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Finance Flashcards

Finance 300 Exam 2

If the discount rate declines, investment will then be… Appealing (or more money maker). Because more money is being made.
Nominal rate can be determined by…Example: Calculating nominal rate when Treasury bill rate is 2% and inflation premium is equal to 4% Adding return on risk free investments and rate of inflation.K =? K = 2% + 4% K= 6%K* = 2%IP = 4%
#3If market rate is above the coupon rate then bond will be Trading at a discount
#3If the market rate has gone down (below the coupon rate) this bond will Tarde at a premium
Annuity (aka ordinary annuity)Find the future value of an ordinary annuity that requires payment of 100 at the end of the first, second, and third year & annuity offers you 5% PV = 0FV = 0 FV = 315.25 FV = PMT ((1+i)^(n)-1/i)I = 5N = 3PMT = 100
The basic relationship in interest rate theory is that bonds with a longer maturity will have a larger price fluctuation, and bond with a shorter maturity will have a smaller change Longer maturity will have a larger priceShorter maturity will have a smaller change in price.
A bond with longest maturity is a riskier bonda. 7% coupon rate treasury bond matures in 12 yearsb. 10% coupon rate treasury bond matures in 9 yearsc. 6% coupon rate treasury bond matures in 15 yearsd. 7% coupon rate treasury bond matures in 5 years Answer is C. C is more riskier.
You plan to invest in bonds that pay 6% compounded annually. If you invest $10,000 how long will it take to become $30,000. PV= 10,000FV= 30,000 I/y= 18.85 yearsI= 6N= ?
Suppose a state of California bond will pay you $1,000 in ten years. If the going rate of interest on a 10 year security is 5.5%, find the PV. PV= ?FV= 1,000 PV= 585.43N= 10I/y= 5.5Pmt= 0
How much would $20,000 due in 50 years be worth today if the discount rate is 7.5% PV= ?FV= 20,000 PV= 537.78I/y= 7.5N= 50Pmt= 0
Last year ABC Inc’s sales were $525 million. If sales grew at 7.5% per year, how large will ABC sales be in 8 years? PV= 525FV= ? FV= 936.33I/y= 7.5N= 8Pmt= 0
ABC, Inc, issued (i.e. sold) 20 year non callable 7.5 annual coupon bonds (i.e. face value of each is 1,000) one year ago. Today the market rate is 5.5%. Calculate the value of this bond today? PV= ? Payment= (coupon rate)(face value)FV= 1,000 (7.5%) (1,000)I/y= 5.5 0.075 (1,000)N= 20-1= 19 = 75Pmt= 75 PV= 1,232.15
A 25-year $1,000 face value bond with a coupon rate of 8.5% is selling in the market for $925. If yield-to-matuirty remains at the current level, what will the price be for this bond 5 years from today?(there are two parts) PART 1:PV= 925 Pmt= (8.5)(1,000)FV= 1,000 0.085 (1,000)I/y= ? pmt= 85N= 25Pmt= 85 I/y= 9.281%PART 2: PV= ?FV= 1,000I/y= 9,281 Pmt= 85 PV= 930.11
Current YieldA $1,000 face value bond matures in 20 years is selling in the market for $900. Then its current yield will be greater than…. the coupon rate
If a $1,000 face value bond that matures in 20-years and is selling in the market for $1,100 then its current yield will be… smaller/lower than the coupon rate.
Yield-to-maturity (different prob, same #s as question 12)A 25-year, $1,000 face value bond has a 8.5% annual coupon rate. This bond is selling in the market for $925. Find the yield-to-maturity (YTM) PV= 925FV= 1,000 I/y= 9.281%I/y= ?N= 25Pmt= 85
Which of the following will have a higher than average coupon rate Callable or call provision
Pre-emptive right is important for the current stockholders because it protects them from Dilution of ownership
Find the price at which shares of ABC will be trading if the expected rate of return equals 10% and ABC’s last paid dividend was $3 per share. These dividends are to grow at a constant rate of 6% Formula: Po= (D1/Ks-g)Po= Stock Price ?Ks= Expected rate of return (aka required rate of return) 10%g= Growth Rate (constant) 6%D1= Next dividend or year-end-dividend 3.18%Do= Last paid or current dividendD1= Next dividend or year-end-dividendD1= Do(1+g) = 3(1+0.06)= 3.18 3.18/ (0.10-0.06) = 79.5
If stock of a XYZ is trading for $80 per share and XYZ year-end dividend was $2 per share and constant growth rate is 5%. Calculate the required rate of return for XYZ’s stock (please note expected rate of return is the same as the required rate). Ks= (D1/Po) +gPo= 80 (2/80)+0.05 = 0.075 7.5%D1= 2g= 5%Ks= ?
Another method to calculate Ks. If risk-free rate is 4% and market rate premium is 6% with a beta (coefficient) of 1.2, calculate Ks. Ks= Krf + (Km-Krf) (b)(Km-Krf)= Market Risk Premium (MRP)Krf= 4% 4%+6% (1.2)Km-Krf= MRP 6% 0.04+0.72 = .112 11.2%b= 1.2
There is a 25% chance that a stock will earn 30%, and a 50% chance it will earn 12%. Another 25% of the time it will lose 18% Ki Pi Ki(Pi)0.30—0.25 0.0750.12—-0.50 0.060-0.18—0.25 -0.045Ks= the sum of(KiPi) = 0.09 9%
Your company paid a dividend of $2 per share six years ago. Today, this company paid a dividend of $4 per share, calculate the growth rate of dividend. PV= 2FV= 4 I= 12.25% 12%N= 6I= ?Pmt= 0
Stock A has a required rate of 10%, its last paid dividend was $0.07 per share and it is trading for $25 per share. Stock B has a required rate of 12% and its last paid dividend was $0.11 per share. This stock is trading for $40 per share. What can be paid about these twos stocks. Current (dividend) yield = Do/ stock priceStock A= 0.07/25 = 0.0028Stock B= 0.11/40 = 0.0028* The two stocks have the same dividend yield
Preferred StockFor the preferred stock of an ABC, Inc, dividend was $10 per share and the required rate is 10.3%. Find the value of the preferred VP= Dp/rpV= Value of preferred Dp= Preferred dividendRp= Rate of return for preferred rate 10.00/10.3% = $97.09
Present value of any asset can be determined by discounting future cash flows, i.e. PV can be determined by discounting
Your company sold bonds of $1,000 face value that mature in 20 years and have a coupon rate of 10%. Find the cost of debt after-taxes if your company pays taxes at 40%. Kd(1-T) Kd= 10% = 10%(1-40%) = .06 6%T= 40%
Ks =Formula Ks= Cost of Equity1st Formula: Ks= (D1/Po)+gWhere, Ks= Expected rate of return, aka, required rate of return aka (cost of equity or cost of common equity)2nd Formula: Ks= Krf + (Km-Krf)(b)Where, Ks= Required rate of return or expected rate of return or cost of equity.Krf= Risk free rateKm= Market rateKm-Krf= MRPb = beta coefficient
If stock of ABC is selling for $80 per share, the year-end dividend is $2 per share and the constant growth rate is 5% using this information calculate Ks for ABC Po= $80 Ks= (D1/Po)+g = 2/80 +0.05 = 0.75 7.5%g= 5%D1= $2
If risk free rate is 5% and market risk premium is 1% with a beta coefficient of 1.2. Calculate Ks. Krf= 5% ks=krf + (km-krf)bMRP= (km-krf)= 1% 5% + 1%(1.2)b= 1.2 5% + 1.2% = 6.2% Ks= 6.2%Always a percentage
If Ks is equal to 13%, and risk-free rate equals 5%, with MRP equal to 4%. Calculate beta. Ks= 13% ks=krf + (km-krf)bKrf= 5% 13% = 5% + (4%)bMRP=(Km-Krf) 4% b = 2%b= ?
Weighted average cost of capital WACC= WaKd (1-T) + Wskswhere;WACC= Weighted average cost of capitalwd= Debt portion of capital aka (debt component)ws= Equity portion of capital aka (equity component)Kd= Cost of debtT= Tax rateKs= Cost of equity
An ABC, Inc. is trying to find the weighted average cost of capital and for this ABC has collected the following information-ABC has 40% debt and 60% equity i.e. Wd= 40% 0.40 & ws=60% 0.60-ABC has a 20-year bond issue with a coupon rate of 8% and the bond is trading at par.-ABC is in 40% tax bracket-Risk free rate is 5%MRP equals 4% and ABC’s beta is 1.2 using this information calculate WACC. Wd= 0.40Ws= 0.60 WACC=WdKd (1-T) +WsKsT= 40% Step1: (Find Ks)= Krft (km-kmf)bKrf= 5% bc kerf is givenMRP= 4% 5% + 4% (1.2)= .098 9.8% Percentb= 1.2 Ks= 9.8%Kd= 8%Ks= ? Step 2: WACC= WdKd(1-T)+WsKs ?= (0.04)(0.08)(1-.40)+ 0.6(0.098) .1092 + 0.0588 = .078 7.8%
WACC= WdKd(1-T) + WsKs + WpKp Wp = Preferred StockKp= Cost of preferred stock and return of preferred stock.
A company paid a dividend of $1 per share 12 years ago. This year it paid a dividend f $2 per share. Calculate the growth rate of these dividends I= 5.95%
Payback period has some drawbacks such as -It ignores the time value of money-It ignores cash-flow after the recovery.
Your company has invented $5,000 on a project & it generates the following cash flows:Investment= $5,000 Year CF Cumulative CF Payback Period yrs1 1,500 1,500 – 3 years2 1,250 2,7503 2,250 5,000 –> It ignores cash flow 4 2,250 7,250 after the recovery5 2,250 9,500 (A&B or C&D) answer
A project acceptable i.e. should be accepted if its NPV>0 You invested $750 & it generated cash flows.Year CF [email protected]%0 -750 -7501 2450 2,227.272 3175 2,623.963 4400 3,305.78 7,407.01 = NPV1. PV=? 2. PV=? 3.PV=?FV= 2450 FV= 3175 FV= 4400N= 1 N= 2 N= 3I= 10 I= 10 I= 10Pmt= 0 Pmt= 0 Pmt= 0= 2,227.27 =2,623.96 =3,305.78
If IRR>WACC, accept the project also, IRR is similar to… yield-to-maturity
Riskiness of a project is accounted for by adjusting discount rate upward. PV will be… Smaller (increasing discount rate)
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Finance Final Exam: Ch 6

