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Finance Flashcards

Finance Chapter 11

B Initial cash outflows and subsequent operating cash inflows for a project are referred to as ________.A) necessary cash flowsB) relevant cash flowsC) perpetual cash flowsD) ordinary cash flows
B Relevant cash flows for a project are best described as ________.A) incidental cash flowsB) incremental cash flowsC) sunk cash flowsD) contingent cash flows
C When making replacement decisions, the development of relevant cash flows is complicatedwhen compared to expansion decisions, due to the need to calculate ________ cash inflows.A) conventionalB) opportunityC) incrementalD) sunk
C In developing the cash flows for an expansion project, the analysis is the same as the analysis for replacement projects where ________.A) all cash flows from the old assets are equalB) prior cash flows are irrelevantC) all cash flows from the old asset are zeroD) cash inflows equal cash outflows
D Cash outlays that had been previously made and have no effect on the cash flows relevant to acurrent decision are called ________.A) incremental historical costsB) incremental past expensesC) opportunity costs foregoneD) sunk costs
C Cash flows that could be realized from the best alternative use of an owned asset are called ________.A) incremental costsB) lost resale opportunitiesC) opportunity costsD) sunk costs
B Benefits expected from proposed capital expenditures ________.A) must be on a pre-tax basis because it provides the true position of profits by the firmB) must be on an after-tax basis because no benefits may be used until tax claims are satisfiedC) may be valued either on pre-tax or after-tax basis based on the size of the firmD) are independent of interest and taxes
A One basic technique used to evaluate after-tax operating cash flows is to ________.A) add noncash charges to net incomeB) subtract depreciation from operating revenuesC) add cash expenses to net incomeD) subtract cash expenses from noncash charges
C The book value of an asset is equal to the ________.A) fair market value minus the accounting valueB) original purchase price plus annual depreciation expenseC) original purchase price minus accumulated depreciationD) depreciated value plus recaptured depreciation
D The tax treatment regarding the sale of existing assets that are sold for more than the originalpurchase price results in ________.A) an ordinary tax benefitB) no tax benefit or liabilityC) a recaptured depreciation taxed as ordinary incomeD) a capital gain tax liability
C The tax treatment regarding the sale of existing assets that are sold for more than the bookvalue but less than the original purchase price results in a(n) ________.A) ordinary tax benefitB) capital gain tax liabilityC) recaptured depreciation taxed as ordinary incomeD) capital gain tax liability and recaptured depreciation taxed as ordinary income
B The tax treatment regarding the sale of existing assets that are sold for their book value results in ________.A) an ordinary tax benefitB) no tax benefit or liabilityC) recaptured depreciation taxed as ordinary incomeD) a capital gain tax liability and recaptured depreciation taxed as ordinary income
B The portion of an asset’s sale price that is above its book value and below its initial purchaseprice is called ________.A) a capital gainB) recaptured depreciationC) a capital lossD) book value
C The portion of an asset’s sale price that is below its book value and below its initial purchaseprice is called ________.A) a capital gainB) recaptured depreciationC) a capital lossD) book value
B The tax treatment regarding the sale of existing assets that are sold for less than the book value results in ________.A) an ordinary tax benefitB) a capital loss tax benefitC) recaptured depreciation taxed as ordinary incomeD) a capital gain tax liability and recaptured depreciation taxed as ordinary income
D A corporation is selling an existing asset for $21,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.A) $0 tax liabilityB) $7,560 tax liabilityC) $4,400 tax liabilityD) $7,720 tax liability
A A corporation is selling an existing asset for $1,700. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.A) $0 tax liabilityB) $840 tax liabilityC) $3,160 tax liabilityD) $3,160 tax benefit
D A corporation is selling an existing asset for $1,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.A) $0 tax liabilityB) $1,100 tax liabilityC) $3,600 tax liabilityD) $280 tax benefit
B A firm is selling an existing asset for $5,000. The asset, when purchased, cost $10,000, wasbeing depreciated under MACRS using a five-year recovery period and has been depreciated forfour full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the taxeffect of this transaction is ________.A) $0 tax liabilityB) $1,320 tax liabilityC) $1,160 tax liabilityD) $2,000 tax benefit
B A loss on the sale of an asset that is depreciable and used in business is ________; a loss on the sale of a non-depreciable asset is ________.A) deductible from capital gains income; deductible from ordinary incomeB) deductible from ordinary income; deductible only against capital gainsC) a credit against the tax liability; not deductibleD) not deductible; deductible only against capital gains
C A corporation has decided to replace an existing asset with a newer model. Two years ago,the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________.A) $42,000B) $52,440C) $54,240D) $50,000
A A corporation has decided to replace an existing asset with a newer model. Two years ago,the existing asset originally cost $70,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $30,000. The new asset will cost $80,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________.A) $48,560B) $44,360C) $49,240D) $27,600
B Which of the following would be used in the computation of an initial investment?A) the annual after-tax inflow expected from the investmentB) the initial purchase price of the investmentC) the historic cost of the existing investmentD) the profits from the new investment
C Which of the following basic variables must be considered in determining the initial investment associated with a capital expenditure?A) incremental annual savings produced by the new assetB) cash flows generated by the new investmentC) proceeds from the sale of an existing assetD) profits on the sale of an existing asset
D An important cash inflow in the analysis of initial cash flows for a replacement project is ________.A) taxesB) the cost of the new assetC) installation costD) the sale value of the old asset
B When evaluating a capital budgeting project, installation costs of a new machine must beconsidered as part of ________.A) the operating cash inflowsB) the initial investmentC) the incremental operating cash inflowsD) the operating cash outflows
D The change in net working capital when evaluating a capital budgeting decision is ________.A) the change in fixed liabilities minus the change in fixed assetsB) the increase in current assetsC) the increase in current liabilitiesD) the change in current assets minus the change in current liabilities
C In evaluating the initial investment for a capital budgeting project, ________.A) an increase in net working capital is considered a cash inflowB) a decrease in net working capital is considered a cash outflowC) an increase in net working capital is considered a cash outflowD) net working capital does not have to be considered
D A corporation is considering expanding operations to meet growing demand. With the capitalexpansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is ________.A) an increase of $120,000B) a decrease of $60,000C) a decrease of $120,000D) an increase of $60,000
