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Finance Flashcards

Personal Finance- Chapter 11- Planning for Health Care Expenses

Premiums The monthly or annual cost of a health care plan
Patient Protection and Affordable Care Act (ACA) The law passed by Congress in 2010 to provide affordable health insurance for all US citizens and reduce the growth in health care spending
Essential Health Benefits A list of ten categories of benefits that all health care plans sold on the health insurance exchanges must providee
Health insurance exchange (HIX) Stat-by-state mechanisms established by the ACA through which consumers can purchase a health care plan
Health care plan Generic name for any program that pays or provides reimbursement for health care expenditures
Group health plan Sold collectively to an entire group of people rather than to individuals, such as the group health care policies offered by employers
Health insurance Provides protection against direct medical expenses resulting from illness and injury based on the concept of payment after an expense occurs
Deductibles Clauses in health care plans that require the participant to pay an additional portion of health expenses annually before receiving reimbursement
Health maintenance organizations (HMOs) Health insurance plans that provide a broad range of health care services for a set monthly fee on a prepaid basis
Preferred provider organization (PPO) Group of health care providers (doctors, hospitals, and other health care providers) who contract with a health insurance company to provide services at a discount
COBRA rights The Consolidated Omnibus Budget Reconciliation Act of 1985 allows a former employee to remain a member of a group health plan for as long as 18 months if the employee worked for an employer with more than 20 workers
Medicare The federal government’s health care program for the elderly
Medicaid A government health care program for low-income people funded jointly by the federal and state governments
Health savings account (HSA) Tax-deductible savings account into which individuals or employers can deposit tax-sheltered funds to pay medical bills
Certificate of insurance Document or booklet that outlines group health insurance benefits
Co-payment A variation of a deductible that requires you to pay a specific dollar amount each time you use your benefits for a specific covered expense item
Coinsurance clause A clause in a health care plan that requires the participant to pay a proportion of any loss suffered
Long-term care insurance Provides reimbursement for costs associated with custodial care in a nursing facility Or at home
Activities of daily living (ADLs) Insurance companies use the inability to perform a certain number of such activities as a criterion for deciding when the insured becomes eligible for long-term care benefits
Custodial care Suitable for people who do not need skilled nursing care but who nevertheless require supervision (for example, help with eating or personal hygiene)
Benefit period The maximum period of time for which benefits will be paid under a disability income or other insurance
Waiting period (elimination period) The time period between the onset of a disability and the date that disability benefits begin
Disability income insurance Insurance that covers a portion of the income lost when you cannot work because of illness or injury
Social Security Disability Income Insurance Under this government program, eligible workers can received some income if their disabilities are total, meaning that they cannot work at any job
Any-occupation policy Provides full benefits only if the insured cannot perform any occupation
Residual clause Feature of own-occupation policies that allows for some reduced level of disability income benefits when a partial-rather than full-disability strikes
Social Security rider Provides an extra dollar amount of protection if a person fails to qualify for Social Security disability benefits (70 percent of all applicants are rejected)
Advance medical directives Treatment preferences and the designation of a surrogate decision maker in the even that a person should become unable to make decisions on her or his own behalf
Health care proxy A legal document in which individuals designate another person to make health care decisions on their behalf if they are rendered incapable of making their wishes known
Living will Allows you to document in advance your specific wishes concerning medical treatments in an emergency or during end-of-life health care
Will is concerned that his monthly disability income benefit would be eroded by inflation in case of a long-term disability. Which policy provision would guard against this problem? Cost-of-living adjustments
Your health insurance requires that you pay $50 each time you visit the doctor’s office and $15 for each prescription drug. This is an example of A copayment
One cannot rely on worker’s compensation to cover your health care needs because it Covers only job-related injuries and illnesses
Which of the following best describes a preexisting condition? A previously diagnosed medical condition
A legal document in which individuals designate another person to make health care decisions on their behalf if they are incapable of making their wishes known is called a health care proxy
___is a long-term care provision that is especially important for a relatively young person purchasing this type of insurance. Inflation protection
Which of the following government programs is jointly funded by federal and state governments? Medicaid
Traditional health insurance provides protection against direct medical expenses and, thus, does not cover lost income when you cannot work due to illness or injury
Eligibility for which of the following is based on household income and net worth? Medicaid
To make it possible for consumers to comply with the individual mandate to buy health insurance the Affordable Care Act established____ run by their states or the federal government health insurance exchanges
In what way(s) can health care costs potentially provide an income tax benefit? All of these(itemizing deductions for health care expenditures, flexible spending arrangement through an employer, and writing off a portion of premium by self-employed people)
Your waiting period on disability income insurance can be____ if you have some savings set aside as an emergency fund. lengthened
Medicare Part B covers all of the following except hospitilization
Lyle’s health care plan will pay 75 percent of all covered expenses over the first $500 per year. This policy contains coinsurance and deductible
The disability income insurance feature that provides a reduced level of benefit when you suffer a partial disability is called a residual clause
A longer waiting period on a disability income policy will reduce the disability income insurance premium
The period of time each year when you can make changes in your selection of health care plans available from your employer is called a(n) open-enrollment period
Which of the following can provide increased disability income from your disability income policy whenever you do not qualify for Social Security disability benefits? social security rider
Which of the following is NOT true of Medicare Part B? Does not cover outpatient care
The cost of a health maintenance organization is generally a(n) monthly fee, a deductible, and copayments
Long-term custodial care is covered by Medicaid
Persons who have a high-deductible health plan can make tax-sheltered deposits into an investment account called a___ from which they can pay medical expenses health savings account
A____ does not take effect until a specified event occurs, usually physical or mental incapacitation durable power of attorney
_____provide(s) preventative care as well as other types of care for a set monthly fee which is considered to be advance payment for the care received Health maintenance organization (HMO)
Traditional health insurance plans typically have___and____requirements that result in out-of-pocket costs for the insured deductibles; coinsurance
__provide(s) preventative care as well as other types of care for a set monthly fee which is considered to be advance payment for the care received. health maintenance organization (HMO)
Drawbacks of an HMO include limited choice of physicians
Most companies will NOT write disability income policies for more than___percent of one’s after-tax earnings. 60 to 80
Lance, a volunteer baseball coach, was hit by a hard line drive. As a result of the injury, Lance was taken to the emergency room for treatment and admitted to the hospital. Lance’s covered expenses totaled $4,000. How much of the $4,000 will Lance have to pay if these are his first medical expenses of the year and he has the following health insurance coverage?$500 deductible per year80/20 coinsurance$1,000 per year out-of-pocket coinsurance cap $1,200
Medicare Part A is a hospitalization program for persons over 65 and requires no premiums
Your waiting period on disability income insurance can be__ if you have some savings set aside as an emergency fund lengthened
You can help yourself afford a longer benefit period under a long-term care insurance plan by selecting a longer waiting period
If a long-term care policy is purchased prior to age___,the buyer faces a significant risk because inflation may render the daily benefit woefully inadequate when care is ultimately needed 60
Health care plans for Medicare eligible people that are purchased through a private company and provide both Medicare Parts A and B coverage are called. Medicare Advantage Plans
In a dual-income household where both employers provide a health care plan, it is important to choose to be covered under the plan that provides__and is___. more protection; less expensive
Reimbursement for costs associated with intermediate and custodial care in a nursing facility or at home is provided by long-term care insurance
A___ does not take effect until a specified event occurs, usually physical or mental incapacitation durable power of attorney
Under the Affordable Care Act, all health care plans must include ten specified essential health benefits
A person who wants to continue health insurance coverage through your COBRA rights must pay the full premiums plus a 2 percent administrative fee
An alternative name for traditional health insurance is a(n)? fee-for-service plan
A group of physicians and hospitals who have banded together to offer a health insurance contract in areas where there is no available HMO is called a preferred-provider network
To qualify as a high-deductible health care plan, the deductible must be at least $1000
Under the Affordable Care Act, your level of income used to calculate the maximum tax penalty if you have a health care plan is your modified adjusted gross income
Categories
Finance Flashcards

