Finance Flashcards

Finance Chpt 9

Payback Period how long does it take to get the initial cost back in a nominal sense?
Payback Advantages easy to understand an compute, adjusts for uncertainty or later cash flows, biased toward liquidity
Payback Disadvantages ignores the time value of money, requires an arbitrary cutoff point, ignores the cash flows beyond the cutoff point, biased against long-term projects
Discounted Payback Period how long does it take to get the initial cost back after you bring all the cash flows to the present value
Discounted Payback Advantages includes the time value of money, easy to understand, biased toward liquidity
Discounted Payback Disadvantages requires an arbitrary cutoff point, ignores the cash flows beyond the cutoff point, biased against long-term projects
Net Present Value the difference between a market value of a project and its cost
A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners
NPV is a direct measure of how this project will meet our goals
NPV > 0 we accept the project
NPV < 0 we reject the project
Net Present Value Advantages considers all the cash flows in the computation, uses the time value of money, provides the answer in dollar terms which is easy to understand, usually provides a similar answer to the IRR computation
Net Present Value Disadvantages requires the use of time value of money which makes harder to compute, projects that differ by orders of magnitude in cost are not obvious in the NPV final figure
Profitability Index measure the benefit per unit cost of a project, based on the time value of money
PI > 1 means the firms is increasing in value
Which one of the following increases the net present value of a project an increase in the aftertax salvage value of the fixed assets
Which one of the following will decrease the net present value of a project? increasing the project’s initial cost at time zero
Net present value: is the best method of analyzing mutually exclusive projects.
A project’s average net income divided by its average book value is referred to as the project’s average accounting return
Why is payback often used as the sole method of analyzing a proposed small project It is the only method where the benefits of the analysis outweigh the costs of the analysis.
The length of time a firm must wait to recoup the money is has invested in a project is called the payback period
The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the discounted payback period
Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project’s anticipated cash flows discounted cash flow valuation
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: mutually exclusive
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project’s cash flows. What is the name given to this graph? NPV profile
Which one of the following increases the net present value of a project? an increase in the aftertax salvage value of the fixed assets
Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project? cash inflow in the final year of the project
If a project has a net present value equal to zero, then: the project earns a return exactly equal to the discount rate
The internal rate of return is defined as the: discount rate which causes the net present value of a project to equal zero Correct
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to: have multiple rates of return
Using NPV: An investment should be accepted if the NPV is positive and rejected if it is negative
Based on the payback rule an investment is acceptable if its calculated payback period if less than some prespecified number of years
Payback period ignores time value of money
Payback period is biased toward ______ therefore ______ short term projects, it is biased toward liquidity
What kind of measure is payback? breakeven
Biggest issue with payback period doesn’t answer the right question- the relevant issue is the impact an investment will have on the value of the stock, not how long it takes to recover the initial investment
AAR average net income divided by average book value
As long as we use straight line depreciation the average investment will always be one-half of the initial investment
Based on the average accounting return rule, a project is acceptable if its average accounting return exceeds a target average accounting return
Biggest drawback with AAR it is not a rate of return in any meaningful economic sense. It is not comparable to the returns offered
One of the reasons AAR is not a true rate of return is that it ignores time value of money
There is no ______ involved when calculating AAR discounting
Second problem with AAR is the lack of an objective cutoff period
Worst flaw with AAR is instead of cash flow and market value it uses, book value and net income
Most important alternative to NPV is IRR (internal rate of return)
With IRR we try to find a single rate of return that summarizes the merits of a project
Based on the IRR rule, an investment is acceptable if the IRR exceeds the required return. it should be rejected otherwise
We are indifferent to project when NPV is just equal to zero
The IRR on an investment is the required return that results in a zero NPV when it is used as the discount rate
Which rules are most similar? IRR and NPV
Net present value profile a graphical representation of the relationship between an investment’s NPVs and various discounts ( NPVs on y-axis, discount rate of x-axis)
IRR and NPV lead to identical decisions when cash flows are conventional (first cashflow is negative all the rest are positive) the project must be independent (doesn’t accept or reject another decision)
Multiple rates of return the possibility that more than one discount rate will make the NPV of an investment )
mutually exclusive investment decisions a situation in which taking one investment prevents the taking of another
IRR is preferred because people seem to prefer talking about rates of return rather than dollar values
We can’t estimate the NPV unless we know the appropriate discount rate, but we can still estimate the IRR
Profitiability index is also considered th benefit-cost ratio (bang for buck)
If a project has a positive NPV then the present value of the future cash flows must be bigger than the initial investment
We can on ______ NPV
Finance Flashcards