C.The ratio tells Ed and Marta that approximately 6.15% of their​ after-tax income is available for savings after expenses are paid.
Ojai and​ Kaya’s current ratio is 4.00 B.Ojai and​ Kaya’s current ratio is 4.00. The ratio tells Ojai and Kaya that their monetary assets could pay their current expenses 4.00times. ​ However, this ratio is not truly accurate since it does not include the monthly student loan payment. The student loan is not considered a current liability.
The (lower) the number of wage earners in the​ household, the (less) credit​ available, and the (lower) the stability of​ employment; the higher the emergency fund should be.
Insolvency results from earning more than you spend false
Net income is used in calculating one’s net worth false
According to the Keown​ book, the median net worth for American families in which the head of the household is less than 35 years old is below​ $10,000 true
The house that you are leasing from a landlord is an example of a tangible asset that you would list on your balance sheet false
Current liabilities are those that can typically be paid in full within 12 months true
Before you can hope to achieve your financial goals, you will need to first measure your current financial health and develop a plan and a budget true
The first section of a balance sheet represents your assets
Assets that you purchase for the purpose of accumulating wealth to satisfy your financial goals are called investment assets
​________ can be more than or less than the price you paid for a given​ asset, depending on what others are willing to pay for that asset today. fair market value
The term “fair market value” refers to what an asset could be sold for today
Your financial situation is insolvent when your assets are less than your liabilities
Which of the following items would not be included on a balance sheet? mortgage payment paid
Items on the balance sheet that represent amounts owed to others are termed liabilities
A physical asset such as a high-definition, flat-screen TV or a Harley Davidson motorcycle is called a tangible asset
The interest charge on your credit card statement should be listen on your personal income statement as a variable expense true
Your net worth, or your general level of financial worth, is found by subtracting your liabilities from your assets
Practical uses of an income statement include all of the above A.knowing where your money is going.B.spotting problem areas of overspending.C.determining whether you are spending more than you earn.D.determining if money is available for saving or investing.
An expenditure that you can control over time and that you can manage is a variable expenditure
How would an income statement help you create a financial plan? determines whether you are earning more than you spend
Which of the following would be included on a personal income statement? making a payment to your credit card company
A statement that records where your money has come from and where it has gone over some period of time is called an income statement
An expenditure over which you have no control, are obligated to make, and is generally at a constant level each month is called a ……….. expenditure fixed
Using financial ratios helps you quickly compare and analyze the raw data found in your personal income statement and balance sheet true
An emergency fund, or rainy-day fund, is comprised of liquid assets sufficient to cover 3.5 years of expenditures false
The purpose of using financial ratios is to both C and D C.help analyze your raw data to compare how well you are doing.D.better understand how you are managing your financial resources.
Which questions do financial ratios help you answer? All of the above*** A.Do I have the ability to meet my debt​ obligations?B.Am I saving as much as I think I​ am?C.Do I have adequate liquidity to meet​ emergencies?
Your ………… debt ratio is found by dividing total debt or liabilities by total assets debt ratio
Suppose that you wanted to calculate a financial ratio to measure your liquidity. You would most likely use the ……… ratio current
The current ratio is a measure of liquidity that reflects how many times you can pay off your current liabilities by using your liquid assets
Below are several people and their current ratios. If they were to lose their jobs​ today, which one would probably experience financial stress and pressures the​ quickest? A.***Elmo has a current ratio of 0.5 times.Your answer is correct.B.Dee has a current ratio of 1 time.C.Andy has a current ratio of 2.1 times.D.There is not enough information to answer this question
Hector’s month’s living expenses covered ratio is 0.25 months. He just broke his leg and will not be able to work for six weeks. Without a paycheck for six​ weeks, what will Hector most likely​ experience? E.***Both A and C are realistic possibilities. A.He may have to liquidate some of his tangible or investment assets to keep current on his monthly billsC.He may have to borrow some money to keep current on his monthly bills
According to the Keown​ book, Mint and Level Money are two of the best smartphone apps for tracking your spending and setting up a budget true
According the Keown​ book, which Web-based personal financial planning website is known as​ “the best free way to manage your​ money?” Mint.com
A strong record-keeping system allows you to all of the above
An estimate of your anticipated after-tax income available for living expenses is commonly called take-home pay true
Having negative net income every once in a while is not such a bad thing as long as you have planned for it true
Which of the following financial documents would you to use to create a financial plan? A.Balance sheetB.Cash budgetC.BudgetD.Income statementE.All of the above****
A plan for controlling and forecasting your cash inflows and cash outflows is called a cash budget
Commission-only planners charge fees and collect commissions on products they recommend false
​________ planners charge a fee that is reduced by the amount of the commissions they earn. Fee- Offset
Under what conditions should people hire a professional financial planner? A.When it is apparent their financial planning skills are limitedB.When they run into complex tax or legal issuesC.When they start receiving late payment penalties from their creditorsD.When they need someone to improve or validate the plan they prepared themselvesE.All of the above***
Which of the following are not typically found on a balance sheet? both B and D
According to the Keown​ book, the most popular personal financial management program for the PC is Intuit’s Quicken
Suppose that you have been operating an online marketing business out of your​ home, and the business has recently expanded beyond belief. Since you have neglected your personal finances for some​ time, what would you do as a first​ step? Separate your personal finances from the business finances.
An expenditure over which you have control and are not obligated to​ make, and which may vary from month to month is called a​ ________ expenditure. flexible
Which of the following statements describe the importance of a​ budget? A.With a​ well-planned budget, money will seem to go farther and he will be able to do more with what he has.Your answer is correct.B.A​ well-planned budget prepares someone for the future and the unforeseen events that the future holds. Your answer is correct.C.A​ well-planned budget accurately matches a​ household’s abilities with its financial goals.
Which type of expenditure would probably be the hardest for an individual to​ track? cash
Your​ ________include cash, checking and savings account​ balances, and money market funds monetary assets
Which of the following would you calculate if you were concerned about your financial resources with regards to unplanned money​ emergencies? current ratio
The common thread among investment assets is that they are purchased for the purpose of generating wealth
From the Keown​ book, you have learned that a budget all of the above
A personal income statement is prepared both B and C
To determine your net​ worth, subtract your liabilities from your positive net equity. false
An income statement tracks the amount of money you have coming in and going out over some period of​ time, such as a month or a year. true
Alysha has​ $500 in monetary assets and​ $5,000 in current liabilities. What is her current​ ratio? .10 times
When including an asset such as a car on your balance sheet list its current value as indicated in a blue book or site like www.edmunds.com
In some cases insolvency can lead to bankruptcy. true
What would happen to your net worth if you sold a tangible asset you owned for​ $1,000 and used the money to pay off your credit card balance for​ $1,000? your net worth remain the same
According to the Keown​ book, an emergency fund consists of liquid assets that are sufficient to cover​ ________ of expenditures. 3 to 6 months
Cameron has​ $17,000 in monetary assets and​ $4,000 in current liabilities. What is his current​ ratio? 17,000/4,000
Bradley went shopping today and used his American Express credit card to buy a new pullover sweater. He used his bank debit card to pay for a video game and bought some snack food with cash. Which of these purchases are difficult to track and monitor on his​ budget? the snacks are difficult to track because cash interactions don’t leave a paper trail
Your​ ________ is found by dividing monetary assets by current liabilities and is a good measure of liquidity. current ratio
If the people​ below, with their respective current​ ratios, were to lose their jobs​ today, which one would have more time and more choices until he or she found another​ job? rick has a current ratio of 2.5 times
A budget is a process of setting spending goals for the upcoming month or year. true
The term​ “fair market​ value” refers to how the price of an asset has changed since its original purchase. false
The lower the number of wage earners in the​ household, the less credit​ available, and the lower the stability of​ employment; the higher the emergency fund should be.
Which of the following might be found on an income​ statement? all of the above
When measuring your current financial health it is important to create both B and C
A debt ratio is aimed at determining if you have adequate liquidity to meet emergencies. false
Jorge has a debt ratio of 37 percent and Jose has a ratio of 102 percent. They both have the same take-home pay every month. How can we describe their current financial​ situation? all of the above
If your liabilities are greater than the value of your assets you are considered insolvent
A(n) ________ is a reserve or rainy-day fund with money set aside to be used for unexpected expenses or when normal income has been disrupted. emergency fund
As long as a financial planner is certified you need not worry about his ability to provide you with the correct financial plan for your situation. false
To calculate your net​ worth, subtract your total debt from your total assets. true
Planning and budgeting requires all of the above
Which of the following is the best type of record-keeping system to use in maintaining financial​ records? all of the above
Which financial planning document should you use to measure your current financial​ condition? balance sheet
Suppose that you were trying to determine how much income was available for future monetary needs as well as for investments. Which of the following ratios would you most likely​ use? savings ratio
A vehicle leased in your name is an example of a tangible asset that you would list on your balance sheet. false
An expenditure over which you have no control and are obligated to make is a fixed expenditure
Liabilities are best described as financial debts and obligations that you owe
Which of the following is a relevant question to ask a financial​ planner? all of the above
From her annual salary of​ $60,000, Claudia has​ $4,500 automatically deducted for insurance on an annual basis.​ Additionally, $7,500 is deducted each year in taxes. When preparing her personal income​ statement, what figure should Claudia enter for her​ income? $60,000
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Finance Quiz #11

