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Finance Flashcards

Finance 318 Chapter 8

The net present value of an investment represents the difference between the incestment’s cost and its market value
discounted cash flow valuation is the process of discounting an investments future cash flow
the payback period is the length of time it takes an investment to generate sufficient cash flow to enable the project to recoup its initial cost
the average net income of a project divided by the projects average book value is referred to as the projects average accounting return
which one of the following defines the internal rate of return for a project discount rate which 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 project A and B are acceptable as independent projects…. mutually exclusive
which one of the following can be defined as a benefit-cost ratio profitability index
which one of the following indicates that a project is expected to create value for its owners positive net present value
the net present value decreases as the required 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 investments net present value will be zero
which one of the following indicates that a project should be rejected profitability index less than 1.0
which one of the following inidators 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
payback is best used to evaluate which type of projects low-cost, 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 ignore the time value of money payback
which one of the following methods of analysis has the greatest bias towards 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 anaylsis is most similar to computing the return on assets average accounting return
the average accounting return measures profitability rather than cash flow
which one of the 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 internal rate of return
the modified internal rate of return is specifically designed to address the problems associated with which one of the following unconventional cash flows
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 unconventional 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 exculsive net present value
the profitability index reflects the value created per dollar invested
based on the most recent survey information presented in your textbook CFO’s tend to use which 2 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…. net present value
you were recently hired by a firm as a project analyst, the owner of the firm is unfamiliar with financial analysis 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 towards short term projects
which one of the following indicated that a project is definitely acceptable profitability index greater than 1.0
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Finance Flashcards

CH1 finance

The corporate officer generally responsible for tasks related to tax management, cost accounting,financial accounting, and data processing is the: Corporate Controller.
The corporate officer generally responsible for tasks related to cash and credit management, financialplanning, and capital expenditures is the: Corporate Treasurer.
The process of planning and managing a firm’s Long-term investments is called: Capital budgeting.
The mixture of debt and equity used by the firm to finance its operations is called: Capital structure.
The management of the firm’s short-term assets and liabilities is called: Working capital management
A business owned by a single individual is called a(n): Sole proprietorship.
A business formed by two or more individuals or entities is called a(n): Partnership.
The division of profits and losses between the members of a partnership is formalized in the: Partnership agreement.
A business created as a distinct legal entity composed of one or more individuals or entities is calleda(n): Corporation.
The document that legally establishes domicile for a corporation is called the: Articles of incorporation.
The rules by which corporations govern themselves are called: Bylaws.
The primary goal of financial management is to: Maximize the current value per share of the existing stock.
The possibility of conflict of interest between the stockholders and management of the firm iscalled: The agency problem.
Agency costs are: The costs of the conflict of interest between stockholders and management.
A stakeholder is: A person or entity including a stockholder or creditor, who potentially has a claim on the cashflows of the firm.
The original sale of securities by governments and corporations occurs in the: Primary market.
The purchase and sale of securities after the original issuance occurs in the: Secondary market.
A market where dealers buy and sell securities for themselves, at their own risk, is called a(n): Dealer market.
A market where trading takes place between buyers and sellers directly is called a(n): Auction market.
The secondary market is: The market in which securities are bought and sold after original sale.
The Chief Financial Officer of a corporation is the: Vice President of Finance.
Deciding whether or not to open a new store is part of the process known as: Capital budgeting.
Capital structure refers to: The mixture of debt and equity
Working capital management refers to: The levels of cash and inventory held.
A business that is a distinct legal entity is a: Corporation.
The primary goal of financial management is to maximize the: Current value of each share of outstanding stock.
A proxy fight is: A method used by stockholders to replace corporate management.
Suppliers, customers, and employees of a corporation are called: Stakeholders.
A proprietorship is: A business owned by an individual who has unlimited personal liability.
Conflicts that arise between the interests of managers and stockholders are referred to as: Agency problems.
The primary market includes: The sale of new securities by a corporation on an exchange.
Stocks that trade on an exchange are referred to as: Listed stocks.
An individual who buys and sells stocks for his/her own account is a: Dealer.
Tasks related to tax management, cost accounting, financial accounting, and data processing are theresponsibility of which corporate officer? The Corporate Controller.
The controller can be defined as the person who is generally responsible for overseeing the _____ of afirm. Accounting functions
The treasurer can be defined as the person who is generally responsible for overseeing the _____ of afirm. Financial planning
Capital budgeting is defined as the: Management of a firm’s long-term investments.
A firm’s capital structure is defined: As the combination of debt and equity used to finance the firm’s operations
Working capital management refers specifically to: The oversight of a firm’s current accounts
A sole proprietorship is best defined as a business owned by: A single individual who has unlimited liability for the firm’s debts.
A general partnership is best defined as a business owned by: One or more individuals who are each totally responsible for the debts of the entity
An entity wherein one or more owners may elect to actively manage the firm while other ownerschoose limited liability instead of management responsibility is called a: Limited partnership.
Bylaws are: The rules by which corporations govern themselves.
The agency problem is best defined as a conflict of interest between a firm’s: Stockholders and the firm’s managers.
The primary goal of financial management is defined as the: Maximization of the current value per share of the outstanding stock.
An agency problem is said to exist when there is a conflict of interest between _____ and _____. A principal; his or her agent
The primary market is defined as the market Wherein the original sale of securities by the issuer to the general public occurs.
The secondary market is the market wherein: Shareholders buy from and sell to other shareholders.
A dealer is a person who: Buys and sells for themselves, at their own risk.
The person generally directly responsible for overseeing the tax management, cost accounting,financial accounting, and data processing functions is the: Controller.
The person generally directly responsible for overseeing the cash and credit functions, financialplanning, and capital expenditures is the: Treasurer.
The process of planning and managing a firm’s long-term investments is called: Capital budgeting
The mixture of debt and equity used by a firm to finance its operations is called: Capital structure
The management of a firm’s short-term assets and liabilities is called: Working capital management.
Which one of the following correctly defines the chain of command in a typical corporateorganizational structure? The chief executive officer reports to the board of directors.
A business formed by two or more individuals who each have unlimited liability for business debts iscalled a General partnership
The division of profits and losses among the members of a partnership is formalized in the: Partnership agreement.
A business created as a distinct legal entity composed of one or more individuals or entities is calleda: Corporation.
The corporate document that sets forth the business purpose of a firm is the: Articles of incorporation
Capital structure decisions include which of the following? Determining the number of shares of stock to issue
The decision to issue debt rather than additional shares of stock is an example of: The capital structure decision
A conflict of interest between the stockholders and management of a firm is called: The agency problem
A stakeholder is: Any person or entity who potentially has a claim on the cash flows of the firm.
The original sale of securities by governments and corporations to the general public occurs inthe: Primary market.
When one shareholder sells stock directly to another the transaction is said to occur in the: Secondary market.
A market where dealers buy and sell securities for themselves, at their own risk, is called a(n): Dealer market.
A market where trading takes place directly between buyers and sellers is called a(n): Auction market
This of the following is an answer to “What are the duties of a financial manager?”I. Deciding how much interest to pay the holders of the corporation’s bonds.II. Deciding the mix of long-term debt and equity.III. Deciding which projects a firm should undertake.IV. Deciding how much short-term debt to use. II, III, and IV only
A financial manager is responsible for deciding whether or not new manufacturing equipment shouldbe purchased to replace existing equipment. The new equipment would reduce labour expenses andwould allow the firm to reduce its investment in inventory. Which of the financial management areaswould be involved in the decision process?I. Capital budgeting.II. Capital structure management.III. Working capital management. I and III only
According to the statement of financial position model of the firm, corporate finance may be thoughtof as the analysis of three primary subject areas. Which of the following correctly lists these areas? Capital budgeting, capital structure, net working capital.
Which of the following is NOT considered one of the basic questions of corporate finance? At what rate of interest should a firm borrow?
In the evaluation of cash flow in a capital budgeting decision, which of the following must beconsidered?I. The size of the cash flow.II. The timing of the cash flow.III. The risk of the cash flow. I, II, III
Which of the following combinations of attributes would make a capital expenditure project desirableto a financial manager?I. The project is worth more to the firm than the cost to acquire it.II. The value of the cash flow generated by the project exceeds the project’s cost.III. The project’s cash flows have acceptable levels of risk and size, but not timing. I and II only
The term capital structure describes: The mixture of debt and equity a firm uses to finance its operations.
A financial manager is responsible for determining the firm’s appropriate level of inventory. Which ofthe financial management areas addresses this decision?I. Capital budgeting.II. Capital structure management.III. Working capital management. III only
Which of the following statements is/are false concerning partnerships?I. Limited partners are responsible for all debts of the partnership.II. Limited partners generally do not manage the partnership.III. In a limited partnership, all partners share equally in the gains or losses. I only
Which of the following is an advantage of ownership of a corporation compared to that of a soleproprietorship? The corporation has an unlimited life.
Which of the following is a true statement concerning corporations? The life of the corporation is unlimited.
Sue Folker wants to start a new business decommissioning nuclear warheads and reactors. The workwill involve significant hazards, and Sue is concerned about protecting her personal wealth from anylosses the business might incur. If she is to be the majority owner of the business how should shestructure it? As a corporation
Limited liability may be a characteristic of each of the following form(s) of organization EXCEPT a________________. Sole proprietorship
Which of the following is a true statement concerning a general partnership?I. Partners are not responsible for the debts of the partnership.II. Partners generally do not manage the partnership.III. The income of a partnership is taxed at the partners’ income tax rate. III only
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Finance Flashcards

