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Finance Flashcards

Personal finance chapter 1

Financial plan A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities is a(n)
Used to estimate how fast prices will double using a given annual inflation rate The rule of 72 is
Borrowers who is less likely to be harmed by inflation?
lower interest rates Increase consumer saving and investing is likely to be accompanied by
higher uncertainty about getting his/her money back An investor should expect to receive a risk premium for
obtaining Attempts to increase income through employment are part of the component of financial planning
Maintaining control over credit-buying habits The “borrowing” component in a financial plan relates to
A regular savings plan for emergencies The saving component of financial planning focuses on long-term security and includes:
Purchase a house within the next 5 years with a mortgage no greater than $150,000 Which of the following intermediate goals is stated most clearly using the SMART approach?
long-term The goal of investing $50 per month for the next 12 years for your nephews college fund is a ____ goal
poor planning and weak money management habits Many Americans have money problems because of
food and clothing are consumable-product goals which of the following is correct?
Durable- product ____ goals relate to infrequently purchased, expensive tangible items
Identify specific, realistic goals that are measurable along with a time frame and action plan to develop financial goals, one should
What you give up by making a choice opportunity cost refers to
personal opportunity cost relating to time Robert Brown is interested in attending a concert next weekend. Unfortunately he is scheduled to work. If he finds a substitute for his shifts so he can attend the concert, what kind of cost is he incurring?
forgiving wages to attend school Which of the following is an example of a financial opportunity cost?
Time comparing several brands of personal computers An examples of a personal opportunity cost would be
increases in an amount of money as a result of Interest earned which of the following dest describes the concept of the time value of money?
more if I can invest a dollar today and earn interest on it, then it should be worth _____ in the future.
type of investing to calculate the time value of money, we need to consider all of the following except
compounding Future value computations are often referred to as
determine your current financial situation The first step of the financial planning process is to
taking Making financial decisions related to income involves all of the following except
evaluating risk every decision involves uncertainty, which is referred to as
interest-rate changes in the cost of money is referred to as ____ risk
inflation the rising or falling of prices that changes in buying power is referred to as ____ risk.
income the loss of a job or encountering an illness results in ____ risk.
personal the tangible of intangible factors that create a less desirable situation is referred to as _____ risk.
Review and revise your financial plan more frequently Changes in personal, social, and economic factors may require you to
Review and revise the financial plan The step in the personal financial planning process that follows immediately after the step: “Create and implement your financial actions plan” is
evaluate your alternatives Using the services of financial institutions or financial specialists to seek relevant information is done in which step in the financial planning process?
9 years if inflation is expected to be 8 percent, how long will it take for prices to double?
112.50 if Melinda Miller estimates that her 100 weekly grocery bill will increase at an annual inflation rate of 4% that should her weekly grocery bill be in 3 years?
15.00 if you deposit 500 into a certificate of deposit earning 3% what would be earnings after 12 months?
17,460 Randy Hill wants to retire in 20 years with 1,000,000. if he earn 10% per year on his investments, how much does he need to deposit each year to reach his goal?
889 If you want 1,000 three years from now and you earn 4% on your savings, how much do you need to depose now?
increased control of financial affairs an advantage of effective personal financial planning is
adult life cycle The stages in the family situation and financial needs of an adult is called the
the average change in prices of a fixed basket of goods and services of urban consumers the consumer price index measures
poor credit rating Which of the following would increase the interest rate for a loan?
borrowing the problem of bankruptcy is associated with overuse and misuse of credit in the ____ component of financial planning
discounting present value computations are also referred to as
liquidity the difficulty of converting savings and investments to cash is referred to as ____ risk.
if a 10,000 investment earns interest of 500 in one year, what is its rate of return? 5 %
if a 10,000 investment earns a 4% annual return, what should its value be after one year? 10,400
15,010 if a 10,000 investment earns a 7% annual return, what should its value be after 6 years
22,054 if you begin saving 2,000 a year at 5% what will these funds grow to in this time period?
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Finance Flashcards

