Categories
Finance Flashcards

Finance test 1 chapter 2

net working capital is defined as current assets minus current liabilities
the accounting statement which measures the revenues, expenses and net income of a firm over a period of time is called the income statement
the financial statement that summarizes a firms accounting value as a particular date is called the balance sheet
which one of the following decreases net income but does not affect the operating cash flow of a firm which owes no taxes for the current year noncash item
which one of the following terms is defined as the total tax paid divided by the total taxable income average tax rate
which of the following is the tax rate that applies to the next dollar of taxable income that a firm earns marginal tax rate
cash flow assets is defined as operating cash flow minus the change in net working capital minus net capital spending
operating cash flow is defined as the cash that a firm generates from its normal business activities
which one of the following has nearly the same meaning as free cash flow cash flow from assets
cash flow to creditors is defined as interest paid minus net new borrowing
cash flow to stockholders is defined as dividends paid minus net new equity raised
which one of the following is an intangible fixed asset copyright
delivery trucks are classified as tangible fixed assets
which one of the following is included in net working capital accounts payable
over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm’s net working capital: had to decrease
which one of the following is included in net working capital invoice from a supplier for inventory purchased
shareholders equity is equal to net fixed assets minus long-term debt plus net working capital
which one of the following is an equity account paid in surplus
which one of the following statements is correct shareholders equity is the residual value of a firm
all else equal, an increase in which one of the following will decrease owners equity increase in accounts payable
which one of the following will decrease the net working capital of a firm making a payment on a long-term debt
which one of the following will decrease the liquidity level of a firm cash purchase of inventory
highly liquid assets can be sold quickly at close to full value
financial leverage increases the potential return to the shareholders
which one of the following statements concerning market and book values is correct the market value tends to provide a better guide to the actual worth of an asset than does the book value
which one of the following is included in the market value of a firm but not in the book value reputation of the firm
the market value of a firms fixed assets: is equal to the estimated current cash value of those assets
which one of the following statements is correct concerning a firms fixed assets? the market value is the expected selling price in today’s economy
which one of the following statements concerning the balance sheet is correct assets are listed in descending order of liquidity
an income statement prepared according to GAAP records expenses based on the matching principle
an increase in which one of the following will increase net income revenue
which two of the following determine when revenue is recorded on the financial statements based on the recognition principle the earnings process is virtually complete the value of a sale can be reliably determined
depreciation does which one of the following for a profitable firm lowers taxes
the recognition principle states that sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined
the matching principle states that the costs of producing an item should be recorded when the sale of that item is recorded as revenue
which one of the following statements related to the income statement is correct net income is distributed either to dividends or retained earnings
firms that compile financial statements according to GAAP can still manipulate their earnings to some degree
the concept of marginal taxation is best exemplified by which one of the following Mitchells grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes
The corporate tax structure in the U.S. is based on a modified flat-rate tax
which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant an increase in depreciation
a negative cash flow to stockholders indicates a firm received more from selling stock than it paid out to shareholders
if a firm has a negative cash flow from assets every year for several years, the firm may be continually increasing in size
an increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm depreciation
tressler industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued positive cash flow to stockholders
net capital spending is equal to ending net fixed assets minus beginning net fixed assets plus depreciation
which one of the following relates to a negative change in net working capital increase in current liabilities with no change in current assets for the period
which one of the following will increase cash flow from assets but not affect the operating cash flow sale of a fixed asset
cash flow to creditors is equal to beginning long-term debt minus ending long-term debt plus interest paid
which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period positive cash flow from assets
Categories
Finance Flashcards

Principles of Finance ch. 4 questions

Allocation of the historic costs of fixed assets against the annual revenue they generate is called ________. depreciation
A corporation ________. can use different depreciation methods for tax and financial reporting purposes
Given a financial manager’s preference for faster receipt of cash flows, ________. a shorter depreciable life is preferred to a longer one
In general, ________. a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows
A firm’s operating cash flow (OCF) is defined as ________. EBIT times one minus the tax rate plus depreciation
Which of the following is an example of noncash charges? depreciation
Which of the following is a source of cash flows? increase in accounts payable
) ________ is a noncash charge Depreciation
In the statement of cash flows, retained earnings are handled through the adjustment of ________. Net Profits After Taxes” and “Dividends Paid” accounts
The cash flows from operating activities section of the statement of cash flows includes ________. cost of raw materials
The cash flows from operating activities section of the statement of cash flows includes ________. labor expense
The cash flows from financing activities section of the statement of cash flows includes ________. dividends paid
The three categories of a firm’s statement of cash flows are ________. cash flow from operating activities, cash flow from investment activities, and cash flow fromfinancing activities
Which of the following is a cash inflow? a decrease in accounts receivable
Which of the following is a cash outflow? an increase in accounts receivable
Which of the following line items of the statement of cash flows must be obtained from the income statement? interest expenses
Cash flows directly related to production and sale of a firm’s products and services are called ________. cash flow from operating activities
Cash flows associated with the purchase and sale of fixed assets and business interests are called cash flow from ________. investment activities
Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called cash flow from ________. financing activities
A corporation sold a fixed asset for $100,000. This is ________. an investment cash flow and a source of funds
A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered as ________. a financing cash flow and investment cash flow, respectively
Which of the following is a cash flow from financing activities? repurchasing stock
Which of the following represents a cash flow from operating activities? increase or decrease in current liabilities
For the year ended December 31, 2014, a corporation had cash flow from operating activities of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing activities of $9,000. The statement of cash flows would show a ________. ) net increase of $3,000 in cash and marketable securities
For the year ended December 31, 2014, a corporation had cash flow from operating activities of $20,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The statement of cash flows would show a ________. net decrease of $5,000 in cash and marketable securities
For the year ended December 31, 2014, a corporation had cash flow from operating activities of $12,000, cash flow from investment activities of – $10,000, and cash flow from financing activities of $4,000. The statement of cash flows would show a ________. net increase of $6,000 in cash and marketable securities
A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. One possible problem this firm may face is ________. insolvency
Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%. $70,000
Calculate a firm’s free cash flow if it has net operating profit after taxes of $60,000, depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a net current asset requirement of $30,000 and a tax rate of 30%. $0
NICO Corporation had net fixed assets of $2,000,000 at the end of 2015 and $1,800,000 at the end of 2014. In addition, the firm had a depreciation expense of $200,000 during 2015 and $180,000 during 2014. Using this information, NICO’s net fixed asset investment for 2015 was ________. $400,000
NICO Corporation had net current assets of $2,000,000 at the end of 2015 and $1,800,000 at the end of 2014. In addition, NICO had net spontaneous current liabilities of $1,000,000 in 2015 and $1,500,000 in 2014. Using this information, NICO’s net current asset investment for 2014 was ________. -$300,000
During 2015, NICO Corporation had EBIT of $100,000, a change in net fixed assets of $400,000, an increase in net current assets of $100,000, an increase in spontaneous current liabilities of $400,000, a depreciation expense of $50,000, and a tax rate of 30%. Based on this information, NICO’s free cash flow is ________. -$30,000
The financial planning process begins with ________ financial plans that in turn guide the formation of ________ plans and budgets. long-term; short-term
Short-term financial plans and long-term financial plans generally cover periods ranging from ________ years and ________ years, respectively. one to two; two to ten
The key aspects of a financial planning process are ________. cash planning and profit planning
Pro forma financial statements are used for ________. profit planning
Which of the following would be the least likely to utilize a cash budget? public investors
________ consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, capital structure, and major sources of financing. Long-term financial plans
________ generally reflect(s) the anticipated financial impact of planned long-term actions. Strategic financial plans
In general, firms that are subject to a high degree of ________, relatively short production cycles, or both, tend to use shorter planning horizons operating uncertainty
The key outputs of the short-term financial planning process are the ________. cash budget, pro forma income statement, and pro forma balance sheet
Key inputs to short-term financial planning are ________. sales forecasts, and operating and financial data
Once sales are forecasted, ________ must be generated to estimate required raw materials. a production plan
The ________ is a financial projection of a firm’s short-term cash surpluses or shortages. cash budget
The primary purpose in preparing a cash budget is ________. to estimate a firm’s short-term cash requirements
An external sales forecast is based on ________. the relationships between a firm’s sales and certain key economic indicators such as GDP and consumer confidence
An internal forecast is based on ________. a buildup, or consensus, of sales forecasts through a firm’s own sales channels, adjusted for additional factors such as production capabilities
A firm’s final sales forecast is usually a function of ________. internal and external factors in combination
The key input to the short-term financial planning process is ________. the sales forecast
A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The firm makes 20 percent of sales for cash and collects the balance one month following the sale. The firm’s total cash receipts in July is ________. $220
In preparing a cash budget, the ________ seasonal and uncertain a firm’s cash flows, the ________ the number of budgeting intervals it should use. more; greater
The key input to any cash budget is ________. the sales forecast
Of the following components of a cash budget, generally the easiest to estimate would be the ________. cash disbursements
Cash disbursements include ________. rent payments
A projected excess cash balance for a month may be ________. invested in marketable securities
If a firm expects short-term cash surpluses, it can plan ________. short-term investments
A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm’s total cash receipts in November is ________. $100
Which of the following represents a way of coping with uncertainty in a cash budget? using scenario analysis, or “what if” approach, to analyze cash flows under a variety of circumstances
One way a firm can reduce the amount of cash it needs in any month is to ________. delay the payment of wages
________ are projected financial statements Pro forma statements
The key inputs for preparing pro forma income statements using the simplified approaches are the ________. sales forecast for the coming year and financial statements for the preceding year
In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the ________. pro forma balance sheet and cash budget
A firm plans to retire outstanding bonds in the next planning period. Which of the following gets affected? pro forma income statement and pro forma balance sheet
A firm plans to depreciate a five year asset in the next planning period. The statements that will be directly affected are the ________. pro forma income statement and pro forma balance sheet
In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________. overstate costs and understate profits
The percentage-of-sales method of preparing pro forma income statements assumes that ________. all costs are variable
The percent-of-sales method of developing a pro forma income statement forecasts sales and other line items as a ________. percentage of projected sales
The best way to adjust for the presence of fixed costs when using the simplified approach for pro forma income statement preparation is ________. to break the firm’s historical costs into fixed and variable components
The percent-of-sales method to prepare a pro forma income statement assumes a firm has no fixed costs. Therefore, the use of the past cost and expense ratios generally tends to ________ understate
For firms with high fixed costs, the percent-of-sales approach for preparing a pro forma income statement tends to ________. underestimate profits when sales are increasing
In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend to ________. understate retained earnings and overstate the financing needed
Under the judgmental approach for developing a pro forma balance sheet, the “plug” figure required to bring the statement into balance may be called the ________. external financing required
The ________ method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while external financing is used as a balancing, or plug, figure. judgmental
A firm has prepared the coming year’s pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of $230,000. The firm should prepare to ________. ) arrange for a loan of $230,000
A weakness of the percent-of-sales method of preparing a pro forma income statement is ________. the assumption that the firm’s past financial condition is an accurate predictor of its future
Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________. understate profits when sales are increasing
Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________. understate profits when sales are increasing and overstate profits when sales are decreasing
The weakness of the judgmental approach to preparing a pro forma balance sheet is ________. the assumption that the values of certain accounts can be forced to take on desired levels
If transportation costs were a huge portion of a firm’s expenses and the firm expected gas prices to increase greatly in the next year, then in preparing its pro forma income statement the firm should ________. increase the percentage of transportation costs from the percentage of last year’s sales
Categories
Finance Flashcards