personal finance- chapter 6 & 7 & 8

The single best indicator of the true cost of credit isa. annual percentage rateb. annual percentage yieldc. finance charged. interest a. annual percentage rate
The total amount a lender charges you to borrow money as measured in dollars is calleda. the finance chargeb. the annual percentage ratec. the prinicpald.interest a. the finance charge
A detailed account of one’s credit history complied by a credit bureau is contained in thema. credit scoreb. credit ratingc. credit reportd. credit opportunity file c. credit report
Using the debt payments-to-disposable income method for a person whose monthly debt payments exclude their mortgage, consider the following: What percentage of their disposable income would be considered seriously over-indebted?a. 10-14b. 15-18c. 19-28d. 29+ c. 19-28
Which of the following methods for determining your own maximum debt includes your level of mortgage payments?a. continuous debt methodb. debt payments-to-disposable income methodc. debt-to-income methodd. debt-to-equity method b. debt payments-to-disposable income method
Which of the following methods for determining your own maximum debt limit divides your debt repayments by your take-home pay?a. continuous debt methodb. debt payments-to-disposable income methodc. debt-to-income methodd. debt-to-equity method c. debt-to-income method
The process for creating a statistical measure to rate applicants for credit on the basis of various factors relevant to creditworthiness and the likeliness of repayment is calleda. a credit recommendationb. credit historyc. credit scoringd. a credit investigation c. credit scoring
Your only source for a truly free credit report isa. freecreditreport.comb. creditfree.comc. annualcreditreport.comd. freecreditcheck.com c. annualcreditreport.com
The amount of outstanding debt on a credit card as compared to the credit limit on that card is referred to as thea. credit utilization ratiob. debt-to-equity ratioc. debt maximum potentiald. credit opportunity ratio a. credit utilization ratio
A loan used to pay off other debts and reduce the total monthly payments by extending the payback period or by obtaining a lower APR is called a(n)a. add-on loanb. debt consolidation loanc. credit amalgamation loand. garnished loan b. debt consolidation loan
Which of the following provides individual credit counseling, assistance with financial problems, educational materials on credit and budgeting, and a debt management plan as an alternative to bankruptcy?a. nonprofit credit counseling agenciesb. credit repair companiesc. credit bureaus d. for-profit credit counselors a. nonprofit credit counseling agencies
The debt payment to disposable income ratio:a. Is a lame and unimportant ratio you don’t need to calculateb. Tell you if you have too much nonmortgage debtc. Should be greater than 14%d. Tells you what to spend money on b. Tell you if you have too much nonmortgage debt
The debt payment to disposable income ratio is calculated by:a. dividing monthly nonmortgage debt repayments by disposable incomeb. dividing monthly student loan repayment by disposable incomec. dividing monthly credit card debt by disposable incomed. dividing monthly utility bills by disposable income a. dividing monthly nonmortgage debt repayment by disposable income
Finance charges are:a. the interest that a borrower demandsb. the interest that a borrower has to payc. the interest a lender demandsd. the interest a lender has to pay b. the interest that a borrower has to pay
The fine print on credit cards could include any of the following EXCEPT:a. application feesb. overlimit feesc. mismatched sock feesd. late fees c. mismatched sock fees
Your credit score is:a. a numerical measurement of how much debt you haveb. a numerical measurement of how many credit lines you have open at any given timec. a numerical measurement of your ability to repay consumer debt as promisedd. a numerical measurement of your waistline c. a numerical measurement of your ability to repay consumer debt as promised
A low credit score means:a. you are one of the worst karaoke singersb. you are one of the best borrowersc. you are highly likely to repay your debtd. you are highly unlikely to repay your debt d. you are highly unlikely to repay your debt
Credit counselors are:a. people who will validate your feelingsb. nonprofit organizations that help young women dress professionally for workc. people you can talk to about your feelingsd. nonprofit organizations that help educate people on consumer credit d. nonprofit organizations that help educate people on consumer credit
Debt Management Plans are NOT:a. useless agreements that lock you into more debtb. formal agreement that make fixed payments to go each creditor until the debt is paidc. formal agreements often brokered by a credit counselord. a way to help fix credit problems a. useless agreements that lock you into more debt
The single best indicator of the true cost of credit isa. annual percentage rateb. annual percentage yieldc. finance charged. interest a. annual percentage rate
The total amount a lender charges you to borrow money as measures in dollars is calleda. the finance chargeb. the annual percentage ratec. the principald. interest a. the finance charge
A detailed account of one’s credit history compiled by a credit bureau is contained in thema. credit scoreb. credit ratingc. credit reportd. credit opportunity file c. credit report
Variable or adjustable rate loans:a. Are better because the interest rate is lowerb. Have an interest rate that doesn’t change over the life of the loanc. Have an interest rate that can change over the life of a loand. Are better because the payments will never change in amount c. Have an interest rate that can change over the life of a loan
Interest rate risks falls upon whom in a variable or adjustable rate loan:a. the lenderb. the borrowerc. the marketd. your father b. the borrower
Open-ended credit or revolving credit works like so:a. you pay in advance and then you get a monthly allowanceb. your borrow but don’t have to pay it backc. you borrow and then you pay it offd. you pay in advance and use it like a checking account c. you borrow and then you pay it off
One drawback of open-ended credit or revolving credit is:a. it can help when you don’t have cash on youb. it can lead to finance chargesc. it is very easy to used. it can help you build credit history b. it can lead to finance charges
Introductory rates are:a. low initial rate that only last temporarilyb. also known as teaser ratesc. very attractive but have major downsidesd. all of the above d. all of the above
The default rate means that if the borrower does not follow the rules of the loan agreement:a. no big dealb. the interest rate can skyrocketc. the interest rate can plummetd. the interest rate will not change b. the interest rate can skyrocket
Average daily balance is:a. the number of days in the period divided by the sum of the balance owed on each day of the periodb. the number of days in the period divided by the smallest balance of the monthc. the number of days in the period divided by the largest balance of the monthd. the sum of the balances owed on each day of the period divided by the number of days in the period d. the sum of the balances owed on each day of the period divided by the number of days in the period
Average daily balance multiplied by the interest rate gives you:a. the amount of interest that can be chargedb. the tax ratec. betad. the rate of return a. the amount of interest that can be charged
Secured loans differ from unsecured loans in that:a. they are tired down to a particular spot on the groundb. they are backed by some collateral that was pledgedc. they make you feel really safed. they are kept in a safe deposit box at a bank b. they are backed by some collateral that was pledged
Unsecured loans:a. can be auto loans with a lien on the automobileb. can be mortgages with a lien on the housec. are also known as cash advancesd. are also known as signature loans d. are also known as signature loans
Payments for installment loansa. include some interest and some principalb. include neitherc. include only interestd. include only principal a. include some interest and some principal
Installment loans differ from balloon payment loans in that:a. payments on installment loans are different each month for the life of the loanb. payments on balloon loans are same each month for the life of the loanc. payments on balloon loans are huge in the beginning and then decrease for the life of the loand. payments on installment loans are the same each month for the life of the loan d. payments on installment loans are the same each month for the life of the loan
Amortization is:a. the distribution of payments over seasb. the distribution of people over seasc. the distribution of people over timed. the distribution of payments over time d. the distribution of payments over time
An amortization schedule will show how each payment in an installment loan is:a. separated into people and interestb. separated into principal and incomec. separated into people and incomed. separated into principal and interest d. separated into principal and interest
A prepayment penalty is:a. a giant fee charged just because the lender is a jerkb. a giant fee charged if you pay too latec. a giant fee charge if you pay as promisedd. a giant fee charged if you pay too early d. a giant fee charged if you pay too early