B A corporation is considering expanding operations to meet growing demand. With the capitalexpansion the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by $30,000, and long-term debt by $80,000. The change in net working capital is ________.A) an increase of $10,000B) a decrease of $10,000C) a decrease of $90,000D) an increase of $80,000
D If accounts receivable increase by $1,000,000, inventory decreases by $500,000, and accounts payable increase by $500,000, net working capital would ________.A) decrease by $500,000B) increase by $1,500,000C) increase by $2,000,000D) experience no change
B A corporation is evaluating the relevant cash flows for a capital budgeting decision and mustestimate the terminal cash flow. The proposed machine will be disposed of at the end of itsusable life of five years at an estimated sale price of $15,000. The machine has an originalpurchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percenttax rate on ordinary income and long-term capital gain. The terminal cash flow is ________.A) $24,000B) $16,000C) $14,000D) $26,000
C A corporation is evaluating the relevant cash flows for a capital budgeting decision and mustestimate the terminal cash flow. The proposed machine will be disposed of at the end of itsusable life of five years at an estimated sale price of $2,000. The machine has an originalpurchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percenttax rate on ordinary income and long-term capital gain. The terminal cash flow is ________.A) $5,800B) $7,800C) $8,200D) $6,200
B Which of the following must be considered in computing the terminal value of a replacementproject?A) operating cash flow for the final yearB) after-tax proceeds from the sale of a new assetC) before-tax proceeds from the sale of an old assetD) before-tax proceeds from the sale of a new asset
B Behavioral approaches ________.A) are used to explicitly recognize project riskB) are used to get a feel for project riskC) are not used by rational financial managersD) are used to quantify the risk
A Breakeven cash inflow refers to ________.A) the minimum level of cash inflow necessary for a project to be acceptable, that is, NPVgreater than zeroB) the minimum level of cash inflow necessary for a project to be acceptable, that is, NPV lessthan zeroC) the minimum level of cash inflow necessary for a project to be acceptable, that is, IRR lessthan zero cost of capitalD) the minimum level of cash inflow necessary for a project to be acceptable, that is, IRR equalszero
D In capital budgeting, risk refers to ________.A) the chance that a project will prove acceptableB) the conflicting IRR and NPV in a projectC) the degree of variability of initial outlayD) the uncertainty of cash inflows
A In capital budgeting, risk refers to ________.A) the degree of variability of the cash inflowsB) the degree of variability of the initial investmentC) the chance that the net present value will be greater than zeroD) the chance that the internal rate of return will exceed the cost of capital
B Tangshan Mining Company, with a cost of capital of 10 percent, is considering investing in project A, with an initial investment of $1,000,000. Project A is expected to provide equal cash inflows over its 15 year useful life. Based on this information, the breakeven cash inflow for the project is ________.A) $1,000,000B) $131,474C) $100,000D) $66,667
B A behavioral approach that evaluates the impact on a firm’s return through simultaneouschanges in a number variables of a project is called ________.A) sensitivity analysisB) scenario analysisC) simulation analysisD) Monte Carlo simulation
B The advantage of using simulation in the capital budgeting process is the ________.A) ease of calculation over scenario analysisB) continuum of risk-return trade-offs for decision makingC) single point estimate that helps the decision maker to choose the most accurate alternativeD) use of several possible outcomes to asses risk
D One type of simulation program made popular by the widespread use of personal computers is called ________.A) Monaco SimulationB) Lemans SimulationC) Cannes SimulationD) Monte Carlo Simulation
C ________ reflects the return that must be earned on the given project to compensate the firm’s owners adequately.A) Internal rate of returnB) Cost of capitalC) Risk-adjusted discount rateD) Average rate of return
B The difference by which the required discount rate exceeds the risk-free rate is called the________.A) excess returnB) risk premiumC) inflation premiumD) maturity premium
D A preferred approach for risk adjustment of capital budgeting cash flows, from a practicalviewpoint, is ________.A) sensitivity analysisB) simulation analysisC) scenario analysisD) risk-adjusted discount rates
B The theoretical basis from which the concept of risk-adjusted discount rates is derived is ________.A) the Gordon modelB) the capital asset pricing modelC) simulation theoryD) the basic cost of money
C The shares traded publicly in an efficient market are ________.A) generally positively affected by diversification, because of the reduction in riskB) generally negatively affected by diversification, because of the increase in riskC) generally not affected by diversification, unless greater returns are expectedD) generally negatively affected by diversification, because of the increase in the required rate ofreturn
C Firms do not usually get rewarded by diversifying investments in different lines of business because ________.A) the capital markets are efficient and they quickly respond to change in economic conditionsB) cash flows from such projects tend to respond less to changing economic conditionsC) investors themselves can diversify by holding securities in a variety of firms; they do not needthe firm to do it for themD) it is not possible for a firm to diversify its risk as the inflation premium is different fordifferent projects
D The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms).A) internal rate of returnB) investment opportunities scheduleC) risk-adjusted discount rateD) annualized net present value
A The option to develop follow-on projects, expand markets, expand or retool plants, and so on that would not be possible without implementation of the project that is being evaluated is called ________.A) growth optionB) timing optionC) flexibility optionD) abandonment option
A A(n) ________ allows management to avoid or minimize losses on projects that turn bad.A) abandonment optionB) growth optionC) timing optionD) put option
A The objective of ________ is to select the group of projects that provides the highest overallnet present value and does not require more dollars than are budgeted.A) capital rationingB) scenario analysisC) real optionsD) sensitivity analysis
D An IRR approach to capital rationing involves graphically plotting project IRRs indescending order against total dollar investment on an ________ graph.A) ANPVB) NPVC) RADRD) IOS
C If a firm has a limited capital budget to fund its capital projects, it is said to be facing the problem of ________.A) constrained capitalB) wealth optimizationC) capital rationingD) profitability
B An approach to capital rationing that involves graphing project returns in descending orderagainst the total dollar investment to determine the group of acceptable projects is called the________.A) net present value approachB) internal rate of return approachC) payback approachD) profitability index approach
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Finance Flashcards