Finance Exam #1 Chap. 1-4

bid price price at which the dealer is willing to buy
ask price price at which the dealer is willing to sell
Bid-Ask Spread The difference between the ask price and the bid price ex. bid price: 27.80 ask price: 28.60 bis-ask spread = .80
oversubscribed If there is more demand for an IPO than supply (creating a shortage), a higher price could have been charged, and the issuer could have raised more capital.
market-clearing price the highest price at which the all the shares will be sold
EPS (Earnings Per Share) EPS = Net Income / # of Outstanding Shares
Efficient Markets Hypothesis states that the stock price trades at a value equal to the intrinsic value, which is the true value of a stock.
informational efficiency of financial markets determines the ability of investors to beat the market and earn abnormal returns on their investments.
Weak-Form Efficiency implies that current market prices reflect all relevant historical and current information, such as past and current price movements. In this situation, investors will be unable to earn above-average returns simply by examining the company’s past and current stock price trends.
Semistrong-Form Efficiency implies that the current market prices reflect all relevant publicly available information. If semistrong-form efficiency characterizes a market, then investors cannot beat the market by making trades based on information reported in today’s Wall Street Journal or in a CNN news report, since the information is immediately incorporated in the company’s current share price.
Strong- Form Efficiency implies that current market prices reflect all relevant information, whether it is known publicly or privately. This means that investors (even corporate insiders) will not be able to earn above-average returns, because any information that they may trade on has already been incorporated in the current stock price.
Shareholders owners of the company
Shareholders Wealth = the # of shares that the investor owns xmarket price per share
Financial Management Study of the corporation, its investing and financing decision, analysis of its results
Capital Markets Introduction of financial instruments (stocks, bonds) including the institutions that handle them (banks) and the institutions that regulate them. (Federal Reserve)
Investment Analysis Valuing the above, including markets
EBIT Earnings from operations before interest and taxes ex. EBIT = Sales Revenue – Operating Costs
EBT Pre-Tax Income ex. EBT = Operating Income (EBIT) – Interest Expense
EBITDA Earnings before interest, taxes, depreciation, and amortization
Current Ratio Current Assets/Current Liabilities
Quick Ratio Current Assets – Inventories / Current Liabilities
Inventory Turnover Sales/Inventories
Days Sales Outstanding DSO = Receivables/Average sales per day
Fixed Assets Turnover Ratio Sales/Net Fixed Assets
Total Assets Turnover Ratio Sales/Total Assets
Debt Ratio total debt/total assets
Times-Interest-Earned TIE = EBIT/Sales
Profit Margin Net Income/Sales
Return on Total Assets ROA = Net Income/Total Assets
Return on Common Equity ROE = Net Income/Common Equity
Return on Invested Capital = EBIT (1-T) / total invested capital
Basic Earning Power BEP = EBIT (1-T) / debt + equity
Price/Earnings Ratio P/E = price per share/earnings per share
Book Value Per Share = common equity/shares outstanding
Market/Book Ratio M/B = market price per share / book value per share
The DuPoint Equation ROE = net income/sales x sales/total assets x total assets/total common equity
Gross Profit Margin gross profit/sales
Operating Profit Margin operating expenses/sales
Net Profit Margin net profit/sales
Return on Equity net profit/total equity
Equity Multiplier total assets/total equity
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Finance Flashcards

20 Utilities Personal Finance

Which of these should not be considered when estimating your needs for cell phone usage? ringtone options
Which statement about electricity charges is typically true? not entirely sureThe higher the number of kilowatt hours consumed, the higher the rate per kilowatt hour.WRONG
Which two rate schedules are maintained by most cities for electrical service? one for winter and one for summer
If you move to another state, what will happen to the deposit you paid for electricity? It will be applied to your final bill.
Which of these should not be done before you buy or rent a new home or apartment? Pay a deposit on all of the utilities.
Which of the statements is not true? Most utility companies do not report your on-time payments on your credit report each month. (I think) WRONG
What is the difference between a utility deposit and a service initiation fee? deposits are refundable, and fees are not
Which of these statements about utilities is not true? Energy costs are a trivial element of a monthly budget. (I think) Utility bills are what consumers pay for the use of energy.
How is electricity utility service to your home measured? in kilowatt hours (kWh)
Which of these strategies will not help reduce your heating and cooling costs? Turn the lights off when you leave a room.
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Finance Flashcards

