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Finance Flashcards

Finance Exam Review

On a balance sheet, deferred taxes are classified as: long term liabilities
Net working capital is defined as: current assets – current liabilities
An asset that can be quickly converted into cash without significant loss in value is referred to as being: liquid
The financial statement summarizing a firm’s accounting performance over a period of time is the: income statement
An accountant’s snapshot of the firm’s accounting value at a specific point in time balance sheet
Which term defines the tax rate that applies to the next dollar of taxable income earned? marginal
U.S. corporate taxes switch to a constant flat-rate tax once the average tax rate reaches:32 percent.33 percent.28 percent.40 percent.35 percent. 35 percent
The cash flow resulting from a firm’s ongoing, normal business activities is referred to as the: operating cash flow.
Capital spending is equal to:- ending next fixed assets minus beginning net fixed assets.- ending net fixed assets minus beginning net fixed assets plus depreciation.- ending total assets minus beginning total assets.- ending total assets minus beginning total assets minus depreciation.- beginning total assets plus asset purchases minus asset sales. ending net fixed assets minus beginning net fixed assets plus depreciation
Operating cash flow is defined as:- Pretax income – Taxes.- Net income – Dividends.- EBIT + Depreciation – Taxes.- Pretax income + Depreciation.- Cash flow to investors + Taxes. EBIT + depreciation – taxes
Which one of these terms refers to the firm’s interest payments less any net new borrowing?- operating cash flow- capital spending- net working capital- cash flow to stockholders- cash flow to creditors cash flow to creditors
Assuming the number of shares outstanding remains constant, an increase in dividends per share will reduce the:- earnings per share.- addition to retained earnings.- net income.- cash flow to stockholders.- cash flow from assets. addition to retained earnings
Which one of the following assets is generally the most liquid?- inventory- buildings- accounts receivable- equipment- patents accounts receivable
Which one of the following accounts is included in stockholders’ equity?- long-term debt- deferred taxes- plant and equipment- accumulated retained earnings- intangible assets accumulated retained earnings
Which one of these statements is correct?- Pretax income is equal to net income minus taxes.- The addition to retained earnings is equal to net income plus dividends.- Operating income is equal to operating revenue minus cost of goods sold.- Only current taxes are included in the tax expense.- Earnings per share can be negative but dividends per share cannot. Earnings per share can be negative but dividends per share cannot.
Cash flow from assets:- equals net income plus non-cash items.- can be positive, negative, or equal to zero.- equals operating cash flow minus net capital spending.- equals the addition to retained earnings.- equals operating cash flow minus the cash flow to creditors. can be positive, negative, or equal to zero
Net capital spending is equal to the:- net change in total assets plus depreciation.- net change in fixed assets plus depreciation.- net income plus depreciation.- difference between the market and book values of the total assets.- change in total assets. net change in fixed assets plus depreciation.
At the beginning of the year, long-term debt of a firm is $2,400 and total debt is $3,150. At the end of the year, long-term debt is $2,800 and total debt is $4,370. The interest paid is $40. What is the amount of the cash flow to creditors?$440−$40$1,260$1,180−$360 -$360
what are the two noncash items on a balance sheet? depreciation and deferred taxes
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Finance Flashcards

Personal & Family Finance Unit 2

When talking about economic resources, capital refers to which of the following? Tools and machinery to manufacture goods
An economy where more money is being collected than is being allocated or spent is known as what type of economic stance? Contractionary
While we talk about the stock market as if it were one big entity, the reality is that there are many stock markets around the world. True
What is one economic principle? Resources are limited.
What is a benefit of stock markets? They create jobs. They allow companies to generate income. They allow individuals to invest money and create more money. “All of the above.”
A share of ownership in a company is known as which of the following? Stock
A balanced economy generally has which economic stance? Neutral
Entrepreneurial ability refers to the human resource of finding resources, making business decisions, and creating new products. True
In economic terms, marginal is another word for which of the following? Additional
Why do most companies sell shares of stock? To generate income for the company.
Labor is an unlimited resource. False
What is a sort of auction for stocks in which traders verbally submit their offers? Open outcry
Governments collect money through which of the following? Taxes Bonds Selling resources All of the above
In economic terms, “land” refers only to physical plots of ground. False
The difference between unlimited wants and limited resources affects both individuals and the economy. True
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Finance Flashcards