Finance Chapter 5

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?PerpetuityAnnuityConsolLump sumFactor Annuity
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?Ordinary annuityAnnuity dueConsolOrdinary perpetuityPerpetuity due Annuity Due
The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?Ordinary annuityAnnuity dueAmortized paymentPerpetuityContinuation Perpetuity
The stated interest rate is the interest rate expressed:as if it were compounded one time per year.as the quoted rate compounded by 12 periods per year.in terms of the rate charged per day.in terms of the interest payment made each period.in terms of an effective rate. in terms of the interest payment made each period.
Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:annual percentage rate.compounded rate.quoted rate.stated rate.effective annual rate. effective annual rate
Which one of the following has the highest effective annual rate?6 percent compounded annually6 percent compounded semiannually6 percent compounded quarterly6 percent compounded monthlyAll the other answers have the same effective annual rate. 6 percent compounded monthly
Which one of the following statements is correct?The APR is equal to the EAR for a loan that charges interest monthly.The EAR is always greater than the APR.The APR on a monthly loan is equal to (1 + monthly interest rate)12 – 1.The APR is the best measure of the actual rate you are paying on a loan.The EAR, rather than the APR, should be used to compare both investment and loan options. The EAR, rather than the APR, should be used to compare both investment and loan options.
Categories
Finance Flashcards

Business Finance 3

Common-size financial statements present all balance sheet account values as a percentage of:a. the forecasted budget.b. sales.c. total equity.d. total assets.e. last year’s account value. d. total assets.
The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?a.No new external financing of any kindb. No new debt but additional external equity equal to the increase in retained earningsc. New debt and external equity in equal proportionsd. New debt and external equity, provided the debt-equity ratio remains constante. No new external equity and a constant debt-equity ratio e. No new external equity and a constant debt-equity ratio
The equity multiplier is equal to:a. one plus the debt-equity ratio.b. one plus the total asset turnover.c. total debt divided by total equity.d.total equity divided by total assets.e. one divided by the total asset turnover. a. one plus the debt-equity ratio.
Which ratio was primarily designed to monitor firms with negative earnings?a. Price-sales ratiob. Market-to-book ratioc. Profit margind. ROEe. ROA a. Price-sales ratio
Sweet Candies reduced its fixed assets this year without affecting the shop’s operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratioII. Return on assetsIII. Total asset turnoverIV. Return on equity a. I and II onlyb. II and III onlyc. II, III, and IV onlyd. I, II, and IV onlye. I, II, III, and IV b. II and III only
The sustainable growth rate is based on the premise that:a. an additional dollar of debt will be acquired only if an additional dollar in equity shares is issued.b. no additional equity will be added to the firm.c. the debt-equity ratio will be held constant.d. the dividend payout ratio will be zero.e. the dividend payout ratio will increase at a steady rate. c. the debt-equity ratio will be held constant.
Financial statement analysis:a. is primarily used to identify account values that meet the normal standards.b. is limited to internal use by a firm’s managers.c. provides useful information that can serve as a basis for forecasting future performance.d. provides useful information to shareholders but not to debtholders.e. is enhanced by comparing results to those of a firm’s peers but not by comparing results to prior periods. c. provides useful information that can serve as a basis for forecasting future performance.
Which one of the following statements is correct?a. Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business.b. Peer group analysis is easier when seasonal firms have different fiscal years.c. Peer group analysis is simplified when firms use varying methods of depreciation.d. Comparing results across geographic locations is easier since all countries now use a common set of accounting standards.e. Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory. e. Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.
A firm has net working capital of $6,800 and current assets of $21,800. What is the current ratio?a. .69b. .60c. 1.45d. 1.67e. .92 c. 1.45Current ratio = $21,800 / ($21,800 – 6,800) = 1.45
Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio?a. .08b. .25c. .30d. .46e. .51 b. .25Cash ratio = $2,950/$11,900 = 0.25
The Gift Shoppe has total assets of $487,920 and an equity multiplier of 1.47. What is the debt-equity ratio?a. .68b. .33c. .52d. .47e. .67 d. .47Debt-equity ratio = 1.47 – 1 = .47
A firm has net income of $28,740, depreciation of 6,170, taxes of $13,420, and interest paid of $2,605. What is the cash coverage ratio?a. 8.78b. 20.10c. 14.14d. 16.32e. 19.55 e. 19.55Cash coverage ratio = ($28,740 + 13,420 + 2,605 + 6,170) / $2,605 = 19.55
UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate?a. 7.33 timesb. 6.90 timesc. 5.70 timesd. 7.14 timese. 8.47 times b. 6.90 timesInventory turnover = $512,900 / $74,315 = 6.90 times
Kessler Cleaners has accounts receivable of $28,943, total assets of $387,600, cost of goods sold of $317,400, and a capital intensity ratio of .97. What is the accounts receivable turnover rate?a. 12.63b. 13.81c. 12.42d. 14.61e. 10.97 b. 13.81
Leisure Products has sales of $738,800, cost of goods sold of $598,200, and accounts receivable of $86,700. How long on average does it take the firm’s customers to pay for their purchases? Assume a 365-day year.a. 8.65 daysb. 11.28 daysc. 25.01 daysd. 42.83 dayse. 45.33 days d. 42.83 daysDays’ sales in receivables = 365 / ($738,800 / $86,700) = 42.83 days
Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes is equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent?a. -2.43 percentb. 1.56 percentc. 3.33 percentd. -5.29 percente. -6.11 percent b. 1.56 percentProfit margin = {[(.058 × $137,000) – $4,700] × (1 – .34)} / $137,000 = .0156, or 1.56 percent
A firm has net income of $197,400, a return on assets of 8.4 percent, and a debt-equity ratio of .72. What is the return on equity?a. 11.67 percentb. 18.98 percentc. 14.45 percentd. 16.22 percente. 15.06 percent c. 14.45 percentReturn on equity = .084 ×(1 + .72) = .1445, or 14.45 percent
The Blue Lagoon has a return on equity of 23.62 percent, an equity multiplier of 1.48, and a capital intensity ratio of 1.06. What is the profit margin?a. 15.06 percentb. 13.57 percentc. 15.84 percentd. 16.92 percente. 14.60 percent d. 16.92 percent
World Exports has total assets of $938,280, a total asset turnover rate of 1.18, a debt-equity ratio of .47, and a return on equity of 18.7 percent. What is the firm’s net income?a. $119,359.43b. $88,303.33c. $104,624.14d. $121,548.09e. $92,236.67 a. $119,359.43
Tessler Farms has a return on equity of 11.28 percent, a debt-equity ratio of 1.03, and a total asset turnover of .87. What is the return on assets?a. 5.56 percentb. 8.06 percentc. 13.67 percentd. 15.24 percente. 17.41 percent a. 5.56 percent
A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio?a. 5.11 percentb. 4.88 percentc. 6.62 percentd. 7.67 percente. 8.37 percent a. 5.11 percentInternal growth rate = [($32,600/$503,000) ×(1 -.25)]/{1 – [($32,600/$503,000) ×(1 -.25)]} = .0511, or 5.11 percent
Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year? Assume a 365-day year.a. 24.78 daysb. 26.78 daysc. 29.09 daysd. 31.15 dayse. 33.33 days b. 26.78 days
High Road Transport has a current stock price of $5.60. For the past year, the company had net income of $287,400, total equity of $992,300, sales of $1,511,000, and 750,000 shares outstanding. What is the market-to-book ratio?a. 3.54b. 3.81c. 3.99d. 4.47e. 4.23 e. 4.23Market-to-book = $5.60 /($992,300 / 750,000) = 4.23
A fire has destroyed a large percentage of the financial records of the Strongwell Co. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt ratio was .42, and total debt was $548,000. What is the return on assets?a. 6.92 percentb. 8.00 percentc. 8.45 percentd. 9.03 percente. 9.29 percent b. 8.00 percentDebt-equity ratio = .42/(1 -.42) = .72414 Return on assets = .138/(1 + .72414) = .0800, or 8.00 percent
Donegal’s Industrial Products wishes to maintain a growth rate of 6 percent a year, a debt-equity ratio of .45, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 1.25. What profit margin must the firm achieve?a. 4.68 percentb. 5.29 percentc. 6.33 percentd. 6.97 percente. 8.19 percent d. 6.97 percentSustainable growth = 0.06 = {[(PM × (1/1.25) × (1 + 0.45)] × (1 – 0.30)}/{1 – {[(PM × (1/1.25) × (1 + 0.45)] × (1 – 0.30)}} = 6.97 percent
Categories
Finance Flashcards