FINANCE CHPT 1

In most corporations, the CFO ranks under the CEO. TRUE
The Chairman of the Board must also be the CEO. FALSE
The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person. TRUE
Partnerships and proprietorships generally have a tax advantage over corporations. TRUE
A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership. FALSE
An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships. FALSE
Some partners in a partnership may have different rights, privileges, and responsibilities than other partners. TRUE
One advantage of the corporate form of organization is that it avoids double taxation. FALSE
It is generally harder to transfer one’s ownership interest in a partnership than in a corporation. TRUE
One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business. TRUE
If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm’s net income. TRUE
If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses. FALSE
It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. FALSE
The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation. TRUE
One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm’s investors to transfer their ownership interests. FALSE
Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations’ stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests. TRUE
In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the expected EPS. FALSE
In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price on a specific target date. FALSE
In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price in the long run, or the stock’s “intrinsic value.” TRUE
If management operates in a manner designed to maximize the firm’s expected profits for the current year, this will also maximize the stockholders’ wealth as of the current year. FALSE
Globalization of business has been facilitated by improvements in information technology. TRUE
As a result of financial scandals occurring during the past decade, there has been a strong push to improve business ethics. TRUE
There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is not illegal to provide it to stockholders because they are the owners of the firm, not outsiders. FALSE
A stock’s market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock’s market price would equal its intrinsic value. TRUE
If a stock’s market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy. FALSE
If a stock’s intrinsic value is greater than its market price, then the stock is overvalued and should be sold FALSE
For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value. FALSE
The term “marginal investor” means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose, barring any new information coming out about the stock. It is the “marginal investor” who determines the actual stock price. TRUE
If a lower level person in a firm does something illegal, like “cooking the books” to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted. FALSE
If someone deliberately understates costs and thereby increases profits, this can cause the price of the stock to rise above its intrinsic value. The stock price will probably fall in the future. Also, those who participated in the fraud can be prosecuted, and the firm itself can be penalized. TRUE
Managers always attempt to maximize the long-run value of their firms’ stocks, or the stocks’ intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible. However, there can be conflicts between stockholders and bondholders. FALSE
A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve the economy. However, hostile takeovers are controversial, and legislative actions have been taken to make them more difficult to undertake. TRUE
If a firm’s board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose goal is to maximize the stock’s intrinsic value rather than the stock’s current market price. TRUE
Which of the following statements is CORRECT?a. One of the disadvantages of incorporating your business is that you could become subject to the firm’s liabilities in the event of bankruptcy.b. Proprietorships are subject to more regulations than corporations.c. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner.d. Corporations of all types are subject to the corporate income tax.e. Proprietorships and partnerships generally have a tax advantage over corporations A
Which of the following statements is CORRECT?a. One of the advantages of the corporate form of organization is that it avoids double taxation.b. It is easier to transfer one’s ownership interest in a partnership than in a corporation.c. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.d. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.”e. Corporations of all types are subject to the corporate income tax. C
Which of the following statements is CORRECT?a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.b. Corporations face fewer regulations than proprietorships.c. One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level.d. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.e. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business. A
Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?a. Relaxant’s shareholders (the ex-partners) will now be exposed to less liability.b. The company will probably be subject to fewer regulations and required disclosures.c. Assuming the firm is profitable, none of its income will be subject to federal income taxes.d. The firm’s investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.e. The firm will find it more difficult to raise additional capital to support its growth. A
Which of the following statements is CORRECT?a. Corporations generally face fewer regulations than proprietorships.b. Corporate shareholders are exposed to unlimited liability.c. It is usually easier to transfer ownership in a corporation than in a partnership.d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.e. There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small. C
Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?a. Corporations generally face fewer regulations.b. Less of a corporation’s income is generally subject to federal taxes.c. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.d. Corporate investors are exposed to unlimited liability.e. Corporations generally find it easier to raise large amounts of capital. E
The primary operating goal of a publicly-owned firm interested in serving its stockholders should be toa. Maximize its expected total corporate income.b. Maximize its expected EPS.c. Minimize the chances of losses.d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.e. Maximize the stock price on a specific target date. D
Which of the following statements is CORRECT?a. In most corporations, the CFO ranks above the CEO.b. By law in most states, the chairman of the board must also be the CEO.c. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.d. The CFO generally reports to the firm’s chief accounting officer, who is normally the controller.e. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility. C
Which of the following statements is CORRECT?a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations.b. One drawback of forming a corporation is that it subjects the firm’s investors to increased personal liabilities.c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital.d. One advantage of forming a corporation is that it subjects the firm’s investors to fewer taxes.e. One disadvantage of forming a corporation is that it is more difficult for the firm’s investors to transfer their ownership interests. A
Which of the following statements is CORRECT?a. If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.b. The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation.c. It is generally easier to transfer one’s ownership interest in a partnership than in a corporation.d. One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.e. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. D
Which of the following statements is CORRECT?a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.b. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships.c. Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations’ less favorable tax treatment.d. Large corporations are taxed more favorably than proprietorships.e. Corporate stockholders are exposed to unlimited liability. C
Which of the following statements is CORRECT?a. A hostile takeover is the main method of transferring ownership interest in a corporation.b. A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers.c. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.d. Limited liability is an advantage of the corporate form of organization to its owners (stockholders), but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.e. Although the stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm’s managers in the same way, i.e., bondholders can sue the firm’s managers if the firm defaults on its debt. B
Which of the following statements is CORRECT?a. In a typical partnership, liability for other partners’ misdeeds is limited to the amount of a particular partner’s investment in the business.b. In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm’s debts in the event of bankruptcy.c. A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.d. Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.e. A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself. D
The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be toa. Maximize managers’ own interests, which are by definition consistent with maximizing shareholders’ wealth.b. Maximize the firm’s expected EPS, which must also maximize the firm’s price per share.c. Minimize the firm’s risks because most stockholders dislike risk. In turn, this will maximize the firm’s stock price.d. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers. e. Since it is impossible to measure a stock’s intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value. D
Which of the following statements is CORRECT?a. If a lower level person in a firm does something illegal, like “cooking the books” to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.b. There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm.c. If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the price of the stock to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.d. Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business. C
With which of the following statements would most people in business agree?a. A corporation’s short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation.b. Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.c. “Whistle blowers,” because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees.d. It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior.e. Although people’s moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation. E
Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?a. Compensating managers with stock options.b. Financing risky projects with additional debt.c. The threat of hostile takeovers.d. The use of covenants in bond agreements that limit the firm’s use of additional debt and constrain managers’ actions.e. Abolishing the Security and Exchange Commission. D
Which of the following actions would be most likely to reduce potential conflicts between stockholders and bondholders?a. Including restrictive covenants in the company’s bond indenture (which is the contract between the company and its bondholders).b. Compensating managers with more stock options and less cash income.c. The passage of laws that make it harder for hostile takeovers to succeed.d. A government regulation that banned the use of convertible bonds.e. The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more, rather than debt that matures in less than one year. A
Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?a. Pay managers large cash salaries and give them no stock options.b. Change the corporation’s formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.c. Beef up the restrictive covenants in the firm’s debt agreements.d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm’s stock.e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold. B
Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?a. Congress passes a law that severely restricts hostile takeovers.b. A firm’s compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.c. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.d. The company’s outside auditing firm is given a lucrative year-by-year consulting contract with the company.e. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash. E
Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?a. Decrease the use of restrictive covenants in bond agreements.b. Take actions that reduce the possibility of a hostile takeover.c. Elect a board of directors that allows managers greater freedom of action.d. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.e. Eliminate a requirement that members of the board of directors have a substantial investment in the firm’s stock. D
Which of the following actions would be likely to encourage a firm’s managers to make decisions that are in the best interests of shareholders?a. The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced.b. The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover.c. The percentage of the firm’s stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.d. The firm’s founder, who is also president and chairman of the board, sells 90% of her shares.e. The firm’s board of directors gives the firm’s managers greater freedom to take whatever actions they think best without obtaining board approval. C