A prepayment penalty benefits who:a. the lenderb. the peoplec. the governmentd. the borrower a. the lender
With ________ credit, the borrower must repay the amount owed plus interest in a specific number of equal payments, usually monthly.a. revolvingb. open-endedc. installmentd. periodic c. installment
You can continue to make use of an open-ended credit account as long as:a. the amount owed is below your credit limitb. you can afford the monthly repaymentsc. the amount owed is equal to or below your credit limitd. you payments are on time a. the amount owed is below your credit limit
VISA and MasterCard are examples ofa. installment creditb. travel and entertainment accountsc. thirty-day accountsd. bank credit card accounts d. bank credit card accounts
The APR for a charge account is divided by the number of billing periods per year is thea. monthly percentage rate (MPR)b. average daily balancec. monthly finance charged. periodic rate d. periodic rate
The ending balance on your credit card statement last month was $1200 and your average daily balance was $900. The APR on the card is 18 percent. What was the finance charge for the month?a. $13.50b. $18.00c. $16.20d. $21.60 a. $13.50
Being over 60 days past-due on a credit card can result in your lender raising the APR on that card and on other-credit cards you have with the lender. This new APR is referred to as a(n)a. error rateb. cumulative ratec. penalty rated. nominal rate c. penalty rate
Financial institutions that offer a variety of consumer loans from funds obtained primarily from depositors are calleda. consumer finance companiesb. depository institutionsc. commercial banksd. mutual funds b. depository institutions
A lender whose primary business is financing the sales of its parent company such as a vehicle manufacturer is called a a. sales finance companyb. credit unionc. consumer finance companyd. pawnshop a. sales finance company
A loan backed up by collateral is referred to as a(n)a. secured loanb. installment loanc. signature loand. line of credit a. secured loan
Which type of purchase loan calls for title of the property involved to be transferred to the buyer only when the final payment has been made?a. installment purchase agreementb. secured mortgagec. simple-interest loand. conditional sales contract d. conditional sales contract
Charging interest periodically over the course of a loan based upon the unpaid balance each period is referred to as the _________ _________ methoda. discount interestb. add-on interestc. declining balanced. simple interest c. declining balance
What is the monthly payment for a $200,000, three-year, 10-percent loans with the interest calculated using the add-on method?a. $167b. $556c. $611d. $722 d. $722
You wish to obtain a $1,000 single-payment loan and have four loan options to choose from. Loan A is a two-year loan with an 8 percent APR and finance charge of $160. Loan B is a one-year loan with a 9 percent APR and a finance charge of $90. Loan C is a two-year loan with an 11 percent APR and a finance charge of $220. Loan D is a discount method loan for one year with a finance charge of $85. Which loan is the best deal?a. Loan Ab. Loan Bc. Loan Cd. Loan D a. Loan A
When buying a vehicle, pre-shopping research would focus on all of the following excepta. cost of car insuranceb. trade-in valuec. gap insuranced. cost of financing c. gap insurance
Before interacting with a seller in any major way when making a major expenditure you should do all of the following excepta. prioritize your wantsb. do pre-shopping researchc. fit the expenditure into your budgetd. comparison shopping d. comparison shopping
Which of the following is the retail price set by a vehicle manufacturer and posted on the window sticker, and is higher than the price you should expect to pay?a. invoice priceb. manufacturer’s suggested retail pricec. dealer invoice priced. initial negotiation price b. manufacturer’s suggested retail price
If you finance a vehicle through the dealer to get a low APR and the dealer will keep the rebate, you shoulda. file a complaint in order to get the rebate, toob. ignore the fact that you lost the rebatec. add the rebate to your first monthly paymentd. add the rebate to the finance charge on the dealer loan and recalculate the APR to compare to financing you have arranged on your time d. add the rebate to the finance charge on the dealer loan and recalculate the APR to compare to financing you have arranged on your own
The term “best buy” refers to a product witha. lowest price without regard for qualityb. acceptable quality at a fair pricec. highest quality at a reasonable priced. lowest quality without regard for price b. acceptable quality at a fair price
Which of the following is a disadvantage of an open-end lease as compared to a closed-end lease?a. other things being equal, an open-end lease will cost more per monthb. with an open-end lease, you cannot purchase the vehicle at the end of the lease periodc. you may be required to come up with more money at the end of an open-end lease periodd. under an open-end lease the buyer takes title to the vehicle during the lease period c. you may be required to come up with more money at the end of an open-end lease period
All negotiation for buying a new car should start with getting a firm commitment from the dealer on thea. price of the carb. trade-in value of your old carc. price of the service contractd. interest rate on financing a. price of the car
Attempts by a vehicle seller to raise the price on a product that had previously been agreed upon when it is time to sign the final contract is referred to as a. lowballingb. highballingc. haggingd. negotiating a. lowballing
In which step of the buying process would you come to an agreement with a seller on the actual terms of the deal?a. comparison shoppingb. making the decisionc. comparison pricingd. negotiating d. negotiating
Which of the following related to the legal right to back out of a signed contract is not a myth?a. 3-day cooling off rule for sales occurring away from the seller’s usual place of businessb. 7-day recission period on vehicle salesc. 3-day cooling off rule for all purchases from established businessesd. buyer’s remorse a. 3-day cooling off rule for sales occurring away from the seller’s usual place of business
The term used for the process of righting the wrong when a product or service is not satisfactory isa. negotiationb. redressc. rebalancingd. plaintiff b. redress
Under which of the following dispute resolution procedures does a neutral third party make a judgement that is binding on at least one of the parties?a. arbitrationb. small claims courtc. civil courtd. mediation a. arbitration
A loan pre-approval:a. happens before you make a big purchaseb. happens after you eat a big mealc. happens before you eat a big meald. happens after you make a big purchase a. happens before you make a big purchase
A loan pre-approval has the effect of:a. showing a buyer you are seriousb. showing off your absc. showing off your assetsd. showing your family and friends that you are serious a. showing a buyer you are serious
Extended warranties are NOT available for:a. your refrigeratorb. your cell phonec. your computerd. your marriage d. your marriage
Extended warranties are:a. a good idea because they will certainly pay offb. not always worth itc. a good idea because they give you peace of mindd. always worth it b. not always worth it
The dealer invoice price tells you:a. what was the cost to Santa Clausb. what was the cost to the manufacturerc. what was the cost to the sellerd. what was the cost to the dealer d. what was the cost to the dealer
The dealer holdback is:a. a discount from the manufacturer to the dealerb. a discount from the dealer to the manufacturerc. a discount from the manufacturer directly to youd. when a dealer keeps huge secret from you a. a discount from the manufacturer to the dealer
rebate an inducement to purchase that takes the form of a partial refund of a car’s purchase price
impulse purchase the purchase of a good or service without fully considering your priorities and the availability of any alternatives
lease an arrangement in which a lessee receives the use of an item, such as a car or a house, in exchange for scheduled payments for a fixed period
dealer holdback this rebate, calculated as a percentage of the vehicle’s invoice price, that increases the dealer’s profit and allows a vehicle to be sold for less than either the vehicle’s sticker price or the dealer’s invoice price
sticker price the popular name given to the manufacturer’s suggested retail price (MSRP), which by federal regulation is posted on the vehicle’s window
residual value this item refers to the estimated value of a leased asset at the end of the lease period
low-balling the practice involving unethical car dealers who first quote a low sales price to induce a potential customer to make an offer and then attempt to add costly add-ons to the transaction prior to the signing of the contract
gross capitalized cost the price of a leased asset as specified in the lease agreement, which includes the negotiated cost of the vehicle and any applicable fees and taxes
gap insurance an insurance policy that pays the policyholder the difference between the actual cash value (AVC) that the insurance company pays when a vehicle is declared a total loss and the outstanding loan amount on the purchase of the vehicle
Categories
Finance Flashcards