Which of the following is not a true statement? Because investment goals deal with the future, it is ineffective to make long-term goals.
Which of the following steps is NOT a factor to be considered before making your first investment? Save at least $10,000 to invest
A ________ is an employer-sponsored retirement account, and participating in one is one of the easiest ways to begin an investment program. 401(k) account
When choosing an investment, you should consider risk. The four primary risk components are Inflation, interest rate, business failure, market.
Which of the following risks reduces your purchasing power? Inflation risk
Which of the following risks deals with fluctuations in the economy from a period of rapid expansion followed by a period of recession? Market risk
Inflation risk deals with A reduction in purchasing power.
Business failure risk can be due to Bad management and/or unsuccessful products.
Market risk is associated with fluctuations in the market due to Economic conditions such as rapid expansion and recession.
Business failure risk Causes the business to be less profitable than originally anticipated.
Timothy Calibe purchased common stock in XYZWidgets.com. To be a successful investor, he should Continue to evaluate his investment in XYZWidgets.com after the purchase.
Which of the following investments is the most liquid? Interest-bearing checking account
The process of spreading your assets among several different types of investments to lessen risk is called Asset allocation.
A fancy way of saying you need to diversify your investments is Don’t put all of your eggs in one basket.
Which of the following investments typically has the largest potential growth? Stocks
Which of the following investments typically has the most risk? Stocks
Which of the following has returned an average of almost 10% per year since 1926? Stocks
Some financial experts, such as Suze Orman, suggest that investors include a percentage of growth investments as part of their investment plan. This percentage can be calculated by subtracting your age from 100.
Which of the following is not a U.S. Treasury security? Treasury stock
A discounted security means that the actual purchase price is Less than the maturity value.
A U.S. government security issued in minimum units of $100 with 4, 13, 26, or 52-week maturities is called a Treasury bill.
A U.S. government security issued in $100 units with maturities of more than 1 year but not more than 10 years is called a Treasury note.
A U.S. government security issued in minimum units of $100 with a 30-year maturity is called a Treasury bond.
A security issued by the U.S. government where the principal increases with inflation and decreases with deflation is called a TIPS.
A bond backed by the full faith, credit, and unlimited taxing power of the government that issued it is called a ________ bond. general obligation
A bond that is repaid from the income generated by the project it is designed to finance is called a(n) Revenue bond.
A debt security issued by a state or local government is known as a Municipal bond.
Generally, interest on corporate bonds is normally paid every Six months.
A bond that is backed only by the reputation of the issuing corporation is called a(n) ________ bond. debenture
A corporate bond that is secured by various assets of the issuing firm is called a(n) ________ bond. mortgage
A bond that can be exchanged, at the owner’s option, for a specified number of shares of the corporation’s stock is called a(n) ________ bond. convertible
A fund to which annual or semiannual deposits are made for the purpose of redeeming a bond issue is called a(n) ________ fund. sinking
Bonds of a single issue that mature on different dates are called ________ bonds. serial
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Personal Finance