Pers Finance 12

Typical examples of uses of life insurance proceeds are All of the above are typical examples.
Which is a correct statement about life insurance? Life insurance is still more often sold than bought.
Life insurance premiums are determined basically by the use of mortality tables.
The 1980 CSO Table separates the mortality experience by sex.
What factors should you consider before you buy insurance? All of the above factors should be considered.
A two-earner couple may have a moderate need for life insurance, especially if they have a mortgage.
Your first step in determining a life insurance program should be to determine your life insurance objectives.
The easy method of determining life insurance requirements assumes that your family is typical
Which method of determining life insurance requirements is best suited for a working couple with no dependents? DINK method
A participating life insurance policy has somewhat higher premiums than nonparticipating policy.
Most participating policies are sold by mutual life insurance companies.
Which statement is correct regarding mutual insurance companies? A mutual company refunds part of the premium to the policyholders.
Which statement is correct regarding stock life insurance companies? A stock company generally sells nonparticipating (non par) policies.
Which type of insurance is sometimes called temporary insurance? term insurance
Which of the following statements is correct for term insurance? Term insurance is protection for a specified period of time.
The most common type of permanent life insurance is called the whole life policy.
Which statement is correct about whole life insurance? Whole life insurance builds up cash value.
The cash values of a ____________ life insurance policy fluctuate according to the yields earned by a separate fund, which can be a stock fund, a money market fund, or a long-term fund. variable
Which type of life insurance policy combines term insurance and investment elements? universal life
Some experts claim that credit life insurance policies are the nation’s biggest rip off.
A plan that insures a large number of persons under the terms of a single policy without a medical examination is called a(n) ____________ life insurance policy plan. group
A document attached to the policy that modifies its coverage by adding or deleting a specified condition is called a(n) rider.
In planning your insurance program, you should consider all of the above factors.
An authoritative rating guide to the financial stability of the nation’s insurers is published by all of the following except Dow Jones Company.
Among the most important steps in the process of building your insurance program is choosing a good insurance agent.
What percent of all applicants who apply for life insurance are found to be insurable? 98
The prices of life insurance policies vary considerably.
Perhaps the most common settlement options in a life insurance program are All are common options.
A financial contract written by an insurance company to provide you with a regular monthly income for as long as you live is called an annuity.
A contract stating that the annuitant will receive a fixed amount of income over a certain period or for life is called a fixed annuity.
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Finance Flashcards

Finance

The cost of capital is the rate of return a firm must earn on its investments in projects in order to maintain the market value of its stock
The cost of capital reflects the cost of funds over a long-run time period
The cost of capital depends on the risk-free cost of that type of funds, the business risk of the firm and the financial risk of the firm
The cost of capital is a weighted average of The cost of funds which refects the interelatioship of financing decisions
The four basic sources of long-term funds for the business firm are 1. long-term debt2. preferred stock3. retained earnings4. new common stock
A tax adjustment must be made in determening the cost of long-term debt
Debt is generally the least expensive source of capital, primarily due to the tax deductibility of interest payments
The yield to maturity is a market determined rate and can be found by examining the relationships of security price, periodic interest payments, maturity value, and length of time to maturity
Preferred stock is similar to debt in that the preferred dividen is fixed
The firm’s ability to acquire equity capital is through retained earnings or through new common stock
The cost of common stock equity may be estimated by using the Gordon model or the capital asset pricing model (CAPM)
The cost of retained earnings can be explained as an opportunity cost for the use of the stock holders’ funds
The cost of new common stock financing is higher than the cost of retained earnings due to flotation costs and underpricing
The firm’s optimal mix of debt and equity is called its target capital structure
The optimal capital structure is the one that balances return and risk factors in order to maximize market value
The before-tax cost of debt for a 15-year, 11 percent coupon rate, $1,000 par value bond selling at $950 is 15 11I/Y $1,000PV CPT PMT =11.72%
A firm has issued preferred stock at its $120 per share par value. The stock will pay a $15 annual dividened. The cost of issuing and selling the stock was $3 per share. The cost of the preferred stock is 15/(120-3) = 12.82%
A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 4 percent. The cost of the firm’s common stock equity is (2/25)+.04 =12%
Capital budgeting is the process of evaluating and selectiong long-term investments consistent with the firm’s goal of owner wealth maximization
Earning assets are fixed assets that provide the basis for the firm’s profit and value
The most common motive for adding fixed assets to the firm is Expansion
Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are called Mutually exclusive projects
A firm with limited dollars available for capital expenditures is subject to capital rationing
The payback period is the exact amount of time it takes the firm to recover its initial investment
The minimum return that must be earned on a project in order to leave the firm’s value unchanged is the cost of capital
Net present Value (NPV) -is a sophisticated capital budgeting technique -found by subtracting a projects initial investment from the present value of its cash inflows discounted at a rate equal to the firm’s cost of capital
The internal rate of return (IRR) the discount rate that equates the present values of the cash inflows with the initial investment
Comparing net present value and internal rate of return analysis always results in the same accept/reject decision
On a purely theoretical basis, the NPV is the better approach to capital budgeting because it measures the benefits relative to the amount invested
In comparing the internal rate of return and net present value methods of evaluation, net present value is superior, but financial managers prefer to use internal rate of return
The profitability index (PI) is the present value of cash inflows divided by the initial cash outflow
The change in net working capital when evaluating a capital budgeting decision is the change in current assets minus the change in current liabilities
When evaluating a capital budgeting project, the change in net working capital must be considered as part of the initial investment
Sunk costs are cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision
Opportunity costs cash flow that could be realized from the best alternative use of an owned asset
The book value of an asset is equal to the original purchase price minus accumulated depreciation
In the context of capital budgeting, risk refers to the degree of variablity of the cash inflows
Sensitivity analysis measures the risk of a capital budgeting project by estimating the NPVs associated with the optimistic, most likely, and pessimistic cash flow estimates
Scenario analysis is a behavioral approach that evaluates the impact on the firm’s return of simultaneous changes in a number of project variables
The risk-adjusted discount rate (RADR) reflects -the return that must be earned on the given project to compensate the firm’s owners adequately according to the project’s variability of cash flows-It is the preferred approach for risk adjustment of capital budgeting cash flows, from a practical viewpoint
Important types of risk in an international capital budgeting context include (2) 1. exchange rate risk2. political risk
The annualized net present value approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount
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Finance Flashcards