Finance 3000: Chapter 2

Which of the following is an example of a capital market instrument? Preferred stock(Capital markets are markets for stocks and for intermediate- or long-term debt.)
Which of the following is an example of securities traded in money markets? Short-term debt securities such as Treasury bills and commercial paper.(Money markets are the financial markets in which funds are borrowed or loaned for periods of less than one year.)
Three years ago you purchased 500 shares in the Kellogg Company, but yesterday you sold 200 of those shares through your broker. This is: A secondary market transaction(Secondary markets involve securities and other financial assets traded among investors after they have been issued by corporations
Hedge funds are similar to mutual funds except that they are less regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions. True(Hedge funds are largely unregulated and are marketed primarily to institutions and individuals with high net worths.)
Which of the following statements about financial institutions and securities is CORRECT? The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.(Commercial banks specialize in raising money, money market funds invest in short-term debt securities, and liquid securities are those that are easy to buy and sell. NASDAQ is a dealer market, which means it has all facilities needed to conduct security transactions without a physical location.)
Thinking about the financial markets, which of the following statements is CORRECT? Both NASDAQ dealers and specialists on the NYSE hold inventories of stocks.(Futures markets involve transactions set to close in the future, no matter how short or how long. Capital markets include long-term debt securities. A primary market transaction involves the issuance of new securities, and money markets may be denominated in any currency. Both dealers and specialists hold inventories of stock.)
Which of the following statements about IPOs is CORRECT? In a Dutch auction, investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.(IPO stands for initial public offering, in which the prices are usually determined by the investment bankers based on indications of interest from investors. This is less efficient but more popular than a Dutch auction, in which investors commit to buying shares at a specific price. An IPO is considered to be undersubscribed if investors don’t want to buy the shares offered, and the company is not obligated to issue shares to satisfy demand.)
To find the annual rate of return on any given stock, add the stock’s dividend for the year plus the change in the stock’s price during the year, then divide by its beginning-of-year price. True(The return on a stock is a function of its dividend and the change in price.)
A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. One example is a commercial bank, which takes in demand deposits and then uses that money to make long-term mortgage loans. True(A financial intermediary matches those who need money with those who supply it.)
You recently sold 100 shares of Facebook stock to your uncle. You had the certificates and gave them to him. In exchange, he wrote you a check. Which of the following best describes this transaction? This is an example of a direct transfer of capital.(If one person transfers an asset to another without the involvement of a financial intermediary, then a direct transfer of capital has occurred.)
Which of the following statements describes a primary market transaction? Facebook issues 2,000,000 shares of new stock and sells them to the public through an investment banker.(A primary market transaction is one that brings an asset to the public markets for the first time.)
Of the following statements, which is CORRECT? As they are generally defined, money market transactions involve debt securities with maturities of less than one year.(Money markets are the financial markets in which funds are borrowed or loaned for periods of less than one year.)
Categories
Finance Flashcards

SHS Chapman Finance Questions (Modules 1-9)