Anyone can open an account here Commercial Bank
Offers financial services Commercial Bank and Credit Union
Owned by their customers Credit Union
In business to make money Commercial Bank
Membership requirements to open an account Credit Union
What are two benefits depository institutions can provide? Keep money safe Help manage money
What would be the three most important factors that you would consider when deciding which depository institution fits your needs? Fees LocationServices
What are two ways depository institutions keep your money safe? Insurance and security such as safes and secure networks
Checking account vs savings account: Checking account helps with day to day money managementSavings account is designed to store money that will be used in the future
One example of a special needs payment instrument? Traveler’s checks
Online banking vs credit union: Online banking allows access to computerCredit union allow access to any mobile device
3 activities completed with online banking: Transfer moneyPay billsAccess account info
2 activities completed with an ATM? Depositing and withdrawing money
Traveler’s Check a check for a fixed amount that can be cashed or used in payment after endorsement with the holder’s signature.
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Chapter 7 and 8

Which of the following statements is true about an organizational chart in the context of organizational structure? It gives information about an organization’s chain of command.
_____ is the division of labor into small, specific tasks and the assignment of employees to do a single task Specialization
Which of the following is a disadvantage of job specialization? It can lead to dissatisfaction and boredom among employees if overly done.
_____ is the grouping of jobs into working units usually called units, groups, or divisions. Departmentalization
All of the following are approaches to departmentalization product, function, andgeographic region.
A company that has departments for marketing, finance, personnel, and production is organized by function
An airlines company having different departments for frequent travelers and occasional travelers illustrates _____ departmentalization. customer
Which of the following concepts deals with giving employees the power to make commitments and use resources to accomplish the assigned tasks? Delegation of authority
Which of the following statements is true about delegation of authority in the context of an organization? It does not relieve the superior of accountability for the delegated job.
_____ is usually preferred when the decisions of a company are very risky and low-level managers lack decision-making skills. Centralization
When an organization has a structure in which decision-making authority is delegated as far down the chain of command as possible, it is said to be exercising: decentralization.
Span of management refers to the: number of subordinates working for a manager
Organizational layers, in the context of assigning responsibility in an organization, refer to: the levels of management in an organization
Which of the following is an informal communication channel? The grapevine
Which of the following is a temporary group of employees, usually chosen for their expertise, responsible for bringing out a specific change? Task force
Viewed from the perspective of operations, the money used to purchase a carpenter’s tools and the electricity used to run his power saw are: inputs
Viewed from the perspective of operations, the furniture items produced by a carpenter are: outputs
From the perspective of operations, food sold at a restaurant and services provided by a plumbing company are: outputs
How do operations managers ensure quality and efficiency during the transformation process? They take feedback at various points in the transformation process and compare them to established standards.
Which of the following statements is true about grapevine? It sometimes carries information that could help in decision making.
Which of the following is true of the transformation process? It occurs in all organizations, regardless of what they produce or their objectives.
For most organizations, the ultimate objective is for produced outputs to be: worth more than the cost of inputs.
Facility location decisions are complex because: the firm must live with it once the decision has been made and implemented.
All activities involved in obtaining and managing raw materials and component parts, managing finished products, packaging them, and getting them to customers are part of: supply chain management.
The term _____ refers to all raw materials, components, completed or partially completed products, and pieces of equipment a firm uses. inventory
Materials that have been purchased to be used as inputs in making other products are included in: raw materials inventory
Minimizing inventory by providing an almost continuous flow of items from suppliers to the production facility is referred to as: just-in-time inventory management.
Which of the following is true about quality? It is a critical element of operations management
_____ refers to the processes an organization uses to maintain its established quality standards. Quality control
T/F:Service organizations require high capitol requirements and low labor to produce an input. False
T/F:Scheduling and Routing are a direct function of the measurement-chain. False
T/F: Inventory control focuses on leveraging a firm’s assets. True
T/F:Control of the operations process is a direction function of Management to ensure that an organization’s resources are being maximized. True
T/F:Decentralization is a direct component of a firm’s cost strategy. True
T/F:There 5 Assigned Tasks in business are: 1) Specialization; 2) Departmentalization; 3) Delegation of Authority; 4) Span of Management, and 5) Organizational Layers. False
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Foundations In Personal Finance: Money In Review Chapter 4

Debt consolidation Combining debt into one payment
Co-signing Taking responsibility for someone else’s loan
Leasing Long-term rental agreement
Cash advance Charges of 400% and up for their services
Paradigm A different way of looking at something
Home equity loan Using your home as collateral to borrow money
Credit Money loaned
Debt consolidation is wise False
You need a credit card to rent a car False
Buying used cars is a good way to minimize depreciation True
The typical millionaire drives new cars False
The elderly are the number one target of credit card companies False
Co-signing a loan is a good way to help a friend or relative False
The lottery is a tax on the poor and on people who can’t do math True
Home equity loans are a good way to consolidate debt False
It is never wise to take out an ARM or balloon mortgage True
Paying off the balance of your credit card each month is an acceptable use of credit False
The best way to teach teenagers about money is to get them a credit card False
It is best to attack your debt by consolidating many payments into one False
Carrying cash results in an increase of spending versus paying with credit False
Why do people go into debt when they know they will have to pay more for an item once they figure interest? •aren’t willing to wait•don’t feel that pain when using a credit card•instant gratification
Why are teens such a major target of the credit card industry? •adult market is saturated •brand loyalty
How do cash advance and car title companies keep people in the cycle of debt? •they’re located where there are poor people•give you what you want when you want it
Why is it better to buy a used car instead of a brand new vehicle? New cars depreciate value faster.
Why does debt consolidation typically not save money? The interest rate is either the same or higher, so there won’t be a positive impact.
Explain how the debt snowball works. Pay off debts lowest to highest and put whatever the minimum monthly payment was towards your next debt.
What are the five steps to get out of debt? 1 quit borrowing2 save money3 sell something4 work part-time or overtime 5 use the debt snowball
How can lending money cause problems in a relationship? •may strain or destroy the relationship•slave and master vs. friends or relatives
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Finance Flashcards