budgeting – personal finance

what is the reason to have (financial) goals more likely to achieve financial security
characteristics that provide a meaningful goal direction can be abbreviated as SMART – Specific, Measurable, Action-oriented, Realistic with a Time frame
all goals should be SMART goals
“timely” means that a goal should be anchored to a timeframe
by establishing a specific timetable to achieve the goal… it is more likely to be accomplished
a person’s goals time frames are defined as short term, intermediate, and long term
what’s an important goal for a full time employee having an emergency fund
what is budget budget is an estimate of your income and your expenses for a period of time
what is the purpose of a budget it helps to control spending, the budget indicates how money is to be spent and/or savedwhen expenses are reviewed, they can be adjusted if needed to make sure that spending and saving does not exceed income on a monthly basis
individuals should start budgeting by… tracking income & expenses for one or two months in order to prepare a realistic budget
create a budget/spending plan with categories for… income, fixed expenses, variable expenses, investments and savings
fixed expenses vs variable expenses fixed expenses are those expenses that are the same amount each month such as rent, a mortgage payment, or car insurancevariable expenses are those expenses that vary from month-to-month such as food, vacation or entertainment costs
how to keep track of expenses there is software available but also you can just write down the amount of money they spend on everything to understand how you are using your money
what is the value of having a spending plan/budget can help you gain control over your income and spending
when & why might a budget have to change change in income or expenses
what are budget factors things to consider while making a budget
what are the budget factors Limited resources- Your capacity to generate income is limited by your time and abilities.How to budget for expenses that are paid once a year (e.g. insurance)- Divide annual (yearly) expense by 12 and save that amount every month.Needs vs. wantsNeed- something you have to haveWant-something you would like to haveOpportunity cost- choices create opportunity costs…what are you sacrificing based on your budget choices? savings/investments for future income, security provided by emergency fund, etc.Analyzing income vs. fixed and variable expensesIncluding savings (Define savings and how savings help to be prepared for emergencies and to achieve financial goalsVariables – inflation, unforeseen events (good and bad), unemployment
budget to include savings with the first goal of having an… emergency account with three to six months worth of income – (increases to one year fund as responsibilities, e.g. starting a family, increase)
what is an advantage to a savings account it is liquid because it is a savings account = liquid means it can be converted to cash quickly and easily
have an emergency fund _____ deciding to invest before
professional financial planners recommend that individuals create an emergency fund of 3-6 months of living expenses to cover… unanticipated expenses (medical or home etc) and loss of a job
some advisers are recommending 6-9 months of living expenses
the emergency account should be… easily accessible and exempt from fees/expenses
the emergency account is in addition to savings for college, retirement, and other intermediate or long-range goals
how do you develop the habit of saving “pay yourself first” = if a person takes home $1,000 each pay period and puts $100 (10%) in a savings account before paying expenses – she could build substantial savings over the course of years
in creating a balanced budget a person should include a portion of income as savings for … future goals such as education, a car or a home.
to have a balanced budget, the income has to cover both savings and expenses
what is the best way to achieve a financial goal? . creating a budget that includes savings, such as setting aside enough money for a down payment (usually 10-20% is required) to purchase a house. sometimes people may have to cut their spendings
balancing a budget total income = total expenses + savings
what are the three R’s to balancing a budget reality, responsibility, restraint
surplus can also be called discretionary income
determining surplus or deficit and what to do: there needs to be sufficient income to cover monthly expenses and savingswhen a person has income of $500 and expenses and savings totaling $450, the person has a $50 surplus of discretionary income for the month. When a person has a surplus for a number of months, he might want to increase the amount of money he has budgeted for savings or investing
what is a deficit a deficit occurs when income is less that expenses and savings. if a deficit occurs, a person should consider finding a source for more income or cut expenses or savings
discretionary income (how to create it, what it is, what it includes) spending less on expenses, getting a raise, starting a business and earning a profit, or having income from investments are ways to create discretionary incomediscretionary income is usually described as the amount of an individual’s income that is left for spending, investing or saving after taxes and personal necessities (such as food, shelter, and clothing) have been paiddiscretionary income includes money spent on luxury items, vacations and non-essential goods and services.
purchasing strategies comparison shopping, negotiation, coupons, catalog, internetbefore making a decision about purchasing an item, it is recommended to compare prices and review the research on the productas a consumer, it is helpful to prioritize needs and evaluate the safety, durability, and cost of repairs before making a purchase
understanding the influence of… advertising and peer pressure on spending (evaluating information)
what to do to balance a budget if you overspend on a variable expense reducing spending leaks (expenses such as gourmet coffee, manicures, impulse purchases, etc)
what is budget variance the difference between the amount of money budgeted for items ($200 for clothing) and the actual amount of money spent for those items ($150 for clothing)
Finance Flashcards