Finance 3715 Chapter 1

Which one of the following terms is defined as the management of afirm’s long-term investments? capital budgeting
Which one of the following terms is defined as the mixture of a firm’sdebt and equity financing? capital structure
Which one of the following is defined as a firm’s short-term assets andits short-term liabilities? working capital
A business owned by a solitary individual who has unlimited liability forits debt is called a: sole proprietorship
A business formed by two or more individuals who each have unlimitedliability for all of the firm’s business debts is called a: general partnership
A business partner whose potential financial loss in the partnership willnot exceed his or her investment in that partnership is called a: limited partner
A business created as a distinct legal entity and treated as a legal”person” is called a: corporation
Which one of the following terms is defined as a conflict of interestbetween the corporate shareholders and the corporate managers? agency problem
A stakeholder is: any person or entity other than a stockholder or creditor whopotentially has a claim on the cash flows of a firm.
Which of the following questions are addressed by financial managers?I. How should a product be marketed?II. Should customers be given 30 or 45 days to pay for their credit purchases?III. Should the firm borrow more money?IV. Should the firm acquire new equipment? II, III, and IV only
Which one of the following functions should be the responsibility of thecontroller rather than the treasurer? income tax returns
The controller of a corporation generally reports directly to the: vice president of finance
Which one of the following correctly defines the upward chain ofcommand in a typical corporate organizational structure? the treasurer reports to the vice president of finance
Which one of the following is a capital budgeting decision? deciding whether or not to purchase a new machine for theproduction line
Which of the following should a financial manager consider whenanalyzing a capital budgeting project?I. project start up costsII. timing of all projected cash flowsIII. dependability of future cash flowsIV. dollar amount of each projected cash flow I, II, III, and IV
Which one of the following is a capital structure decision? determining how much debt should be assumed to fund aproject
The decision to issue additional shares of stock is an example of whichone of the following? capital structure decision
Which of the following accounts are included in working capitalmanagement?I. accounts payableII. accounts receivableIII. fixed assetsIV. inventory I, II, and IV only
Which one of the following is a working capital management decision? determining whether to pay cash for a purchase or use thecredit offered by the supplier
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Finance Flashcards

