselect a longer waiting period (time between nursing home admission and payment of benefits by the insurance company)
see chapter 9 question 2for insurance decision making
TF: life insurance and health insurance are designed to transfer the catastrophic risk you can’t afford to keep onto the insurance companies true
TF: an insurance policy is a contract with an insurance company that spells out what losses are covered, what the policy costs, and who receives the payment if a loss occurs true
TF: actuaries are statisticians who specialize in estimating the probability of death based on personal characteristics, such as your age and general health, as well as lifestyle specifics such as whether or not you exercise true
TF: the beneficiary is the individual designated by the owner of the life insurance policy to receive the insurance policy’s proceeds upon the death of the insured true
TF: all life insurance policies should have a contingent beneficiary designated true
TF: in dealing with risk, one can either avoid it, manage it, or transfer it for a fee true
TF: life insurance is not meant to benefit you, its purpose is to protect others in the event of your death true
TF: one of the reasons insurance is so expensive is due to the expense of developing, testing and verifying new drugs. This cost is passed on to consumers true
sharing the financial consequences associated with risk in the insurance industry is sometimes called risk pooling
wayne and sarah are trying to manage the risk they face in life as best they can. they are following principle 7 which states protect yourself against major catastrophes
life insurance may not be necessary if you’re married and unemployedyou’re retiredyou’re single and don’t have any dependentsyou’re married, a double income couple with no children
the individual designated by the owner of the life insurance policy to receive the policy’s proceeds upon the death of the insured is called the beneficiary
TF: using the earnings multiple approach is determining the present value of an annuity as a means to determine the face value of the insurance policy one needs to purchase trie
TF: with the needs approach, you should take into consideration any additional insurance policies that have been taken out on your life true
TF: the earnings multiple approach is based on the notion that you want to replace a stream of annual income that’s lost due to the death of a breadwinner true
TF: a disadvantage of term insurance is that the cost rises each time the policy is renewed true
TF: with term life insurance, the beneficiary receives a fixed death benefit true
TF: one of the best features of term insurance is that you are able to borrow against the face value false
TF: the nonforfeiture right gives the policyholder the cash value of the policy in exchange for the policy holder giving up his or her right to a death benefit true
TF: the policy owner must pay the premium during the grace period or they forfeit the policy true
TF: the suicide clause will pay double the face value to the beneficiary if the named insured commits suicide false
TF: most life insurance settlements are based on the named insured dying from an accidental death false
TF: a guaranteed insurability rider allows you to increase your face value even if your health fails true
TF: term life insurance provides protection for a specified amount of time, typically 1-30 years true
John purchases a life insurance policy on his wife Betty where he pays the premium and he will receive the life insurance money when she dies. John is both the​ ________ and the​ ________ who will receive the​ ________ upon the death of​ Betty, the​ ________. policy owner, beneficiary, face amount, insured
life insurance buying is a new experience for many people. what is not a basic consideration when determining life insurance needs? the settlement options
Riley knows her ex-husband would not think about taking out a life insurance policy on himself to protect their two children in the event of his untimely death. As a​ result, Riley is taking out a policy on him and paying for it herself. That makes Riley the​ ________ and her children are the​ ________. policy owner, beneficiaries
what are the advantages of term life insurance it has no investment feature so it costs less than other forms of insurance and it allows you to increase your insurance coverage for specific reasons and specific time periods
cash value policies include a ___ clause that allows you to borrow against the cash value of the policy loan
what are the risks associated with term insurance policies? you may need to have insurance coverage past the term expiration date and the renewal premium may be cost prohibitive
what are the disadvantages of group term insurance? relying on group insurance may hinder your decision to leave the company and the cost to convert from group coverage to individual coverage if you leave the company may be cost prohibitive
what are the main features of whole life insurance? the premiums stay constant for your entire lifeit provides you with permanent insurance regardless of age or health issuesthe nonforfeiture right allows you to access the cash value account if needed
what is the purpose of companies such as AM Best, Moody’s and Standard and Poors? they evaluate and rate the financial stability of the insurance industry
TF: cash value insurance is any policy that provides both a death benefit and an opportunity to accumulate cash value true
TF: the money that the policy holder is entitled to if the policy is terminated is known as the face value false
TF: the advantage of whole life insurance is that it is generally cheaper than term life insurance per dollar of coverage false
TF: practically all insurance contracts include a suicide clause stating that the insurance company won’t pay off for suicide deaths that occur within the first five years of the contract false
the primary advantage of term insurance is affordability
the coverage grace period gives you an extension of generally ___ in which to make your premium payment without cancelling your policy 30 days
the incontestability clause states that the insurance company cannot dispute the validity of the contract after a specified period of time, usually two years
your agent argues in favor of cash value life insurance. you counteract with term to have a larger policy and keep things simpleenjoy a relatively low cost per each 1000$ of coveragesave the difference you would pay, invest it, and come out aheadhave a lot of insurance at affordable prices when you need it the most
the policy feature that allows you to pay the premium late but still retain coverage is known as the grace period