Chapter 14 Econ 260

In 2015, government spending is $3.3 trillion, and taxes collected are $2.9 trillion. What is the federal government deficit in that year? 3.3-2.9= 0.4
Which of the following statements is true when considering budget deficits and the national debt? The national debt is a stock variable and a federal budget deficit is a flow variable
The federal government has its best opportunity to lower its national debt when it has A budget surplus
In 2005 national government spending is $8.00 trillion and tax collections are $8.50 trillion. This government, in 2005, experienced a Budget surplus
If the federal government has a budget deficit it can finance its spending by Selling treasury bonds
Which of the following statements is true regarding the national debt and federal government deficits? There is a positive relationship between the national debt and a federal government budget deficit
It may be argued that the effects of a higher public debt are the same as the effects of a higher deficit because A higher deficit creates a higher public debt
Since the 1940s, more often than not, the U.S. federal government has Run a budget deficit
Since 2001, more ofthen than not, the U.S. federal government has Run a budget deficit
Which of the following is a reason for this resurgence in federal government budget deficits? Tax revenue not keeping pace with growth in spending
Since 1970 the U.S. government’s budget deficit as a percentage of real GDP has Averaged approximately 3%
Suppose that a particular economy has a real GDP of 40.0 trillion in 2004. It grows to 40.8 trillion in 2005. Meanwhile, the national debt was 20.0 trillion in 2004. In 2005 the federal government ran a budget deficit of 6.0 trillion, which was totally financed by borrowing. The national debt as a percentage of real GDP has…. Increased
What is the relationship between the gross public debt and the net public debt? The net public debt only included government debt held by the public
The accumulation of borrowing by all federal government agencies is referred to as the Gross public debt
When considering the gross public debt, one can argue that it is overstated because The federal government owes itself money
Which of the following statements is true when considering the expenditures of the U.S. federal government? The expenditures are used for all these purposes
If federal budget deficits increase, then a part of that deficit Will be financed by foreign dollar holders, who will buy fewer U.S. exports, thus increasing the U.S. trade deficit
A trade deficit implies that The dollar value of imports exceeds the dollar value of exports
Generally a larger US trade deficit is accompanied by a Larger US federal government budget deficit
Suppose the dollar value of imports to the U.S. exceed the dollar value of exports from the US. This imlies that Foreigners are holding an excess supply of dollars
If foreigners have an excess supply of dollars after trading goods and services they will likely Buy more US treasury bonds
If the U.S. federal government operates with a budget deficit it must borrow. In order to entice people to lend money to finance this deficit, the U.S. government must Pay a higher rate of interest on the bonds it sells
As the interest rate or yield on U.S. bonds increases, foreigners Buy more U.S. bonds and fewer U.S. goods and services
From the end of WWII through 1983 the U.S. government had consistently experienced A trade surplus
What happens to the net public debt if the federal government operates next year with a a. Budget deficit? INCREASESb. Balanced budget? REMAINS UNCHANGEDc. Budget surplus? DECREASES
Which of the following is an example of a flow variable? The government budget deficit
Which of the following is the definition of the government budget deficit? An excess of government spending over revenues during a given period of time
Previously, the government operated with a balanced budget, but recently there has been a sudden increase in federal tax collections. The net public debt Decreases
The federal government had been operating with a very small annual budget deficit until three successive hurricanes hit the Atlantic Coast, and now government spending has risen substantially. The net public debt Increases
The General National Mortgage Association, a federal government agency that purchases certain types of home mortgages, buys U.S. treasury bonds from another government agency. The net public debt Remains unchanged
Which of the following best describes the historical pattern of U.S. budget deficits since 1950? In most years, the government has had a budget deficit
Until recently, the federal government has been operating with a very small annual budget surplus. Now congress has eliminated several expenditure programs that it has decided wasted funds provided by taxpayers. The net public debt Decreases
Using funds raised from issuing bonds to another government agency, the U.S. Treasury decides to buy back bonds that it had issued three years ago to a different government agency. The net public debt Remains unchanged
Previously, the government operated with a balanced budget, but there has been a drop in personal income and a corresponding decrease in individual income tax collections. The net public debt Increases
Net public debt is equal to Gross government debt minus all government interagency borrowing
Which of the following is a reason why the public debt may impose a burden on future generations? Future taxes may have to be increased to repay the debt
The increase in government borrowing will cause interest rates to Rise (federal budget deficit increases)
In an open economy, this will make U.S. bonds ______ to overseas residents, who will buy _____ bonds and ______ U.S. exports, and thus the trade deficit will _____. More attractive, more, less, rise
In an open economy, if the federal government has a budget deficit, the trade balance is more likely to be A deficit
In long-run macroeconomic equilibrium, after the economy has fully adjusted to changes in all factors, the effect of an increased government budget deficit resulting from higher government spending or lower taxes is No change in equilibrium real GDP, and a redistribution of real GDP from private spending to public spending
In the short run, if the economy has a recessionary gap, an increased government budget deficit resulting from higher government spending or lower taxes is mots likely to Increase aggregate demand, which will move the economy towards full employment real GDP
Finance Flashcards

Finance: Chapter 3 Quiz

​Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet? ​The company issues new common stock.
Which of the following items cannot be found on a firm’s balance sheet under current liabilities? Cost of goods sold
Below are the 2014 and 2015 year-end balance sheets for Tran Enterprises: Assets: 20152014Cash $ 200,000$ 170,000Accounts receivable 864,000700,000Inventories 2,000,0001,400,000Total current assets $3,064,000$2,270,000Net fixed assets 6,000,0005,600,000Total assets $9,064,000$7,870,000Liabilities and equity: Accounts payable $1,400,000$1,090,000Notes payable to bank 1,600,0001,800,000Total current liabilities $3,000,000$2,890,000Long-term debt 2,400,0002,400,000Common stock 3,000,0002,000,000Retained earnings 664,000580,000Total common equity $3,664,000$2,580,000Total liabilities and equity $9,064,000$7,870,000The firm has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, long-term debt in 2014. As of the end of 2015, none of the principal on this debt had been repaid. Assume that the company’s sales in 2014 and 2015 were the same. Which of the following statements must be CORRECT? The firm issued new common stock in 2015.
On its 12/31/15 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? Dividends could have been paid in 2015, but they would have had to equal the earnings for the year.
Wu Systems has the following balance sheet. How much net operating working capital does the firm have? Cash $ 100 Accounts payable $ 200Accounts receivable 650 Accruals 135Inventory 550 Notes payable 565Current assets $ 1,300 Current liabilities $ 900Net fixed assets $ 1,000 Long-term debt 600 Common equity 300 Retained earnings 500Total assets $ 2,300 Total liab. & equity $ 2,300 $965
Last year Almazan Software reported $10.50 million of sales, $6.25 million of operating costs other than depreciation, and $1.30 million of depreciation. The company had $5.00 million of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year’s data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $0.63 million. By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes. (Round your final answer to 3 decimal places.) -$0.410
On 12/31/15, Hite Industries reported retained earnings of $497,500 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/14, the company had reported $445,000 of retained earnings. No shares were repurchased during 2015. How much in dividends did the firm pay during 2015? $82,500
Hartzell Inc. had the following data for 2014, in millions: Net income = $600; after-tax operating income [EBIT (1-T)] = $700; and Total assets = $2,000. Information for 2015 is as follows: Net income = $825; after-tax operating income [EBIT (1-T)] = $1,175; and Total assets = $2,500. How much free cash flow did the firm generate during 2015? $675
Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $37 million of common equity on its balance sheet, what is the company’s Market Value Added (MVA)? Answer options are provided in whole dollar. -3,000,000
Finance Flashcards