Which of the following statements is CORRECT?a. One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm’s capital structure.b. The threat of takeover generally increases potential conflicts between stockholders and managers.c. Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers.d. The threat of takeovers tends to reduce potential conflicts between stockholders and managers.e. The creation of the Securities and Exchange Commission (SEC) has eliminated conflicts between managers and stockholders. D
Which of the following statements is CORRECT?a. Corporations are taxed more favorably than proprietorships.b. Corporations have unlimited liability.c. Because of their size, large corporations face fewer regulations than smaller corporations and proprietorships.d. Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders’ interests.e. Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders. E
Which of the following statements is CORRECT?a. A good goal for a firm’s management is the maximization of expected EPS.b. Most business in the U.S. is conducted by corporations, and corporations’ popularity results primarily from their favorable tax treatment.c. Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers.d. Corporations and partnerships have an advantage over proprietorships because a proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.e. For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price. C
Which of the following statements is CORRECT?a. One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability.b. Using restrictive covenants in debt agreements is an effective way to reduce conflicts between stockholders and managers.c. Managers generally welcome hostile takeovers since the “raider” generally offers a price for the stock that is higher than the price before the takeover action started.d. The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers.e. The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers. D
Which of the following statements is CORRECT?a. Well designed bond covenants are useful for reducing potential conflicts between stockholders and managers.b. The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail.c. Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm’s stock to sell at a price below its intrinsic value.d. Takeovers are most likely to be attempted if the target firm’s stock price is above its intrinsic value.e. The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden. B
Which of the following statements is CORRECT?a. Hostile takeovers are most likely to occur when a firm’s stock is selling below its intrinsic value as a result of poor management.b. The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.c. Hostile takeovers are most likely to occur when a firm’s stock sells at a price above its intrinsic value because its management has been issuing overly optimistic statements about its likely future performance. d. In general, it is more in bondholders’ interests than stockholders’ interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development.e. Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm’s stock to sell at a price below its intrinsic value. A
Which of the following statements is CORRECT?a. One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than are partners.b. Relative to proprietorships, corporations generally face fewer regulations, and they also find it easier to raise capital.c. There is no good reason to expect a firm’s stockholders and bondholders to react differently to the types of assets in which it invests.d. Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.e. Bondholders should generally be happier than stockholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns. D
Which of the following statements is CORRECT?a. Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.b. Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.c. One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.d. One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor B
Which of the following statements is CORRECT?a. Corporations face few regulations and more favorable tax treatment than do proprietorships and partnerships.b. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers.c. Bond covenants are an effective way to resolve conflicts between shareholders and managers.d. Because of their simplified organization, it is easier for proprietors and partnerships to raise large amounts of outside capital than it is for corporations.e. One advantage to forming a corporation is that the owners of the firm have limited liability. E
what is finance the system that includes the circulation of money, the granitic of credit, the making of investments, and the provision of baking facilities. 4
finance is divided into what three areas? 1. financial management2. capital markets3. investments pg 4
financial management called corporate finance, focuses on decisions relating to how much and what types of assets to acquire, how to raise the capital needed to purchase assets, and how to run the firm so as to maximize its value. pg 4
capital markets relate to the markets where interest rates, along with stock and bond prices, are determined. pg 4
investments relate to decisions concerning stocks and bonds and include a number of activities:1. security analysis2. portfolio theory3. market analysis. pg 4
CFO COO CEO pg 5
Sarbanes-Oxley Act law passed by congress that requires the CEO and CFO to certify that their firm’s financial statements are accurate. pg 5
finance versus economics and accounting pg 6
defined contribution pension plans where each year the company puts a specified amount of money into an account that belongs to the employee. pg 6
The basics of financial management are the same for all businesses, large or small, regardless of how they are organized. pg 6 still a firms legal structure affects its operations and thus should be recognized
four main forms of business organizations 1. proprietorships2. partnerships3. corporations4. limited liability companies (LLCs) and limited liability partnerships (LLPs)pg. 6
in terms of numbers, most businesses are proprietorships. however, based on the dollar value of sales, more than 80% of all business is done by corporations. because corporations conduct the most business and because most successful businesses eventually convert to corporations. pg 7
proprietorship an incorporated business owned by one individual. pg 7businesses are frequently started as proprietorships and then converted to corporations when their growth results in the disadvantages outweighing the advantages
advantages of proprietorship 1. they are easy and inexpensive to form2. they are subject to few government regulations3. they are subject to lower income taxes than are corporations
limitation to proprietors 1. proprietors have unlimited personal liability for the business’ debts, so you can lose more than the amount of money you put into the company2. the life of the business is limited to the life of the individual who created it, and to bring in new equity, investors require a change in the structure of the business3. because of the first two points, proprietorships have difficulty obtaining large sums of capital; hence, proprietorships are used primarily for small businesses.pg 7
partnership an incorporated business owned by two or more persons. pg 7
advantages and disadvantages to partnership pg 7
corporation is a legal entity created by a state, and it is separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability. pg 7 look to grow shareholders wealth
advantages of corporation -unlimited life-easy transfer or ownership-limited liability-ease of raising capital
disadvantages of corporations -double taxation-cost of setup and report filing
two types of investors those who look at short run (1 yr)or long term (growth investor, warren buffet)
a major drawback to corporations is taxes. most corporations’ earnings are subject to double taxation.
S corporations a special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation. pg 8
limited liability company a popular type of organization that is a hybrid between a partnership and a corporation pg 8
limited liability partnership similar to an LLC but used for professional firms in the files of accounting, law, and architecture. It provides personal asset protection from business debts and liabilities but is taxed as a partnership. pg 8`
LLCs/LLPs were created by lawyers and are structured in different ways by state when deciding on its form organization, a firm must trade off the advantages of incorporation agains possibly higher tax burden,.
advantages of corporations pg 8 -limited liability reduces the risks borne by investors; and other things held constant, the lower the firm’s risk, the higher its value-a firm’s value is dependent on its growth opportunities, which are dependent on its ability to attract capital. because corporations can attract capital more easily than other types of businesses, they are better able to take advantage of growth opportunities.-the value of an asset also depends on its liquidity, which means the time and effort it takes to sell the asset for cash at a fair market value. Because the stock of a corporation is easier to transfer to a potential buyer than is an interest in a proprietorship or partnership, and because more investors are willing to invest in stocks than in partnerships (with their potential unlimited liability), a corporate investment is relatively liquid. This too enhances the value of a corporation.
The main goal for a corporation create value for investors. 9
investors like higher expected cash flows, but they dislike risk: so the larger the expected cash flows and the lower the perceived risk, the higher the stock’s price. 9
intrinsic value an estimate of a stock’s “true” value based on accurate risk and return data. the intrinsic value can be estimated but not measured precisely. 10
market price the stock value based on perceived but possibly incorrect information as seen by the marginal investor. 10
marginal investor an investor whose views determine the actual stock price. 10
equilibrium the situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying and selling a stock. 10
intrinsic values are estimates; and different analysts with different data and different views about the future form different estimates of stock’s intrinsic value estimating intrinsic values is what security analysis is all about and is what distinguishes successful from unsuccessful investors. 10
management’s goal should be to take actions designed to maximize the firm’s intrinsic value, not its current market price. that maximizing the intrinsic value will maximize the average price over the long run, but not necessarily the current price at each point in time. 11
consequences of having a short-run focus 11 huge bonuses for engaging in risky transactions that generated short-term profits. 12
stockholder manager conflicts 12managers’ personal goals may compete with shareholder wealth maximization. in particular, managers might be more interested in maximizing their own wealth than their stockholders’ wealth effective executive compensatiomn plans motivate managers to act in their stockholders’ best interests. useful motivational tools inclue 1. reasonable compensation packages. 2. firing managers who don’t perform well. and threat of hostile takeovers. pg13
compensation packages should be sufficient to attract and retain able managers, but they should not go beyond what is needed. 13
direct stockholder intervention 13 the majority of stock is owned by institutional investors such as insurance companies, pension funds, hedge funds,a nd mutual funds, and private equity groups are ready and able to step in and take over underperforming firms. 13`
corporate raiders individuals who target corporations for takeover because they are undervalued. 15
hostile takeover the acquisition of a company over the opposition of its management. 15
managers should try to maximize their stock’s intrinsic value and then communicate effectively with stockholders. that will cause the intrinsic value to be high and the actual stock price to remain close to the intrinsic value over time 15 stockholder debtholder conflicts 15
conflicts can also arise between stockholders and debtholders. debtholders, which include the company’s bankers and its bonholders, generally receive fixed payments regardless of how well the company does, while stockholders do better when the company does better. 15
shareholder wealth maximization the primary goal for managers of publicly owned companies implies that decisions should be made to maximize the long-run value of the firm’s common stock.17
most managers understand that maximizing shareholder value does not mean that they are free to ignore the larger interests of society. 17 business ethics pg 19. most firms today have strong written codes of ethical behavior; companies also conduct training programs to ensure that employees understand proper behavior in different situations.
consequences of unethical behavior. 20 how should employees deal with unethical behavior. 21
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Finance Flashcards