Chapter 7 finance

67. Long-term financial goals often depend on borrowing funds. The type of loan that generally does not fulfill the long-term goal achievement is ____ loans. a. consumer b. installment c. automobile d. mortgage e. single-payment e
68. A characteristic of consumer loans is that they a. include a negotiated contract. b. are arrived at through a formal process. c. include a repayment schedule. d. are used to purchase big-ticket durable goods and other items. e. are all of these. e
69. A consumer loan probably would not be used to a. purchase an auto. b. pay for college tuition. c. consolidate several loans into one. d. finance a special vacation. e. buy back-to-school clothes. e
70. The most popular use of consumer loans is to a. purchase a car. b. finance a college education. c. finance a vacation. d. buy a house. e. buy furniture. a
71. Consumers whose debt burden has become very heavy might apply for a(n) a. personal loan. b. single payment loan. c. buy-down loan. d. consolidation loan. e. interim financing. d
72. To qualify for a Stafford loan, you must a. demonstrate financial need. b. have a good credit rating. c. make satisfactory academic progress. d. all of the above e. a and c only e
73. To qualify for a Perkins loan, you must a. demonstrate financial need. b. visit the financial institution. c. apply through your parents. d. all of the above e. a and c only a
74. Regarding student loans, which of the following is not true? a. They are available for both undergraduate and graduate students. b. Applications can be filled out on the Internet. c. There is no limit on how much can be borrowed with each loan. d. There is no limit on the number of loans one can have. e. Interest may be tax deductible. c
75. Regarding student loans, which of the following is true? a. They are available only for undergraduate students. b. Parents (or legal guardians) must cosign. c. There is a limit on how much can be borrowed wirh each loan. d. There is a limit on the number of loans one can have. e. Interest does not have to be repaid. c
76. ____ loans do not have to be repaid until after you graduate from college. a. Stafford and Perkins b. Stafford and PLUS c. Perkins and PLUS d. Only Stafford e. Only Perkins a
77. If your installment loan has a variable interest rate, a. the rate will remain the same over the life of the loan. b. the amount you borrowed will change with interest rates. c. you cannot accurately predict the total interest you will pay on the loan. d. you can calculate the total interest you will pay on the loan. e. none of these are true. c
78. Commercial banks generally charge lower interest rates than other lending institutions because a. they make shorter-term loans. b. they usually take only the best credit risks. c. depositors require lower rates. d. they get their funds in the open credit market. e. they make secured loans only. b
79. A ____ is often a source of low-rate automobile financing on specific models of vehicles. a. savings and loan association b. credit union c. commercial bank d. consumer finance company e. captive finance company e
80. If you needed a loan to buy furniture, the lowest interest rate would usually be available from a a. savings and loan association. b. pawn shop. c. captive finance company. d. consumer finance company. e. credit union. e
81. The highest interest rate installment loans are usually made by a. consumer finance companies. b. commercial banks. c. credit unions. d. savings and loan associations. e. life insurance companies. a
82. Credit unions lend money to qualified people who are a. employees. b. members. c. previous borrowers. d. policyholders. e. stockholders. b
83. The majority of loans made by savings and loan associations are ____ loans. a. home improvement b. auto c. mortgage d. education e. consolidation c
84. Sales finance companies a. lend money to retailers. b. buy installment loans from retailers. c. sell installment loans to retailers. d. lend money to consumers. e. sell installment loans to banks. B
85. A loan against the cash value of your life insurance policy would be characterized by a. increased death benefits to beneficiaries. b. increased premiums. c. unchanged death benefits available to beneficiaries. d. no specific repayment date. e. annual percentage rates higher than other sources. d
86. Bob Shockey borrowed $25,000 from his $250,000 cash value life insurance policy to send his daughter to private college. Assuming he pays interest as it accrues, if Bob dies before the debt is repaid his beneficiary will receive a. $275,000. b. $250,000. c. $225,000. d. $25,000. e. Taxable income. c