CH 1. Foundations of Finance, Ninth edition; Written by Keown, Martin and Petty

The long-run goal of the firm is to- Maximize shareholder wealth.
Maximizing shareholder wealth means maximizing the- Market value of the firm’s common stock.
Advantage of the corporation include- * Transferability of ownership.* Ability of the corporation to raise capital.
Disadvantage of partnership are- * Lack of performance. * Unlimited liability.
According to principle 3, how should investors decide where to invest their money? By determining if the return is more than expected given the level of risk.
Why is it so hard to find extremely profitable projects? * If an industry is generating large profits, then new entrants are attracted, driving down profits. * To find profit projects, the product or service must be differentiated and/or have a cost advantage over the competition. *To find high profit projects, you must locate imperfections in the market that are not currently being taken advantage of.
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Finance Flashcards

Chapter 25 Vocab

Herbert Hoover (Hoover’s Administration) (1928-1932) Hoover took office in 1928 just before the stock market crash in 1929, so the blame for the Depression was placed on Hoover.• Hoover was blamed by the American public for his failure to find effective remedies to combat the Depression. He relied on voluntary commitment by industrialists not to cut production or lay off workers and labor not to ask for higher wages. By 1931, the crisis was so severe the voluntary cooperation collapsed. • Hoover actually went further in his attempt to use government power to end the Depression than any other President to date with his Reconstruction Finance Corporation (see RFC below). • Although Hoover was renominated by the Republicans in 1932, he lost and left office as one of the most unpopular presidents in American history.
Hawley-Smoot Tariff (Hoover’s Administration) (1930) The tariff attempted to protect American farmers from international competition. It raised tariffs on seventy-five farm products and raised duties to the highest point in American history (an average of 50 percent on protected products). • Economists generally opposed the Hawley-Smoot tariff, warning that it would invite retaliation by European powers, but Hoover signed the tariff. Foreign governments retaliated by increasing their own trade restrictions which further limited the market for American goods and intensified the worldwide depression.
Agricultural Marketing Act (Hoover’s Administration) (1929) This was an early attempt (prior to the October 1929 stock market crash) by Hoover to help the struggling agricultural segment of the economy. This was the first time a government agency helped maintain farm prices because it allotted money to buy agricultural surpluses and consequently raise prices. • The act was ineffective because it relied on voluntary action by farmers to limit production rather than using government authority to limit production. • Both this act and the Hawley-Smoot Tariff demonstrated Hoover’s commitment to use government power, even before the Crash, to help the economy.
Black Tuesday (Hoover’s Administration) (October 29,1832) Black Tuesday refers to Oct 29, 1929, when the great stock market crash occurred. The crash came after a long period of speculation in the stock market and a period of instability in the market that started in early September. • Sixteen million shares of stock were traded that day and the stocks in many companies, major and minor, became almost worthless. It was ten years before the market fully recovered. • The crash was the first tangible sign of the economic crisis, but it was not the beginning or the cause of the Great Depression.
Causes of the Great Depression (Hoover’s Administration) (1929-1941) The Great Depression differed from earlier panics and depressions because of its severity and long duration. The Depression, like many important events, was multicausal. Causes included:• the lack of diversification in the economy – 1920s prosperity largely rested on the construction and automotive industries. When these industries declined the impact on the overall economy was significant• income distribution – the Inequality of Income Distribution meant supply outstripped demand because even in 1929 over 50% of Americans lived at or below the poverty level and could not buy the goods America industries were producing. There were also too many factories, warehouses, etc. in existence once the economy started to slow down • overextension of credit – too much of the economy from farming to banking was based on an overextension of credit – some banks were in trouble throughout the 1920’s as customers defaulted on loans and speculation in the stock market by large banks intensified the problem• declining international trade – American goods lost a significant share of the European markets as these countries rebuilt their economies in the 1920s and because some countries, like Germany, couldn’t afford American goods.• international debt structure – Germany couldn’t pay reparation to the former Allies and this meant that Britain and France couldn’t repay World War I loans. After World War I the American banks loaned European governments new loans so they could pay off previous loans. When American banks could not make additional loans to these countries in the 1920s the whole system of international credit began to collapse.
Causes of Great Depression- Lack of diversification of the economy 1920s prosperity largely rested on the construction and automotive industries. When these industries declined the impact on the overall economy was significant
Causes of the Great Depression- Income Distribution (Hoover’s Administration) the Inequality of Income Distribution meant supply outstripped demand because even in 1929 over 50% of Americans lived at or below the poverty level and could not buy the goods America industries were producing. There were also too many factories, warehouses, etc. in existence once the economy started to slow down
Causes of the Great Depression- Overextension of Credit too much of the economy from farming to banking was based on an overextension of credit – some banks were in trouble throughout the 1920’s as customers defaulted on loans and speculation in the stock market by large banks intensified the problem
Causes of the Great Depression- declining international trade American goods lost a significant share of the European markets as these countries rebuilt their economies in the 1920s and because some countries, like Germany, couldn’t afford American goods.
Causes of Depression- international debt structure Germany couldn’t pay reparation to the former Allies and this meant that Britain and France couldn’t repay World War I loans. After World War I the American banks loaned European governments new loans so they could pay off previous loans. When American banks could not make additional loans to these countries in the 1920s the whole system of international credit began to collapse.
Hooverville (Hoover Administration) (1930s) “Hooverville” was a name given to any shantytown during the period when Herbert Hoover was president. The term showed the unpopularity of Hoover and the fact that the American public blamed Hoover for the Depression.
Drought/ Dust Bowel/ Okies (Hoover Administration) (1930s) “Okies” were poor farmers primarily from Oklahoma in the 1930s that moved west to California and Arizona or to the crowded cities. They left because following two generations of drought and poor farming much of the Great Plains were stricken by dust storms (the area was known as the “dust bowl”).
Public relief or work relief (Hoover Administration) (1930s) “Relief” was the commonly used term in the 1930s for public welfare.
Reconstruction Finance Corporation (RFC) (Hoover Administration) (1932) Government agency whose purpose was to give federal loans to businesses such as banks, railroads, and other large corporations. While Hoover opposed direct “public relief” (welfare) to the American public because he thought it would kill American self-reliance, the RFC was intended to supply jobs to Americans by rescuing businesses in danger of bankruptcy. • In addition, the RFC provided money to local governments to pay for public work projects and local relief programs (welfare). This was Hoover’s main effort to combat the Depression. • Although the RFC went much further to intervene in the economy than any previous act or agency, the RFC lent money to large corporations who had some solvency rather than to small businesses that desperately needed aid. The more pressing issue was the RFC didn’t give out enough money to make a difference to the economical crisis (it only spent about 20% of the money available to it). • Hoover’s willingness to loan federal money to businesses while steadfastly refusing to give direct aid to unemployed Americans greatly contributed to his unpopularity.
Bonus Expeditionary Force aka Bonus Army (Hoover Administration) (July 1932) The Bonus Army was a group of WWI veterans who demanded that the federal government pay them a promised bonus of $1000 (the bonus bill was passed in 1924) due in 1945. When Hoover refused because he was worried about balancing the budget, a group of 20,000 marched to Washington to present their cause in person. • Disregarding Hoover’s instructions, General Douglas MacArthur used excessive force to break up their encampment. Hoover was blamed for it and his popularity plummeted to an all time low.
Farmers Holiday Association/ Miles Reno (Hoover Administration) (1932) Midwest group of farmers who adopted the tactic of a farmers’ strike – refusing to sell farm products until prices came up. It did not work because many farmers would not participate and the effort was too small to make an impact on the market. • Violence broke out on several occasions and though this was a limited effort, it created uproar in state governments in farmer states. Reno, the leader of the strike, called off the attempt after the violence.
John Dos Pasos/ USA (Writers/ Literature) (1930-1936) Dos Passos was a writer who was involved in radical political movements. His trilogy U.S.A. attacked all levels of American society, from wealthy businessmen to labor leaders. Dos Passos believed that American society had been corrupted by the greed of the capitalist system.
Dorothea Lange/ Margaret Bourke White (Writers/ Literature) (1930s) Both of these photographers produced memorable portraits of people of the Depression that decades later are still recognized as indelible images of the Depression.
Erskine Caldwell/ Tobacco Road (Writers/ Literature) (1932) This play was the story of the Lesters, a family of southern white sharecroppers so destitute that most of their creditors had given up on them. Tobacco Road painted the debasing effects of poverty on the family.
John Steinback/ The Grapes of Wrath (Writers/ Literature) (1939) Steinbeck’s most famous novel tells the story of the Joad family, migrants from the Dust Bowl to California, and the trials and tribulations the family encounters. Steinbeck offered a blistering portrait of migrant workers’ lives in the West, but also depicted the endurance of the common people.
Richard Wright/ Native Son (Writers/ Literature) (1940) Wright’s novel delved into the extreme psychological pressures that brought a young urban black man to violence. The book established Wright as the leading African-American author of the 1940s.
James Agee and Walker Evans/ Let Us Now Praise Famous Men (Writers/ Literature) (1941) A striking textual and photographic portrayal of the harsh, poverty-stricken life of Southern white sharecroppers that also served as a testimony to the strength and endurance of these people.
“Screwball comedies” (Movies) (1930s) Escapist movies, such as Bringing Up Baby or It Happened One Night or the Marx Brothers A Night at the Opera. Screwball comedies featured improbable plots designed to take the audience’s minds off their troubles.
Frank Capra / Mr. Deeds Goes to Town (1936) / Mr. Smith Goes to Washington (1939) / Meet John Doe (1941)/ It’s a Wonderful Life (1946) (Movies) Director Frank Capra’s movies were known for their optimism and their celebration of the common people and the decency of small town living which he contrasted to the corrupt and decadent values of city living. • Capra’s movies depicted a faith in American democracy and the innate decency of average Americans.
Popular Front (late 1930s) This was a broad coalition of “antifascist” groups chiefly put together by the American Communist Party. • Per the instructions of the Soviet Union’s dictator Joseph Stalin, American Communists tempered their strident criticism of FDR and formed loose alliances with other progressive groups. • Stalin did this because he saw FDR as a potential ally against Nazi dictator Adolf Hitler. The 1930s was the height of the American Communist Party’s numbers (100,000) and influence.
Spanish Civil War (1930s) Many American intellectuals supported the Republican government against the fascist forces of Francisco Franco (who was getting help from Hitler and Mussolini). The Abraham Lincoln Brigade, consisting of 3000 volunteers, was formed and went to Spain to fight in the war.
Election of _____: Franklin Roosevelt (D) vs. Hoover (R) (1932) The issue of the campaign was the Depression. Hoover’s popularity had hit rock bottom and no one doubted a Democratic victory. Roosevelt, a wealthy New York patrician, had made a political comeback after being stricken with polio in 1921. In 1928 and 1930 he was elected governor of New York and put into place government assistance programs to help the state. • In his acceptance speech of the Democratic candidacy he promised “a new deal for the American people.” Roosevelt refused to give details of his planned program during the campaign, but he won by a landslide — 57.4 % to Hoover’s 39.7 % of the popular vote. The Democrats also swept both houses of Congress.
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Finance Flashcards