Fundamentals of Business Finance Chapter 6

The appropriate measure for risk according to the capital asset pricing model is: beta.
Which of the following types of risk is diversifiable? Unsystematic, or company-unique risk.
Of the following different types of securities, which is typically considered most risky? Common stocks of small companies
SeeBreeze Incorporated has a beta of 1.0. If the expected return on the market is 15%, what is the expected return on SeeBreeze Incorporated’s stock? 15%
Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________. beta; standard deviation
The capital asset pricing model: provides a risk-return trade off in which risk is measured in terms of beta.
What is diversifying among different kinds of assets known as? Asset allocation
Investment A has an expected return of 15% per year, while investment B has an expected return of 12% per year. A rational investor will choose investment A if A and B are of equal risk.
Stock A has a beta of 1.2 and a standard deviation of returns of 18%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the market risk premium increases, then the required return on stock B will increase more than the required return on stock A.
Billings, Inc. common stock has a beta of 1.2. If the expected risk free return is 4% and the expected market risk premium is 9%, what is the expected return on Billing’s stock? 14.8%
The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corporation stock is: 22%.
Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $10,500 return. What is the expected amount of return this investment will produce? $7,640
Your stock portfolio has two stocks with the following proportions:Stock A – 20% of the investment; Beta for stock A = 1.4Stock B – 80% of the investment; Beta for stokc B = 0.9What is the beta of the portfolio? 1.00
Which of the following is the slope of the security market line? the market risk premium
Beginning with an investment in one company’s securities, as we add securities of other companies to our portfolio, which type of risk declines? Unsystematic risk
Which of the following measures the average relationship between a stock’s returns and the market’s returns? Beta coefficient
The beta of ABC Co. stock is the slope of: The characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.
Collectibles Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk free rate is 4%. What is the risk premium on the market? 11%
You purchased 1,000 shares of K.C Inc. common stock one year ago for $50 per share. You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share. What is your holding period return? 13.0%
Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return. What is the standard deviation of return for this investment? 2.43%
You have a portfolio of two stocks with the following investment proportions and betas:Stock A = 30% of the portfolio investment; Beta of stock A = 1.8Stock B = 70% of the portfolio investment; Beta of stock B = 1.1What is the portfolio beta? 1.31
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Finance Flashcards

Personal Finance: FIN 1100- Chapter 1

Being financially secure involves balancing what you earn with B) What you spend.
Which statement is true about managing personal finances? C) Financial difficulties can be a major cause of marital problems.
Personal financial planning can help you to E) All of the above.
Evaluating your financial health consists of E) All of the Above
The term that considers having money readily available when you need it is the concept of B) Liquidity
Suppose that you are a 21-year old college student. What stage of the financial life cycle are you currently in? A) Stage 1: wealth accumulation
Based on the Life Cycle of Financial Planning. When would be a good time to review and possibly adjust an effective financial plan? E) Both B and C are correct answers. B) When you get married C) When you have children
What is the main factor in determining your potential income level? A) Education and skills that you have attained.
According to a recent recruiting survey, the most common mistake made by job interviewees is B) talking too much.
According to a recent Rockefeller Foundation report, the ability to pay B) for retirement expenses.
The concept of diversification is illustrated by the old saying B) “Don’t put all your eggs in one basket.”
Chapter 1 discusses 10 principles that form the foundation of personal finance. The principle that considers the value of compound interest is the D) time value of money
In 2008, the Bear Stearns Company collapsed could not be saved and was sold to JP Morgan Chase for $10 per share, a price far below its pre-crisis 52-week high of $133.20 per share. Prior to the collapse, many of the company’s employees had all of their retirement money invested only in Bear Stearns common stock. This was a very risky financial strategy for just such a reason: What if the company dissolves? What financial principle from Chapter 1 did they need to understand better? A) Risk and return go hand in hand.
Matthew bought a used car last month for $2,400. He just found out he needs a new transmission that will cost $2,400 to install. He is asking you for advice as to what he should do. What financial principle would you use to base your advice on? B) Mind games, financial personality, and your money
A solid understanding of personal finance will E) All of the Above.
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Finance Flashcards

Finance2

Which of the following is not true when developing a time line? Cash outflows are designated with a positive number
People borrow money because they expect… their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on them
A payment that your bank credits to your account in one year is known as a: Future Value
How are future values affected by changes in interest rates? The higher the interest rate, the largger the future value will be.
How are present values affected by changes in interest rates? The lower the interest rate, the larger the present value will be.
We call the process of earning interest on both the original deposit and on the earlier interest payments: compounding
Interest earned on the original deposit is called: simple interest
The process of figuring out how much an amount that you expect to receive in the future is worth today is called: discounting
The interest rate, i, which we use to calculate present value, is often referred to as the: discount rate
Who is credited with popularizing the Rule of 72? Albert Einstein
The Rule of 72 is a simple math approximation for: The number of years required to double an investment.
With regard to money deposited in a bank, future values are: larger than present values
Earnings just one percent more in interest rate every year results in much higher future values over time, and: time has the same effect on future values over time
A dollar paid (or received) in the future is: not worth as much as a dollar today
Because we compute interest rates using beginning-period value of an investment, investments that feature gains and losses may become asymmetric between gains and losses
When computing the rate of return from selling an investment, the number of years between the present and future cash flows is an important factor in determining the annual rate earned
When calculating the number of years needed to grow an investment to a specific amount of money: the higher the interest rate the shorter the time period needed to achieve the growth
Moving cash flows from one point in time to another requires us to use both present and future value equations
All TVM equations that you will encounter only require figuring out what is unknown in the situation and: solving for that one unknown factor
The longer the money can earn interest, the greater the compounding effect
When saving for future expenditures, we add the ______________ of contributions over time to see what the total will be worth at some point in time> Future value
When moving from the left to the right of a time line, we are using: compound interest to calculate future values
Level sets of frequent, consistent cash flows are called annuities
The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect? interest rate for compounding
In order to discount multiple as flows to the present, one would use the appropriate discount rate
Your credit rating and current economic conditions will determine the interest rate that a lender will offer
When interest rates are lower, borrowers can borrow more money
The present value of annuity payments made far into the future are worth very little today
While the future value will increase as computing frequency increases, the size of each increase in the future value: diminishes as compounding frequencies increase
Compounding monthly versus annually causes the interest rate to be effectively higher, and thus the future value grows
The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a more accurate measure of the interest rate paid for monthly compounding.
You can more easily evaluate investment opportunities for both businesses and individual applications if you can compute the implied rate of return in a series of cash flows
People refinance their home mortgages when rates fall
Loan amortization schedules show both the principal balance and interest paid per year
When you take out a loan for a car or home mortgage, you will usually find monthly payments at today’s interest rates more relevant for your budget
When you get you credit card bill, it will offer a minimum payment, which usually only pays the accrued interest and a small amount of principal
When you get your credit card bill, if you make a payment larger than the minimum payment you will reduce the payoff time
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Finance Flashcards