Business Finance test 2 chapter 9

Any changes to a firm’s projected future cash flows that are caused by adding a new project are referred to as:A- eroded cash flows.B- deviated projections.C- incremental cash flows.D- directly impacted flows.E- opportunity cash flows. C- incremental cash flows.
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n):A- fixed cost.B- forgotten cost.C- variable cost.D- opportunity cost.E- sunk cost. E- sunk cost
Which one of the following terms refers to the best option that was foregone when a particular investment is selected?A- Side effectB- ErosionC- Sunk costD- Opportunity costE- Marginal cost D- Opportunity cost
The amount by which a firm’s tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:A- tax shield.B- credit.C- erosion.D- opportunity cost.E- adjustment. A- tax shield
Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as:A- sensitivity analysis.B- erosion planning.C- scenario analysis.D- benefit planning.E- opportunity evaluation C- scenario analysis.
Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project’s net present value. What type of analysis is being conducted?A- Sensitivity analysisB- Erosion planningC- Scenario analysisD- Benefit-cost analysisE- Opportunity cost analysis A- Sensitivity analysis
The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of:A- any expected changes in the sales levels of current products caused by adding the new product line.B- cost of new display counters for the additional winter footwear.C- increased taxes from winter footwear profits.D- the research and development costs to produce the current winter footwear samples.E- the expected revenue from winter footwear sales. D- the research and development costs to produce the current winter footwear samples.
Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. All of the following are relevant costs to this project with the exception of: A- the cost of additional utilities required to operate the serving tray production operation.B- any change in the expected sales of plates and silverware gained from offering trays also.C- a percentage of the current operating overhead.D- the additional plastic raw materials that would be required.E- the cost to acquire the forms needed to mold the trays. C- a percentage of the current operating overhead.
The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land?A- The sum of the cash paid to date for both the lot and the improvementsB- The original purchase price onlyC- The current market value of the land plus the cash paid for the improvementsD- The current market value of the landE- Zero because the land and the improvements were previously purchased with cash D- The current market value of the land
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost?A- ErosionB- BookC- SunkD- MarketE- Opportunity C- Sunk
CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?A- Present value of the future incomeB- Cost of the remodelingC- Current market value of the buildingD- Initial cost of the building plus the remodeling costsE- Current market value of the building plus the remodeling costs C- Current market value of the building
Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, originally cost $1.8 million, is currently fully paid for, but needs modernized. Bruce is trying to decide whether to accept an offer and sell Beef and More, as is, for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause an aftertax net loss of $90,000 in today’s dollars. The estimated present value of the cash inflows from the renovated restaurant is $3.2 million. When analyzing the renovation project, what cost, if any, should be included for the current restaurant?A- $0B- $1.1 millionC- $1.1 million + $90,000D- $1.8 million + 1.3 million + 90,000E- $3.2 million -($1.8 million + 1.3 million + 90,000) B- $1.1 million
Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis with the exception of the cost:A- of the property insurance premium increase.B- of the exterior landscaping that will be required once the expansion is complete.C- of the additional sales person that will be required.D- of the inventory required to fill the additional retail space.E- of the blueprints that have been drawn of the expansion area. E- of the blueprints that have been drawn of the expansion area.
Thrill Rides is considering adding a new roller coaster to its amusement park. The addition is expected to increase its overall ticket sales. In particular, the company expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. All of the following are side effects associated with the new roller coaster with the exception of the: A-increased food sales.B- additional sales for the existing coaster.C- increased food costs.D- reduced sales for the boat ride.E- ticket sales for the new coaster. E- ticket sales for the new coaster.
The analysis of a new project should exclude:A- tax effects.B- erosion effects.C- side effects.D- sunk costs.E- opportunity costs. D- sunk costs.
The net working capital invested in a project is generally:A- a sunk cost.B- an opportunity cost.C- recouped in the first year of the project.D- recouped at the end of the project.E- depreciated to a zero balance over the life of the project. D- recouped at the end of the project.
A proposed project will increase a firm’s accounts payables. This increase is generally:A- treated as an erosion cost.B- treated as an opportunity cost.C- a sunk cost and should be ignored.D- a cash outflow at Time zero and a cash inflow at the end of the project.E- a cash inflow at Time zero and a cash outflow at the end of the project. E- a cash inflow at Time zero and a cash outflow at the end of the project.
Which of the following create cash inflows from net working capital? A- Decrease in accounts payable and increase in accounts receivableB- Decrease in both accounts receivable and accounts payableC- Increase in accounts payable and decrease in inventoryD- Increase in both accounts receivable and inventoryE- Increase in inventory and decrease in cash C- Increase in accounts payable and decrease in inventory
The pro forma income statements for a proposed investment should include all of the following except: A- fixed costs.B- forecasted sales.C- depreciation expense.D- taxes.E- changes in net working capital. E- changes in net working capital.
Assume an all-equity firm has positive net earnings. The operating cash flow of this firm:A- ignores both depreciation and taxes.B- is unaffected by the depreciation expense.C- must be negative.D- increases when the tax rate decreases.E- is equal to net income minus depreciation. D- increases when the tax rate decreases.
The tax shield approach to computing the operating cash flow, given a tax-paying firm:A- ignores both interest expense and taxes.B- separates cash inflows from cash outflows.C- considers the changes in net working capital resulting from a new project.D- ignores all noncash expenses and their effects.E- recognizes that depreciation creates a cash inflow. E- recognizes that depreciation creates a cash inflow.
Which one of the following will increase the operating cash flow as computed using the tax shield approach?A- Decrease in depreciationB- Decrease in salesC- Increase in variable costsD- Decrease in fixed costsE- Increase in the tax rate D- Decrease in fixed costs
Scenario analysis is best described as the determination of the:A- most likely outcome for a project.B- reasonable range of project outcomes.C- variable that has the greatest effect on a project’s outcome.D- effect that a project’s initial cost has on the project’s net present value.E- change in a project’s net present value given a stated change in projected sales. B- reasonable range of project outcomes.
Which one of the following is a correct value to use if you are conducting a best-case scenario analysis?A- Sales price that is most likely to occurB- Lowest expected level of sales quantityC- Lowest expected salvage valueD- Highest expected need for net working capitalE- Lowest expected value for fixed costs E- Lowest expected value for fixed costs
Scenario analysis asks questions such as:A- How will changing the number of units sold affect the outcome of this project?B- What is the best outcome that should reasonably be expected?C- How much will a $1 increase in the variable cost per unit change the net present value?D- Will the net present value increase or decrease if the quantity sold increases by 100 units?E- How will the operating cash flow change if the depreciation method is changed? B- What is the best outcome that should reasonably be expected?
Scenario analysis:A- determines the impact a $1 change in sales has on a project’s internal rate of return.B- determines which variable has the greatest impact on a project’s net present value.C- helps determine the reasonable range of expectations for a project’s anticipated outcome.D- evaluates a project’s net present value while sensitivity analysis evaluates a project’s internal rate of return.E- determines the absolute worst and absolute best outcome that could ever occur. C- helps determine the reasonable range of expectations for a project’s anticipated outcome.
Sensitivity analysis:A- looks at the most reasonably optimistic and pessimistic results for a project.B- helps identify the variable within a project that presents the greatest forecasting risk.C- is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional.D- is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable.E- illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project. B- helps identify the variable within a project that presents the greatest forecasting risk.
The Green Tomato purchased a parcel of land six years ago for $389,900. At that time, the firm invested $128,000 grading the site so that it would be usable. Since the firm wasn’t ready to use the site itself at that time, it decided to lease the land for $48,000 a year. The Green Tomato is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $415,000. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land?A- $0B- $389,900C- $415,000D- $229,000E- $101,900 C- $415,000
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Finance Flashcards

Personal Finance: Unit 3

What does your FICO score represent? -Income to debt ration-Credit worthiness-Length of credit history
Secured Debt When a lender gives you money in exchange for collateral
Unsecured debt a debt that does not have specific property serving as collateral for payment
What happens if you fail to make a payment on an unsecured debt? The creditor cannot take any of your property without first suing you
Depreciation When an asset decreases in value over time
What happens if you miss one payment on a credit card? You get accessed a late fee
What happens if you miss two payments on a credit card? You get charged a higher interest rate and a late payment fee
If you have $1,000.00 on a credit limit and the interest rate is 23.7% per year, how much interest will you pay for one year? $1,000.00×23.7=$237.00
What is the typical length of time for a home mortgage? 30-years
How many payments are in a 30-year loan? 360 monthly payments
Savings investment Savings plan or method you can employ to save money ocer time
Short-term financial goal A financial goal to be achieved within a period of time less than twelve months
Long-term financial goal A financial goal to be achieved within a period of twelve months or more
Down Payment The part of the purchase price of a higher-priced item that the buyer pays, usually in cash, and its not included in the loan amount
Lump Sum A one-time payment not expected to recur
Risk seeking An individual who tends to prefer higher risk (possibly higher reward) investments
Risk averse An individual who tends to prefer lower risk (lower return) investments
Venture capital An investment by an individual or venture capital corporation used to start a new or unusual undertaking
Investment bank A firm that acts as an intermediary between a company that needs additional money and potential investors
Certificates of deposit A document representing the money an individual deposits into a financial institution for a set period of time as a specified interest rate
Mortgage The best type of safety net in hard times
How many years do you need to live in a home to break even on closing costs? Three years
What is the most complicated financial transaction that the average American will ever undertake? Buying a home
Real estate is considered to be a ________ investment. illiquid
Why is real estate considered a illiquid investment? it typically cannot be easily sold or exchanged for cash without substantial loss in value and lack of ready/willing investors
Individual credit score Individual mortgage interest rates are generally determined this way
PMI stands for what? Personal (private) Mortgage Insurance
Who dictates how much insurance homeowners must carry on their property? The bank that holds the mortgage
If you have a 30-year loan, how much interest are you paying the first few years? Around 90%
Why is investing in gold beneficial? It is considered a stable investment
Why would some homeowners need hurricane, flood and firestorm insurance? Depends on the location of the home
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Finance Flashcards