Personal Finance- Chapter 13- Investment Fundamentals

Investing Putting saved money to work so that it makes you even more money
Securities Assets suitable for investment, including stocks, bonds, and mutual funds
Stocks Shares of ownership in cooperation
Bond A debt instrument issued by organization that promises repayment at a specific time and the right to received regular interest payments during the life of the bond
Portfolio Collection of investments assembled to meet your investment goals
Total return Income an investment generates from current income and capital gains
Current Income Money received while you own an investment; usually received regularly as interest, rent, or dividends
Interest Charge for borrowing money; investors in bonds earn interest
Capital gain Increase in the value of an initial investment (less costs) realized upon the sale of the investment
Capital loss Decrease in paper value of an initial investment; only realized if sold
Rate of return/yield Total return on an investment expressed as a percentage of its price
Speculative risk Involves the potential for either gain or loss; equity investments might do either
Investment risk The possibility that the yield on an investment will deviate from its expected return
Risk premium (or equity risk premium) The difference between a riskier investment’s expected return and the totally safe return on the T-bill
Risk tolerance An investor’s willingness to weather changes in the value of your investments, that is, to weather investment risk
Investment philosophy Investor’s general approach to tolerance for risk in investments, whether it is conservative, moderate, or aggressive, given the investor’s financial goals
Conservative investment philosophy (risk aversion) Investors with this philosophy accept very little risk and are generally rewarded with relatively low rates of return for seeking the twin goals of a moderate amount of current income and preservation of capital
Risk averse In investments, one who tends to dislike risk and is unable to put money into investments that seem risky
Moderate investment philosophy (risk indifference) Investors with this philosophy accept some risk as they seek capital gains through slow and steady growth in investment value along with current income
Aggressive investment philosophy (risk seeker) Investors with this philosophy primarily seek capital gains, often with a short time horizon
Debts Lending investments that typically offer both a fixed maturity and a fixed income
Fixed maturity Specific date on which a borrower agrees to repay the principal to the investor
Fixed income Specific rate of return that a borrower agrees to pay the investor for use of the principal (initial investment)
Equities Ownership equities such as common or preferred stocks, equity mutual funds, real estate, and so on that focus on capital gains more than on income
Real rate of return Return on a investment after subtracting the effects of inflation and income taxes
Random/unsystematic risk Risk associated with owning only one investment of a particular type (such as stock in one company) that, by chance, may do very poorly in the future due to uncontrollable or random factors that do not affect the rest of the market
Diversification Process of reducing risk by spreading investment money among several different investment opportunities
Market risk/systematic risk/undiversifiable risk The possibility for an investor to experience losses due to unknown factors that affect the overall performance of the financial markets
Financial risk Possibility that an investment will fail to pay a return to the investor
Business-cycle risk The fact that economic growth usually does not occur in a smooth and steady manner, and this impacts profits as well as investments returns
Market-volatility risk The fact that all investments are subject to occasional sharp changes in price such as result of events, affecting a particular company of the overall market for similar investments
Liquidity The speed and ease with which an asset can be converted to cash
Liquidity risk The risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit)
Commissions Fees or percentages of the selling price paid to salespeople, agents, and companies for their services in buying or selling an investment
Leverage Using borrowed funds to invest with the goal of earning a rate of return in excess of the after-tax costs of borrowing
Securities markets Places where stocks and bonds are traded (or in the case of electronic trading, the way in which securities are traded)
Bull market Market in which securities prices have risen 20 percent or more over time
Bear market Market in which securities prices have declined in value by 20 percent or more from previous highs, often over the course of several weeks or months
Market correction A short term price decline in the stock markets of at least 10 percent in a stock, bond, commodity or index to adjust for a recent price rises
Market volatility The likelihood of large price swings in securities due to a company’s success (or lack of it) and various market conditions
Market timers Investors who attempt to predict the short-term movements of various markets (or market segments) and, based on those predictions, move capital from one segment to another in order to capture market gains and avoid market losses
Market efficiency The speed at which new information is reflected in investment prices suggesting that security prices are reflective of their true value at all times because publicly available information has driven market prices to the correct level