Final for Finance Turner 11-14

Which of the following investors will potentially receive dividends on their investments?a) debt holdersb) stock holdersc) bond holdersd)derivative holderse) both b and d are correct b
An investor owns stock from seven different companies, two rental houses, and three government bonds. Together these assets are considered to be the investor’s _____.a) derivative holdingb) collectionc) portfoliod) asset classe) none of the above c
The ____ date is the date at which the bond issuer must repay the loan or borrowed funds.a) completionb) endingc) maturityd) premiume) none of the above c
Suppose that you purchased a machine several years ago for your company. You recently sold the machine for more than you paid. This is an example of a ___.a) capital carry-forwardb) non-taxable gainc) windfalld) capital gaine) none of the above d
The ___ is the stated amount on the face of a bond, which the firm is to repay at the maturity date.a) debt price b) historical valuec) relevant valued) par valuee) none of the above d
You are considered to be engaging in ____ when you purchase an asset whose value depends solely on supply and demand.a) investingb) optioningc) speculationd) hedginge) none of the above c
A security whose value is based solely on the value of other assets is called a ___ security.a) capital optionb) derivativec) hedgingd) alternative assete) none of the above b
When you purchase an asset that generates a return, it is generally considered to be ____. a) speculationb) a windfallc) an expected returnerd) an investmente) none of the above d
If you bought a 20-year bond issued by the government, with a par value of $1,000 and an interest rate of 8%. At maturity you will be returned the principal of ___.a) $80b) $1,600c) $500d) $1,000e) $800 d
As a young college graduate, your biggest investment ally is ______.a) tax-free investmentsb) timec) derivativesd) a windfalle) leverage b
You can make investments on a ____ basis, which means that not only does your investment grow free of taxes, but the money you invest isn’t taxed until you liquidate your investmenta) progressive taxb) asset management c) tax-deferredd) tax-eliminated c
Long term capital gains are taxed at ___ percent.a) 15b) 25c) 10d) 8e) 40 a
If you purchase some shares of stocka) you may earn coupon interestb) you will definitely earn coupon interestc) you may earn dividendsd) you will definitely earn dividends c
Jennifer has money invested in stocks. She earns a return on her investment, which is a portion of the company’s profits, called ____.a) a returnb) interestc) dividendsd) growthe) retained earnings c
What is advantage to being a “preferred” stock holder?a) preferred stock holders receive dividend payouts before common stock holders dob) preferred stock holders always get to vote for the board if directors of the companyc) preferred stock holders receive a better coupon interest rated) there are no advantages to being a preferred stock holdere) preferred stock holders never pay commissions on their stock trades a
Hern MacTavish only invests in lending investments. If his financial advisor gave him the list below, which might Hern invest in?a) saving accountsb) stocksc) income-producing real estated) bondse) both A and D e
Just as valuable as the tax break on capital gains income is the fact that you don’t have to claim it– therefore, you don’t pay taxes on the asset until you____.a) sell itb) Have an equal match in personal incomec) retired) file your next years’ taxes a
Latisha invested $1,000 in XYZ stock. Two years later she sold the stock for $1,200. During the time she owned the stock, she received a total of $80 in dividends. What was her total return on this investment?a) 8%b) 20%c) 23.33%d) 28% d
Tran purchased a house for a rental property for $100,000 five years ago. During the time owned this rental, his net rental income was a total of $4,000. He just sold the property for $120,000. What was his AVERAGE annual return on this investment?a) 4.0%b) 4.8%c) 20%d) 24% b
One should keep in mind that when it comes to tax advantages, _____ is/are better that ____.a) Tax-free investments; tax deferredb) ordinary income; capital gainsc) tax shelters; capital gainsd) capital gains; ordinary incomee) marginal rates; ordinary income d
Bruce Lee owns stocks, bonds, real estate, gold coins, T-Bills, and gemstones. He has a(n) ____.a) default-proof portfoliob) diverse portfolioc) equity portfoliod) risk adverse portfolioe) inflation-proof portfolio b
The risk that you will not be able to find a buyer at a fair market price, and will wind up having to sell for less than an asset’s worth is called ___ risk.a) interestb) liquidityc) calld) inflation b
Albert just purchased a $1,000, 5.4%, 10-year bond when he heard about his friend Charlie who just bought a $1,00, 8%, 10-year bond. What kind of risk did Albert just experience?a) marketb) financialc) interest rated) business c
Asset allocation has to do with how your money should be divided among which of the following?a) real estateb) stocksc) corporate bondsd) government bondse) all of the above e
Which of the following statements regarding risk in investing is most correct?a) It is most important to avoid risk during the early years, up to age 54.b) Trying to avoid risk is an exercise in futilityc) It is hard to achieve a positive return by avoiding risk all togetherd) avoiding risk is the best strategy to accumulate wealth c
Our study of efficient markets tells us all of the following about investing EXCEPTa) long-term investing is your best bet, not systemsb) go with the best investment advisor money can buyc) Do not try to time the market–stay with your pland) Focus on effective asset allocatione) Diversity and seek help if you don’t feel comfortable c
You have just purchased shares of stock from a stock broker. These shares were previously traded on the NYSE. This trade took place in the ____.a) secondary marketb) primary marketc) tertiary marketd) quaternary markete) none of the above a
You just concluded a stock purchase transaction via a computer hookup rather than in an organized exchange. This trade took place in the ____.a) NYSEb) AMEXc) primary marketd)over-the-counter markete) none of the above d
IBM went to a(n) ____ who served as a(n) ___ to sell an IPO in the primary markets.a) underwriter; investment brokerb) investment banker; underwriterc) investment broker; underwriterd) underwriter; investment bankere) investment banker; underacheiver b
A(n) ____ is a legal document that describes a securities issue and is made available to potential investors.a) offering contractb) tombstonec) prospectusd) disclosure agreemente) none of the above c
A(n) _____ advertisement provides a listing of the underwriting syndicate involved in a new offering.a) prospectusb) brokerage notificationc) underwriting notificationd) tombstonee) none of the above d
IBM is considering hiring an investment banker who will purchase and subsequently resell an issue of stock for them. This service is called____.a) churningb) stock brokeragec) full-service brokeraged) underwritinge) none of the above d
ABC Corporation is selling additional shares of common stock. These are new shares of stock, and have never been sold or traded previously. The selling of these shared would take place in the _____ market.a) quaternaryb) secondaryc) primaryd) tertiarye) none of the above c
Securities that are less frequently traded, along with many new and high-tech stocks, are relegated to the a) NYSEb) OTC marketc) ADR marketd) AMEX b
Most of the bonds that are bought and sold are not transacted on the organized exchanges. They are bought and sold through bond dealers who do not sell many ____ bonds but do trade many ____ binds in the secondary market.a) high par value; corporateb) government; corporatec) corporate; firm-specific bondsd) government; low par valuee) corporate; government e
The two major organized stock exchanges in the United States are ___ and the____.a) NYSE; Pacificb) AMEX; Chicagoc) AMEX; Pacificd) NYSE; AMEXe) NSYE; Chicago d
You and your spouse have decided to incorporate bonds into your newly-formed retirement portfolio. You will most likely purchase them ____.a) with your broker acting as intermediaryb) directly from issuing institutionc) directly from a bond dealerd) with an underwriter acting as intermediary a
Patti DeVry has been trading stocks in the over-the-counter market. When she wants to sell her stocks she will specify the ____ price and when she wants to purchase stocks she will specify the ____ price.a) bid; minimumb) starting; minimumc) ask an offer; bidd) ask;minimume) bid; ask on offer c
Securities include both ____ and ____.A) bonds; mutual fundsb) real estate; stocksc) stocks; bondsd) stocks; mutual fundse) bonds; money market funds c
Investors who trade with a very short time horizon, generally holding onto stocks for only a few hours, are called _____.a) hedge tradersb) movement tradersc) deep discount tradersd) day traderse) none of the above d
You have decided to borrow stock from your broker, sell it in the market, and then (you hope) replace the borrowed stocks when the price drops in the future. This is an example ofa) selling shortb) borrowed sellingc) reverse hedgingd) IOU tradinge) none of the above a
A _____ is an order to sell a security if the price drops below a specified level or to buy if the price climbs above a specified level.a) fill-or-kill orderb) market orderc) GTC orderd) stop-loss ordere) none of the above d
A ____ is an order to buy or sell a set number of securities immediately at the best price available.a) prompt orderb) day orderc) limit orderd) market order e) none of the above d
a___ is a trading order that expires at the end of the trading day during which it was made.a) limit orderb) GTC orderc) market orderd) day ordere) fill-or-kill order d