the alternative ways that a beneficiary can choose to receive the policy benefits upon the death of the insured are called settlement options
sally heath has the option of obtaining life insurance through her work place. she will not need to take a physical exam. this type of policy would be a ____ policy. group term life
TF: most major health care policies cover hospital, surgical and physician coverages true
TF: a flexible spending account saves you money on qualifying healthcare and childcare expenses true
TF: the main disadvantage of a flexible spending plan is that you may lose any money remaining in the account at the end of the fiscal year true
TF: with COBRA coverage, the employer pays the premiums false
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Finance Flashcards

Finance T?F

Agency problems arise due to the separation of ownership and control and can arise between stockholders and managers or between stockholders and bondholders True
The appropriate goal of a financial manager is to maximize stockholder wealth, maximize the price per share of the firm’s common stock, or to maximize the firm’s earnings per share. False
Due to the inverse relationship between interest rates and value, when the yield to maturity of a bond that is selling at par decreases, the bond will sell at a premium True
Standard Deviation of returns measures total risk, and it consists of market or systematic risk as measured by beta and of firm specific risk which can be diversified away. True
Net present value, internal rate of return, and profitability index can give conflicting accept/reject capital budgeting decisions for independent projects with normal cash flows. False
The appropriate costs to use in determining a firm’s weighted average cost of capital are the marginal, after-tax costs of the firm’s individual security issues. True
A firm’s optimal capital budget is the oint where the marginal cost of capital intersects the firm’s investment opportunity. True
The benefit of debt financing comes from the tax deductibility of interest payments and the not from fact that the debt is a cheaper source of financing than equity True
As a general rule, the capital structure that maximizes stock price also Minimizes the weighted average cost of capital
Capital structure theory implies which of the following.. A. Capital Structure changes signal important information to investors B. Firms with higher marginal tax rates have relatively higher optimal levels of debt C. Firms with higher levels of asymmetric information have relatively lower optimal levels of debt.
When a firm pays a stock dividend The number of shares outstanding increases.
Stock Dividends and Stock splits do what to shareholders wealth NOTHING
The Ex-Dividend date refers to the last day on which investors can purchase a stock and receive the previously announced dividend. False
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Finance Flashcards

finance exam 2

1) In comparing an ordinary annuity and an annuity due, which of the following is true?A) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due.B) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.q The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.D) The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due. The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.
2) The future value of a dollar as the interest rate increases and the further in the future an initial deposit is to be received.A) decreases; decreasesb increases decreasesq decreases;increasesd increases increases increases increases
the _________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds. —A) Inflationary B) Risk- free q Real D) Nominal q Real
4) Generally, an increase in risk will result in . Hint: use TVM basic formulas 4) _ A)a lower return on investment B) a higher required return or interest rateq a lower required return or interest rate D) a higher return on investment D) a higher return on investment
rate of interest is the actual rate charged by the supplier and paid by the demander of funds _ A) Risk- free B) Nominal q Real D) Inflationary B) Nominal
is a graphic depiction between the maturity and rate of return for bonds with similar 6) _ A) risk- return profileq aggregate demand curve B) yield curveD) supply function B) yield curve
yield curve reflects higher expected future rates of interest. A) linear B) downward- slopingq upward- sloping D) flat q upward- sloping
8) The key inputs to the valuation process include .Hint: Think of most complete description A) returns and risk B) cash flows and discount rateq returns, discount rate, and risk D) cash flow, cash flow timing, and risk D) cash flow, cash flow timing, and risk
9) The value of any asset is the A) sum of all future cash flows it is expected to provide over the relevant time periodB) present value of the sum of all future cash flows it is expected to provide over the relevant time periodq sum of all compounded future cash flows it is expected to provide over the relevant time periodD) sum of the present values of all future cash flows it is expected to provide over the relevant time period B) present value of the sum of all future cash flows it is expected to provide over the relevant time period
10) In the basic valuation model, risk is generally incorporated into the A) cash flows B) discount rate q timing D) total value A) cash flows
11) A type of long- term financing used by both corporations and government entities is _A) retained earnings B) bondsq common stocks D) preferred stocks B) bonds
12) Corporate bonds have a . 12) A) specified coupon rate paid annuallyq par value of $1,000 B) face value of $5,000D) market price of $1,000 A) specified coupon rate paid annually
13) The value of a bond is the present value of its interest payments plus , 13)A) its face value B) future value of its par valueq present value of its par value D) present value of interest payment q present value of its par value
14) Bonds which sell at less than face value are priced at a , while bonds which sell at greater 14) than face value sell at a .A) discount; premiumq par; premium B) coupon;premiumD) discount; par A) discount; premium
15) If the required return is less than the coupon rate, a bond will sell at A) book value B) par q a premium .D) a discount q a premium
16) Which of the following is a difference between common stock and bonds?A) Bondholders have a senior claim on assets and income relative to stockholders.B) Dividend paid to stockholders is tax- deductible but interest paid to bondholders are not.q Bondholders have a voice in management; common stockholders do not.D) Stocks have a stated maturity but bonds do not. A) Bondholders have a senior claim on assets and income relative to stockholders.