Personal Finance – Chapter 2

Personal Balance Sheet A statement of your financial position on a given date. It includes the assets you own, the debt or liabilities you have incurred, and your level of wealth, which is referred to as net worth.
Assets What you own.
Liabilities Something that is owed or the borrowing of money.
Net Worth of Equity A measure of the level of your wealth. It is determine by subtracting the level of your debt or borrowing from the value of your assets.
Fair Market Value What an asset could be sold for rather than what it cost or what it will be worth sometime in the future.
Tangible Asset A physical asset, such as a house or a car, as opposed to an investment.
Blue Book A listing of used-car prices, giving the average price a particular year and model sells for and what you might expect to receive for it as a trade-in.
Insolvent The condition in which you owe more money than your assets are worth.
Income Statement A statement that tells you where your money has come from and where it has gone over some period of time.
Variable Expenditure An expenditure over which you have control. That is, you are not obligated to make that expenditure, and it may very from month to month.
Fixed Expenditure An expenditure over which you have no control. You are obligated to make this expenditure, and it is generally at a constant level each month.
Budget A plan for controlling cash inflows and cash outflows. Based on your goals and financial obligations, a budget limits spending in different categories.
Current Ratio A ratio aimed at determining if you have adequate liquidity to meet emergencies, defined as monetary assets divided by current liabilities.
Month’s Living Expenses Covered Ratio A ratio aimed at determining if you have adequate liquidity to meet emergencies, defined as monetary assets divided by annual living expenditures divided by 12.
Debt Ratio A ratio aimed at determining if you have the ability to meet your debt obligations, defined as total debt or liabilities divided by total assets.
Long-Term Debt Coverage Ratio A ratio aimed at determining if you have the ability to meet your debt obligations, defined as total income available to living expenses divided by total long-term debt payments.
Savings Ratio A ratio aimed at determining how much you are saving, defined as income available for saving and investments divided by income available for living expenditure.
Ledger A book or notebook set aside to record expenditures.
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Finance Flashcards