87. Which of the following are recommended if you loan money to a friend or relative? a. Charge a market rate of interest. b. Have a lawyer draft a loan contract. c. Put the agreement in writing. d. Make the loan due within one year or less. e. All of the these apply. c
88. Which of the following are recommended if you loan money to a friend or relative? a. Do it in a business-like fashion. b. Charge interest if the loan is not to be quickly repaid. c. Be sure both parties understand it is a loan, not a gift. d. Lend only money you can afford to give away. e. All of the above e
89. Besides the finance charge, you should also consider ____ when you shop for a consumer loan. a. loan maturity b. total cost of the loan c. collateral requirements d. prepayment penalties e. all of the above e
90. A single-payment loan is advantageous only if a. the interest rate is less than on an installment loan. b. funds will be available to repay the lump sum. c. figured with the discount method. d. figured with the simple interest method. e. it is unsecured. b
91. A single-payment loan a. is generally unsecured by collateral. b. usually matures in one year or less. c. usually matures in five to seven years. d. is generally used to finance auto purchases. e. is provided by sales finance companies. b
92. If you borrow money with a single-payment loan and discover you cannot pay it back when it is due you should a. let the payment become past due. b. consolidate the loan. c. convert the loan to installments. d. negotiate a loan rollover e. file bankruptcy d
93. When the simple-interest method is used to determine finance charges, the interest is calculated based on the a. ending balance of the loan. b. average outstanding balance. c. actual loan balance outstanding. d. beginning balance of the loan. e. none of these. c
94. Annual percentage rate is equivalent to a. dollar cost of credit method. b. discount method. c. average loan balance method. d. add-on method. e. simple interest method. e
95. The annual percentage rate (APR) on a single-payment loan for $1,000 at a simple interest rate of 12% is a. 10%. b. 12%. c. 15%. d. 18%. e. 24%. b
96. Purchasing credit life or disability insurance protection is usually a. required in order to make the loan. b. nonnegotiable. c. at the lender’s option. d. very costly. e. a good idea for the borrower. d
97. When credit life or disability insurance protection is required as a condition of a loan, the cost a. must be added to the finance charge. b. must be included in the APR calculation. c. is generally very reasonable. d. a and b e. a, b, and c d
98. Installment loans using the simple interest method a. have the highest finance charges of any method. b. have interest charged only on the monthly loan balance. c. do not have balloon payments. d. have a lower APR than the stated interest rate. e. have a higher APR than the stated interest rate. b
99. You want to borrow $1,000 at an interest rate of 10%. The most expensive method of calculating the dollar cost of the interest on this installment loan will be the a. add-on method. b. double-declining balance method. c. discount method. d. simple interest method. e. past-due balance method. a
100. The monthly payment on an 8%, 36-month, add-on loan for $10,000 would be a. $278 b. $300 c. $314 d. $344 e. $380 d
101. Home equity loans are similar to other installment loans except a. interest rates are generally higher. b. the interest paid is generally tax deductible. c. your home is used as collateral. d. they are typically unsecured debts. e. b and c e
102. Sometimes it may be better to use savings rather than credit to make a purchase. This would be recommended when a. the borrower has adequate savings. b. interest rates are rising. c. interest rates are falling. d. the cost of borrowing is greater than the interest earned on the savings. e. interest earned on savings is greater than the interest paid on the loan. d
103. A legal claim that allows creditors to liquidate loan collateral is a a. loan. b. note. c. security claim. d. lien. e. none of these d
104. The average graduating college senior leaves school with about _______ in debt. a. $12,800 b. $18,400 c. $26,300 d. $30,000 e. $50,000 d
105. Which of the following loan sources is the most expensive? a. Commercial banks b. Credit unions c. Consumer finance companies d. Savings and loan associations c
106. Which type of educational loan most likely carries the highest interest charges? a. Stafford loan b. Perkins loan c. PLUS loan d. 529 Plan c
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Finance Flashcards