17) Holders of equity capital _A) own the firmq receive interest payments B) have loaned money to the firmD) receive guaranteed income A) own the firm
18) Which of the following typically applies to common stock but not to preferred stock?A) voting rights B) legally considered as equity in the firmq par value D) dividend yield 18)_ A) voting rights
20) If the expected return is above the required return on an asset, rational investors will . 20)A) sell the asset, which will drive the price up and cause the expected return to reach the level of the required returnB) sell the asset, since price is expected to decreaseq buy the asset, which will drive the price down and cause the expected return to reach the level of the required returnD) buy the asset, which will drive the price up and cause expected return to reach the level of the required return D) buy the asset, which will drive the price up and cause expected return to reach the level of the required return
is a guide to a firm’s value if it is assumed that investors value the earnings of a given 21)firm in the same way they do the average firm in the industry.A) The present value of the dividends B) The PIE multipleq Liquidation value D) Book value B) The PIE multiple
22) A common approach of estimating the variability of returns involving the forecast of pessimistic, 22)most likely, and optimistic returns associated with an asset is called _A) scenario analysis B) marginal analysisq break- even analysis D) DuPont analysis scenario analysis
23) Risk aversion is the behavior exhibited by managers who require A) an increase in return, for a given increase in riskB) an increase in return, for a given decrease in riskq no changes in return, for a given increase in riskD) decrease in return, for a given increase in risk A) an increase in return, for a given increase in risk
A(n) _________ distribution shows all possible outcomes and associated probabilities for a given A) lognormal B) exponential q probability D) discrete q probability
is the extent of an asset’s risk. It is found by subtracting the pessimistic outcome from the optimistic outcome.A) Rangeq Standard deviation B) VarianceD) Probability distribution A) Range
26) The the coefficient of variation, the the risk. 26)_ A) higher; lower B) more stable; higherq lower; lower D) lower; higher q lower; lower
27) The goal of an efficient portfolio is to _ 27)A) minimize profit in order to minimize riskB) achieve a predetermined rate of return for a given level of riskq maximize risk in order to maximize profitD) minimize risk for a given level of return D) minimize risk for a given level of return
28) A measures the dispersion around the expected value. 28) A) coefficient of variation B) chi squareq standard deviation D) mean q standard deviation
29) Perfectly correlated series move exactly together and have a correlation coefficient of 29) — while perfectly correlated series move exactly in opposite directions and have acorrelation coefficient of _ A) negatively; +1; positively; -1q positively; +1; negatively; -1 B) negatively; -1; positively; +1D) positively; -1; negatively; +1 q positively; +1; negatively; -1
A(n) portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return A) risk- free B) risk- indifferent q efficient D) risk- neutral q efficient
31) The of a given outcome is its chance of occurring. A) standard deviation B) reliabilityq probability D) dispersion q probability
32) The portfolio with a standard deviation of zero .. (See Table 8.1) 32) A) is comprised of Assets A and B B) is comprised of Assets A and Cq is not possible D) cannot be determined B) is comprised of Assets A and C
33) The correlation of returns between Asset A and Asset B can be characterized as Table 8.1) . (See 33) A) perfectly positively correlatedq uncorrelatedperfectly negatively correlated perfectly negatively correlated
34) Risk that affects all firms is called _A) nondiversifiable riskq maturity risk B) reinvestment riskD) unsystematic risk 34) A) nondiversifiable risk
35) A beta coefficient of +1 represents an asset that A) is more responsive than the market portfolioB) is unaffected by market movementq has the same response as the market portfolioD) is less responsive than the market portfolio q has the same response as the market portfolio
36) The portion of an asset’s risk that is attributable to firm- specific, random causes is called _A) market risk B) unsystematic (diversifiable) riskq political risk D) nondiversifiable risk A) market risk B) unsystematic (diversifiable) risk
37) In the most basic sense, risk is a measure of the uncertainty surrounding the return that an investment will earn. T
38) In the valuation process, the higher the risk, the greater is the required return t
39) The inclusion of assets from countries with business cycles that are not highly correlated with theU.S. business cycle reduces the portfolio’s responsiveness to market movements. t
40) The range of an asset’s risk is found by subtracting the worst outcome from the best outcome t
41) Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance. t