1. Interest is: The amount owed for borrowing money
1. To earn as much interest as possible, you should open a savings account that earns _______ interest and has the ______ interest rate. compound; highest
1. John just opened a savings account and wants to maximize the amount of interest he earns. Which of the following actions would enable him to earn MORE interest? Selecting an account with a high interest rate and leaving his money in the account for long period of time
1. You are opening a savings account that earns compound interest. Which compounding frequency will earn you the MOST money? Compounding daily
1. Which of the following is a type of savings vehicle? Certificate of Deposit and Money Market Account
1. Which of the following is generally true about savings vehicles? People should evaluate different forms of savings vehicles based on their needs
1. Which of the following savings vehicles usually requires a high minimum balance? Certificate of Deposit (CD)
1. Which of the following accounts will give you the LEAST access to your money? Certificate of Deposit (CD)
1. The purpose of a budget is to: Help you plan how you will spend the money you earn or receive
1. When it comes to saving money, what is a good rule of thumb? Put aside money for savings each month
2. Which of the following is NOT one of the responsibilities of the Federal Reserve? Establishing the federal budget
2. Which type of account is typically the MOST liquid? Checking account
2. Savings accounts usually offer _________ interest rates than checking accounts. It is _________ to access your money in a savings account than in a checking account. higher; harder
2. The three parts of the Federal Reserve System are the Reserve Banks, the Federal Open Market Committee (FOMC), and the: Board of Governors
2. Which of the following is a unique feature of credit unions? Credit unions are typically owned and run by their members and credit unions limit membership to certain people or groups
2. What part of a check is the LEAST important? Memo line
2. Which of the following represent typical account fees? ATM fee, service fee, and minimum balance fee
2. What’s the best strategy for avoiding ATM fees? Only use ATMs in your bank’s network
2. What’s the purpose of balancing or monitoring your checking account? To help you calculate how much money you have in your account
2. The best way to ensure the accuracy and safety of your accounts is to: Monitor your online accounts regularly
3. Which of the following payment types require you to pay upfront? Money order, cashier’s check, and pre-paid card
3. Which of the following statements comparing debit cards to credit cards is TRUE? Debit cards allow you to draw funds directly from your checking account
3. Which payment method typically charges the highest interest rates? Payday loans
3. Which payment type can help you stick to a budget? Debit cards
3. If you are planning to carry a large balance on your credit card, which of the following credit card features should you look for? Low APR
3. The annual percentage rate on a credit card determines _______. the amount of interest you are charged on credit card purchases
3. Making a credit card minimum payment: Means you are paying a small portion of your total credit card debt
3. Which of the following can increase your credit card’s APR? Missing a credit card payment
3. What is a credit card balance? The amount of money you still owe to the credit card company
3. Which of the following is NOT a common credit card fee? Minimum payment fee
4. Which of the following statements about credit scores is TRUE? Credit scores reflect how likely individuals are to repay their debts, credit scores range from the low 300’s to the mid 800’s, and each person has three credit scores
4. Having a good credit score is important because: It can impact your ability to be approved for bank loans
4. All of the following make up the big three credit reporting agencies EXCEPT: Federal Reserve
4. Which of the following actions can NEGATIVELY impact your credit score? You forgot to pay the cable bill
4. Which of the following actions has NO impact on your credit score? You inquire about a credit card charge
4. Which of the following MOST influences your credit score? Payment History
4. Which of the following actions would improve your credit score? Paying off your credit card bill
4. Which action is LEAST important to maintaining a healthy credit score? Know your exact credit score
4. How many free credit reports are you legally entitled to each year? One credit report from each credit bureau
4. Having a low credit score can make it more difficult to: Obtain a car loan, open a new credit card, and secure an apartment lease
5. The return on investment (ROI) from education is typically the highest for: Someone with a 4-year (Bachelor’s) degree
5. Your sister is starting 9th grade next year and is thinking about going to college. What step would you recommend she take first? Look for school clubs & organizations she’s interested in
5. Which of the following loans will typically offer the lowest interest rate? Federal Student Loan
5. When referring to student loans, what is a grace period? The period after graduating or leaving school before you must begin paying back student loans
5. Which loan type requires you to make loan payments while you’re attending school? None of the above
5. Which of the following statements about federal student loans is TRUE? The interest rate on your loan will be fixed over time
5. Using the FAFSA form, you can apply for: Federal student loans and the federal work-study program
5. The Federal Application for Student Aid (FAFSA) form: Can be submitted on online or by mail
5. After you send in your FAFSA form, what will you receive back? Your Student Aid Report
5. You are looking for ways to pay for your higher education costs. Which of the following options will require you to pay back any money you receive? Federal student loans
6. Renting provides _________ flexibility but can lead to _________ costs in the long-term. greater; higher
6. Which of the following statements about renting & owning is CORRECT? An owner has complete responsibility and control over the property
6. A _________ is generally considered an appreciating asset because it will _________ in value over time. house; increase
6. One reason to buy a home instead of rent a home is: Homes have the potential to appreciate in value over time
6. John would like to move from the suburbs into the city, but the rent in the city is very high. John has found an apartment he really likes, but he can only afford about 60% of the monthly rent. What is the best housing option for John? Rent the apartment with a roommate
6. What is a mortgage? A type of loan used to buy property
6. All of the following components are commonly found in rental housing agreements EXCEPT: What type of renter’s insurance the renter must buy
6. Someone may choose to own a car instead of leasing because: The car can be resold later to make some money back
6. Jim is in the market for a car, but he’ll probably only need it for a couple of years. After that, he plans on moving into the city and using public transportation. He has a short commute to work, so he won’t be putting many miles on his vehicle. What’s the best transportation option for Jim? Lease the car
6. Which of the following is NOT a cost typically associated with owning a car? Wear & Tear fees
7. Insurance can help you: Financially protect against unexpected accidents
7. Jan pays $70 each month for her auto insurance policy. This regular payment is called a: Premium
7. In which of the following scenarios will you be entitled to pay the least amount of money out-of-pocket for a medical expense? You have health insurance with a $500 deductible
7. Your auto insurance policy has a $200 monthly premium and $700 deductible. What is the maximum amount you will have to pay out-of-pocket for a car accident before your insurance covers your costs? $700
7. You have an insurance policy with a $300 premium and a $500 deductible. How much should you expect to pay the insurance company each month for coverage? $300
7. Which of the following typically have the highest auto insurance premiums? Young, inexperienced drivers
7. When you purchase an item in a store, you may be charged __________. sales tax
7. Which of the following statements about taxes is FALSE? Taxes at the local, state and federal level are all equal
7. Which of the following are NOT deducted on a typical paystub: Sales tax
7. When starting a new job, the form you complete to determine how much tax to withhold from your paycheck is called the _______. W-4
8. Which of the following is the BEST way to protect against identity theft? Change online account passwords frequently
8. Identity thieves can use your personal information to: Open a credit card, Sign up for electricity service, and Get a cell phone contract
8. What is the safest way to dispose of old bank account statements? Shred them in a paper shredder
8. The safest action to take if someone claiming to be from your bank calls you to ask for account information is to: Hang up and call back using the bank’s official phone number
8. The best way to investigate fraudulent transactions on your credit card is to: Review your recent credit card statements
8. Which document puts you at the LEAST risk of identity theft? Cash receipts
8. It is generally safe to provide your Social Security Number to: Verified trusted sources that need it
8. Which action will be least helpful if you’ve been the victim of identity theft? Withdraw your money from all accounts
8. What is the FIRST action you should take if you suspect there has been a fraudulent charge on your credit card? Contact the credit card company to report the fraudulent charge
8. Consumer protection laws are meant to: Prevent unfair or deceptive business practices
9. How can investors receive compounding returns? By investing their earnings back into their original investment
9. When you buy a ____ , you are loaning money to an organization. Bond
9. Which best describes the difference between stocks and bonds? Stocks allow investors to own a portion of the company; bonds are loans to the company
9. What is the primary reason to issue stock? To raise money to grow the company
9. When it comes to investing, what is the typical relationship between risk and return? The greater the potential risk, the greater the potential return
9. Which of the following correctly orders the investments from LOWER risk to HIGHER risk? Treasury bond − Diversified mutual fund – Stock
9. If an investment is considered “volatile”, it means… The value of the investment may be hard to predict
9. Diversification is important in investing because… It helps you to balance your risk across different types of investments
9. Which of the following would be considered the highest risk portfolio? A portfolio made up of 60% stocks, 30% mutual funds, and 10% Treasury bonds
9. Which of the following is generally true about 401(k) and 403(b) retirement plans? They are plans offered through employers, they offer some tax benefits, and they restrict when you can withdraw your money
Categories
Finance Flashcards

MGT 301 Chapter 1

Donna, vice president of finance, and Bob, vice president of human resources, are ____ managers. functional
In February, when Paula, the manager of a landscaping company, is looking at the upcoming need for more workers to handle the increased customers in spring and summer, she is involved with ____. organizing
As a store manager, Liandra has to play the role of negotiator, such as purchasing products at a fair price for her company. As she handles this responsibility, Liandra is playing the ____ role. decisional
The police chief is meeting with some citizens in his community, where he will discuss the police department’s positive service delivery. The success of his organization is measured by _____. its effectiveness, such as decreased crime
Donna, the office manager, spends a large part of her day working closely with those whom she supervises to successfully accomplish the many tasks she is responsible for. She also works well with other departments to get things done. Donna is exhibiting which type of managerial skill? human
Gregson Production is keenly aware of the need to daily strive to produce goods and services more effectively than its competitors. Therefore, to achieve this standard, Gregson’s management strives to ____. maintain quality and efficiency
The vice president of human resources for a national electronics retailer is meeting with employees of several stores to present information to workers that their stores are closing and how the company will help employees in the future. This task is part of a(n) _______ role. disseminator
The city fire department offers its services to any individual within its city limits, so even Paul, who is driving through the city on vacation, received assistance with a car fire. The fire department is an example of a ___ organization. commonweal
Becoming a manager offers ___. many rewards apart from money and status
Mark, vice president of human resources at Executive Corporation, is a(n) ____ level manager. upper
When Randy, a general manager of a national retailer, moved to a different store in his company that was having difficulty, he knew that sales were low and after talking to his employees, he found morale was also low. At first Randy thought attitudes were poor due to low sales, but after working closely with employees, he realized that the poor attitudes were actually the cause of poor sales. Randy was able to discover the cause of the problem by utilizing ______ skills. conceptual
Josh, a college student, has become very interested in helping his community, so he is volunteering in a neighborhood improvement organization. This type of organization is an example of a(n) ______ organization. mutual-benefit
Two of the primary challenges facing managers today are ____. managing for a competitive advantage and diversity
The rarest and most precious resource in business according to Fortune magazine is ___. skilled and effective managers
Elizabeth is a chef and the kitchen manager in an upscale restaurant. She is very knowledgeable in both the culinary and restaurant management fields. Because of these skills, Elizabeth can be considered a(n) ____ worker. knowledge
Greg, the marketing manager, is constantly seeking information about his competition while looking online or speaking to people; this is an example of the ___ role. monitor
The district manager of a national fast-food restaurant watches the sales reports for each restaurant daily to compare actual sales with projected sales goals, and then takes corrective action if needed. This function is ____. controlling
Being a manager can be one of the greatest avenues to a meaningful life, particularly if the manager ____. is working within a supportive or interesting organizational culture
One way to think of management is ___. the art of getting things done through people
Tom, a restaurant general manager, carefully watches his costs by reusing some items that in the past were immediately thrown away. Tom is an example of a(n) _____ manager. efficient
Raylene, the CEO of a Fortune 500 company, met with business leaders from the local community. Afterwards, she spent time informally answering their questions about the company as part of which managerial role? monitor
One of the reasons Ace Distributors, a local manufacturing company, is considered to be a good place to work is that the managers are expected to encourage and reward their employees for developing new products and ways of improving existing products and services. This policy is an example of managers carrying out the ______ role. entrepreneur
Deshawn started a new type of business that provides new and unique services that did not exist before his efforts. This is an example of a(n) ____. entrepreneur
An individual or individuals who work(s) within an existing organization, using personal resources to exploit an opportunity, defines a(n) ____. intrapreneur
Management scholar Henry Mintzberg found that in their workday, managers ____. have work that is characterized by fragmentation, brevity, and variety
Categories
Finance Flashcards