Finance Chapter 1

Which one of the following terms is defined as the management of a firm’s long-term investments? capital budgeting
Which one of the following terms is defined as the mixture of a firm’s debt and equity financing? capital structure
Which one of the following is defined as a firm’s short-term assets and its short-term liabilities? working capital
A business owned by a solitary individual who has unlimited liability for its debt is called a: sole proprietorship.
A business formed by two or more individuals who each have unlimited liability for all of the firm’s business debts is called a: general partnership
A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: limited partner.
A business created as a distinct legal entity and treated as a legal “person” is called a: corporation
Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? agency problem
A stakeholder is: any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.
Which of the following questions are addressed by financial managers?I. How should a product be marketed?II. Should customers be given 30 or 45 days to pay for their credit purchases?III. Should the firm borrow more money?IV. Should the firm acquire new equipment? II, III, and IV only
Which one of the following functions should be the responsibility of the controller rather than the treasurer? income tax returns
The controller of a corporation generally reports directly to the: vice president of finance
Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure? The treasurer reports to the vice president of finance.
Which one of the following is a capital budgeting decision? deciding whether or not to purchase a new machine for the production line
Which of the following should a financial manager consider when analyzing a capital budgeting project?I. project start up costsII. timing of all projected cash flowsIII. dependability of future cash flowsIV. dollar amount of each projected cash flow I, II, III, and IV
Which one of the following is a capital structure decision? determining how much debt should be assumed to fund a project
The decision to issue additional shares of stock is an example of which one of the following? capital structure decision
Which of the following accounts are included in working capital management?I. accounts payableII. accounts receivableIII. fixed assetsIV. inventory I, II, and IV only
Which one of the following is a working capital management decision? determining whether to pay cash for a purchase or use the credit offered by the supplier
Which one of the following statements concerning a sole proprietorship is correct? The owner of a sole proprietorship is personally responsible for all of the company’s debts.
Which of the following individuals have unlimited liability based on their ownership interest?I. general partnerII. sole proprietorIII. stockholderIV. limited partner I and II only
Which one of the following best describes the primary advantage of being a limited partner instead of a general partner? maximum loss limited to the capital invested
A general partner: is solely responsible for all the partnership debts.
A limited partnership: has a greater ability to raise capital than a sole proprietorship
Which of the following apply to a partnership that consists solely of general partners?I. double taxation of partnership profitsII. limited partnership lifeIII. active involvement in the firm by all the partnersIV. unlimited personal liability for all partnership debts II, III, and IV only
Which of the following are advantages of the corporate form of business ownership?I. limited liability for firm debtII. double taxationIII. ability to raise capitalIV. unlimited firm life I, III, and IV only
Which one of the following statements is correct? Corporations can raise large amounts of capital generally easier than partnerships can.
Which one of the following statements is correct? Both sole proprietorship and partnership income is taxed as individual income.
The articles of incorporation:I. describe the purpose of the firm.II. are amended periodically.III. set forth the number of shares of stock that can be issued.IV. detail the method that will be used to elect corporate directors. I and III only
Corporate bylaws: determine how a corporation regulates itself.
Which one of the following characteristics applies to a limited liability company? taxed similar to a partnership
Which one of the following business types is best suited to raising large amounts of capital? corporation
Which type of business organization has all the respective rights and privileges of a legal person? corporation
Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm’s debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm’s profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt? limited partnership
Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally. limited liability company
Which one of the following best states the primary goal of financial management? maximize the current value per share
Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? increase in the market value per share
Why should financial managers strive to maximize the current value per share of the existing stock? because they have been hired to represent the interests of the current shareholders
Decisions made by financial managers should primarily focus on increasing which one of the following? market value per share of outstanding stock
The Sarbanes-Oxley Act of 2002 is a governmental response to: management greed and abuses.
Which one of the following is an unintended result of the Sarbanes-Oxley Act? corporations delisting from major exchanges
A firm which opts to “go dark” in response to the Sarbanes-Oxley Act: can provide less information to its shareholders than it did prior to “going dark”.
Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002?I. increased foreign stock exchange listings of U.S. stocksII. decreased compliance costsIII. increased privatization of public corporations I and III only
Which one of the following actions by a financial manager is most apt to create an agency problem? increasing current profits when doing so lowers the value of the firm’s equity
Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.I. compensation based on the value of the stockII. stock option plansIII. threat of a company takeoverIV. threat of a proxy fight I, II, III, and IV
Which form of business structure is most associated with agency problems? corporation
Which one of the following is an agency cost? hiring outside accountants to audit the company’s financial statements
Which one of the following is least likely to be an agency problem? increasing the market value of the firm’s shares
Which one of the following is a means by which shareholders can replace company management? proxy fight
Which one of the following grants an individual the right to vote on behalf of a shareholder? proxy
Which one of the following parties has ultimate control of a corporation? shareholders
Which of the following parties are considered stakeholders of a firm?I. employeeII. long-term creditorIII. governmentIV. common stockholder I and III only
Which of the following represent cash outflows from a corporation?I. issuance of securitiesII. payment of dividendsIII. new loan proceedsIV. payment of government taxes II and IV only
Which of the following are cash flows from a corporation into the financial markets?I. repayment of long-term debtII. payment of government taxesIII. payment of loan interestIV. payment of quarterly dividend I, III, and IV only
Which one of the following is a primary market transaction? sale of a new share of stock to an individual investor
Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: was facilitated in the secondary market.
Public offerings of debt and equity must be registered with which one of the following? Securities and Exchange Commission
Which one of the following statements is generally correct? Auction markets match buy and sell orders.
Which one of the following statements concerning stock exchanges is correct? Some large companies are listed on NASDAQ.
Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following? secondary, auction market
Which one of the following statements is correct concerning the NYSE? The listing requirements for the NYSE are more stringent than those of NASDAQ.
Which one of the following statements concerning NASDAQ is FALSE? NASDAQ is an auction market
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Finance Flashcards

Finance: NPV and IRR

The difference between the present value of an investment and its cost is the: net present value.
Which one of the following statements concerning net present value (NPV) is correct? An investment should be accepted if the NPV is positive and rejected if it is negative.
The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the: payback period.
The length of time required for a project’s discounted cash flows to equal the initial cost of the project is called the: discounted payback period.
The discount rate that makes the net present value of an investment exactly equal to zero is called the: internal rate of return.
An investment is acceptable if its IRR: exceeds the required return.
A situation in which accepting one investment prevents the acceptance of another investment is called the: mutually exclusive investment decision.
The present value of an investment’s future cash flows divided by the initial cost of the investment is called the: profitability index.
An investment is acceptable if the profitability index (PI) of the investment is: greater than one.
All else constant, the net present value of a typical investment project increases when: the rate of return decreases.
Net present value: is more useful to decision makers than the internal rate of return when comparing different sized projects.
The internal rate of return is: difficult to compute without the use of either a financial calculator or a computer.
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Finance Flashcards