Herd behavior When emotion, not logic, rules investing decisions and investors decide to copy the observed decisions of other investors or movements in the markets rather than follow their own beliefs and information
Buy and hold/buy to hold Investment strategy in which investors buy a widely diversified mix of stocks and/or mutual funds, reinvest the dividends by buying more stocks and mutual funds, and hold onto those investments almost indefinitely
Dollar-cost averaging/cost averaging Systematic program of investing equal sums of money at regular intervals, regardless of the price of the investment
Below-average costs Average costs of an investment if more shares are purchased when the price is down and fewer shares are purchased when the price is high
Average share price Calculated by dividing the share price total by the number of investment periods
Average share cost Actual cost basis of the investment used for income tax purposes, calculated by dividing the total amount investment by the total shares purchased
Portfolio diversification Practice of selecting a collection of different asset classes of investments (such as stocks, bonds, mutual funds, real estate, and cash) that are chosen not only for their potential returns but also for their dissimilar risk-return characterisitics
Asset allocation Form of diversification in which the investor decides on the proportions of an investment portfolio that will be devoted to various categories of assets
Limited managed account An account an investment firm whereby, for a fee, they sell and buy your mutual fund assets, usually quarterly, on your behalf to automatically rebalance your portfolio back to your specific standards
Monte Carlo analysis Technique that performs a large number of trial runs of a particular portfolio mix of investments, called simulations, to find an optimal allocation for a particular investor’s goals and risk tolerance
Investment plan An explanation of your investment philosophy and your logic on investing to reach specific goals
A stock or mutual fund with a__ beta means the security goes up when the market as a whole goes up average when the market is rising; a__ beta indicates the opposite. positive; negative
The firms that serve as intermediaries in selling newly issued securities are called__ firms. investment banking
Stocks with low price/earnings ratios tend to have a slower earnings growth rate
Common stock owners typically expect to make money on stocks by receiving dividends and capital gains
Companies that consistently pay out higher than average cash dividends are classified as__ stocks. income
Common stockholders elect the corporation’s board of directors.
A__ stock is one that has little or no track record but has a potential for substantial earnings at some time in the future. speculative
Most stock investors invest in public corporations
Capital gains on the sale of municipal bonds are taxable and will occur when bonds are purchased at a discount then sold at a higher price at full value at maturity
The approximate compound yield (ACY) formula provides a measure of the annualized compound growth of any long-term investment
Employees can benefit from the appreciation in the stock in their company even if they put no money down if their employer offers employee stock options
When a bond is purchased at a discount from its face value, yield to maturity will be__ the coupon rate printed on the certificate. more than
The limited liability of common stockholders refers to their losses being limited to their original amount that they invested
The average corporation pays out__ percent of its after-tax earnings in cash dividends to stockholders. 40 to 60
Which of the following statements accurately describes preferred stock investments? preferred stock is a fixed-income investment
Which of the following serve as the intermediaries between companies and investors when new issues of stocks or bonds are offered? investment banking firms
Which of the following statements regarding cash dividends is true? growth and speculative companies typically pay little or no cash dividends
The inverse of the P/E ratio is the earnings yield
You can purchase__ directly from the issuer and avoid the transaction fees. treasury securities
The type of business ownership that has the potential to raise large amounts of capital through the sale of stock is called a corporation
The after-tax earnings of a corporation that are not paid out to stockholders are called retained earnings
__would be classified as cyclical industries airlines
Owners of a corporation who want to raise more capital by issuing new securities but who also want to retain control of their company could issue either preferred stock or bonds.
__would be classified as a countercyclical industry. tobacco
A stock that tends to trade a low price relative to its company fundamentals is labeled a value stock
Tammy and Richard have $100 a month automatically transferred from their checking account to their mutual fund account. This is an example of dollar-cost averaging
Investors want to earn a__ for their willingness to make investments for which there is no absolute guarantee of future success. risk premium
A conservative investor would be least likely to invest in growth mutual funds
A bond represents a debt owed by a business or organization
Diversification__risk, and leverage__ risk. decreases; increases
Research suggests that you can eliminate random risk by holding__ or more stocks and bonds. 15