Finance Quiz Chapter 10+11

The dividend on preferred stock is most similar to …a.) a common stock with a constant growth in dividendsb.) a common stock with no growth in dividendsc.) common stock with a variable growth in dividendsd.) a certificate of deposit B.) a common stock with no growth in dividends
Which is a characteristic of the price of the preferred stock?a.) because the preferred stock has no maturity, the price analysis is similar to that of debtb.) since preferred stock dividends are fixed, they are tax-deductiblec.) preferred stock is valued as a perpetuityd.) none of these options are true c.) preferred stock is valued as a perpetuity
The value of common stock is based on its..a.) value of future benefits to the holderb.) current earningsc.) past performanced.) historic dividends a.) value of future benefits to the holder
The dividend valuation model stresses the a.) importance of dividends and legal rules for maximum paymentb.) relationship of dividends to earnings per sharec.) importance of earnings per shared.) relationship of dividends to market prices d.) relationship of dividends to market prices
As a bond approaches its maturity date, its sales price approaches a.) the price of comparable bondsb.) the par valuec.) US treasury bond pricesd.) the par adjusted for yield to maturity B.) the par value
According to traditional financial theory, the cost of capital curve is U shaped over the range of debt-equity mixesT or F True
A firm that does not earn the cost of capital in the long run will not maximize shareholder wealthT or F True
Although debt financing is generally cheaper than equity financing, financial managers should not use debt financing significantly above the industry standard because it can increase the firm’s overall cost of capital T or F True
The cost of debt, preferred stock, and common equity must all be adjusted for tax implicationsT or F False
Each project should be judged against a.) the exiting interest rate at that point in timeb.) the specific means of financing used to support its implementationc.) the cost of new common stock equityd.) none of these options are true d.) none of these options are true
The market determination required rate of return is the appropriate discount rate used in valuation calculationsT or F True
In estimating the market value of the bond, the coupon rate should be used as the discount rateT or F False
The yield to maturity is always equal to the interest payment of a bondT or F False
The “risk free rate of return” is equal to the inflation premium plus the real rate of returnT or F True
In a general sense, the value of any asset is thea.) value of past dividends and price increases for the assetb.) future value of the expected earnings discounted by the asset’s cost of capitalc.) present value of the cash flows expected to be received from the assetd.) value of the dividends received from the asset c.) present value of the cash flows expected to be received from the asset
A bond that has a “yield to maturity” greater than its coupon interest rate will sell fo a pricea.) at parb.) below parc.) that is equal to the face value of the bond plus the value of all interest paymentsd.) above par b.) below par
The longer the time to maturitya.) the less the bond price decrease from a decrease in interest ratesb.) the less the bond price increases from an increase in interest ratesc.) the greater the bond price increases from an increase in interest ratesd.) the greater the bond price increase from a decrease in interest rates d.) the greater the bond price increase from a decrease in interest rates
If the yield to maturity on a bond is greater than the coupon rate, you can assumea.) risk premiums have decreasedb.) interest rates have decreasedc.) the sales price is below pard.) the sales price is above par c.) the sales price is below par
The return measure that an investor demands for giving up current use of funds, without adjusting for purchasing power changes or the real rate of return, is the a.) discount rateb.) dividend yieldc.) inflation premiumd.) risk premium d.) risk premium
Explain the difference between coupon and discount bond. Be specific: What is coupon bond?an investment bond on which interest is paid by presenting coupons, periodic interest payments (interest expense on debt is tax deductible) What is a discount bond?A discount bond is a bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the secondary market.Difference: one sells at par and gets par redeemed at end, discount bond didn’t pay par value, paid present value (based on coupon rate)Principle difference: The key difference between a coupon rate and discount rate is that you pay par value for coupon in the beginning and get redeemed par at the end for coupon. But for discount bond you pay the discounted present value for the bond in the beginning, but get redeemed par value in the end.
TIPS Treasury Inflation Protection Securities: -provides protection from inflation- when a TIPS matures you are paid the adjusted principal or the original principle, whichever is greater-The principal of TIPS increases with inflation and decreases with deflation
Finance Flashcards