Finance CH. 5 Quiz

Prequalification provides a home buyer with information regarding the specific mortgage amounts he or she is eligible for subject to the expected changes in interest rates.TrueFalse True
Jane and Smith are considering the purchase of a home in downtown Minneapolis. They approached Larson’s Mortgagers Inc. to arrange for the financing needed for their home. This process of arranging with a mortgage lender in advance of buying a home is called?a. contingency auctionb. prequalificationc. diversificationd. foreclosuree. real estate short sale b. prequalification
Fredrick purchased a property worth $150,000 on mortgage. He had paid $30,000 as a down payment on this property. However, because of a recent slump in the real estate prices, the property is worth only $110,000, forcing Fredrick to sell the property. Assuming that no mortgage payments have been made by Fredrick, this sale is termed a(an) _____.a. real estate declining equityb. shrinking principal salec. indexed equityd. real estate short salee. fixed mortgage sale d. real estate short sale
Assume that you have taken a car on a closed-end lease for a period of 5 years. At the end of the fifth year, you would need to pay additional money only a. when the mileage limits are exceeded b. when the residual value is lower than expected c. when the residual value is more than expected d. when the mileage limits are not exceeded a. when the mileage limits are exceeded
In a co-op, the buyer receives title to a unit and joint ownership of the common areas.TrueFalse False
Which of the following is a type of down payment that lowers the potential depreciation and therefore your monthly lease payments on a leased car?a. Money factorb. Property depreciation costc. Purchase optiond. Initial residual valuee. Capital cost reduction e. Capital cost reduction
The seller of the house typically pays thea. real estate agent’s commission.b. loan application fee c. appraisal fee. d. title search and insurance. a. real estate agent’s commission.
The price of the car you are leasing is called the:a. capitalized cost.b. residual value.c. money factor.d. purchase option.e. capital cost reduction. a. capitalized cost
Matt is considering the purchase of a condo on a mortgage. However, he is not sure of the amount of the mortgage he is eligible for. _______________ will help him identify and correct any problems such as credit report errors that may arise on his application. a. Prequalificationb. A contingency clause c. A Multiple Listing Service d. Due diligence a. Prequalification
The Real Estate Settlement Procedures Act governs __________ on owner-occupied houses, condominiums, and apartment buildings of four units or fewer.a. mortgage closings b. the terms of prequalified loans c. mortgage rates d. the contingency clause a. mortgage closings
Phil and Christina are recently married and are unsure of where they will be relocated after Christina finishes her residency in 9 months. Based on this information, which of the following housing recommendations would be most appropriate for them?a. Leasing a cooperative apartmentb. Purchasing a trailerc. Renting a homed. Sharing a single-family dwellinge. Buying a condominium c. Renting a home
If you made a down payment of $11,000 on a house worth $110,000, the lenders will require _____ because of the size of the down payment.a. application feesb. homeowner’s insurancec. closing pointsd. a bonde. private mortgage insurance e. private mortgage insurance
Fees charged by lenders as a condition of a mortgage loan that raises the effective rate of interest are called:a. add-on charges.b. mortgage points.c. loan discounts.d. down payments.e. commissions. b. mortgage points.
When shopping for a lease, you want:a. a low residual value.b. a low capitalized cost.c. a high money factor.d. high lease payments.e. a high insurance cost. b. a low capitalized cost.
Which of the following are tax deductible if one itemizes deductions?a. Interest and real estate taxesb. Principal and interestc. Principal, interest, and real estate taxesd. Principal, interest, real estate taxes, and insurancee. Interest, real estate taxes, and insurance a. Interest and real estate taxes
The first step in the auto-buying process should be:a. to begin negotiations on various automobiles.b. to test-drive several automobiles.c. to consider alternative buying strategies.d. to decide whether to trade in your used car or to sell it yourself.e. to analyze how much you can afford to spend on the car. e. to analyze how much you can afford to spend on the car.
The majority of each monthly payment at the beginning of the loan goes to pay the:a. real estate taxes.b. private mortgage insurance.c. homeowner’s insurance.d. principal.e. interest. e. interest
_____ is a situation where homeowners owe more to the lenders than what their properties are worth.a. Inflationb. A negative equityc. A restructured. A foreclosuree. An expanded mortgage b. A negative equity
If the maximum loan-to-value ratio that a lender will accept on a house costing $100,000 is 90 percent, then the borrower must make:a. a maximum down payment of $10,000.b. a maximum down payment of $10,000 including closing costs and mortgage points.c. a minimum down payment of $90,000 including closing costs.d. a minimum down payment of $10,000 including closing costs .e. a minimum down payment of $10,000 plus closing costs. e. a minimum down payment of $10,000 plus closing costs
A financing made available by a builder or seller to a potential new-home buyer at interest rates well below market interest rates, often only for a short period is termed as a a. two-step ARM b. conventional mortgage c. convertible ARM d. buydown d. buydown
As the maturity of term of loan goes down, A. Monthly payment goes upB. Monthly payment goes downc. Total interest paid over the life of the loan goes downd. Both A and C d. Both A and CMonthly payment goes upTotal interest paid over the life of the loan goes down
Assume you are renting now and monthly:Cash inflows- $4,900. Cash outflow- $3, 650 (of which rent is $650) Want to put 10% of inflow into savings and have another $200 per month as “cushion” for emergenciesHow much of a mortgage (loan) plus property taxes plus insurance can you manage?a. $1,050b. $1,210c. $1,470d. $1,390 b. $1,2104900-490-200= 4,2104,210 – 3,650= 560560+650= 1,210
Leasing a car generally will result in ____________ equity than purchasing a cara. Higherb. Lowerc. Trick Question c. Trick Question
Depreciation of ones car is an operating expenseTrueFalse True
Fredrick purchased a property worth $150,000 on mortgage. He had paid $30,000 as a down payment on this property. However, because of a recent slump in the real estate prices, the property is worth only $110,000, forcing Fredrick to sell the property. Assuming that no mortgage payments have been made by Fredrick, this sale is termed a(an) _____.a. shrinking principal saleb. indexed equityc. real estate declining equityd. fixed mortgage salee. real estate short sale e. real estate short sale
At the end of your car lease period, you intend to turn in the car, and you will not pay extra at that time based on the residual value of the car. You have _____ lease.a. a money factorb. a purchase optionc. a residuald. a closed-ende. an open-end d. a closed-end
Which of the following is true of buying a used car as compared with a new car?a. A used car will have a higher residual value than a new car.b. Purchasing a used car will be less expensive as compared with purchasing a new car.c. The accessories in a new car will be better updated compared with those fitted in a new car.d. The fuel efficiency in a used car is always higher compared with that of a new car.e. A used car will be in a better mechanical condition compared with a new car. b. Purchasing a used car will be less expensive as compared with purchasing a new car.
The _____ governs closings on owner-occupied houses, condominiums, and apartment buildings of four units or fewer.a. Mortgage Lenders Actb. Real Estate Settlement Procedures Actc. Real Estate Agents Actd. Equal Credit Opportunity Acte. Truth-in-Lending Act b. Real Estate Settlement Procedures Act
A lender will usually require a loan-to-value ratio of _____ or less for a borrower to avoid having to pay private mortgage insurance (PMI).a. 85%b. 75%c. 80%d. 95%e. 90% c. 80%
Which of the following will help a buyer know ahead of time the specific mortgage amount that he or she will be eligible for subject to changes in rates and term?a. Prequalificationb. The interest ratec. Anchoringd. The rent ratioe. Leasing a. Prequalification
You made a $900 mortgage payment. The interest of $925 on the mortgage for this month leads to an increase in the principal balance. You have __________a. signed up for a conventional mortgage b. experienced a negative amortization c. taken a fixed-rate mortgage d. refinanced your loan b. experienced a negative amortization
You made a $900 mortgage payment. The interest of $925 on the mortgage for this month leads to an increase in the principal balance. You havea. signed up for a conventional mortgage b. experienced a negative amortization c. taken a fixed-rate mortgage d. refinanced your loan b. experienced a negative amortization
An escrow account is used to collect _____ from one’s monthly mortgage payment.a. operating expensesb. interestc. real estate taxesd. closing costse. principal c. real estate taxes
As home prices have fallen in recent years, the rent ratio:a. and rent attractiveness have decreased.b. and rent attractiveness have increased.c. has increased and rent attractiveness has stabilized.d. has decreased and rent attractiveness has increased.e. has increased and rent attractiveness has decreased. a. and rent attractiveness have decreased.
When you lease your apartment from a nonprofit corporation that owns the building and you own a share of the nonprofit corporation, you own:a. a cooperative apartment.b. a condominium.c. a row house.d. a mobile home.e. a single family home. a. a cooperative apartment.
Lowballing is a sales technique where the salesperson quotes a low price for a car to get you to make an offer, and negotiates the price upward prior to signing the sales agreement. true false True
Most homeowners get financial benefit from owning a home as it results in:a. adding to the hidden costs of mortgage payments.b. saving tax liability by tax evasion.c. tax savings due to tax shelter.d. reducing non-depreciating assets.e. the creation of a recession proof liability. c. tax savings due to tax shelter.
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Finance Flashcards