Healthcare Finance Chapter 9

What is a opportunity cost rate? An opportunity cost rate is the rate of return that is expected if an alternative course of action were taken. This type of rate is commonly earned on the same risks that have been experienced. An opportunity cost is not a single number that’s used in all situations.
How is this rate used in time value analysis? Opportunity cost has a huge impact on time value analysis. Because one investment decision automatically negates all other possible investments with the same funds the cash flows expected to be earned from any investment must be discounted at a rate that reflects the return that could be earned on forgone investment opportunities.
Is this rate a single number that is used in all situations? No the rate varies depending upon the situation and the opportunity costs at stake.
What is the difference between a lump some and annuity and an unequal cash flow stream? lump sums are single values, annuity is a series of equal payments at fixed intervals for a specified number of periods. An unequal cash flow is when an analysis involves more than one lump sum that does not meet the definition of an annuity.
Great lakes networks net income increased from 3.2 million in 2001 to 6.4 million in 2011. The total growth rate over 10 years is 100%, While the annual growth rate is only about 7.2%, which is much less than 100% divided by 10 years. Why is the annual growth rate less than the total growth rate divided by 10. Annual growth rate is less because you are dividing your total growth rate into how many years it has been. It is much less because if in year 1 the has $100 and the company grows 10% you add that $10 into the amount the company can grow for the next year. If next year the company grows another 10% it would have gained $11.
Which growth rate has more meaning the total growth rate over 10 years or the annualized rate? The annual rate has more meaning because it is the average growth over the 10 years.
Would you rather have a savings account that pays 5% compounded semiannually or one that pays 5% compounded daily? A savings account that pays 5% compounded daily would be there better choice. The more compounding the better
The present value of a perpetuity is equal to the payment divided by the opportunity cost interest rate:PV=PMT/I. What is the future value of the perpetuity? Since perpetuity means there is no end, there is no specific formula. You find the future value over one period and then treat it as an ordinary annuity.
When a loan is amortized what happens over time to the size of the total payment, interest rate, and principle payment? Amortized Loan:Size of total payment – will stay the sameSize of interest payment – will decreaseSize of principal payment – will increase
Explain the difference between the stated rate, periodic rate, and effective annual rate. Stated rate- this is the annual rate that is normally quoted in financial contracts.Periodic rate- this equals the stated rate divided by the number of compounding periods per year.Effective annual rate- this is the rate that produces the same results under annual compounding as obtained with frequent compounding.
What are three techniques for solving time value problems? The first of three ways to solve time value problems is a regular calculator solution. The second is by using a financial calculator to answer the question. Third is a spreadsheet solution.
Explain the concept of return on investment(ROI) and the two different approaches to measuring ROI. Return on investment is a concept that helps you determine as a manager just how much you are making back on purchases that have been made. This will give an idea if the purchase is worth it or paying itself off. There are two different ways to measure ROI the first is by the dollar return and the second is percentage return.
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Finance Flashcards