Finance: Chapter 9: Net Present Value and Other Investment Criteria

Payback Period The amount of time required for an investment to generate cash flows sufficient to recover its initial cost
Discounted Payback The length of time required for an investment’s discounted cash flows to equal its initial cost
Average Accounting Return (AAR) An investments average net income divided by its average book value
Net Present Value (NPV) The difference between an investment’s market value and its cost. It is a measure of how much value is created or added today by undertaking an investment.
If the payback period is less than some present limit When do you accept the payback period?
Payback Rule An investment is acceptable if its calculated payback period is less than some prespecified number of years
Advantages of Payback – easy to understand and compute – adjusts for uncertainty of later cash flows – biased toward liquidity
Disadvantages of Payback – ignores the time value of money – required an arbitrary cutoff point- ignores cash flows beyond the cutoff date- biased against long-term projects, such as research and development, and new projects
Advantages of NPV – considers all of the cash flows in the computation- uses the time value of money- provides the answer in dollar terms, which is easy to understand
Disadvantages of NPV – requires the use of time value and money, thus a bit more difficult to compute- projects that differ by order of magnitude in cost are not obvious in the NPV final figure
Disadvantages of Payback – requires an arbitrary cutoff point – ignores cash flows beyond the cutoff point – biased against long-term projects, such as research and development and new products – may reject positive NPV investments
Average Account Return Rule Accept if the average accounting return exceeds a target average accounting return
accept the project if NPV is positive When do you accept a projected based on NPV?
Positive NPV The project is expected to add value to the firm and will therefore increase the wealth of the owners.
Internal Rate of Return (IRR) the discount rate that makes the NPV of an investment zero. It is the most important alternative to NPV. It is based entirely on the estimated cash flows and is independent of interest rates found elsewhere.
IRR Rule Accept if the IRR exceeds the required return. It should be rejected otherwise.
Advantages of IRR – considers the cash flows in the computation- uses the time value of money- if it is high enough, you may not need to estimate a required return- usually provides a similar answer to the NPV computation
Disadvantages of IRR – uses the firm’s required rate of return for comparison – usually high numbers can often occur when a significant amount of the project’s cash flows occur early in the life of the project
Profitability Index (PI) The present value of an investment’s future cash flows divided by its initial cost. Also called the benefit-cost ratio. It is usual in situations where you have multiple projects of hugely different costs and/or limited capitl. PV of future cash flows/initial investment
PR decision rule Accept if PI is greater than 1.
Modified Internal Rate of Return (MIRR) The possibility that more than one discount rate will make the NPV of an investment zero. The reinvestment rate for the cash flows is determined by the evaluator. It can produce a single number with specific rates for borrowing and reinvestment.
Net Present Value Profile A graphical representation of the relationship between an investment’s NPVs and various discount rates.
Mutually Exclusive Projects If you chose one, you can’t choose another.
When NPV and IRR indicate different rankings for mutually exclusive projects – initial investments are substantially different- timing of cash flows is substantially different
Mutually exclusive projects and nonconvential cash flows When will NPV an IRR give us different decisions?
NPV and IRR most commonly used in primary investment criteria and payback in secondary investment criteria NPV Which criteria are mostly used in practice and which one should you always use if there is a conflict between another decision rule?
Categories
Finance Flashcards