Unit 1: National Finance: Real Estate Financing:Quiz

When a lender requires tax and/or insurance amounts to be deposited with the lender by placing the monies in an escrow account, a “Budget Mortgage or Deed of Trust” occurs. These escrow accounts may also be referred to asimpound or Reserve Accounts.compound or Reserve Accounts.insured or Restricted Accounts.interlocked and Restricted Accounts. impound or Reserve Accounts.
In which way are a mortgage document and promissory note similar?Both are non-negotiable instrumentsBoth are debt-reducing instrumentsBoth are contractsBoth are fully standardized instruments of conveyance Both are contracts
Which mortgage clause allows a lender to regain their investment if the borrower does not pay his payment?AlienationDefeasanceAccelerationPrepayment Acceleration
When a mortgage is paid off, what clause allows the lender to release the mortgage rights and issue a satisfaction piece?AccelerationDefeasanceCodicil – change in a willWrit of execution Defeasance
A DEBENTURE is defined as a long-term note that is not secured by a specific property. When the lender holds the security so that if the borrower does not pay the promise made in the note they can foreclose on the property, the real estate loan is calleda secondary market loan.an upside down loan.a subordinated loana collateralized loan. a collateralized loan.
If prioritizing loans as when recording, a second mortgage or deed of trust is referred to asa secondary loan.an underwater mortgage.a factored loan or mortgage.a junior mortgage. a junior mortgage.
Of the following parties to a mortgage, whose interest is benefitted by an acceleration clause?The mortgagorThe mortgageeThe trusteeThe trustor The mortgagee
Typically, a mortgage loan monthly payment consists of PITI, (P) the amount borrowed from the lender is calledthe primary loan.the penalty.the principal.the promulgated covenant. the principal.
Which clause protects a lender if he does not want the loan to be assumed by another party?DefeasanceSubordinationDue on sale (alienation)Subrogation Due on sale (alienation)
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Finance Flashcards

1930’s APUSH Test

Reconstruction Finance Corporation – RFC created under Hoover to give out loans to railroads, banks and monopolistic companies. To Pump money back in to economy
Hawley-Smoot Tariff charged a high tax for imports thereby leading to less trade between America and foreign countries along with some economic retaliation
Bonus Marchers Former servicemen who were due bonuses. The day of payment was pushed back so they marched on Washington
Hoovervilles Any shabby inhabitance that formed town during the bad days of the Hoover presidency.
Rugged Individualism The argument that people should be able to withstand the bad climate on their own without the help of anyone else
Brain Trust the individual people outside the FDR appointees who helped in the decision making process
Francis Perkins Roosevelt’s Secretary of Labor and first woman cabinet member in U.S. history.
Harry Hopkins leader of FERA Federal Emergency Relief foundation, granted 3 billion to states for direct dole payments or wages on work projects
Harold Ickes Secretary of the Interior. Director of the Public Works Administration.
Bank Holiday Called by FDR. Allowed banks to close down for a few days to re cooperate from losses
Hundred Days In 1933 Congress enacted more than a dozen measures which increased the level of federal involvement in the nation’s economic life
John Maynard Keynes English economist who advocated the use of government monetary and fiscal policy to maintain full employment without inflation (1883-1946)
Deficit Spending the government spends more money than it recieves
Pump Priming The Government giving the poor money which they can use to buy product and jump start the economic system
New Deal A FDR focus on relief, recovery and reform
Elanor Roosevelt social reformer who combined her deep humanitarian impulses with great political skills
Wagner Act established a defined minimum wage and gave workers the right to bargain collectively
National Labor Relation Act (NLRA) Managed the complaints of laborers and other people in unions through the NLRB
John L. Lewis Established the CIO
Congress of Industrial Organizations (CIO) a federation of North American industrial unions that merged with the American Federation of Labor in 1955
Sit Down Strikes term for when workers would strike in their working positions but refuse to work
Civilian Conservation Corps (CCC) New Deal program that hired unemployed men to work on natural conservation projects
Work Progress Administration (WPA) Massive work relief program funded projects ranging from construction to acting; disbanded by FDR during WWII
Agricultural Adjustment Administration (AAA) attempted to regulate agricultural production through farm subsidies; ruled unconstitutional in 1936; disbanded after World War II
Federal Deposit Insurance Cooperation (FDIC) federal agency that insures bank deposits
Securities and Exchange Commission stock market monitoring
National Recovery Administration (NRA) Enforced codes that regulated wages, prices, and working conditions
Tennessee Valley Authority (TVA) A relief, recovery, and reform effort that gave 2.5 million poor citizens jobs and land. It brought cheap electric power, low-cost housing, cheap nitrates, and the restoration of eroded soil.
The Scottsboro Boys Accused of raping 2 white women. Convicted and sentenced
Joe Lewis Black world champion boxer
Black Cabinet group of African Americans FDR appointed to key Government positions; served as unofficial advisors to the president.
Court Packing Where FDR tried to add more members to the Supreme Court to pass his programs.
US vs. Butler ruled processing taxes under AAA unconstitutional
Schechter vs. US 1935- court case, supreme court successfully challenged constitutionality of NRA/new deal
The Second New Deal based on the premise that government should try to redistribute the national income so as to sustain mass purchasing power in the consumer economy
Huey Long Had the idea to “share the wealth”
Father Coughlin National Union for Social Justice. Promoted inflation and anti-semetisim
Francis Townsend For the promotion of the old people. Old people should get pensions that must be spent.
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Finance Flashcards