Chapter 2 Finance

Forms of Business Organizations 1. Sole proprietorship2. Partnership3. Corporation4. Hybrids (LLP, LLC, Sub S)
Sole Proprietorship Business owned and operated by one person.
Advantages to the Sole Proprietorship 1. Easy to form. (no paperwork is involved)2. Business income is taxed once, at the individual’s personal level
Disadvantages to the Sole Proprietorship 1. Unlimited Liability2. Lack of continuity (“unbroken; consistent existence”)3. Limited access to additional funds.
Small Business Accounting Net income is added to the regular salary income and taxed at ordinary tax rates.
Partnerships is a business owned and operated by two or more people.
A partnership can be formalized by : having a lawyer create a partnership agreement
Partnership Agreement : – Establishes how decisions are made, such as how each partner can buy out the other in the event that one wants to dissolve the partnership- Stipulates how the partnership’s income is allocated among the partners.
Advantages to the Partnership Form of Business 1. Easy to Form2. Business income is taxed once, at the individual partners’ level
Disadvantages to the Partnership Form of Business 1. Unlimited liability for general partners2. Lack of continuity3. Limited access to additional funds.
Corporation Business organized as a separate legal entity under corporation law, with ownership divided into transferable shares.In tax law, such a business is generally taxed as a C corporation (C corp).
Corporate Owners have the benefit of limited liability : the maximum that owners can lose is their investment.
A corporation is usually formed by : filing articles of incorporation and receiving a certificate of incorporation from the state.
What does the articles of incorporation indicate ? * the most basic information about the company, such as its mailing address, name, line of business, number of shares issued, names and addresses of the officers of the company, and so on.
What is a critical feature of a corporation? It is a distinct legal entity.
Who are the owners in a corporation? the owners are the owners of the ownership interests—that is, the shareholders—who elect members of the board of directors, who in turn hire and monitor the company’s management.
Is the separation of management and ownership an issue for smaller companies? Or large companies? For smaller companies, the separation of management and ownership isn’t a problem, but for larger companies, it becomes a serious concern. This division is the fundamental problem of the governance structure of large companies
Advantages to the Corporation Form of Business 1. Limited Liability2. Unlimited life3. Access to capital
Disadvantages to the Corporation Form of Business 1. Income taxed at the corporate level and at the owners’ level, when distributed.2. Separation of owners and management.
Effective tax rate on corporate income Tc + [(1-Tc) DPO Ti]where, Tc – represents the corporate tax rateTi – represents the individual tax rateDPO – represents portion of dividends paid to owners
Limited Liability Company (LLC) – Hybrid Organization – a company that embodies some of the best features of both the partnership and corporate forms of business- business organized as a separate legal entity in which owners have limited liability, but the income is passed through to the owners for tax purposes
Advantages to the Limited Liability C. Form of Business 1. Limited liability for the owners2. Unlimited life3. Income taxed only at the owners’ level
Disadvantages to the Limited Liability C. Form of Business 1. Separation of owners and management.2. Access to capital.
Limited liability partnership (LLP) or Limited Partnership – Hybrid Organization – at least one general partner who manages the business (unlimited liability);- any number of limited partners (limited liability), who are passive investors.
S corporation (Sub S) A corporation that elects to be taxed as a partnership
C Corporation Business taxed as a corporation according to Subsection C of the Internal Revenue Code.
Characteristics of a Sub S Taxation: Pass – throughOwnership: Maximum of 75 ShareholdersLiability: Limited LiabilityLife: Perpetual
Characteristics of a LLC Taxation: Pass – throughOwnership: No maximumLiability: Limited LiabilityLife: Limited
Stakeholders is a party that is affected by the decisions and operations of the business entity. SH include not only the owners, but also the creditors, the employees, the suppliers, and the customers.
What is the goal of a company? To maximize the market value of the equity interest or, alternatively, maximize shareholder value.
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Finance Flashcards

Corporate Finance Ch 9

The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the ____ model. Dividend Growth Model
Next year’s annual dividend divided by the current stock price is called the ___. Dividend Yield
The rate at which a stock’s price is expected to appreciate (or depreciate) is called the ____ yield. capital gains yield
A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called ____ stock. Common Stock
Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called ____. Dividends
Differential Growth refers to a firm that increases its dividend by ____. a rate which is most likely not sustainable over an extended period of time.
The total rate of return on a stock is comprised of which of the following?1. Current Yield2. Yield to Maturity3. Dividend Yield4. Capital Gains Yield 3 and 4
The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The Company ____. Must still declare each dividend before it becomes an actual company liability.
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business finance chapter 8