personal finance economics

bond This is a contract to repay borrowed money, often issued by a company. This issues financial security for a debt.
compound interest This is a method of calculating interest in which the interest is added to the principal each period so that the principal continues to grow throughout the life of the loan or investment. The formula is A = C * (1 + r/100)n where A is the future value, C is the principal, r is the interest rate per period, and n is the number of periods.
current yield The annual interest rate paid by a bond. It does not reflect the interest rate paid over the life of the bond.
disability insurance A type of insurance paid to an individual if he/she is injured and is unable to work for a specified length of time.
earnings This is a payment usually of money for labor or services usually according to contract and on an hourly basis.
excise tax This is a tax on production, transportation, sale or consumption of a certain good or service.
incentive Any factor, usually financial, to influence once choice over another by an individual or business.
income tax This is a tax levied on net personal or business income.
inflation a rise in the general level of prices
insurance A form of risk management purchased by a business or individual against a possible financial loss paid in the form of a monthly or annual premium.
interest This is a fixed charge for borrowing money; usually a percentage of the amount borrowed.
interest rate The percentage of a financial loan which is paid as a fee over a period of time.
ira This is special savings account created for an individual to spend when the person stops employment completely. It often has many tax advantages over a regular savings account.
lender The institution or individual that loans money to an individual or business at a set interest rate over a set period of time.
life insurance A special type of insurance paid to family or primary beneficiary at the time of death of the policy holder.
money market A type of checking account that also earns interest. These accounts generally have a higher minimum balance.
mutual fund A collection of investments, usually stocks, bonds, and other securities managed by a portfolio manager. The collective investment gains or loses value as a group. Generally the group of items spread the risk of items purchased individually. The net proceeds are passed to the individual investors.
professional A worker with a high level of specialized training or education that is almost always formalized.
progressive tax a tax where the percentage paid in tax increases as the level of income rises
property tax This tax is locally assessed, varies according to the worth of land and goods on it, and generally funds things like public schools.
proportional tax This is a type of taxation that takes the same percentage of one’s income regardless of how much or how little one makes.
regressive tax This is a type of taxation that takes a higher percentage of one’s salary as one’s income decreases.
return The profit or loss derived from an investment.
risk The potential that an investment will lose money.
sales tax This is a tax on goods and services, a percentage of the retail price.
semi-skilled labor Workers that may master a specific job with a few weeks of limited training.
simple interest formula The formula I = prt, where p stands for principal, r represents rate, and t represents time in years.
skilled labor Labor with a high level of training, education, and experience.
stock Certificate of ownership in a company which entitles the shareholder to vote for the board of directors of the corporation.
unskilled labor workers who are not trained to do a specific task or operate specialized machinery
stock a share of ownership in a corporation
Categories
Finance Flashcards