Personal Finance ch 13 & 14

Jack Masters earns $40,000 a year. His monthly expenses total $2,100. What is the minimum amount of money that Mr. Masters should set aside in an emergency fund? a.) $8,400 b.) $2,100 C.) $10,000 d.) $6,300 e.) $4,200 d.) $6,300
If interest rates in the overall economy decrease, what will happen to the market value of a corporate bond with a fixed interest rate? a.) The bond is worthless. b.) The value of the bond will increase. c.) It is impossible to determine if the bond’s value will increase or decrease. d.) The value of the bond will decrease. e.) The value of the bond will not change. b.) The value of the bond will increase.
One dollar placed in a safe deposit box in 1980 is worth: a.) about 10 cents. b.) less than 60 cents. c.) zero. d.) more than one dollar. e.) between 60 cents and one dollar. b.) less than 60 cents.
Which of the following investments would rank the highest with regard to safety? a.) preferred stock b.) common stock c.) corporate bonds d.) real estate e.) government bonds e.) government bonds
Which of the following investments offers the least amount of growth potential? a.) mutual funds b.) options c.) corporate bonds d.) real estate e.) common stock b.) options
Matt Jackson is single and 24. He has just graduated from college and obtained a job making $26,400 a year. He would like to establish a long-term investment program. Which of the following investments would you recommend for his investment program? a.) a money-market fund b.) corporate bonds c.) commodities d.) government bonds e.) growth stocks e.) growth stocks
An example of ____________ risk occurs when an investment does not keep up with prices that are increasing in the overall economy. a.) business failure b.) market c.) interest d.) current e.) inflation e.) inflation
Garrett Jennings is thinking about buying an investment. The investment option that he is thinking about buying represents the most basic form of ownership and pays a dividend. The dividend on this investment is paid after all other payments and dividends have been made. What investment is Garrett thinking about purchasing? a.) Real Estate b.) Mutual fund c.) Preferred Stock d.) Corporate Bond e.) Common Stock e.) Common Stock
An emergency fund should be deposited in a: a.) six month certificate of deposit. b.) savings account at the highest available interest rate. c.) safe place at home. d.) safe deposit box in a bank vault. e.) checking account. b.) savings account at the highest available interest rate.
Which of the following investments would provide the most predictable source of income? a.) government bonds b.) commodities c.) real estate d.) derivatives e.) common stock a.) government bonds
A type of investment that combines and invests the funds of many investors and manages it with a professional manager is called a(n): a.) certificate of deposit. b.) securities exchange. c.) NOW account. d.) mutual fund. e.) option fund. d.) mutual fund.
Twenty years ago, you began investing $2,000 a year. Because your investments earned an average of 8 percent a year, your investment portfolio has a current dollar value of $92,000. How much did you earn on your investments over the 20-year period of time? a.) $40,000 b.) $132,000 c.) $92,000 d.) $52,000 e.) $2,000 d.) $52,000
Earnings that are reinvested in a corporation are called: a.) additional capital. b.) collected capital. c.) retained earnings. d.) surplus earnings. e.) retention capital. c.) retained earnings.
When a bondholder loses money because interest rates in the economy increase, it is an example of ____________ risk. a.) interest rate b.) business failure c.) market d.) inflation e.) current a.) interest rate
A good rule of thumb is to limit installment payments to ____________ percent of your net monthly income. a.) 60 b.) 30 c.) 20 d.) 40 e.) 50 c.) 20
Dividends remain with the stock until: a.) five days before the date of record. b.) five days before the actual payment date. c.) two business days before the date of record. d.) two business days after the date of record. e.) five days after the date of record. c.) two business days before the date of record
Becky Martinez owns stock in GBX Corporation. The GBX stock has a market value of $50 a share. If Becky receives $4.50 a year in dividends, what is the current yield? a.) 11.1 percent b.) 7 percent c.) 8 percentd.) 9 percent e.) It is impossible to calculate the current yield with the above information. d.) 9 percent
Jo Bower owns 150 shares of Data General stock. She purchased the stock for $24 a share. She sold her stock for $30 a share. The commissions required to buy and sell her stock totaled $120. Assuming that she received no dividends during the time she owned the stock, what is her total return for this transaction? a.) $3,000 b.) $600 c.) $2,400 d.) $780 e.) $900 d.) $780
A request that a stock be bought or sold at a specified price is called a ____________ order. a.) limit b.) discretionary c.) market d.) round e.) stop a.) limit
Patsy Banz owns 220 shares of General Mills Corporation. For the last calendar quarter, General Mills Corporation paid a dividend of $0.47 a share. What is the total amount she received in her dividend check for this quarter? a.) $47 b.) $0.47 c.) $94 d.) $103.40 e.) It is impossible to calculate the total dividend amount with this information. d.) $103.40
The federal government requires that a corporation selling a new issue of securities must disclose information about the company and its finances in a(n): a.) annual report. b.) quarterly report. c.) stock guide. d.) accountant’s audit report. e.) prospectus. e.) prospectus.
If the board of directors approves a two for one stock split, an investor who owns 150 shares before the split owns ____________ shares after the split. a.) 75 b.) 450 c.) 300 d.) 225 e.) 150 c.) 300
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? a.) $3 a share b.) $0.67 a share c.) $1.50 a share d.) None of the above answers is correct. e.) $2 a share c.) $1.50 a share
Last year, High-Tech Electronics earned $1.50 per share. If the current market value for a share of stock is $45, what is the firm’s PE ratio? a.) It is impossible to calculate a PE ratio with this information. b.) 3.3 c.) 0.033 d.) 30 e.) 33 d.) 30
The type of preferred stock that may be exchanged at the stockholder’s option for common stock is: a.) callable preferred stock. b.) corporate bond. c.) cumulative preferred stock. d.) participating preferred stock. e.) convertible preferred stock. e.) convertible preferred stock.
A stock issued by a corporation that has the potential of earning above-average profits when compared to other firms in the economy is called a(n) ____________ stock. a.) growth b.) cyclical c.) blue-chip d.) income e.) defensive a.) growth
A stock that pays higher than average dividends is called a(n) ____________ stock. a.) blue-chip b.) defensive c.) growth d.) cyclical e.) income e.) income
A very safe investment that generally attracts conservative investors is called a(n) ____________ stock. a,) cyclical b.) penny c.) small-cap d.)growth e.) blue-chip e.) blue-chip
Apple Computer Corporation holds its annual meeting in April. Maxine Star, who owns stock in the company, cannot attend the meeting. She can vote by: a.) participatory certificate. b.) preemptive right. c.) cumulative certificate. d.) proxy. e.) voluntary certificate. d.) proxy.
A small-cap stock is defined as a corporation that has total capitalization of: a.) no capitalization. b.) between $250 million and $2 billion c.) less than $400 million. d.) less than $300 million. e.) more than $10 billion. b.) between $250 million and $2 billion
Finance Flashcards

Finance chap. 13 (test 4)

The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as: homemade leverage.
Which one of the following states that a firm’s cost of equity capital is a positive linear function of the firm’s capital structure? M&M Proposition II without taxes
Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship? Interest tax shield
Assume you are comparing two firms that are identical in every aspect, except one is levered and one is unlevered. Which one of the following statements is correct regarding these two firms? The unlevered firm will have higher EPS at relatively low levels of EBIT.
You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm: whenever EBIT exceeds $428,000.
Which one of the following statements concerning financial leverage is correct? Changes in the capital structure of a firm will generally change the firm’s earnings per share.
T.L.C. Enterprises just revised its capital structure from a debt-equity ratio of .37 to a debt-equity ratio of .48. The firm’s shareholders who prefer the old capital structure should: sell some shares and loan out the sale proceeds.
Which one of the following statements is the core principle of M&M Proposition I, without taxes? The capital structure of a firm is totally irrelevant
Which one of the following supports the theory that the value of a firm increases as the firm’s level of debt increases? M&M Proposition I with taxes
M&M Proposition II, without taxes, states that the: cost of equity increases as a firm increases its debt-equity ratio.
Which one of the following represents the present value of the interest tax shield? Tc ×D
According to M&M Proposition I with taxes, the value of a levered firm will increase when the: value of the unlevered firm increases.
M&M Proposition I with taxes states that: the levered value of a firm exceeds the firm’s unlevered value.
Which one of the following conditions exists at the point where a firm maximizes its value? WACC is minimized.
Finance Flashcards