A group of 100 shares of common stock is referred to as a(n) ____.a) odd lotb) square lotc) round lotd) even lote) none of the above c
You specify that your trade is to be made only at a certain price or better. You are placing a(n)a) stop orderb) limit orderc) open orderd) closed ordere) market order b
You have just purchased 10 shares of a stock selling at $50 per share, Since that time, the company was found to be in violation of several environmental laws and has several major lawsuits outstanding. Which of the following statements is most correct?a) You could lose up to your $500 investmentb) You cannot lose your investment based on the actions of the actions of the companyc) You could lose more than you $500 investmentD) By owning stock in the company, you have also technically violated the lawe) none of the above A
Which of the following statements is most correct regarding the general relationship between stocks and interest rates?a) As interest rates increase, stock prices should decreaseb) there is no relationship between interest rates and stock pricesc) Stock prices are negatively exponentially related to interest rate increasesd) As interest rates increase, stock prices should also increasee) none of the above A
______ are a company’s distributor of its profits in the form of cash or stock to its owners.a) shareholder divestmentsb) coupon interest paymentsc) equity paymentsd) dividendse) none of the above D
When a company buys back its own common stock it is engaging in a _____.a) stock repob) stock splitc) stock reissued) stock repurchasee) none of the above D
A ____ increases the number of stock shares outstanding by replacing each existing share of stock with a stated number of new shares.a) stock reissueb) stock repurchasec) stock splitd) dividend reinvestmente) none of the above C
A(n) ______ is a legal agreement signed by a stockholder allowing someone else to vote on his or her behalf at the corporation’s annual meeting.a) proxyb) voting contractc) agency contractd) contingency contracte) none of the above A
The ____ is the date on which the board of directors announces the amount of the dividend.a) declaration dateb) dividend datec) ex-dividend dated) announcement datee) maturity date A
You purchased 100 shares of Quantex at $150 per share for a total investment of $15,000. After your purchase the stock had a 3 for 1 split. How many shares do you now own and how much is your original investment now worth?a) 100 shares and $150 b) 300 shares and $15,000c) 300 shares and $45,000d) 100 shares and $45,000 B
You are really keen on stocks. However, you do not like stocks with regard to ____. This means that if a company you have invested in goes bankrupt, the creditors are paid first and you will be out of luck.a) limited liabilityb) voting rightsc) claims on assetsd)claim on incomee) claims on dividends C
Common stock holders are entitled to elect the company’s board of directors. Usually one share of stock is equal to ____ vote(s).a) 100b) onec) 1,000d) two b
The dividend yield in a share of common stock is_______.a) available at most large companiesb) the taxes you pay on the reinvested dividendsc) the amount of annual dividends divided by the market price of the stockd) all of the abovee) Only A and B c
The book value of a company is calculated by ____.a) adding the price per share to the dividends paidb) subtracting the value of all the form’s liabilities from the value of its assetsc) subtracting its price per share from the dividends paidd) subtracting the value of all the firm’s assets from the value of its liabilities b
As a shareholder in the Titanic Shipping, Inc, James Blue is one of the many actual owners. In case of the bankruptcy of the corporation, his liability would be limited to______.a) the amount of his investmentb) what is left after selling the stock and subtracting the debtc) nothing at alld) his ownership percentage of the actual loss a
Figure 13.1 in your textbook compares the returns on various investments over the period 1951-2010. Which of the following is shown to exceed the inflation rate by the widest margin?a) treasury billsb) government bondsc) mutual fundsd) common stocks d
A stock market characterized by increasing is termed a(n) ____ market.a) animalb) bearc) bulld) none of the above c
A stock market characterized by _____ prices is termed a bear market.a) steadyb) risingc) fallingd) none of the above c
Jessica wanted to gauge stock performance in general. She found a useful tool that measured the stock prices of 30 large industrial firms, called the ____.a) Moody’s Indexb) Value Line Surveyc) Standard and Poor’s Indexd) Dow Jones Industrial Averagee) none of the above d
When you got home after work you saw on the news that the S&P was down by 20 points. Which of the following is true?a) All of your stocks’ markets prices must have declined by 20 pointsb) Some of your stocks’ market prices may have increasedc) Some of your stocks’ market prices may have decreasedd) Both B and C are correct d
If you purchase stock of big companies like Proctor & Gamble, General Electric, and Texaco you would be buying shared of ___ stocks.a) true-blueb) blue-tripc) mini-capsd) speculative b
Deborah recently purchased a stock that is considerably more risky than a typical stock. It has exhibited a high degree of earnings variability. This is an example of a(n) _____ stock.a) incomeb) blue-chipc) mid-capd) speculative d
Why might you consider investing in bonds?a) Bonds can be safe investment if held to maturityb) bonds produce steady incomec) bonds reduce risk through diversificationd) all of the above d
Bond issuers may do something very important for the bondholder that increases the probability the debt will be successfully paid off at maturity. The issuera) establishes a sinking fundb) has the bond deferredc) had the bond indenturedd) sets a fixed interest rate a
Any bond that is backed by the pledge of collateral is known as what type of bond?a) agencyb) sinkingc) securedd) collateralizede) recalled c
Bonds enjoy all but one of the following advantages. Which is it?a) When interest rates drop, bond prices riseb) Bonds may be called when interest rates dropc) bonds produce steady income d) they can be a safe investment if held to maturitye) They reduce risk through diversification b
You hold in your hands a legal document that provides the specific terms of the loan agreement, including a description of the bind, as well as the rights of the bondholder. You have a(n)_____.a) indentureb) bond signatoryc) agency contractd) signatory contracte) debenture a
State or municipal bonds that have interest and par vale paid for with funds from a designated project or specific tax are known as ____ bonds.a) general obligationb) Series EEc) life cycled) revenuee) none of the above d
The ___ is the face value of a bond, and the amount that is returned to the bondholder at maturity.a) par valueb) market valuec) return priced) dead pricee) none of the above a
Herman Melville never thought of a bond as being a ____ and that he would be ____ when securing one until he read bout it in his personal finance test.a) lien; borrowerb) loan; borrowerc) lien; lenderd) lien; debenturee) loan; lender e
An unsecured long-term bond is known as a(n) ____.a) abdentureb) bondenturec) debenturec) indenture c
The largest single player and payer in the bond market ____.a) are foreign firmsb) is the U.S. governmentc) is corporate Americad) are school and county governmentse) are municipal bond issuers b
If you were considering the purchase if a bind issued by a state, county, or city, you would be considering the purchase of a ___ bond.a) corporateb) municipal bondc) government hedged) statee) none of the above b
Treasury bonds are generally viewed as being risk-free, given the government’s ability to ___ and ___.a) print money; do volume businessb) tax people; do volume businessc) tax corporations; do volume businessd)tax; print more moneye) none of the above d
The corporate bond that you own is backed by the corporation’s Houston, Texas real estate holdings. If the company defaults, these holdings could be liquidated to repay the debt. This is an example of a ___ bond.a) creditb) liquidationc)debentured) mortgagee) none of the above d
Because there is no default or call risk associated with government bonds, they generally pay ___ rate of interest of interest than other bondsa) the sameb) a higherc) none of the above d) a lower d
Because junk bonds carry a much higher risk of default, they also carry an interest rate ___ percent above the AAA grade long-term bonds.a) 10-12b) 1-2c) 20-25d) 7-9e) 3-6 e
A real estate investment that is most similar to a mutual fund specializing in real estate investment is called a ____.a) property trustb) pass-through property bondc) real estate agency bondd) none of the above c
Which of the following bonds would be appropriate for a retired person seeking a stream of income during retirement?a) investment grade corporate bondb) US Treasuryc) Municipal bondd) all of the above are correct d
Which of the following starts off with the highest risk bond and ends with the lowest risk bond?a) Municipal, Corporate, Treasury, Junkb) Corporate, Junk, Municipal, Treasuryc) Junk, Corporate, Municipal, Treasuryd) Corporate, Junk, Treasury, Municipal c
The advantages of Treasury bonds includea) there is no defaultb) they can’t be called inc) most interest is free of state and local taces.d) all of the abovee) Only A and C d
The interest rate carried on agency bonds, such as FNMA and FHLB, is ___ the interest rate on Treasury bonds.a) higher thanb) usually the same asc) at most that ofd) lower thane) none of the above a
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Finance Flashcards