The net present value of an investment represents the difference between the investment’s: cost and its market value
Net present value involves discounting an investment’s future cash flows
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to recoup its initial cost
The average net income of a project divided by the project’s average book value is referred to as the project’s: average accounting return
The internal rate of return is the discount rate that results in a zero net present value for the project.
The net present value profile illustrates how the net present value of an investment is affected by which one of the following? discount rate
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as multiple rates of return
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? mutually exclusive
Which one of the following can be defined as a benefit-cost ratio? probability index
Which one of the following indicates that a project is expected to create value for its owners? postive net present value
The net present value Decreases as the requires rate of return increases
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? net present value
Which one of the following statements is correct? If the internal rate of return equals the required return, the net present value will equal zero.
If an investment is producing a return that is equal to the required return, the investment’s net present value will be zero
Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative. profitability index less than 1.0
Which one of the following indicators offers the best assurance that a project will produce value for its owners? positive NPV
Which one of the following statements is correct? The payback period ignores the time value of money
Generally speaking, payback is best used to evaluate which type of projects? low costs, short term
Which one of the following is the primary advantage of payback analysis? ease of use
The payback method of analysis ignores which one of the following? time value of money
Which one of the following methods of analysis ignores the time value of money? payback
Which one of the following methods of analysis has the greatest bias toward short-term projects? payback
Which one of the following methods of analysis ignores cash flows? average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? average accounting return
The average accounting return: measures profitability rathe than cash return
Which one of the following analytical methods is based on net income? average accounting return
Which one of the following is most closely related to the net present value profile? interest rate of return
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? The investment is mutually exclusive with another investment of a different size.
Which one of the following statements is correct? Assume cash flows are conventional. When the internal rate of return is greater than the required return, the net present value is positive.
Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. Internal rate of return that exceeds the required return
The modified internal rate of return is specifically designed to address the problems associated with: unconventional cash flow
The reinvestment approach to the modified internal rate of return: compounds all the cash flows except for the initial cash flow to the end of the project
Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows? modified internal rate of return
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? net present value
You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? The net present value of Project A equals that of Project B, but generally does not equal zero.
Which one of the following will occur when the internal rate of return equals the required return?
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? The net present value is equal to zero
Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5? The firm should increase in value each time the firm accepts a new project.
If a project with conventional cash flows has a profitability index of 1.0, the project will: have an internal rate of return that equals the required return.
The profitability index reflects the value created per dollar invested
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? Internal rate of return and net present value
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? net present value
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? profitability index
In which one of the following situations would the payback method be the preferred method of analysis? Investment funds available only for a limited period of time
Which one of the following statements is correct? The payback method is biased toward short-term projects
Which one of the following indicates that an independent project is definitely acceptable? Profitability index greater than 1.0
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Finance Flashcards

Finance Test 2

A legal agreement that provdies for the management and control of assets by one party for the benfit of another is known as a trust
Franklin is planning for a purchase of a vehicle in two years. Since he wants to be certain that his funds are safe (insured), which of the following should he use? Savings account
Investments, insurance, and tax assistance are tools for financial planning and are also known as financial services
An all-in-one account that provides a complete financial services program for a single fee is known as asset management account
Brenda lost her debit card. When she realized it was gone, her account had $173 in unauthorized charges. She notified her financial institution within two days. How much is she potentially liable for? $50
Brandon lost his debit card. When he realized it was gone, his account had $238 in unauthorized charges. Since he was embarrassed about his loss, he didn’t contact his financial institution for 70 days. What is the most that he is liable for? $238
All of the following are deposit institutions except: -a commerical bank-a credit union-a finance company-a mutual savings bank-a savings and loan assoication a finance company
All of the following are non-deposit institutions except:-a credit card company-an investment company-a life insurance company-a finance company-a credit union a credit union
Which of the following primarily provides loans for home purchases? A mortgage company
When Angela wanted to provide financial security for her dependents, she considered purchasing a product that would provide income replacement in the event of her untimely death and also provide a savings/investment component while she is alive. Which company would she most likely do business with? life insurance company
Which of the following will likely provide the most expensive loans? a payday loan company
Why are some financial service operations referred to as financial supermarkets? they offer a combination for services from one source
a drawback of a regular savings account is a relatively low rate of return
Zach wants to open an account, but he doesn’t know which
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Government Chapter 8

Individuals and organizations can give an unlimited amount of money to Super PACS
When a coalition of credit card companies forms an interest group called the Partnership to Protect ConsumerCredit, this suggests that that private interests are hiding behind the ideals of public interests
In recent years, the religious right has had a great effect on American politics through grassroots mobilization
When membership in an organization allows for a reduction in the price of museum tickets, it is called a material benefit
The free-rider problem occurs because the benefits of a group’s actions are broadly available and cannot be denied tononmembers
Interest groups are concerned with the ________ of government, while political parties are concerned with the________ of government. policies; personnel
Which of the following was eliminated as a result of 2002 campaign finance reforms? soft money
Which of the following issues is part of the agenda of the New Politics movement?
Most initiative campaigns today are sponsored by interest groups seeking to circumvent legislative opposition to their goals.
Members of interest groups in the United States are typically people with higher levels of income and education.
The liberal-leaning MoveOn.org and the conservative-leaning Americans for Prosperity are examples of netroots political association
The collection of grassroots online activist organizations that have redefined membership and fund-raisingpractices and streamlined staff structure are referred to as the pluralists
How the Constitution balances the threat posed by organized interests with the need for liberty is discussed inthe federalists paper no. 10
AARP has approximately ________ members today. 38 million
The Federal Election Campaign Act of 1971
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VB Personal Finance Paying Your Taxes (Reading Quiz)