Finance Chapter 7

own the firm Holders of equity capital ________.
secured creditors If bankruptcy were to occur, ________ would have the first claim on assets.
voting rights Which of the following typically applies to common stock but not to preferred stock?
the stock market Equity capital can be raised through ________.
residual owners Common stockholders are sometimes referred to as ________.
ADRs securities, backed by American depositary shares (ADSs), that permit U.S. investors to hold shares of non-U.S. companies and trade them in U.S. markets
preferred stockholders ______ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.
cumulative Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are ________.
quasi-debt nature Preferred stock is characterized by ________.
treasury bill Which of the following is a marketable security?
outstanding shares Shares of stock currently owned by a firm’s shareholders are called ________.
dividends Common stockholders expect to earn a return by receiving ________.
proxy battle The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes is called a ________.
rights offering ________ are financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares.
investment banker A(n)________ is hired by a firm to find prospective buyers for its new stock or bond issue
rights offering In a ________, new shares are sold to the existing shareholders.
underwriting syndicate A group formed by an investment banker to share the financial risk associated with underwriting new securities is called a(n) ________.
perpetuity Preferred stock is valued as if it were a ________.
zero-growth model The ________ is utilized to value preferred stock.
book value ________ is the value of a firm’s ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders.
liquidation value ________ is the actual amount each common stockholder would expect to receive if a firm’s assets are sold for their market value, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.
P/E multiple ________ is a guide to a firm’s value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.
P/E multiple The use of the ________ is especially helpful in valuing firms that are not publicly traded.
Finance Flashcards

Finance Exam I: Chapter 1

Shares in a corporation can be sold to raise capital from investors who are not involved in the business. This greatly increases the amount of capital that can be raised to fund the business. Which of the following is the advantage of the corporate form of organization?A. Reduced start-up costsB. Greater access to capital marketsC. Unlimited liabilityD. Single taxation B.
A good capital budgeting or investment decision is one in which the benefits are worth more to the firm than the cost of the asset.A. TrueB. False A.
Corporations hold the majority of all business assets and generate the majority of business revenues and profits in the United States.A. TrueB. False A.
Unlimited liability means that the owner of a firm is responsible for paying all the bills of the firm.A. TrueB. False A.
The process of transferring ownership of a sole proprietorship is relatively easy compared to a public corporation.A. TrueB. False B.
General partners in a business have limited liability with regard to their firm’s obligations.A. TrueB. False B.
An agency conflict can arise when the agent of the firm is the sole owner of the firm.A. TrueB. False B.
The owners of a firm are unaffected by agency costs.A. TrueB. False B.
Which of the following is a stakeholder?A. An employeeB. A lenderC. The IRSD. All of the above D.
The capital budgeting decision process addresses…A. How a firm’s day-to-day financial matters should be managedB. How a firm should finance its assetsC. Which productive assets a firm should purchaseD. All of the above C.
Which of the following business organizational form(s) subject(s) the owner(s) to unlimited liability?A. Sole proprietorshipB. General partnershipC. CorporationD. Both sole proprietorship and general partnership D.
Which of the following business organizational form(s) create(s) a tax liability on income at the personal income tax rate?A. Sole proprietorshipB. PartnershipC. CorporationD. Both sole proprietorship and partnership D.
Which of the following business organizational form(s) is/are the easiest one(s) to raise capital?A. Sole proprietorshipB. PartnershipC. CorporationD. Both sole proprietorship and partnership C.
Which of the following cannot be engaged in managing the business?A. A sole proprietorB. A general partnerC. A limited partnerD. None of the above C.
If a firm establishes maximizing profits as the most important goal of the firm, which of the following would not be given proper consideration?A. Sales revenuesB. ProfitsC. Cost of goods soldD. Risk of bankruptcy D.
One reason for the existence of agency problems between managers and stockholders is that…A. There is a significant degree of separation between management and ownershipB. Managers know how to manage the firm better than stockholdersC. Stockholders have unreasonable expectations about managerial performance A.
Who among the following is the principal in the agency relationship of a corporation?A. The Board of DirectorsB. The CEO of the firmC. A stockholdersD. A company engineer C.
An example of an agency cost is…A. A manager turning down a value-contributing project because of its risksB. A manager expensing a lavish dinner on the company expense reportC. A manager using too little debt within the firm’s capital structure because of the additional risk associated with debt B.
Executives that repeatedly put their own interests before that of the firm may find that they have difficulty in finding another job after their current one. This is an example of…A. The managerial labor market disciplining managersB. The market for corporate controlC. The Board of Directors affecting the prospects of a manager A.
The legal system and market forces impose substantial costs on individuals and institutions that engage in unethical behavior. Which of the following would not be an example of the above?A. Legal finesB. Jail timeC. Financial lossesD. Agency conflicts D.
Maximization of a firm’s profit is more important than maximization of a firm’s value.A. TrueB. False B.
Which of the following is likely to reduce agency costs?A. Guaranteeing managers a large base salaryB. Hiring few qualified managersC. The threat of the firm being a takeover targetD. A Board of Directors compromised mostly of insiders C.
Profit maximization is not an appropriate goal for a firm because…A. It directly considers the timing and riskiness of the firm’s cash flowsB. It does not consider time value of moneyC. It considers the current value of the firm’s stockD. It directly accounts for the firm’s cash flows B.
The main objective of a firm’s management should be to…A. Maximize its profitB. Minimize its risk exposureC. Maximize its long-term shareholder valueD. Maximize its current stock price C.
Finance Flashcards