Finance 300 Test 1

Financial management deals with the maintenance and creation of economic value or wealth. True
The fundamental goal of a business is to maximize the retained earnings available to the​ corporation’s shareholders. False
The payment of a dividend to current shareholders will have no impact on a​ corporation’s share price because the cash paid is not available to future potential shareholders who may want to buy the​ corporation’s stock. False
Only a​ firm’s financial decisions affect its stock prices. False
The primary goal of a publicly owned corporation is to​ ________. Maximize shareholder wealth
Shareholder wealth maximization means Maximizing the price of existing common stock
Which of the following goals of the firm are synonymous​ (equivalent) to the maximization of shareholder​ wealth? maximization of the total market value of the​ firm’s common stock
Which of the following is the most important goal that a corporation should strive​ for? Maximize shareholder wealth
When making financial​ decisions, managers should always look at​ marginal, or incremental cash flows. True
An investment project is acceptable if the total cash received over the life of the project exceeds the total cash spent over the life of the project. False
Cash flows and profits are​ synonymous; in other​ words, higher cash flows equal higher profits. False
The risk−return trade−off implies that the return on a riskless asset must be zero. False
An efficient market is one where the prices of the assets traded in that market fully reflect all available information at any instant in time. True
Beginning in 2007 the United States experienced its most severe financial crisis since the Great Depression of the 1930s. True
To measure​ value, the concept of time value of money is used to bring the future benefits and costs of a​ project, measured by its cash​ flows, back to the present.
The expected return on a riskless asset is greater than zero due to an expected return for delaying consumption.
The principle of risk−return trade−off means that a rational investor will only take on higher risk if he expects a higher return.
Investors generally​ don’t like risk.​ Therefore, a typical investor will only take on additional risk if he expects to be compensated in the form of additional return.
As of​ today, the most severe economic crisis to afflict the United States economy is considered to be The Great Depression of the 1930’s
The financial manager most directly responsible for producing the​ company’s financial statements and directing its cost accounting functions is the Controller
The three basic types of issues addressed by the study of finance are capital​ budgeting, capital structure​ decisions, and working capital management.
Cash and credit management are typically the responsibility of the Treasurer
Capital budgeting is concerned with what long−term investments a firm should undertake.
Determining the best way to raise money to fund a​ firm’s long−term investments is called The capital structure decision
Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital. True
The procedure by which significant changes may be made to a​ partnership, such as admission of a new partner or termination of the​ partnership, are governed by each state so no partnership agreement is needed. False
A limited partnership provides limited liability to only to limited partners who do not participate in the management of the business.
Limited partnerships are not as prevalent as corporations because it is easier to transfer ownership by selling common stock than it is to sell partnership.
The true owners of the corporation are the Common stockholders
Advantages of the corporate form of business organization include Easier transfer of ownership
Due to unstable world​ markets, most large U.S. corporations do almost all of their business in the United States. False
Even though many U.S.​ companies, including General​ Electric, IBM, Walt​ Disney, and American​ Express, have successfully restructured their operations to expand​ internationally, not many foreign firms have made their mark in the United States. False
It is important to evaluate a corporate​ manager’s financial decision by measuring the effect the decision should have on the​ corporation’s stock price if everything else were held constant. True
Shareholder selection committees select potential board of director nominees ensuring that board members will monitor management sufficiently to protect shareholder interests. False
Each financial decision made by a corporate manager can be evaluated by its direct impact on the​ corporation’s stock price. False
In a sole​ proprietorship, the owner is personally responsible without limitation for the liabilities incurred. True
A corporate treasurer is typically responsible for cash​ management, credit​ management, and raising capital. True
Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money. False
Determining how a firm should raise money to fund its long−term investments is referred to as capital structure decisions True
The chief financial officer​ (CFO) is responsible for overseeing financial​ planning, corporate strategic​ planning, and controlling the​ firm’s cash flow. True
One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the​ firm’s financial decisions. False
If the stock market is​ efficient, then investors do not need to read the Wall Street Journal or research companies before they select which stocks to buy because market prices already reflect all publicly available information. False
Profits represent money that can be​ spent, and as​ such, form the basis for determining the value of financial decisions. False
The corporation is a legal entity separate from its​ owners; thus it is possible for the corporation to continue even upon the death of one or more shareholders. True
Shareholder wealth maximization means maximizing the price of the existing common stock. True
There is no legal distinction made between the assets of the business and the personal assets of any of the owners in the limited partnership. False
Shareholders react to poor investment or dividend decisions by causing the total value of the​ firm’s stock to​ fall, and they react to good decisions by bidding the price of the stock up. True
The root cause of agency problems is conflicts of interest. True
The owners of a corporation enjoy limited liability. True
A limited liability company​ (LLC) is taxed like a partnership but provides limited liability for its​ owners, similar to a corporation. True
An income statement reports a​ firm’s cumulative revenues and expenses from the inception of the firm through the income statement date. False
Owners equity increases each period by the amount of the​ corporation’s positive net cash flow. False
If two companies have the same revenues and operating​ expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity. True
Common−sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a​ firm’s financial performance across time and with competitors. True
Net profit margin is equal to the gross profit margin times the operating profit margin. False
Earnings before​ taxes, or taxable​ income, is equal to operating income minus financing costs. True
Earnings available to common shareholders represents income that may be reinvested in the firm or distributed to its owners. True
The basic format of an income statement is Sales − Expenses​ = Profits.
Gross profit is equal to Sales – COGS
The accounting book value of an asset represents the historical cost of the asset rather than its current market value or replacement cost. True
A​ firm’s income statement reports the results from operating the business for a period of​ time, while the​ firm’s balance sheet provides a snapshot of the​ firm’s financial position at a specific point in time. True
If a​ company’s cash balance increases during the​ year, and the company also reports positive net​ income, then the​ company’s retained earnings balance must increase. False
Fixed assets are assets whose balances will remain the same throughout the year. False
Accounting rules specify that assets on the balance sheet must be reported at current market​ value, because this is the valuation most useful to potential investors. False
Liquidity refers to the ability to quickly convert an asset into cash without lowering the selling price. True
The two principal sources of financing for corporations are Debt and equity
Net working capital is equal to current assets – current liabilites
The statement of cash flow explains the changes that took place in the​ firm’s cash balance over the period of interest. True
A company with negative net income will also have negative operating cash flow. False
When a company sells a piece of equipment or​ land, any gain​ (sales price less the book value of the asset or residual​ value) is thought to be a capital gain. False
It is possible for two companies to have the same financial​ performance, but their financial statements can be​ different, depending on how and when the managers choose to report certain transactions. True
Common – sized income statements are used to compare companies that have the same amount of revenues. False
A balance sheet is a statement of the financial position of the firm on a given​ date, including its asset​ holdings, liabilities, and equity. True
The balance sheet equation is Total Assets​ = Total Revenues − Total Liabilities. False
Changes in depreciation expense do not affect operating income because depreciation is a non−cash expense. False
In the United​ States, financial statements are prepared following the Financial Accounting Standards​ Board’s generally accepted accounting principles​ (GAAP). True
Profits−to−Sales relationships are defined as profit margins. True
The increase in​ owners’ equity for a given period is equal to Net income – dividends
International Financial Reporting Standards​ (IFRS) is a set of principle−based accounting standards that were established by the International Accounting Standards Board​ (IASB). True