Finance 3104

The​ long-run goal of the firm is toA. increase sales regularly. B. maximize shareholder wealth.C. hold large quantities of cash.D. maximize earnings per share. B. maximize shareholder wealth.
Maximizing shareholder wealth means maximizing theA. value of the​ firm’s assets. B. value of the​ firm’s cash.C. market value of the​ firm’s common stock.D. value of the​ firm’s profits. E. value of the​ firm’s investments. C. market value of the firm’s common stock
Advantages of the corporation include ​ A. transferability of ownership. B. unlimited liability.C. ability of the corporation to raise capital. D. double taxation of dividend income. E. A and C. F. A and B. E. a and c
Disadvantages of the partnership areA. expense of formation. B. lack of permanence. C. double taxation of income. D. unlimited liability. E. b and d.F. a and d. E. b and d
Which method listed below is NOT a method by which securities are distributed to final​ investors?A. Commission basisB. Privileged subscriptionC. Direct saleD. Negotiated purchaseE. ​Competitive-bid purchaseF. Upset Agreement F. Upset Agreement
Which of the following is generally NOT an advantage of private​ placements?A. Interest costsB. Financing flexibilityC. Reduced flotation costsD. Speed A. Interest Costs
Which of the following is generally not a disadvantage of private​ placements?A. Imposition of several restrictive covenants B. Speed C. Interest costsD. Possibility that the security may have to be registered some time in the future at the​ lender’s option B. Speed
What are the two major categories of flotation​ costs? ​I.​ Underwriters’ spreadII. Issuing CostsIII. CommisionsIV. TaxesA. I and IIB. II and IIIC. I and IIID. I and IV A. I and II
Flotation costs are the highest​ on:A. common stock.B. preferred stock.C. bonds.D. mutual funds and bonds. A. Common Stock
Identify the major reasons why underdeveloped countries remain underdeveloped.I. Underdeveloped countries lack natural resources.II. Underdeveloped countries lack effective financial market systems.III. Underdeveloped countries lack political stability.IV. Underdeveloped countries lack a labor force.A. Only IVB. II and IIIC. I and IID. I and IV B. II and III
What are profit​ margins? What are the different types of profit​ margins?A. The profit margins are the​ profits-to-sales relationships. Three types are cost profit​ margin, fixed profit​ margin, and net profit margin.B. The profit margins are the​ profits-to-sales relationships. Three types are gross profit​ margin, operating profit​ margin, and net profit margin.C. The profit margins are the​ profits-to-assets relationships. Three types are current profit​ margin, gross profit​ margin, and net profit margin.D. The profit margins are the​ profits-to-assets relationships. Three types are gross profit​ margin, operating profit​ margin, and net profit margin. B. The profit margins are the profits-to-sales relationships. Three types are gross profit margin, operating profit margin, and net profit margin
The purpose of doing a financial analysis is all of the following​ except:A. Restating accounting data in relative terms so that comparisons can be made with firms of different sizes and with the same firm over time.B. To identify some of the financial strengths and weaknesses of a company.C. To prepare GAAP financial statements.D. A and B only. D. A and B only
Which of the following might use financial ratios for the purposes​ stated?A. Firm managers to evaluate the​ firm’s performance.B. ​Credit-rating agencies to determine the​ firm’s creditworthiness.C. Major suppliers to decide whether or not to grant credit terms to a company.D. Investors to decide whether or not to invest in a company.E. Lenders to decide whether or not to make a loan to the company.F. All of the above. F. All of the above
Which differences in the accounting practices of firms limit the usefulness of financial​ ratios?A. Different firms choose different methods to depreciate their fixed assets. Differences such as these can make thecomputed ratios of different firms difficult to compare.B. Different firms choose different methods to allocate their inventory. Differences such as these can make thecomputed ratios of different firms difficult to compare.C. Different firms choose different methods to book revenues and expenses. Differences such as these can make thecomputed ratios of different firms difficult to compare.D. A and B only.E. ​A, B and C. D. A and B only
Why should you be careful when comparing a firm with industry​ norms?A. Accounting practices differ widely among firms. These differences can make the computed ratios of different firms difficult to compare.B. Many firms experience seasonal changes in their operations.C. An industry average is not necessarily a desirable target ratio or norm. You may wish to be in the top​ 10%.D. Sometimes it is difficult to identify the industry to which your firm​ belongs, so you must select your peers and construct your own norm.E. Published peer group or industry averages are only approximations.F. All of the above. F. All of the above
True or False:The expected​ benefits, or returns of most investments come in the form of cash flows. True
The additional compensation for assuming greater risk is​ called:A. standard deviation of return.B. nominal average return.C. real average return.D. risk premium. D. Risk Premium
Type of Risk:The CEO of a firm retires. Unsystematic risk
Type of Risk:The Federal Reserve announces that it will lower the interest rate to boost the economy. Systematic risk
Type of Risk:Production costs of a firm increase due to rising oil prices. Systematic risk
Type of Risk:A manufacturer loses a product liability suit. Unsystematic risk
Type of Risk:The inflation rate increases unexpectedly. Systematic risk
Type of Risk:A firm announces a decrease in its earnings forecast. Unsystematic risk
How many different securities must be owned to essentially diversify away unsystematic​ risk?A. 1B. 5C. 20D. 100 C. 20
A​ firm’s market risk can be estimated byA. estimating the required rate of return using the Capital Asset Pricing Model. B. estimating the beta coefficient of the characteristic line using the regression method.C. calculating the coefficient of variation of the​ firm’s stock returns.D. calculating the standard deviation of the​ firm’s stock returns. B. estimating the beta coefficient or the characteristic line using the regression method
How do debentures differ from mortgage bonds with regard to their​ risk?A. Debentures have a higher market value than mortgage bonds.B. Mortgage bonds require higher interest rate.C. The earning ability of the issuing corporation has a higher impact on the risk of debentures than it does on mortgage bonds.D. The duration of a debenture has a greater impact on its risk than the duration of a mortgage bond. C. The earning ability of the issuing corporation has a higher impact on the risk of debentures than it does on mortgage bonds
How would investors respond to the varying types of​ risk?A. Investors will be indifferent to perceived higher risk.B. Investors will hold the security for a longer period of time.C. Investors will require a higher yield for assuming higher risk.D. Investors will sell the security to realize the returns. C. Investors will require a higher yield for assuming higher risk
How does an investor receive a return from a zero or very low coupon​ bond?A. From the coupon payments. B. From the tax savings of the bonds.C. From the increase of the market interest rate.D. From the appreciation of the bonds. D. From the appreciation of the bonds
True or False:Since the bond pays little or no​ interest, the issuing company is unable to deduct the amortized interest over the life of the​ bond. False
Which of the following is not one of the important features of a​ bond? ​A. Dividend.B. Maturity.C. Coupon interest rate.D. Par value. A. Dividend
Which feature determines the cash flows associated with a​ bond?A. Maturity.B. Call provision.C. Coupon interest rate.D. Claims on assets and income. C. Coupon interest rate
When the market interest rate rises above the stated interest rate of a​ bond, the bondA. will sell at its par or stated value.B. will sell at a premium.C. will sell at a discount.D. will not sell because investors can receive a better return from the market. C. will sell at a discount
True or False:The opportunity cost represents the​ investor’s return on the​ next-best investment that is foregone should the project under consideration be accepted and thus must equal the​ investor’s required rate of​ return. True
When a firm raises funds by issuing a particular type of​ security, it incurs flotation costs that will​ _____ the​ firm’s cost of capital.A. decreaseB. eliminateC. not affectD. increase D. Increase
When firms operate in multiple industries for which the risk characteristics and financial structures vary significantly they shouldA. calculate divisional costs of capital for use in evaluating each​ division’s investment opportunities.Your answer is correct.B.try to adjust the capital structures used in each of the divisions such that the weighted average cost of capital in each is the same.C. use a company wide weighted average cost of capital because the divisional risk can be diversified away when the new investment is combined with other projects within the company as a whole.D. use a company wide weighted average cost of capital to evaluate all new investments so as to hold each operating division to the same standard. A. Calculate divisional costs of capital for use in evaluating each division’s investment opportunities
It is so difficult to find an exceptionally profitable project because ​A. ​R&D is very expensive and time consuming.B. it rarely exists.C. competition is brisk and will push down prices and profits.D. most companies do not have the skill to discover one. C. Competition is brisk and will push down prices and profits
True or False:The search for new profitable projects is so important because without the flow of new projects and ideas most firms cannot grow and even survive for​ long. True
If Ford introduces a new auto​ line, might some of the cash flows from that new car line be diverted from existing product​ lines? A. If Ford introduces a new auto line that might compete with the​ firm’s existing product​ lines, then​ new-product sales achieved at the cost of losing sales of existing product lines should also be considered as a benefit in​ capital-budgeting analysis.B. If Ford introduces a new auto line that might compete with the​ firm’s existing product​ lines, this is called a synergistic effect.C. If Ford introduces a new auto line that might compete with the​ firm’s existing product​ lines, then​ new-product sales achieved at the cost of losing sales of existing product lines are considered as sunk costs that should be excluded in​ capital-budgeting analysis. D. If Ford introduces a new auto line that might compete with the​ firm’s existing product​ lines, then only the incremental sales the new line brings to the company should be considered in determining the free cash flows in​ capital-budgeting analysis. D. If Ford introduces a new auto line that might compete with the firm’s existing product lines, then only the incremental sales the new line brings to the company should be considered in determining the free cash flows in capital-budgeting analysis
Which of the following is an example of an option to delay a​ project? ​A. The option to enter into the foreign markets.B. The option to increase production if the new product launches successfully. C. The option to wait for one year to open a restaurant.D. The option to shut down a mining operation due to the depletion of the ore reserves. C. The option to wait for one year to open a restaurant.
Which of the following is an example of an option to expand a​ project? ​A. The option to shut down a mining operation due to the depletion of the ore reserves.B. The option to increase production if the new product launches successfully. C. The option to wait for one year to open a restaurant.D. The option to refinance at a lower rate to prepay the home mortgage. B. The option to increase production if the new product launches successfully
The​ project’s ________________, which is a​ project’s risk ignoring the fact that much of this risk will be diversified away as the project is combined with the​ firm’s other projects. standing alone risk
The​ project’s___________________ which is the amount of risk that the project contributes to the firm as a whole. contribution-to-firm risk
The​ project’s____________________ which is the risk of the project from the viewpoint of a​ well-diversified shareholder. systematic risk
True or False:Because much of a​ project’s risk is diversified away within the​ firm, the project standing alone risk is an appropriate measure of the meaningful level of risk of a​ capital-budgeting project. False
True or False:Combining operating and financial leverage magnifies variations in earnings per share in response to changes in​ sales. True
If a​ firm’s operating and financial leverage are such that a 10 percent change in sales revenue produced a 20 percent change in​ EBIT, and a 10 percent change in EBIT led to a 20 percent change in earnings per​ share, what percentage change in earnings would you expect should revenues decline by 25​ percent?If sales revenues will decline by 25​ percent, what percentage change in earnings would you​ expect?A. -50%B. ​+100%C. ​+50%D. -100% D. -100%
The optimal capital structure refers to a capital structure thatA. is comprised of​ 99.9% equity capital.B. will minimize the composite cost of a​ firm’s capital for raising a given amount of funds.C. is comprised of​ 99.9% debt capital.D. will minimize the​ firm’s common stock price. B. will minimize the composite cost of a firm’s capital for raising a given amount of funds
It is important for managers of corporations to act ethically​ ___________.A. because ethical behavior is its own justificationB. because it is important for a business to be trusted by​ investors, customer and the public if it is to succeedC. because business managers must answer to a higher authorityD. because a violation of ethics will be punished by the law B. because it is important for a business to be trusted by investors, customer and the public if it is to succeed