Finance Chapter 13

The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called: HOMEMADE LEVERAGE
The theory that the value of a firm is independent of its capital structure is referred to as: M&M Proposition I
The theory that a firm’s cost of equity capital is a positive linear function of its capital structure is referred to as: M&M Proposition II
Business Risk is defined as the: Equity risk that comes from the nature of a firm’s operating activities
Financial risk is defined as : Equity risk that comes from the capital structure of a firm.
The tax savings attained by a firm because of the tax deductibility of the interest expense is called the: Interest Tax Shield
The legal and administrative costs of bankruptcy are called____ bankruptcy costs. DIRECT
The costs incurred by a firm in an effort to avoid bankruptcy are called_____bankruptcy costs: INDIRECT
The direct and indirect costs of bankruptcy are also called____ costs. FINANCIAL DISTRESS
The argument that a firm borrows up to the point where the tax benefit of an extra dollar of debt is exactly offset by the increased probability of financial distress is called: The static theory of capital structure
Bankruptcy is best defined as: A legal proceeding for liquidating or reorganizing a business.
The term which best describes the termination of a firm as a going concern is: LIQUIDATION
The financial restructuring of a firm in an attempt to create a situation in which the firm can continue its operations as a going concern is best described as : REORGANIZATION
The list which establishes the order of claims in a liquidation is referred to as: The absolute priority rule
A firm’s optimal capital structure: The Debt-Equity ratio that results in the lowest possible weighted average cost of capital
Assume that you are comparing two firms which are identical with one excpetion. Firm A is an all-equity firm and firm B has a debt-equity ratio of .6. All else equal firm A will: Earn less than firm B when the level of earnings before interest and taxes (EBIT) is relatively high
Which one of the following statements concerning financial leverage is correct? Financial leverage magnifies both profits and losses
You are comparing two financial policies. The first is all equity. The second involves the use of $2 million of debt. The break-even point between these two policies occurs when the earnings before interest and taxes (EBIT) is $450,000. Given this, it is accurate to say that leverage____ beneficial to the firm when EBIT is $325,000 and _____beneficial when EBIT is $625,000. IS NOT, IS
Which one of the following statements concerning financial leverage is correct? If a firm employs financial leverage, the shareholders will be exposed to greater risk.
Less Debt INC. just revised its capital structure such that the firm’s debt-equity ratio decreased from .80 to .40. Those individual investors who prefer the old capital structure: Can replicate that structure by increasing their use of homemade leverage.
M&M Proposition I, without taxes, states that: It is completely irrelevant how a firm arranges its finances.
Which one of the following suggests that a firm should be indifferent between a debt-equity ratio of .40 and a ratio of .75 if the firm’s goal is to maximize firm value? M&M Proposition I, without taxes
According to M&M Proposition II, without taxes, the cost of equity depends on the firm’s: -Cost of Debt-Debt-equity Ratio-Required rate of return on its assets
M&M Proposition II, without taxes, states that: Re rises as a firm increases its use of financial leverage.
Financial Risk: Increases as a firm’s debt-equity ratio increases
Taylor & Taylor has positive earnings before interest and taxes (EBIT). Given this, which one of the following statements related to the interest tax shield is correct? The present value of the tax shield is equal to Tc X D.
M&M Proposition I, with taxes, states that the value of a levered (Vl) firm is equal to: Vu+(Tc X D)
Which of the following statements correctly relate to M&M Proposition I, with taxes? DEBT financing is advantageous to a firm
Which one of the following is an example of a direct bankruptcy cost? A firm engages an attorney to draft a prepack
The assumption that a firm is fixed in terms of its operations and assets is most related to: The static theory of capital structure
The maximum firm value, according to the static theory of capital structure, occurs at a point where the: Value of the firm equalizes the costs of financial distress with the present value of the tax shield on debt.
The maximum firm value, as defined by the static theory of capital structure, demonstrates that a firm: Benefits from leverage, net of financial distress costs.
Which of the following are correct assumptions based on the static theory of capital structure? -There is an inverse relationship between the amount that a firm should borrow and the volatility of its earnings before interest and taxes (EBIT)-The higher a firm’s tax rate, the greater the firm’s incentive to borrow
U.S firms, in general: Have debt-equity ratios that vary by industry
A firm is technically insolvent: When it is unable to meet its financial obligations
Which one of the following relates to a bankruptcy liquidation, but not to a reorganization? Termination of the firm as a going concern
Which one of the following will generally recieve the highest priority in a bankruptcy liquidation , assuming that the absolute priority rule applies? Bankruptcy administrative expenses
A secured creditor in a bankruptcy liquidation is entitled to the proceeds from the underlying security: Up to the amount they are due.
Which one of the following statements is true concerning a bankruptcy? A federal judge has the authority to deny a chapter 11 bankruptcy petition field by a firm.
A prepackaged bankruptcy: has been approved by a firm’s creditors prior to the bankruptcy petition being filed with the court
The bankruptcy process has been utilized in the past by firms to: -Renegotiate labor contracts -Reduce their labor costs-Avoid paying a legal judgement -Improve their competitive position
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Finance Flashcards

Finance Finale

A firm has a cost of equity of 10 percent, a cost of preferred of 9 percent, and an aftertax cost of debt of 5 percent. Given this, which one of the following will decrease the firm’s weighted average cost of capital? Issuing new debt
The cost of preferred sock is equal to the stock’s dividend yield.
All else constant, an increase in a firm’s cost of debt will result in an increase in the firm’s cost of capital
The cost of capital for a project depends primarily on the Use of the funds.
The weighted average cost of capital is defined as the weight average of a firm’s cost of equity and its aftertax cost of debt.
Woven Goods is considering adding a new line of baskets to its product line-up. Which of the following are relevant cash flows for this project?I. increased revenue from existing goods if these baskets are added to the lineupII. revenue from the new line of basketsIII. money spent to date investigating the availability of woven basketsIV. cost of expanding the showroom to make space for the new baskets I, II, and IV only
Payback ignores the time value of money
A net present value of zero implies that an investment is earning a return that exactly matches the requirement
The IRR decision rule states that a project should be accepted if its IRR: exceeds the required rate.
An indicator that a project has a rate of return that exceeds its required return is: a positive NPV
The most valuable alternative that is forfeited if a particular investment is undertaken is called: an opportunity cost
The payback period is the period of time it takes an investment to generate sufficient cash flows to: recover the investment’s initial cost
A proposed project will increase a firm’s accounts payable. This increase: is a cash inflow at time zero a cash outflow at the end of the project.
The change in a firm’s future cash flows that results from adding a new project are referred to as _____ cash flows. incremental
The NPV rule states that you should accept an investment if the NPV: is positive
The discount rate that causes the net present value of a project to equal zero is called the: internal rate of return.
A sunk cost is: a cost that has already been incurred and cannot be recouped.
The hypothesis that stock market,s such as the NYSE, are efficient is called the: efficient markets hypothesis
The lower the standard deviation of a security, the ______ the expected rate of return and the ______ the risk. lower; lower
What is used as the risk-free rate of return? U.S. Treasury bills
If the financial markets are efficient then: stock prices should only respond to unexpected news and events.
The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield, are based on: the stocks of the 500 companies included in the S&P 500 index.
Weak form market efficiency state that the value of a security is based on: historical price information only.
Standard deviation measure the _____ of a security’s returns over time. volatility
A bell-shaped frequency distribution that is defined by its average and standard deviation is called a: normal distribution
Over the period of 1926-2006: long-term government bonds underperformed long-term corporate bonds.
Which of the following statement are correct?I. The risk-free rate of return has a zero risk premiumII. The reward for bearing risk is called the standard deviationIII. Based on historical returns, there are rewards for bearing risk.IV. In general, the higher the risk, the higher the expected return. I, III, and IV only
The distribution of returns for which stocks of the period of 1926-2006 produces the widest bell curve (or distribution)? small-company stocks
Systematic risk is a risk that affects a large number of assets
What must total to 100 percent? portfolio weights and probabilities of occurrence for the various economic states
The concept of investing in a variety of diverse assets to reduce risk is referred to as: the principle of diversification
An example of systematic risk? Inflation exceeding market expectations
Diversifying a portfolio across various sectors and industries will tend to: reduce the firm-specific risk
The goal of diversification is to eliminate: unsystematic risk
An example of unsystematic risk? an unexpected increase in the sales of a firm
A U.S. Treasur bill has a beta of ___ while the overall market has a beta of ____. 0; 1
The difference between beta and standard deviation is best described as: Beta measures the risk investors are compensated for, while standard deviation measures both systematic and unsystematic risk.
The amount of systematic risk present in a particular risk asset relative to that in an average risk asset (or the market in general) is called the: beta coefficient
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Finance Flashcards