personal finance chapter 9

basic health insurance a term used to describe most health insurance, which includes a combination of hospitals, surgical, and physician expense insurance
hospital insurance insurance that coves the costs associated with a stay; room charges, nursing costs, operating room fees, drugs supplied by the hospital. generally a part of all insurance. depending on the policy, hospital insurance may reimburse the policyholder for specific charges, give the holder a set amount of money for each day the person is hospitalized, or pay the hospital directly for the holder’s expenses. if the policy holder receives a set amount of money per day of hospitalization, he or she must make up the difference between what is charged and what is received from the insurance company
surgical insurance insurance that covers the cost of surgery. generally lists the specific operations it covers and all cities . you will have to pay any charges above what the policy will cover. don’t cover experimental treatment
physician expense insurance insurance that coves physicians fees outside of surgery. includes office or home visits, lab fees, and x-ray costs when they are not preformed in the hospital
major medical expense insurance insurance that covers medical costs beyond those covered by basic health insurance. meant to offset all financial effects of a catastrophic illness. doesn’t provide complete coverage, but instead allows deductibles and coinsurance payments
stop-loss provision a medical insurance feature that limits the total dollar amount that the policyholder is responsible for holding
traditional fee-for-service plan and managed health care(prepaid care) basic types of health care plans
traditional fee-for-service plan an insurance plan that provides reimbursement for all or part of your medical expenditures. in general, it gives you a good deal of freedom to choose your doctor and hospital. dis: relatively expensive and involve a good deal of paperwork.
managed health care plan an insurance plan that entitles you to the health care provided by a specific group of participating doctors, hospitals, and clinics. these plans are offered by health maintainence organizations or variations of them. most of your expenses are already covered and dont need to be reimbursed. receive all health services at one location, might not see the same doctor everytime, co-payments necessary. adv: efficiency, less paperwork, involve a number of doctors.
private health care plans more than 800 insurance companies whose main business comes from selling health insurance to people to be offered as part of a benefits package. these companies offer a variety of traditional fee for service and managed health care plans rather than insurance policies
1) health maintenance organizations (HMOs) 2) preferred provider organizations (PPOs) two basic types of managed health care
HMO most popular form; prepaid insurance plan that entitles members to the services of participating doctors, hospitals, and clinics. members pay a flat fee for this privilege and then can select a managing physician who is responsible for the care of that member. might be a co-payment. has three types: individual practice association, group practice, point-of-service. adv: efficient, costing as little as 60% of what comparable fee-for service insurance plan would cost. dis: service is too quick and waits can be long. getting referrals is a hassle, lack of choice in doctors, unable to establish relationships with doctors, doctors receive bonuses based on the number of patients seen or based on the amount of money saved
individual practice association plan, group practice plan, point-of-service plan three types of hmos
individual practice association plan an hmo made up of independent doctors, in which the patients visit the doctors and receive their medical treatment in their office. many ipa doctos maintain a regular practice too
group practice plan an insurance plan in which doctors are generally employed directly by an HMO, and members of the hmo must receive their medical treatment from these doctors at a central facility
point of service plan an insurance plan that allows its members to seek medical treatment from both hmo doctors and non hmo doctors. drs tend to be free or at least covered at a very low co-payment rate. private employers can still join HMOs, need a referral to switch doctors in different ares. hmos emphasize preventive medicine because preventing an illness is an awful lot cheaper than curing it. hmos provide regular exams
Preferred provider organization an insurance plan which an employer or insurer negotiates with a group of doctors and hospitals to provide health care for its employees or members at recued rates. a cross between a traditional fee for service plan and an hmo. doctors and hospitals that agree to the pricing system become members of the ppo. generally have an additional, or penalty, co-payment requirement for service from nonmembers. adv: allows for halth care at a discount, with the negotiating power of the insurer or employer determining how great a discount is achieved
actuaries statisticians who specialize in estimating the probability of death based on personal characteristics ex: age and general health, as well as lifestyle specifics such as whether or not you exercise.
beneficiary the individual designated to receive the insurance policy’s proceeds upon the death of the insured
policy owner (policyholder) the individual or business that owns the life insurance policy
face amount the amount of insurance provided by the policy at death
insured the persons whose life is insured by the life insurance policy. Sometimes the policy is owned or held by an individual, and sometimes its held by a business.
annuity a series of equal dollar payments coming at the end of each time period for a specified number of time periods.
grace period the length of time given to make a payment before interest is charged against the outstanding balance on a credit card
riders a special provision that may be added to your policy, which either provides extra benefits to the beneficiary or limits the company’s liability under certain conditions. Often an additional cost, but it is anything that the policy doesn’t give you.
workers compensation state laws provide payment for work-related accidents and illness. Each state determines the benefits level for the workers.
medigap insurance insurance sold by private insurance companies aimed at bridging gaps in medicare coverage. Can only sell you a standard medigap policy
disability insurance health insurance that provides payments to the insured in the event that income is interrupted by illness, sickness, or accident, more like earning power insurance. Your income stops when you are disabled.
insurance co-payment the amount you have to pay every time you go in to see the doctor
deductible the amount you have to pay before your insurance picks up the rest.
earnings multiple approach a method of determining exactly how much life insurance you need by using a multiple of your yearly earnings. Replaces stream of income
needs approach a method of determining how much life insurance you need based on funds your family would require to maintain their lifestyle after your death, more complicated than earnings multiple, allows you to account for the fact that your family’s needs may be different from the average. Immediate needs at the time of death, debt elimination funds, immediate transitional funds, dependency expenses, spousal life income, educational expenses for the children
decreasing term insurance each time the renewable item is renewed, the premium increases. The term insurance in which the annual premium remains constant but the face amount of the policy declines each year.
whole life insurance cash value insurance that provides permanent coverage and a death benefit when the insured dies. If the insured turns 100, the policy pays off as well. Advantages: provides both savings and permanent insurance needs. Has 3 premium payment patterns: continuous, single premium or single payment whole life, or limited premium whole life. has fixed premium and death, cash-value is fixed too