QUESTION 1 of 10: The W2 form: b) Is provided to you by your employer, and it lists total income and all tax withheld amounts
QUESTION 2 of 10: Which of the following forms reports interest income earned on a savings account? c) 1099INT
QUESTION 3 of 10: A paycheck has withholding tax taken out: b) That is paid to state and federal taxing authorities
QUESTION 4 of 10: The penalty for not paying taxes owed: b) Includes penalty fees and interest calculated starting April 15 of the year the taxes are owed
QUESTION 5 of 10: A major payroll tax is called: a) FICA, for Federal Insurance Contributions Act
QUESTION 6 of 10: To file your taxes, you need: c) W2 and 1099INT reports, and charitable deduction receipts
QUESTION 7 of 10: A program like Quicken or Money: a) Can help keep track of receipts over a year to make taxes easier to complete
QUESTION 8 of 10: Taxes go to pay for: c) Social Security 21%, National Defense 21%, and net interest 9%
QUESTION 9 of 10: Tax refunds: a) Occur when a taxpayer’s income tax payments, including withholdings, exceed what they owe
QUESTION 10 of 10: The federal government: a) Is the national government of the U.S. that takes in taxes and funds such programs as maintaining interstate highways and the military
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Finance Flashcards

Personal Finance Quiz 6

5 C’s of Credit character, capacity, capital, collateral, conditions
Affinity Card a card issued in conjunction with a specific charity or organization. That group name is on the card and a % of purchases is donated to that group
APR on unpaid balance If you are a credit user, the most important decision factor is this
Average daily balance This method sums the outstanding balances owed each day during the billing period and divides by the number of days in the period
Capacity Out of the five C’s of credit this would be affected by extra use of a credit card. that is, you will begin to start carrying balances from month to month. This category considers your current income level and current borrowing level
Capital This category considers your investment holding or portfolio
Collateral This category considers the amount of assets or property offered as loan security
Credit Bureau A company that gathers and sells consumers’ financial history to creditors
Credit Card Advantages convenience or ease of shopping, emergency use, and it allows for online shopping
Credit Card Denials often these rejections go to a new employee who works solely on commissions
Credit Card Disadvantages They make it easy to lose control of spending, in general they are an expensive way to borrow money, and using them means you will have less spendable money in the future
Credit Card Losses your liability on these losses is limited by law to $50
Credit Cards These are a form of open ended and revolving credit
Credit Report Info information generally found in your credit report includes personal and employment information, personal credit report, and your public financial history
Credit Score Card includes annual income, length of residence, and length of time on current job
Credit Scoring process of mathematically evaluating your creditworthiness to obtain credit
Grace Periods Most banks eliminate this on new purchases if customers don’t pay their balance in full
Merchant’s discount fee The percentage of the credit card sale the retailer owes to the credit card company
Previous balance method uses the balance at the end of the previous billing period
Secured Credit Card this card is useful to someone who has bad credit or no credit established yet
Single-purpose cards example include Shell Oil, Toys R Us, and Sears
T&E Card Features main feature is they do not offer revolving credit and the balance must be paid in full every month
T&E Cards not really a credit charge card. do not offer revolving credit and require full payment of balance each month
Truth in Lending Act requires that all consumer credit agreements disclose the APR in bold print
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Finance Flashcards