personal finance final exam

In a contract, each party has what? An obligation or responsibility
When you want to add coverage for something not included in an insurance policy, what would you add to your policy? A rider
Everyone has the same amount of risk. False
Negligence is typically thought of as a failure to take reasonable actions to prevent injury or damage. True
Contracts are really only used for business; most people do not have contracts for their personal finances. True
If someone dies without a will, who handles the distribution of the person’s estate? The state
Only individuals over the age of 60 need to create an estate plan. False
The power of attorney is a legal document that gives the person of your choice the authority to act on your behalf. True
What is NOT true about contracts? A contract can be enforced even if the agreement contains an illegal activity.
The specific protection that the insurer provides to the policy holder is known as which of the following? Coverage
A guardian does which of the following? Agrees to care for a person’s children in the event of the person’s death
If someone dies without a will, a situation known as intestate, the state will step in to handle the distribution of the estate, even if it is not what you may have wanted. True
Who agrees to pay for certain types of losses in exchange for payments on a policy? Insurer
With a contract, consideration is something of value offered by one party in exchange for something of value from the second party. True
Verbal contracts can never be legally enforced. False
The broad types of investments are known as which of the following? Asset classes Speculative investments High risk types Dividends Asset classes
Common stocks are considered to be lower risk than municipal bonds. False
Treasury bonds have what maturity date? 30 year
Preferred stocks share characteristics with which of the following? Common stocks and corporate bonds
Speculative investments are which of the following? High risk
What is a legal document that outlines all of the conditions of the bond? Bond indenture
What is true about investing? It is used to generate money.
Direct stock plans are only offered by brokerage firms. False
What is the process of earning interest on interest that you’ve already earned? Compounding
A bond indenture is which of the following? Legal document
Dividends are the periodic distribution of profits to investors. True
Real estate is a great investment for everyone, particularly since the money is more liquid than common stocks. False
Individuals have to choose whether to save or invest, since it is not recommended to do both. False
All investments carry the same amount of risk. False
A stock is a share of what? Ownership
One advantage of credit is that it can give you a “float” time between buying the product and when you need to pay for the product. True
Collateral is the net worth of your household. False
What type of card includes a computer chip with additional information on it? Smart card
Credit tends to cost individuals more than paying in cash. True
Individuals who do not pay off their credit card balances each month are known as which of the following? Borrowers
In regards to credit, what does capacity mean? Your perceived ability to repay your loans and debt.
What is true about debit cards? They are linked to a savings or checking account.
Smart cards are also known as gift cards. False
What is a reason why someone would use a secured credit card? To help overcome a bad credit history
What is a disadvantage of using credit? It can be tempting to overspend.
Consumer credit has very few advantages and is best avoided at all times. False
Before giving you a loan or credit, lending institutions may want to know more about you to help determine whether you are a good person to give a loan or credit to. True
If you are trying to establish credit history, what is a good place to start? Gasoline or department store credit card
Those who pay off their credit balances in full each month and avoid the finance and interest charges are known as convenience users. True
Credit unions tend to give credit only to whom? Members of the credit union.
What is an example of a liquid asset? Money in a savings account
What is a common mistake made in budgeting? Budgeting for financial goals or savings last
What is simply a spending plan that we create to help manage our money? Budget
Liquid assets are those that cannot be easily converted to cash. False
What is true about computer files of financial records? They should be backed up regularly.
A home file is the place where you should keep financial records that you may need to access regularly. True
What is the first step in creating a cash flow statement? Record your income
The first step in creating a cash flow statement is which of the following? Recording income
What is a reason for keeping organized financial records?Paying bills Filing taxes Measuring financial status All of the above All of the above
What is an assessment of what you own and what you owe? Personal balance statement
What budgeting option is best used only with limited resources and expenses? Mental budgeting
It is not important to keep financial records since they can all be found online. False
A budget variance is any difference between what was actually spent during the time period and the budget. True
What is an example of a long term liability? Mortgage
Personal financial statements are a good way of measuring our current finances and giving us information about our financial activities. True
In the United States, over 9 million are victims of identity theft each year. True
Weasel Words involve advertising all of the good things about a product while ignoring the negative aspects of the product. False
What advertising technique focuses on the positive and ignores any negative aspects in the product? Card Stacking
What might be a consideration in deciding where to buy something?The location of the store The price of the item you wish to buy Customer service All of the above All of the above
One of the first steps that you can take is to place a fraud alert on your credit reports from Equifax, Experian, and TransUnion. True
Experts recommend that you time your purchases to what, if possible? Sales
What is a partial refund of the purchase price of an item? Rebate
Experts recommend that you don’t wait for sales before buying an item, since the item is likely to rise in price in the time you wait. False
Fraud alerts and credit freezers are the same thing. False
If you believe that your identity has been stolen, you should close the accounts that have been compromised. True
What advertising technique involves the use of “positive words without actually really making any guarantee”? Weasel Words
What involves special devices that steal your credit card or debit card information when you use the card for a purchase? Skimming
What is when an identity thief calls or emails you pretending to be someone else in order to get your personal information? Phishing
If you receive a phone call and the caller asks for personal information, what should you do? Refuse to give the information and hang up
Credit freezes prevent anyone from viewing your credit report, essentially blocking the creation of new credit accounts in your name. True
personal financial statement form outlining an individual’s assets and liabilities, used when an individual is applying for credit
cash flow statement document used by businesses or individuals showing the money generated and used during a specific time. shows differences in income and spending.
financial record Formal documents representing the transactions of a business, individual or other organization. Financial records maintained by most businesses include a statement of retained earnings and cash flow, income statements and the company’s balance sheet and tax returns.
budgeting the process of creating a plan to spend your money. ex: recording your income and finding what you need to spend on necessities, how much you can spend on luxuries, and how much you will save for emergencies
phishing the activity of defrauding an online account holder of financial information by posing as a legitimate company. ex: the prince of nigeria, calling you and trying to solve your computer problems