to get the best rating on insurance purpose of A.M. Best, Moody’s, Standard and Poor’s
affordability, low initial premium, with the premium increasing as the insured gets older advantages of term life insurance
lump-sum settlement pays the entire death benefit, tax free, to the beneficiary at one time. Allows the beneficiary to withdraw, use, or invest the funds in any way that he or she wishes. Drawback: requires beneficiary to have self-control in managing it
interest-only settlement instead of receiving the death benefits immediately, they are left on deposit with the insurance company for a length of time earning interest is tied to the market interest rate, with a guaranteed minimum rate. Beneficiary will pay taxes on the interest earned after you death.
installments-payments settlement the cash-value, including both interest and principal, is completely distributed over a fixed period or in fixed payments. When proceeds are taken in installments, the portion of each payment attributable to the basic death benefit is tax-free, but the portion attributable to interest earned on the proceeds is taxable.
life-annuity settlement a settlement where the beneficiary receives income for life. 3 types: straight life, period certain annuity, and refund annuity
no medical exam characteristics of group term insurance
whole, variable, universal 3 types of cash-value insurance
medicare a government insurance program enacted in 1968 to provide medical benefits to the disabled and those over 65. cost of this insurance is covered by social security, with the individual patient paying an annual deductible
medicare, Medicaid, and workers compensation 3 government sponsored insurance
group health insurance health insurance that is sold, usually without a medical exam, to a specific group of indivuals who are associated for some purpose other than to buy insurance. refers the way insurance is sold rather than the characteristics of the policy. provide to a specific group of people. group insurance offered through an employer do require medical exams
individual insurance policy an insurance policy that is tailor-made for you, reflecting your age, health, geographic location, and chosen deductible amount. not many advantages. group and indivual offer the same coverafe, but the difference is cost- individual tends to cost more
medicaid government insurance plan for the needy, aged, blind, or disabled. enacted n 1965. joint program operated by the federal and state governments, with the benefits varying from state to state. purpose is to provide medical care for the people ahead. Medicaid payments go toward premiums, deductibles, and co-payments
disability most policies define people as disabled if they cant preform the duties of their own occupation or of any occupation for which they are reasonably suited for.
combination disability your are covered if you cant preform your own occupation for the first 2 years of your disability.
waiting period (elimination period) the period after the disability during which no benefits occur, equivalent to a deductible in a health care insurance policy. most have a waiting range of 1 month to 6 months. longer the wait, the more expensive it is
waiver a disability insurance provision that allows your insurance to stay in force should you become unable to work because of a disability or illness
life insurance not meant to benefit you, the purpose is to protect your dependents in the event of your death. gives you a piece of mind by ensuring that your dependents will have the financial resources to pay off your debts.
insurance policy a contract with an insurance company that spells out what losses are covered, what the policy costs, and who receives payments if a loss occurs
risk pooling sharing the financial consequences associated with risk
premium a life insurance payment; the amount that everyone puts into the pot. the size of this depends on the probability of when you will die
modified whole life premiums begin at a level below comparable whole life and gradually rise in steps until the first premiums are above those of comparable whole life
combination whole life which include elements of whole life and decreasing term insurance. the change in coverage is done in such a way that the face amount of the policy remains constant, with the coverage gradually shifting from term to whole life
universal life insurance type of cash value insurance that’s much more flexible than whole life. it allows you to vary the premium payment and the level of protection. combines term insurance and tax-deferred savings featured in a package which both the premiums and benefits are flexible. adv: flexible dis: the returns fluctuate dramatically, you may not end up with as much savings as you anticipated
variable life insurance insurance that provides permanent insurance coverage as whole life does; however, the policyholder, rather than the insurance company, takes on the investment risk. type of whole life in which the cash value and death benefit are tied to and vary according to the performance of a set of investments chosen by the policy holder. two forms: straight variable and straight universal. returns are tax deferred. no guarantee of a minimum cash value, and what happens to the cash value doesn’t effect the insurance company. AIMED AT PEOPLE WHO WANT TO MANAGE THEIR OWN INVESTMENTS AND ARE WILLING TO TAKE RISKS
term what is the better insurance, term or cash-value?
term what type of insurance should a single person get?
term what type of insurance should a married couple with two incomes get?
cash-value what type of insurance should a married couple with one income get>
cash-value what type of insurance should a married couple with one income and gets get?
beneficiary provision person designated to receive the death benefits when you die. can be a person, a business, or a trust. also will name on or more contingent beneficiaries who will receive the death benefits only if the primary beneficiary dies before the benefits have been distributed
nonforfeiture clause defines the choices available to policyholders who miss premium payments, causing the policy to lapse. protects cash-value of the policy
straight line annuity a type of annuity where the beneficiaries receive monthly payments regardless of how long they live. insurance companys obligation ends when the beneficiary dies. a younger beneficiary receives less.
period certain annuity payments are guaranteed for a certain period of time, if the beneficiary dies before this time, the payments go to a secondary
refund annuity a type of annuity that provides the beneficiary with income for life as well as bestowing any reaming death benefit on a secondary if primary dies. monthly payments will besmaller than those received under straight line bc insurance company will have to pay out more money over time
cash-value insurance A type of insurance that has two components: life insurance and a savings plan.
renewable term insurance A type of term insurance that can be renewed for an agreed-upon period of up to a specified age (usually 65 or 70) regardless of the insured’s health.
credit or mortgage group life insurance Group life insurance that’s provided by a lender for its debtors.
convertible term life insurance Term life insurance that can be converted into cash-value life insurance at the insured’s discretion regardless of his or her medical condition and without a medical exam.
Traditional Net Cost (TNC) Method A method of comparing insurance costs that sums the premiums over a stated period (usually 10 to 20 years) and subtracted from this the sum of all dividends over that same period.
Interest- Adjusted Net Cost (IANC) Method or Surrender Cost Index A method of comparing insurance costs that incorporates the time value of money into its calculations.
Coinsurance or Percentage Participation Provision An insurance provision that defines the percentage of each claim that the insurance company will pay.
cleanup funds Funds needed to cover immediate expenses at the time of your death.