finance chapter 7

false The largest category of mortgages by dollar volume is commercial mortgages.
true The process of mortgage securitization results in a separation between mortgage origination and mortgage financing.
true subprime mortgage is a mortgage made to a borrower who has a below normal credit rating.
false Federally insured mortgages are called conventional mortgages.
false Private mortgage insurance (and hence, that part of the homeowner’s monthly payment) is automatically removed from a mortgage when the loan-to-value ratio on the mortgage falls below 80 percent.
true A borrower using a conventional mortgage will have to put up at least a 20 percent down payment or purchase private mortgage insurance.
false Discount points are paid to reduce the down payment required.
true On a fixed-rate mortgage the dollars of interest the homeowner pays falls each year the mortgage is outstanding.
homecommercialmultfarm 9. Rank the following types of mortgages by amount outstanding from largest to smallest.I. Home mortgagesII. Multifamily mortgagesIII. Farm mortgagesIV. Commercial mortgages A. I, II, III, IVB. I, II, IV, IIIC. II, I, IV, IIID. IV, II, III, IE. I, IV, II, III
securitization 10. The process of packaging and/or selling mortgages that are then used to back publicly traded debt securities is called A. collateralization.B. securitization.C. market capitalization.D. stock diversification.E. mortgage globalization.
lien 11. A ___________ placed against mortgaged property ensures that the property cannot be sold (except by the lender) until the mortgage is paid off. A. collateralB. lienC. writ of habeas corpusD. down paymentE. writ of certiorari
none 12. If a borrower makes a 20 percent down payment on a conventional mortgage, she will be required to obtain A. FHA insurance.B. VA insurance.C. private mortgage insurance.D. GNMA payment guarantees.E. none of the options.
higher and less interest 13. Mortgage payments are ____________ on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage, and ____________ is paid on a 15-year mortgage than on a 30-year mortgage; ceteris paribus. A. lower; less interestB. lower; less principalC. higher; less interestD. higher; more principalE. higher; more interest
lender ;borrower With a fixed-rate mortgage, the ____________ bears the interest rate risk and with an ARM the ______________ bears the interest rate risk. A. borrower; lenderB. borrower; borrowerC. lender; lenderD. lender; borrowerE. federal government; pool organizer
amoritization schedule 15. The schedule showing how monthly mortgage payments are split into principal and interest is called a(n) A. securitization schedule.B. balloon payment schedule.C. graduated payment schedule.D. amortization schedule.E. growing equity schedule.
1203.48.80 * $255,000 = Pmt × PVIFA (0.0585/12, 360 months); Pmt = $1,203.48 16. You purchase a $255,000 house and you pay 20 percent down. You obtain a fixed-rate mortgage where the annual interest rate is 5.85 percent and there are 360 monthly payments. What is the monthly payment? A. $1,215.27 B. $1,203.48 C. $1,194.45 D. $1,367.22 E. $1,504.35 0
$265,000 = [Pmt × PVIFA (0.0625/12, 180 months)] + $275 = $2,547 You obtain a $265,000, 15-year fixed-rate mortgage. The annual interest rate is 6.25 percent. In addition to the principal and interest paid, you must pay $275 a month into an escrow account for insurance and taxes. What is the total monthly payment (to the nearest dollar)? A. $2,272 B. $1,632 C. $2,547 D. $1,907 E. $2,311
0.75 * $325,000 = Pmt × PVIFA (0.0575/12, 360 months); Balance after five years = $226,107.8; New Pmt = $226,107.8/PVIFA (0.051/12,300) = $1,335.01 18. You purchase a $325,000 town home and you pay 25 percent down. You obtain a 30-year fixed-rate mortgage with an annual interest rate of 5.75 percent. After five years you refinance the mortgage for 25 years at a 5.1 percent annual interest rate. After you refinance, what is the new monthly payment (to the nearest dollar)? A. $1,422 B. $1,401 C. $1,366 D. $1,335 E. $1,296
$2,250,000 = Pmt × PVIFA (0.072/12, 360 months); Pmt = $15,272.73; New Balance = $15,272.73 × PVIFA (0.072/12, 300 months) = $2,122,425.62 19. A borrower took out a 30-year fixed-rate mortgage of $2,250,000 at a 7.2 percent annual rate. After five years, he wishes to pay off the remaining balance. Interest rates have by then fallen to 7 percent. How much must he pay to retire the mortgage (to the nearest dollar)? A. $2,122,426 B. $2,225,330 C. $2,015,678 D. $2,212,041 E. $1,999,998
0.80 * 245,000 * 1.03 = Pmt × PVIFA (0.05/12, 360 months); Pmt = $1,083.74; Total interest = (360 * 1,083.74) – (0.80 245,000 1,083.74) – (0.80 = Pmt × PVIFA (0.05/12, 360 months); Pmt = $1,083.74; Total interest = (360 * 1,083.74) – (0.80 * 245,000 * 1.03) = $188,265 A homebuyer bought a house for $245,000. The buyer paid 20 percent down but decided to finance closing costs of 3 percent of the mortgage amount. If the borrower took out a 30-year fixed-rate mortgage at a 5 percent annual interest rate, how much interest will the borrower pay over the life of the mortgage? A. $224,655 B. $180,622 C. $228,477 D. $188,265 E. $248,575
$195,000 = Pmt × PVIFA (0.055/12, 180 months); Pmt of $1,593.31 × 180 = $91,796; $195,000 = Pmt × PVIFA (0.061/12, 360 months); Pmt of $1,181.69 × 360 = $230,408; $230,408 – $91,796 = $138,612 21. A homeowner could take out a 15-year mortgage at a 5.5 percent annual rate on a $195,000 mortgage amount, or she could finance the purchase with a 30-year mortgage at a 6.1 percent annual rate. How much total interest over the entire mortgage period could she save by financing her home with the 15-year mortgage (to the nearest dollar)? A. $230,408 B. $190,105 C. $155,612 D. $144,325 E. $138,612
