Exam 1 Flashcards
FCF (formula)
EBIT - Taxes + Depreciation - CapEx - change in NWC
DuPont breakdown of ROE
Profit Margin * Asset Turnover * Equity Multiplier
Net Income/Sales) * (Sales/Assets) * (Assets/Equity
ROE (shorter formula)
Net Income / Equity
Constant Perpetuity (formula)
PV = PMT / r
Growing Perpetuity (formula)
PV = PMT / (r - g)
Compounding Perpetuity (formula)
PV = PMT / (r-g)
Constant Annuity (formula)
PV = PMT * [1 - 1/(1+r)^T]
Growing Annuity (formula)
PV = (PMT/r-g) * [1 - (1+g/1+r)^T]
Annuity Due (formula)
PV = PMT/r * [1 - 1/(1+r)^T] * (1+r)
Annuity Payment (formula)
(PV * r) / [1 - 1/(1+r)^T]
Bond Price (formula)
B = [(c/m) / (y/m)] * [1 - 1/(1+y/m)^mT] + Face / (1+y/m)^mT
Bond Price (formula)
B = [(c/m) / (y/m)] * [1 - 1/(1+y/m)^mT] + Face / (1+y/m)^mT
Which of the following statements is FALSE?
A. Financial Managers make three basic types of decisions: Capital Budgeting, Capital Structure, and Working Capital Management.
B. Capital budgeting is the process of planning and managing a firm’s short-term investments.
C. The primary goal for corporate managers should be to make good decisions to maximize the market value of the owner’s equity.
D. Agency conflicts, which sometimes arise when CEOs are overly motivated to seek job security, can be reduced by adjusting managerial compensation.
b
Which of the following statements is TRUE?
A. In a sole proprietorship, the owner has limited liability and full control.
B. In a partnership, ownership can be transferred quickly, and capital can be raised easily.
C. Corporations face double taxation, meaning the corporation pays taxes on income before dividends, while the owners pay personal taxes on dividends and capital gains.
D. Intended to improve public disclosures, the Sarbanes-Oxley Act has likely increased the number of small companies going public in the USA.
c
Managers should act in shareholders’ interests because shareholders have ___________ priority in receiving their claims.
A. Top
B. Somewhere in the middle
C. Bottom
D. Equal (to those of all other stakeholders)
c
Which of the following is NOT an effective means of aligning management goals with shareholder interests?
A. Employee stock options
B. Threat of a takeover
C. Management bonuses tied to performance goals
D. Compensating managers with salaries significantly higher than their peers
d
If any, which of the following statements is FALSE?
A. Capital Budgeting is the process of planning and managing a firm’s long-term investments where managers identify investments that are worth more than they cost to acquire.
B. Capital Structure is the mix of debt and equity maintained by a firm to finance operations, where the firm decides how much to borrow and what the cheapest sources of funds are.
C. Working Capital Management is the day-to-day management of finances that determines how much cash and inventory should be kept on hand, whether to sell on credit to customers, and how to obtain short-term financing.
D. None of the above statements is false.
d
Which of the following statements is TRUE?
A. The marginal tax rate for most U.S. corporations prior to 2018 was 35% while the average tax rate actually paid across U.S. corporations had actually been closer to 25%
B. A Limited Liability Company (LLC) is legally defined as a person, while a corporation with limited liability is considered a partnership of several persons
C. The ability of a corporation to grow can be seriously limited by an inability to raise cash via the primary capital markets for investment.
D. According to the theory of the firm, among all stakeholders, the stockholders take the least risk.
a
Which of the following is NOT an advantage to the corporate form of organization?
A. Ability to raise large sums of equity capital
B. Ease of ownership transfer
C. Profits taxed at the corporate level
D. Limited liability for all owners
c
Which of the following is an advantage of the corporate form of organization?
A. Corporations can easily raise capital and its ownership can be transferred easily.
B. Corporations can be started easily and face little regulation.
C. Owners of corporations have unlimited liability and full control.
D. Corporations pay taxes on income before dividends to their owners.
a
Which of the following statements is TRUE?
A. All secondary markets are dealer markets.
B. All secondary markets are broker markets.
C. All stock trades between existing shareholders are secondary market transactions.
D. All stock transactions are secondary market transactions.
c
Which of the following statements about the corporate form of ownership is FALSE?
A. The shareholders are the owners of the firm and hold the top priority claim among all stakeholders.
B. The shareholders elect the directors of the corporation, usually in uncontested elections.
C. The directors appoint the firm’s management, and yet managers usually participate in nominating new candidates for directors.
D. Separation of ownership from control can cause agency problems where managers act in their own interests, rather than shareholders’ interests.
a
Which of the following statements is TRUE?
A. Bank loans, private placements to funds and insurance companies, and investment bank transactions are all activities in the secondary markets.
B. Like general partners, the owners of a corporation have unlimited liability for business debts.
C. While maximizing stockholder wealth is the relevant goal of the corporation, sometimes management goals are pursued at the expense of the stockholders.
D. The Sarbanes-Oxley Act of 2002 dramatically streamlined American corporate regulations resulting in billions of dollars in overall savings.
c
Which one of the following is most apt to align management’s priorities with shareholders’ interests?
A. Compensating managers with shares of stock that must be held for 3 years before the shares can be sold
B. Allowing a manager to decorate his or her own office once he or she has been in that office for a period of 3 years or more
C. Increasing the number of paid holidays that long-term employees are entitled to receive
D. Allowing employees to retire early with full retirement benefits
a
Which one of the following situations is most apt to create an agency conflict?
A. Giving all employees a bonus if a certain level of efficiency is maintained
B. Hiring an independent consultant to study the operating efficiency of the firm
C. Rejecting a profitable project to protect employee jobs
D. Selling an under producing segment of the firm
c
Hon just bought 800 shares of TYUJ stock, which has been trading for some time on the NYSE. In which market did Hon’s purchase occur? A. Dealer market B. Secondary market C. Derivative market D. Primary market
b