Earnings available to common shareholders is equal to a​ corporation’s positive net cash flow over a given​ period, typically one year. False
The balance sheet reflects the accounting​ equation: Assets​ = Liabilities​ + Owners’ Equity. True
Common−sized balance sheets show each account as a percentage of total sales to help analysts in comparing companies of difference sizes. False
Generally Accepted Accounting Principles​ (GAAP) is a set of principle−based accounting standards established by the Financial Accounting Standards Board​ (FASB). False
The more debt a company uses to finance its​ assets, the lower will be its operating income due to higher interest expense. False
When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry it is called trend analysis. False
​Theoretically, market values of assets are better for evaluating the creation of shareholder wealth than accounting​ numbers, but accounting numbers are used because they are more readily available. True
Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading. True
Common stockholders may use financial ratios to monitor manager actions to help lessen agency problems. True
Accounting information is used in financial ratio analysis because it is theoretically the best data to guide financial decision False
Common−size balance sheets are balance sheets of companies with almost identical total assets​ (within 2% of each​ other). False
Ratios are used to standardize financial​ information, thereby making it easier to interpret. True
How managers choose to finance the business affects the​ company’s risk, and as a​ result, the rate of return stockholders receive on their investments. True
Return on equity is driven by​ (1) the spread between the operating return on assets and the interest​ rate, and​ (2) changes in the debt ratio. True
Borrowing money causes a​ corporation’s return on operating assets to decrease because of the interest that must be paid. False
Financial ratios are useful for measuring performance because maximizing the return on equity for common shareholders is the primary goal of financial managers. False
If company A has a lower average collection period than company​ B, then company A will have a higher accounts receivable turnover. True
Operating return on assets​ (OROA) is equal to operating profit margin times fixed assets turnover. False
Lower asset turnover ratios are generally indicative of more efficient asset management. False
A high debt ratio can be favorable because higher leverage may result in a higher return on equity. True
A common method of evaluating a​ firm’s financial ratios is to compare the current values of the​ firm’s ratios to its own ratios from prior periods. This is referred to as trend analysis. True
The astute financial manager will seek to attain the highest current ratio possible. False
DuPont analysis indicates that the return on equity may be boosted above the return on assets by using leverage​ (debt). True
The computation of return on​ equity, or​ ROE, does not include retained earnings as part of common equity because retained earnings includes all net income for the company since its inception and analysts are trying to calculate the return for just the current year. False
The current ratio of a firm would equal its quick ratio whenever The firm has no inventory
Financial ratios are used by personnel in​ marketing, human​ resources, and other groups within a​ firm, not just by the finance and accounting personnel. True
Seasonality causes comparability problems in ratio analysis. A common solution is to use an average account balance as opposed to an ending account balance. True
Financial ratios cannot be used to evaluate the creation of shareholder wealth because they are based on accounting numbers that reflect historical cost and not current market values. False
Borrowing more money will always increase a​ company’s return on equity because the company is using financial​ leverage, but it also adds to the riskiness of the company. False
When comparing inventory turnover​ ratios, other things being​ equal, A higher inventory turnover is preferred to improve liquidity
How managers choose to finance the business does not affect the rate of return to shareholders because the rate of return is based on how the company uses the assets it​ has, not whether or not they paid for the assets with debt or equity. False
Ratios that examine profit relative to investment are useful in evaluating the overall effectiveness of the​ firm’s management. True
Operating return on assets is equal to the operating profit margin times total asset turnover. True
Ratios of almost all companies are easily comparable because all public companies prepare their financial reports based upon generally accepted accounting principles. False
Financial ratios are used by managers inside the company and by​ lenders, credit−rating ​agencies, and investors outside of the company. True
Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low. True
Trend analysis is the forecasting of the​ firm’s financial ratios for a future time period by using its own ratios from previous periods. False
Seasonality is introduced into financial ratios by averaging monthly account​ balances, and thus it is recommended that ending account balances be used. False
Financial ratios are useful for evaluating performance but should not be used for making financial projections. False
Operating profits or EBIT is used to measure a​ firm’s profits on assets because it does not include the​ firm’s cost of debt financing. True
The current ratio and the acid test ratio both measure financial leverage. False
The goal of most financial managers is to reduce the amount of long−term debt to​ zero, thus maximizing shareholder wealth. False
It is commonly accepted that the industry average for a ratio is the ideal goal for a financial manager to achieve. False
Ratio analysis enhances our understanding of three basic attributes of​ performance: liquidity,​ profitability, and the ability to create shareholder value. True
Net income is the best measure to use for evaluating a​ firm’s profits on assets because it includes the effect of financing as well as the effect of operations. False
One weakness of the times interest earned ratio is that it includes only the annual interest expense as a finance expense and ignores other financing items such as lease payments that must be paid. True
Total asset turnover is equal to accounts receivable turnover plus inventory turnover plus fixed asset turnover. False
The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment. True
The realized rate of​ return, or holding period​ return, is equal to the holding period dollar gain divided by the price at the beginning of the period. True
The risk−return trade−off that investors face on a day−to−day basis is based on realized rates of return because expected returns involve too much uncertainty. False
For a well−diversified ​investor, an investment with an expected return of​ 10% with a standard deviation of​ 3% dominates an investment with an expected return of​ 10% with a standard deviation of​ 5%. False
​Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk. False
How many different securities must be owned to essentially diversify away unsystematic​ risk? ​ 20
The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated. True
A stock with a beta of 1.4 has​ 40% more variability in returns than the average stock. True
Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds. False
Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities. True
Total risk equals systematic risk plus unsystematic risk. True
The beta of a T−bill is zero. True
The slope of the characteristic line of a security is that​ security’s beta. True
Most stocks have betas between 0.60 and 1.60
Beta is a statistical measure of the relationship between an​ investment’s returns and the market return.
In an efficient​ market, a stock with a standard deviation of returns of​ 12% could have a higher expected return than a stock with a standard deviation of​ 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock. True
The capital asset pricing model provides a risk−return trade−off in which risk is measured in terms of beta.
The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the Investor’s required rate of return
The T−bill return is used in the CAPM model as the risk−free rate. True
Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns. True
The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio. False
In​ general, the required rate of return is a function of​ (1) the time value of​ money, (2) the risk of an​ asset, and​ (3) the​ investor’s attitude toward risk. True
The beta of a T−bill is one. False
Portfolio risk is typically measured by​ ________ while the risk of a single investment is measured by​ ________. Beta; Standard deviation
Portfolio performance is determined mainly by stock selection and market​ timing, with less emphasis on asset allocation. False
Another name for an​ asset’s expected rate of return is holding−period return. False
As the required rate of return of an investment​ decreases, the market price of the investment decreases. False
Negative historical returns are not possible during periods of high volatility​ (high standard deviations of​ returns) due to the risk−return trade−off. False
An investor with a required return of​ 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to​ 8%. False
Small company stocks have historically had higher average annual returns than large company​ stocks, and also a higher risk premium. True
The appropriate measure for risk according to the capital asset pricing model is Beta
A rational investor will always prefer an investment with a lower standard deviation of​ returns, because such investments are less risky. False
Proper diversification generally results in the elimination of risk. False
A security with a beta of one has a required rate of return equal to the overall market rate of return. True
An all−stock portfolio is more risky than a portfolio consisting of all bonds. True
Unique security risk can be eliminated from an​ investor’s portfolio through diversification. True