No Points: Pmt = $250,000/PVIFA (0.06/12, 360 months); Pmt = $1,498.88; Pay Points: Pmt = $250,000/PVIFA (0.055/12, 360 months); Pmt = $1,419.47; Pmt savings = $1,498.88 – $1,419.47 = $79.40; NPV of points: [$79.40 × PVIFA (0.055/12, 360 months)] – (0.0225 × $250,000) = $8,360 22. A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points. If you will keep the mortgage for 30 years, what is the net present value of paying the points (to the nearest dollar)? A. $9,475 B. $8,360 C. $7,564 D. $7,222 E. $6,578
$5,625 points cost = $79.40 payment savings× PVIFA (0.055/12, N); N = 85.85 months/12 = 7.15 years 23. A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points. How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is invested monthly? A. 7.15 years B. 3.33 years C. 6.04 years D. 5.90 years E. more than 30 years
$5,625 points cost/79.40 payment savings = N = 70.84 months/12 = 5.90 years Refer To: 07-22 24. A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points. How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is not invested? A. 7.15 years B. 3.33 years C. 6.04 years D. 5.90 years E. more than 30 years
mortgage backed bond 25. The least used form of mortgage securitization is the ______________________. A. second mortgageB. mortgage-backed bondC. mortgage pass-throughD. CMOE. home equity loan
$50,000 26. You want to buy a $250,000 house and you will use a conventional mortgage. What is the minimum down payment you have to make to avoid having to purchase mortgage insurance? A. $10,000B. $20,000C. $30,000D. $40,000E. $50,000
.5 percent of the loan amount 27. The FHA charges the homeowner __________________ to insure an FHA mortgage. A. nothingB. 0.5 percent of the loan amountC. $500D. 1 percent of the loan amountE. $1,500
ram 28. A(n) ___________________ is used to help retired people receive monthly income in exchange for the equity in their home. A. SAMB. Equity Participation MortgageC. RAMD. PLAME. GEM
Mortgage companies service more mortgages than they originate.The government is involved in the residential mortgage markets 29. Which of the following statements about mortgage markets is/are true? I. Mortgage companies service more mortgages than they originate. II. Servicing fees typically range from 2 percent to 4 percent. III. Most mortgage sales are with recourse. IV. The government is involved in the residential mortgage markets. A. I, III, and IV onlyB. II, III, and IV onlyC. I, II, and IV onlyD. II and III onlyE. I and IV only
I. GNMA provides timing insurance. III. GNMA insures only FHA, VA, and FMHA loans.IV. GNMA requires that all mortgages in the pool have the same interest rate. 30. Which of the following statements about GNMA is/are true? I. GNMA provides timing insurance. II. GNMA creates pools of mortgages and issues securities. III. GNMA insures only FHA, VA, and FMHA loans. IV. GNMA requires that all mortgages in the pool have the same interest rate. A. I, II, III, and IV are trueB. I, III, and IV onlyC. I, II, and III onlyD. II, III, and IV onlyE. III and IV only
I. the pass-through yield is 103 basis points above the comparable maturity Treasury bond.II. the pass-through is being prepaid more quickly than standard PSA 31. A $25,000 face value GNMA pass-through quote sheet lists a spread to average life of 103, PSA of 220, and a price of 101-09. This means thatI. the pass-through yield is 103 basis points above the comparable maturity Treasury bond.II. the pass-through is being prepaid more quickly than standard PSA.III. the pass-through is priced at $25,272.50. A. I, II, and III are correctB. I and II onlyC. I and III onlyD. II and III onlyE. III only
prepayment penalty 32. Mortgage fees paid by the homeowner at, or prior to, closing upon the purchase of a house typically include all but which one of the following? A. application feeB. title search feeC. title insurance feeD. appraisal feeE. prepayment penalty
I. the MBB does not result in the removal of mortgages from the balance sheet.II. a MBB holder has no prepayment risk.III. cash flows on a MBB are not directly passed through from mortgages. 33. An MBB differs from a CMO or a pass-through in thatI. the MBB does not result in the removal of mortgages from the balance sheet.II. a MBB holder has no prepayment risk.III. cash flows on a MBB are not directly passed through from mortgages. A. I, II, and IIIB. I and II onlyC. II and III onlyD. I and III onlyE. I only
probably has a higher couponwill mature more quickly 34. One fixed-rate mortgage pool has a 750 PSA and a second fixed-rate pool has 150 PSA. The pool with the higher PSA ______________________ than the pool with the lower PSA.I. probably has a higher couponII. probably has lower default riskIII. will mature more quickly A. I, II, and IIIB. I and II onlyC. II and III onlyD. I and III onlyE. I only
none 35. As compared to fixed-rate mortgages, ARMs result in which of the following for the lender?I. Higher interest rate riskII. Lower default riskIII. Greater prepayment penalty fees A. I, II, and IIIB. I and II onlyC. II and III onlyD. I and III onlyE. none of the options
ram 36. Which one of the following types of mortgages is likely to become more popular as the average age of the U.S. population increases? A. GEMB. GPMC. SAMD. PLAE. RAM
gnma 37. Which one of the following entities is an actual government agency dealing with mortgages? A. GNMAB. FNMAC. FHLMCD. PIPE. CMO