Finance Test 3

Financial instruments in the capital markets generally fall under what category on the balance sheet? a. Short-term liabilities and equitiesb. Long-term liabilities and equitiesc. Near cash assetsd. None of the above b. long term liabilities and equities
The majority of external financing by U.S. corporations is through the sale of a. Common Stockb. Bondsc. Preferred stockd. Options b. Bonds
Corporations prefer bonds over preferred stock for financing their operations becausea. Preferred Stocks require a dividendb. Bond interest rates change with the economy while stock dividends remain constantc. The after-tax cost of debt is less than the cost of preferred stockd. None of the above c. The after-tax cost of debt is less than the cost of preferred stock
In the _____ market, existing securities are exchanged between investors while in the _____ market, participants buy their securities directly from the source of the asseta. Primary, OTCb. Primary, secondaryc. Secondary, primaryd. Prime, sub prime c. Secondary, primary
The purpose of secondary trading is to a. Provide liquidity and pricing for investmentsb. Provide a market for primary tradingc. Provide jobs for brokers and dealersd. Provide lower commissions a. Provide liquidity and pricing for investments
The cause(s) for the increase in corporate debt is/are:a. Rapid business expansionb. Inflationary impactsc. Inadequate internally generated fundsd. All of the above d. All of the above
An indenture isa. The section of a corporation’s bylaws pertaining to bond issuesb. The summary of the essential features of a stock issuec. The contract between a corporation and bondholdersd. The underwriting contract c. The contact between a corporation and bond holders
The term debenture refers toa. Long-term secured debtb. Long-term unsecured debtc. The bond contractd. Protective covenants b. Long-term unsecured debt
A call feature allowsa. The bondholder to redeem the bond before the maturity dateb. The corporation to redeem the bond before the maturity datec. The corporation to convert the bond to common stockd. The bondholder to demand increased collateral b. The corporation to redeem the bond before the maturity date
Prices of existing bonds move _____ as market interest rates move _____a. Down, downb. Up, upc. Up, downd. Bond prices don’t move when market interest rates move c. Up, down
Which of the following is not a true statement?a. Common stockholders have a residual claim to incomeb. Bondholders may force a corporation into bankruptcy for failure to make interest paymentsc. Common stockholders are legally entitled to a dividendd. Stockholders are the owners of the corporation c. Common stockholders are legally entitled to a dividend
Under normal operating conditions, the board of directors is elected by a. The common stockholdersb. The preferred stockholdersc. The bond holdersd. None of the above a. The common stockholders
The purpose of cumulative voting a. To maintain majority control of the board of directorsb. To allow minority stockholders the possibility of a voice on the board of directorsc. To obstruct unfriendly mergers and takeover effortsd. To prevent the dilution of common stock through pre-emptive rights offerings b. To allow minority stockholders the possibility of a voice on the board of directors
Which of the following statements is not true about common stock?a. Common stockholders have a residual claim to incomeb. Common stockholders have a legal claim to dividend incomec. Common stockholders cannot force a company into bankruptcyd. There may be more than one class of common stock b. Common stockholders have legal claim to dividend income
The following are primary purchasers of preferred stock excepta. Corporate investorsb. Insurance companiesc. Pension fundsd. Individual investors d. Individual Investors
A business combination of two or more companies in which the resulting firm maintains the identity of the acquiring company is defined as a a. Consolidationb. Holding companyc. Conglomerated. Merger d. Merger
Synergy is said to occur when the whole isa. Equal to the sum of partsb. Less than the sum of the partsc. Greater than the sum of the partsd. None of the above c. Greater than the sum of the parts
Which of the following is not a motive for selling stock in a company being acquired?a. Opportunity to diversifyb. An attractive pricec. Tax advantaged. None of the above c. Tax advantage
An example of a horizontal merger would bea. Pepsi and Searsb. McDonalds and Pillsburyc. Pepsi and Frito Layd. Coca Cola and Dr. Pepper d. Coca Cola and Dr. Pepper
Selling stockholders in a merger may be willing to part with their shares becausea. The offered shares may be more marketableb. The price they are offered may be above the market valuec. They can attain a greater degree of diversificationd. All of the above d. All of the above
The Majority of external financing is U.S. corporations is through the issuance of:a. Common Stockb. Bondsc. Preferred Stockd. ECNse. Options b. Bonds
The OTC market is primarily regulated by thea. OTCb. NYSEc. SECd. FTCe. NASD e. NASD
The primary benefit provided investors by security markets is:a. Guaranteed returns b. Liquidityc. Riskless tradingd. Costless tradinge. Access to all relevant security information b. Liquidity
The market for securities having maturities of more than one year is called the:a. Intermediate marketb. Money marketc. International marketd. Capital markete. Domestic market d. Capital market
Which of the following owns securities and seeks to earn a profit from buying and selling?a. Brokersb. SECc. OTCd. Dealerse. National Association of Securities Dealers d. Dealers
An issuer may be required to fund the retirement of a bond issue by:a. Conversionb. Call featurec. Mortgage agreementd. Sinking funde. Refunding d. Sinking fund
The legal agreement that details a security issuer’s obligation is called an:a. Indentureb. Trusteec. Covenantd. Pledgee. Assignment a. Indenture
Which type of voting allows minority stockholders to elect some of the directors of a corporation?a. Majorityb. Preferredc. Commond. Cumulativee. Preemptive d. Cumulative
Which of the following has the lowest claim to assets in bankruptcy?a. Common Stockb. Convertible preferred stockc. Preferred stockd. Corporate bondse. Convertible exchangeable preferred stock a. Common Stock
Which of the following statements is correct?a. Preferred stock dividends are tax deductibleb. COmmon stock dividends are tax deductiblec. Seventy percent of intercorporate interest is tax exemptd. The cost of distribution is highest for corporate bonds e. Seventy percent of intercorporate dividends are tax exempt to the receiving firm e. Seventy percent of intercorporate dividends are tax exempt to the receiving firm
A surprise takeover offer made immediately before the market closes for the weekend is calleda. White Knightb. Saturday Night Specialc. Leveraged takeoverd. Poison pille. pooling of interests b. Saturday Night Special
A business combination of two or more firms resulting in a new entity is aa. Mergerb. Acquisitionc. Synergismd. Consolidatione. Purchase of assets d. Consolidation
Which of the following discourages takeover attempts?a. Large cash balances of target firmsb. Business risk reductionc. Financial risk reductiond. Increasing dividends of target firm e. Synergism d. Increasing dividends of target firm
Which of the following is a financial motive for business combination?a. Expansion of marketing capabilities b. Acquisition of new productsc. Attract prestigious investment bankersd. 2+2=5e. Obtain a corporate jet c. Attract prestigious investment bankers
Which of the following is probably the most important nonfinancial motive for a merger?a. Acquisition of new productsb. Synergismc. Portfolio effectd. Expansion of management capabilities e. Tickets to the Super Bowl b. Synergism