True or False:The​ Sarbane-Oxley Act, or​ SOX, is aimed at controlling insider trading by members of Congress. False
If a CEO names his or her friends an family to the board of directors and then pays them quite a bit above the​ norm, this would be an example of the​ _______.A majority voting featureB. agency problemC. proxy fightsD. preemptive right B. agency problem
Which of the following would be considered to be a primary market​ transaction?A. Texas Instruments repurchasing some its own stock from an investor.B. An investor purchasing Paypal stock on Nasdaq.C. An investor selling Ford stock on the NYSE.D. A new issue of stock by Transport Solar. D. A new issue of stock by Transport Solar
True or False:A basis point is equal to one​ one-hundredth of a percentage point. True
The higher the discount​ rate, the greater the importance of the early cash flows. True
A debenture is an unsecured​ long-term debt instrument. True
The detailed legal agreement between a​ bond’s issuer and its trustees that describes the​ bonds, the rights of the bondholders and the issuing firm is called the​ _____.A. indentureB. call provisionC. covenantD. collateral agreement A. indenture
Which of the following gives the bond issuer the right to redeem or repurchase a bond issue before its maturity​ date?​A. Floating rate.B. The priority of claims.C. The call provision.D. Convertibility. C. The call provision
If a bond with a​ $1,000 par​ value, 20 years to​ maturity, and a coupon interest rate of​ 10% was selling for​ $800, then the yield to maturity on that bond​ is:A. cannot be determined.B. is greater than​ 10%.C. is less than​ 10%.D. is​ 10%. B. is greater than 10%
When the required rate of return on a bond is less than the​ bond’s coupon interest​ rate, the bondA. will sell at a premium over par. B. will sell at a discount from par.C. will sell at par value.D. may sell at either a discount or a premium. A. will sell at a premium over par
True or False:Trident Capital has a bond with a​ $1,000 par​ value, an annual coupon interest rate of​ 7% that is paid​ semiannually, and a remaining term of 12 years. The annual market yield on similar bonds is​ 5%. This bond will sell at a discount from par. False
True or False:The more years to​ maturity, the more sensitive the price of a bond will be to changes in market interest rates. True
True or False:How much the value of a bond changes as a result of interest rate changes depends on both the​ bond’s time to maturity and its pattern of cash flows. True
If the market price of a bond​ decreases, then:A. the coupon rate increases. B. the yield to maturity increases. C. the yield to maturity decreases. D. none of the above. B. the yield to maturity increases
If current market interest rates​ drop, what will happen to the value of any bonds that are​ outstanding? A. It will rise.B. It will fall.C. There is no connection between current market interest rates and the value of outstanding bonds. D. It will remain unchanged. A. It will rise
If current market interest rates​ rise, what will happen to the value any bonds that are​ outstanding?A. It will fall.B. It will remain unchanged. C. It will rise.D. There is no connection between current market interest rates and the value of outstanding bonds. A. It will fall.
Tranis Corporation sold an issue of​ 20-year, $1,000 par value bonds to the public that carry a​ 10.00% coupon​ rate, payable semiannually. It is now 10 years​ later, and the current market rate of interest is​ 8.00%. If interest rates remain at​ 8.00% until​ Tranis’ bonds​ mature, what will happen to the value of the bonds over​ time? A. The bonds will sell at a discount and fall in value until maturity. B. The bonds will sell at a premium and rise in value until maturity.C. The bonds will sell at a premium and decline in value until maturity. D. The bonds will sell at a discount and rise in value until maturity. C. The bonds will sell at a premium and decline in value until maturity
Examine the following statements. Which of them is true regarding​ bonds? A. If market interest rates​ change, long-term bonds will fluctuate more in value than​ short-term bonds. B. Bond prices move in the same direction as market interest rates. C. If market interest rates are higher than a​ bond’s coupon interest​ rate, then the bond will sell above its par value. D. ​Long-term bonds are less risky than​ short-term bonds. E. None of the above. A. If market interest rates change, long-term bonds will fluctuate more in value than short-term bonds.
Examine the following statements. Which of them is true regarding​ bonds? A. ​Long-term bonds have less interest rate risk than do​ short-term bonds. B. Bond prices move in the same direction as market interest rates. C. If market interest rate is above a​ bond’s coupon interest​ rate, then the bond will sell below its par value. D. As a bond approaches​ maturity, the market value of a bond will become more volatile. C. If market interest rate is above a bond’s coupon interest rate, then the bond will sell below its par value
Examine the following statements. Which of them is true regarding​ bonds? A. If market interest rates are higher than a​ bond’s coupon interest​ rate, then the bond will sell above its par value. B. As the maturity date of a bond​ approaches, the market value of a bond will become more volatile. C. The market value of a bond moves in the opposite direction of market interest rates.D. ​Long-term bonds are less risky than​ short-term bonds.E. None of the above. C. The market value of a bond moves in the opposite direction of market interest rates
If​ you, as an​ investor, are looking for capital​ gains, which type of bond should you​ purchase?A. Bonds with short maturity dates when interest rates are expected to rise.B. Bonds with distant maturity dates when interest rates are expected to rise.C. Bonds with short maturity dates when interest rates are expected to decline.D. Bonds with distant maturity dates when interest rates are expected to decline. D. Bonds with distant maturity dates when interest rates are expected to decline
Examine the following statements. Which of them is true regarding​ bonds? A. As the maturity date of a bond​ approaches, the market value of a bond will become more volatile. B. If market interest rates are below a​ bond’s coupon interest​ rate, then the bond will sell above its par value. C. Bond prices move in the same direction as market interest rates. D. ​Long-term bonds have less interest rate risk than do​ short-term bonds. B. If market interest rates are below a bond’s coupon interest rate, then the bond will sell above its par value
True or False:If a bond is selling at a​ discount, then its coupon rate is lower than the market interest rate. B. True
True or False:A Eurobonds is a bond issued in a country different from the one in whose currency the bond is denominated. B. True
As an​ investor, you expect a larger expected return on common stock than on bonds​ because:A. you have no legal right to receive dividends.B. you bear greater risk.C. in the event of​ liquidation, you are only entitled to receive any cash that is left after all creditors are paid. D. All of the above. D. All of the above
You are considering buying some stock in Colony Transport. Which of the following is an example of systematic or market​ risk? A. Risk resulting from a general decline in the stock market.B. Risk resulting from a news release that an officer at Colony had been stealing from clients.C. Risk resulting from an impending lawsuit against Colony. D. Risk resulting from a truck owned by Colony getting in an accident. A. Risk resulting from a general decline in the stock market
You are considering investing in Disney. Which of the following is an example of diversifiable​ risk? A. Risk resulting from uncertainty regarding a possible strike against Disney.B. Risk resulting from interest rates decreasing.C. Risk resulting from an expected recession.D. Risk resulting from the possibility of a stock market crash. A. Risk resulting from uncertainty regarding a possible strike against Disney
The beta of a stock is the slope​ of:A. the security market line or SML.B. the arbitrage pricing line. C. the line of best fit for a plot of the​ company’s returns against the returns of the market portfolio for the same period.D. the characteristic line for a plot of returns on the​ S&P 500​ (or market​ portfolio) versus returns on​ short-term Treasury bills. C. the line of best fit for a plot of the company’s returns against the returns of the market portfolio for the same period
Which of the following is NOT an example of market risk or systematic​ risk? A. Management riskB. InflationC. RecessionD. Interest rate risk A. Management Risk
Which of the following has a beta of​ zero? A. The marketB. A​ risk-free assetC. A​ high-risk assetD. Both A and B B. A risk-free asset
The security market line​ (SML) relates risk to​ return, for a given set of market conditions. If you expect inflation to​ increase, which of the following would expect to occur all else being held​ constant? A. The SML line would shift up but maintain the same slope.B. The market risk premium would increase. C. Beta would increase.D. The slope of the SML would increase. A. The SML line would shift up but maintain the same slope
The market risk premium is measured​ by:A. ​T-bill rate.B. market return less​ risk-free rate.C. standard deviation.D. beta. B. market return less risk-free rate
True or False:The security market line can be graphically represented by a line that connects the​ risk-free rate and the expected return on the market portfolio. True
True or False:If investors became more risk​ averse, the slope of the Security Market Line drop​ (that is, it would become less​ steep). False
If you invest a sum of money at​ 8% compounded​ annually, how long will it take for it to​ double? ​(Select the best choice​ below.)A. 5.4 yearsB. 4 yearsC. 9 yearsD. 11 years C. 9 years
If you put​ $1,000 in a savings account that yields an​ 7% annual rate of interest that is compounded​ weekly, how much would that be worth in 25 weeks​ (round to the nearest​ dollar)? A. ​$1,043B. ​$1,025C. ​$1,040D. ​$1,034 D. ​$1,034
True or False:Assuming that an amount is compounded for more than one year and is also compounded more than once a year​ (for example, compounded​ monthly) the EAR will always be greater than the APR. True
True or FalseAll else​ constant, you should be indifferent between receiving​ $7,500 today or receiving a​ $600 perpetuity when the discount rate is​ 8% annually. True
Why is the​ acid-test or quick ratio considered to be a more refined measure of​ liquidity? A. It measures how quickly cash and other liquid assets flow through the company.B. It is a quicker calculation to make.C. Inventory is not included in the numerator of the​ acid-test or quick ratio because inventory is generally the least liquid of the​ firm’s current assets. D. Cash is the most liquid current asset. C. Inventory is not included in the numerator of the acid-test or quick ratio because inventory is generally the least liquid of the firm’s current assets
The Walker Corporation has current assets of​ $15,000, inventories of​ $7,000, and a current ratio of 2.5. What is the Walker​ Corporation’s quick or acid test​ ratio? A. 2.14B. 0.74C. 0.86D. 1.33 D. 1.33
What will happen to the return on equity if the total asset turnover ratio​ decreases? A. It will​ change, but in an indeterminate way. B. It will not change.C. It will decrease. D. It will increase. C. It will decrease
Looking at an income​ statement, sales​ revenue, minus cost of goods sold and operating​ expenses, is equal to which of the​ following?A. Net Profit.B. Retained earnings.C. Net income available to preferred shareholders.D. EBIT. D. EBIT
Which of the following streams of income is not impacted or affected by how a firm is financed or raises​ money, that​ is, whether it uses debt or​ equity?A. Net profit after tax but before dividendsB. Operating incomeC. Income before taxD. Net working capital B. Operating income
Which of the following is not included when computing earnings before taxes or​ EBT?A. Depreciation expenseB. DividendsC. Cost of goods soldD. Marketing expenses B. Dividends
Your firm has the following income statement​ items: sales of​ $25000; income tax of​ $2,500; operating expenses of​ $3,800; cost of goods sold of​ $13,000; and interest expense of​ $2,000. What is the amount of the​ firm’s EBIT? A. ​$5,700B. ​$6,200C. ​$8,200D. ​$3,700 C. $8,200
In looking at Chacko​ Inc.’s income statement you find the​ following: sales of​ $52,000,000; income tax of​ $1,880,000; operating expenses of​ $9,000,000; cost of goods sold of​ $36,000,000; and interest expense of​ $800,000. Given this​ information, calculate Chacko​ Inc.’s gross profit margin.Chacko​ Inc.’s gross profit margin is A. ​8.3%.B. ​13.5%.C. ​69.2%.D. ​30.8%. D. 30.8%
We use which two terms​ interchangeably? A. Earnings before interest and taxes​ (EBIT) and operating income.B. Income after financing activities and operating income.C. Gross profit and earnings before interest and taxes​ (EBIT).D. Income from capital gains and operating income. A. Earnings before interest and taxes (EBIT) and operating income
The gross profit margin will increase when which of the following​ decreases: A. depreciation expense B. interest expense C. cost of goods sold D. both A and B C. cost of goods sold
Any time the profitability index on a project is greater than​ 1, A. the IRR will be higher than the required rate of return.B. the present value of future cash flows will exceed the​ project’s initial outlay.C. the NPV will also be positive.D. All of the above. D. All of the above
If the IRR on a project is exactly equal to the​ project’s required rate of​ return, then:A. the NPV will be exactly equal the​ project’s initial investment.B. the NPV equals zero.C. The​ project’s profitability index will be exactly equal to 0.D. the​ project’s NPV will be exactly equal to 1. B. the NPV equals zero
Categories
Finance Flashcards