Managerial Finance Exam #1

Financial management deals with the maintenance and creation of economic value or wealth True
The fundamental goal of a business is to maximize the retained earnings available to the corporations shareholders False
Shareholder wealth maximization means maximizing the price of the existing common stock True
Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money False
One problem with maximizing shareholder wealth as a goal is that it ignores risk taken by the firms financial decisions False
The goal of profit maximization ignores the risk of financial decisions True
Shareholders react to poor investment or dividend decisions by causing the total value of the firms stock to fall, and they react to good decisions by bidding the price of the stock up True
The primary goal of a publicly owned corporation is to? maximize shareholder wealth
Maximization of shareholder wealth provides benefits to society as scarce resources are directed to their most productive use
A financial manager is considering two projects, A and B. A is expected to add $2 million in profits this year, while B is expected to add $1 million to profits this year. Which of the following statements is most correct The manager should select the project that causes stock price to increase the most, which could be A or B
When making financial decisions, managers should always look at marginal, or incremental cash flows True
Profits represent money that can be spent, and as such form the basis for determining the value of financial decisions False
If the stock market is efficient, then investors do not need to read the Wall Street Journal or research companies before they select which stocks to but because market prices already reflect all publicly available information False
managers should not be concerned with business ethics because ethical behavior is inconsistent with the primary goal of maximizing shareholder value False
The risk-return tradeoff is seen in many areas of finance True
The sole proprietorship has no legal business structure separate from its owner True
An efficient market is one where the prices of the assets traded in that market fully reflect all available information at any instant in time. True
The five basic principles of finance include all of the following except: Incremental profits determine value(included in basic principles: risk requires a reward, cash flow is what matters, money has a time value)
To measure vale, the concept of time value of money is used To bring the future benefits and cost of a project, measure by its cash flows, back to the present
All of the following contributed to recent financial crises except: relying on the efficiency of financial markets
Executive compensation in the U.S is dominated by performance-based compensation designed to reduce agency problems
The recent financial crises was exacerbated by managers who underestimated the real risks of their decisions and borrowed excessively
Ethical behavior is essential in business because unethical behavior destroys trust and business relationships
Investors generally don’t like risk, Therefore, a typical investor will only take an additional risk if he expects to be compensated in the form of additional returen
A corporate treasurer is typically responsible for cash management, credit management, and raising capital True
Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions True
The Chief Financial Officer (CFO) is responsible for overseeing financial planning, corporate strategic planning, and controlling the firms cash flow True
The financial manager most directly responsible for producing the company’s financial statements and directing its cost accounting functions is the: controller
The three basic types of issues addressed by the study of finances are capital budgeting, capital structure decisions, and working capital management
Working capital management is concerned with how a firm can best manage its cash flows as they arise in its day-to-day operations
Capital budgeting is concerned with what long-term investments a firm should undertake
Determining the best way to raise money to fund a firms long-term investment is called the capital structure decisions
The best form of business entity to attract new capital is the sole proprietorship because investors only need to deal with one owner False
S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners True
A limited liability company (LLC) is taxed like a partnership but provides limited liability for its owners similar to a corporation True
Owners of a corporation enjoy limited liabaility True
Limited partnership provides limited liability to: only to limited partners who do not participate in the management of the business
All of the following business organizations provide limited liability to their owners except: general partnership
Which of the following statements about the corporate form of business organizations is true? The corporate form has the disadvantage of double taxation relative to a sole proprietorship
Limited partnerships are not prevalent as corporations because it is easier to transfer ownership by selling common stock than it is to sell partnership
Which of the following is an advantage of the sole proprietorship? no significant legal requirements for starting the business
The true owners of the corporation are the… common stockholders
Which of the following forms of business organization has the greatest ability to attract new capital? corporation
Which of the following is NOT considered to be a disadvantage of the sole proprietorship form of business organization? fewer regulations and reporting requirements
Capital markets are all financial institutions that help a business raise long-term capital True
Organized stock exchanges provide the benefits of a continuous market, fair security pricing, and helping businesses raise new capital True
On the basis of number of shares traded, more stocks are traded over the counter than an organized exchanges True
One advantage of being listed on the NYSE is that all trades are made in an auction setting with face-to-face trading between individuals on the floor of the stock exchnage False
One advantage of organized stock exchanges is increased stock price volatility resulting from the efficient exchange of information False
Three ways that savings can be transferred through financial markets to those in need of funds include direct transfers, indirect transfers using the investment banker, and indirect transfers using the financial intermediary Truue
Each purchase occurring in the secondary markets increases the total stock of financial assets that exist in the economy False
The money market includes transactions in short-term financial instruments True
Over-the-counter markets include all security markets, with the exception of organized exchanges True
For a firm to have its securities listed on an exchange, it must meet certain requirements. These usually include measures of profitability, size, market value, and a public ownership True
A seasoned equity offering is the sale of additional shares by a company whose shares are already publicly traded True
Financial intermediaries issue their own indirect securities and use the proceeds to purchase the direct securities of other economic units True
general Electric (GE) has been a public company for many years with its common stock traded on the NYSE. If GE decides to sell 500,000 shares of new common stock, the transaction will be described as: a seasoned equity offering because GE has sold common stock before
A wealthy private investor providing a direct transfer of funds is called? an angel investor
common examples of financial intermediaries include all of the following except Venture Capital Firms
John calls his stockbroker and instructs him to purchase 100 shares of Microsoft Corporation common stock. This transaction occurs in the secondary market
General Motors raises money by selling a new issue of common stock. This transaction occur in the capital market
All of the following securities are sold in money markets EXCEPT: common stock(Are sold in money markets: commercial paper, 6 month certificates of deposit, 3 month U.S Treasury bills)
Which of the fol.lowing is an advantage of organized stock exchanges? providing a continuous market
The telecommunications system that provides a national information linkup among brokers and dealers operating in the over-the-counter market is called: NASDAQ
In August 2004, Google first sold its common stock to the public at $85 per share and raised $1.76 billion. This is an example of primary market transaction
The Securities and Exchange Commission (SEC) regulates both primary and secondary markets
The investment banker performs three basic functions: (1) underwriting (2) distributing (3) advising
The negotiated purchased is the most prevalent method of securities distribution in the private sector True
Investment banking firms are prohibited from selling securities due to conflicts of interest False
It is common practice among the largest corporations to sell their securities directly to investors False
The competitive bid purchase is largely confined to railroad, public utility, and municipal bond issues True
Because they occur in private, stricter regulations are placed on the private placements of securities False
Investment firms, such as Goldman Sachs, assist the transfer of capital by facilitating indirect transfers from savers (investing public) to borrowers (corporations needing capital)
The investment banker does NOT underwrite the securities to be issued in which of the following? best efforts
A “Dutch auction” was used by Google to raise money in 2004. A Dutch auction involves Allowing investors to submit bids saying how many shares they’d like to buy and at what price
In private placement, the securities are offered and sold to a limited number of investors True
Over time, there has been a high correlation between actual rates of return on securities and the securities’ standard deviations of return True
Investors expect to receive the highest returns from government-issued securities because the government will not default on securities that it has issued False
The real rate of return is the return earned above the Inflation risk premium
Which of the following represents the correct ordering of returns over the period 1926 to 2008 (from lowest to highest return)? Treasury bills, Long-term corporate bonds, Common stocks, Small firm common stocks
In response to the banking crisis and economic collapse of 2007 and 2008, the U.S government moved to increase interest rates in order to attract foreign capital seeking high returns in U.S banks Flase
The time value of money is the opportunity cost of passing up the earning potential of a dollar today True
A rational investor would receive $1,200 today rather than $100 per month for 12 months True
When using a financial calculator, cash outflows generally have to be entered as negative numbers, because a financial calculator sees money “leaving your hands.” True
John has to pay $1,000 per month for his mortgage for another 5 years, but he is considering paying the mortgage off in one lump sum. John cannot calculate the present value of the payments using the annuity formulas because his payments are monthly and not once per year False
To evaluate or compare investment proposals, we must adjust the value of cash flows to a common date True
An example of an annuity is the interest received from binds True
Bill saves $3,000 per year in his IRA starting at age 25 and continuing to age 65, when he retires. The amount Bill has in his IRA at age 65 can be characterized as the future value of annuity True
When repaying an amortized loan, the interest payments increase over time due to compounding process False
The future value of annuity due is greater than the future value of an otherwise identical ordinary annuity True
A return of 12% compounded annually is the same as a return of 1% per month False
If we invest money for 10 years at 8% interest, compounded semi-annually, we are really investing money for 20 six-month periods, and receiving 4% interest each period True
For a given stated interest rate, an investor would receive a greater future value with daily compounding as opposed monthly compunding True
It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year True
A share of preferred stock that pays the same annual dividend forever is an example of perpetuity True