Bert has invested all of his savings in a choice piece of downtown Midland real estate. Recently he has had a personal emergency and needs money. Bert can’t sell the property because of the state of Midland’s economy. His problem is an example of__ risk. marketability
A__ in the market is a person who expects securities prices to go up; a__ expects the general market to decline. bull; bear
The real rate of return on a taxable investment yielding 8 percent annually would be__ percent if the investor were in the 15 percent marginal tax bracket and inflation were 2 percent. 4.80 percent
XZY Corporation has suffered a major downturn in business and will not be able to pay interest on its bonds. This is an example of__ risk. financial
Investing goes beyond saving in that it involves increased risk
Which of the following arises when investors decide to copy the observed decisions of other investors or movements in the markets rather than follow their own beliefs and information. herd-behavior
You put your money into a 0.05 percent savings account. After two years you take your money out of the account, only to find that your purchasing power has decreased. This is an example of__ risk. inflation
With a(n)__ investment, the borrower agrees to pay the investor a specific rate of return for use of the principal. fixed income
__is an example of a lending investment. mortgage-backed bonds
The investment strategy that requires the percentage of dollars invested in stocks, bonds, and cash to remain fixed over a long period of time is called asset allocation
Tyler is going to invest $2,000 in money market mutual fund. He has narrowed his choices to a tax-free fund currently earning 2.8 percent and a taxable fund earning 4.1 percent. If Tyler is in the 28 percent marginal tax bracket, which of these funds would give him the highest after-tax yield? the taxable fund
Securities are made up of all of these (stocks, bonds, mutual funds)
__income is NOT an example of current income from an investment. capital gains
If you time horizon is six to ten years and your asset allocation consists of 10 percent cash, 30 percent bonds, and 60 percent stocks, you would be considered to have a(n)__ investment philosophy. moderate
Portfolio diversification__ volatility while__ return. reduces; averaging out
Ownership investments generally produce capital gains
Since 1927 the worst 20-year performance for stocks was a__of__ percent. gain; 3
In an average year, the price of a typical stock fluctuates up and down by about__ percent. 50
Shares in the ownership of a corporation are called stocks
The__ strategy avoids the risks and responsibilities of investment timing because the stock purchases are made regularly regardless of the price. dollar-cost averaging
__is (are) the portion of a company’s profits that the firm pays out to its shareholders. dividends
__would be a reasonable investment for funds that could be invested less than two years. money market mutual funds
Typically the highest commissions are charged on investments in collectibles
An investment that can be sold quickly but only by making price concessions suffers from__ risk. marketability
Financial risk relates to the possibility that the investment will fail to pay a return to the investor
Which of the following would NOT be considered as securities? real estate
Joelle purchased 100 shares of PAC stock for $20 per share and sold this same stock one year later for $25 per share. She paid commissions of $60 when she purchased the stock and $70 when she sold the stock. Dividends of $2 per share were paid during the year. The total rate of return on this investment was 28.50 percent
Your collection of multiple investments in different assets chosen to meet your financial goals is your portfolio
Commissions are generally based on the value of the transaction
An explanation of your investment philosophy and your logic on investing to reach specific goals is a(n) investment plan
If you have a(n)__ investment philosophy, you accept very little risk and are generally rewarded with relatively low rates of return conservative
With a(n)__investment, the borrower agrees to pay the investor a specific rate of return for use of the principal. fixed income
The likelihood that an investment market will fluctuate up and down in its market volatility
A stock represents a share of ownership in a corporation
Market risk is also known as systematic risk
__risk represents the uncertainty that the yield on an investment will deviate from what is expected. investment
Investing goes beyond saying in that it involves increased risk
When choosing among investment alternatives you want to focus on their yields
Selling shares of stock for more than you originally paid is called capital gain
The income received in return for someone’s use of your property is called rent
Attempting to invest based on predictions of short-term fluctuations in an investment market is called market timing
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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
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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

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

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

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

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

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

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