Focus on Personal Finance CH. 1-5

What is the goal of personal financial planning? achieving personal economic satisfaction
What is a financial plan? a formalized report that summarizes your current financial situation, analyzes you financial needs, and recommends future financial activities
What is inflation? a rise in the general level of prices
What do interest rates represent? the cost of money
What is liquidity? how easily money can be turned into cash
What is the time frame for goals? short term, intermediate, longterm
What is meant by ‘SMART’ goals? specific, measurable, action oriented, realistic, time-based
What is opportunity cost? what a person gives up by making a choice
What is the time value of money? increase in an amount of money as a result of interest earned
Difference between future value and present value future is amount current savings will increased based on interest rate and time. present is the current value for a future amount based on interest and time
difference between a series of deposits and a single amount series- amounts deposited regularly single- one time deposit
what types of changes make it necessary to review and revise your financial plan? career choices, professional development alternatives
What is money management? day to day financial activities necessary to manage current personal economic resources while working toward longterm financial security
What is a balance sheet? a financial statement that reports what an individual or family owns and owes
What is an asset? cash and other property with a monetary value
What is a liability? amounts owed to others
What is net worth? assets – liabilities
What is a cash flow statement? a financial statement that summarizes cash receipts and payments for a given period
What is take-home pay? earnings after deductions for taxes and other items
What are fixed expenses? payments that do not vary from month to month
What are variable expenses? flexible payments that vary from month to month
How is take-home pay determined?
what is a budget? a specific plan for spending income
what is a budget surplus? the amount in which spending is less than planned spending
what is a budget deficit? amount in which spending is more than planned spending
What is an emergency fund? money set aside for unexpected expenses
What amount is recommended to be in an emergency fund? 3 to 6 months living expenses
what is the recommended debt/payments ratio? 20% is max 15% is better
what is the recommended savings ratio? 5-10%
what are some methods to make saving easier? deposit 5-10% into savings each month, payroll deduction, saving coins and spending less on certain items
what are the four major categories of taxes? purchases, property, wealth, earnings
what is the Social Security tax? used to fund the retired
what is medicare? disability insurance, hospital insurance
what is tax-exempt income? income that is not subject to tax
what is tex-deffered income? income that will be taxed at a later date
what is a standard deduction? a set amount on which no taxes are paid
what are the categories of itemized deductions? medical and dental, taxes, interest, contributions, casualty and theft losses, moving expenses, job-related and other miscellaneous expenses
what is an exemption? a deduction from adjusted gross income for yourself, your spouse, and qualified dependents
what is marginal tax rate? the rate used to calculate tax on the last (and next) dollar of taxable income
what is average tax rate? total tax due divided by taxable income
what is a tax credit? an amount subtracted directly from the amount of taxes owed
what is withholding? income tax deducted from pay
what is a W-2 ? reports annual earnings and the amounts deducted for taxes
what are the five filing status categories? single, married filing joint return, married filing seperate return. head of household, qualifying widow or widower
what are the three basic tax forms? form 1040EZ, form 1040A, form 1040
which tax form must you use to itemize your deductions? form 1040
what types of interest are tax deductible?
what is a capital gain?
what is an audit? a detailed examination of your tax return by the Internal Revenue service
what is the deadline for filing your federal income tax return?
what is rate of return? the percentage of increase in the value of savings as a result of interest earned
what is compounding? a process that calculates interest based on preciously earned interest
how does the frequency of compounding affect the yield? the higher the frequency the greater that rate of return
what is the FDIC? us government corporation that provides deposit insurance to members of certain financial institutions
what is the current amount of coverage? $250,000
what is a debit card? a plastic access card used in computerized banking transactions
how do changes in the interest rate influence your choice of savings options? when interest rates are low it may be better to spend or invest rather than save
what are some of the problematic financial businesses? pawnshops, check cashing outlets, payday loan companies, rent to own centers, care title loan companies
what is a commercial bank? a financial institution that offers a full range of financial services to individuals, businesses, and government agencies
what is a credit union? user owned, nonprofit, cooperative financial institution that is organized for the benefit of its members
what are the advantages of credit unions? lower fees, lower loan rates with higher satisfaction levels
what are the benefits and drawbacks of a regular savings account? ease of withdrawl, insured, low minimum balance but does not earn much interest
what is a CD? a savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate
what is a money market account? a savings account offered by banks, savings and loan associations and credit unions that requires a minimum balance and has earnings based on market interest rates
what is a money market fund? a savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments
what is a U.S. savings bond? low risk savings program guaranteed by the federal government that have been used to achieve various financial goals
what are the advantages of U.S. savings bonds? low risk, guaranteed
what factors should one consider in evaluating a checking account? the amount of interest offered
what is the difference between a joint account and an individual account?
what is overdraft protection? an automatic loan made to checking account customers to cover the amount of checks written in excess of the available balance in the checking account
what is a certified check? a personal check with guaranteed payment
what is a cashier’s check? a check of a financial institution
what can one do to avoid identity theft?
what is credit? an arrangement to receive cash, goods, or services now and pay for them in the future
what is consumer credit? the use of credit for personal needs
what are the advantages of credit? can be used in emergency, get it now, can be payed through payment plans based on future income
what are the disadvantages of credit? temptation to overspend
what is closed-end credit? one-time loans that the borrower pays back in a specified period of time and in payments of equal amounts
what is open-end credit? a line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment
what is interest? a periodic charge for the use of credit
what are the various sources of loans? commercial banks, consumer finance companies, credit unions, life insurance companies, federal savings banks
how do the expenses of each type of loan compare?
what is a grace period?
what is a finance charge? total dollar amount you pay to use credit
what is an annual fee?
how do you determine which card is right for you?
how do you determine if you can afford a loan? ask yourself what you plan to give up in order to make the loan payment
what is the maximum percent that experts recommend you spend on credit per month?
what are the five C’s of credit? character, capacity, capital, collateral, conditions
what is collateral? a valuable asset that is pledged to ensure loan payments
what is a FICO score? a measure of credit risk
what is the range of FICO scores? 300-850
what is a credit report? the record of your complete credit history
how many credit reports do you have?
what information is in your file? your employer, position, and income, your precious address, your previous employer, your spouse’s name, social security number, employer, whether you own or rent your home, checks returned for insufficient funds
what are the three major credit bureaus? Experian, Equifax, TransUnion
what is APR? the percentage cost of credit on a yearly basis
how does the term of the loan affect interest costs? the longer the term the more interest you will pay
why is it important to pay more than the minimum monthly payment on credit cards? because the interest will continue to acrue
what should you do if your identity is stolen?
what is cosigning a loan? agreeing to be responsible for the payments on a loan if the other party fails to make them
what are the signs of potential debt problems? you make only the minimum monthly payment on credit cards, youre having trouble making even the minimum payment on your credit card bills, the total balance of your credit cards increases every month, you miss loan payments or often pay late, you use savings to pay for necessities such as food and utilities, you borrow second and third payment due notices from creditors, you borrow money to pay off old debts, you exceed the credit limits on your credit cards, you’ve been denied credit because of a bad credit bureau report
what should you do if you are having trouble paying your bills? contact them
what is bankruptcy? a set of federal laws allowing you to either restructure your debts or remove certain debts
what is ch. 7 bankruptcy? straight bankruptcy where many but not all debts are forgiven
what is ch. 13 bankruptcy? a debtor with a regular income proposes a plan for using his future earnings or assets to eliminate debt