EXAM ONE

Question 1

Why is Competitive Advantage Important?

Answer 1

1. It’s necessary for a business to survive in the long run
2. It generates significant value to the business

Question 2

Do competitive advantages last forever?

Answer 2

It depends, you have to protect it, and others will try to replicate your success

Question 3

Basic accounting equation

Answer 3

Assets = Liabilities + Equity

Question 4

What does financing buy us (the company)

Answer 4

We use money to buy stuff, which generates sales

Question 5

If it takes a lot of “stuff” to make a profit…

Answer 5

Not a great return, unless we’re using other people’s money

Question 6

What do firms do with extra cash?

Answer 6

Pay expenses (taxes & salaries), Pay investors, Keep money in the firm

Question 7

Cash Inflow must equal

Answer 7

Cash outflow

Question 8

If input is less than output needs…

Answer 8

there is a problem

Question 9

Where businesses and individuals go to raise capital

Answer 9

Financial Markets

Question 10

Name examples of some transactions in a Financial Market

Answer 10

1. A business may need to get a loan to build a new plant
2. A business might want to buy another business

Question 11

Financial market transactions tend to happen through

Answer 11

Intermediaries

Question 12

Examples of Intermediaries

Answer 12

1. Commercial Banks
2. Investment Banks
3. Brokerage Firms

Question 13

Explain the Theory of the Firm

Answer 13

A set of theories that explain why firms exist, how they operate, and how they make decisions

Question 14

Managers hold better information than shareholders, and shareholders know it

Answer 14

Asymmetric Information

Question 15

Managerial actions convey information about the true state of the company

Answer 15

Asymmetric Information

Question 16

When a principal hires an agent to act on their behalf

Answer 16

Agency Relationship

Question 17

Agency relationships exist between shareholders and managers in

Answer 17

Corporations

Question 18

How does the conflict between managers and shareholders manifest itself

Answer 18

1. Avoiding risk
2. Reduced effort
3. Entrenching investment
4. Taking excessive risk

Question 19

How can the conflict between Agency relationships be resolved

Answer 19

1. Managerial compensation plans
2. Direct intervention by shareholders
3. The threat of firing

Question 20

The goal of all businesses is to…

Answer 20

Maximize company value

Question 21

Why do we care about Financial statements?

Answer 21

1. FS is the language of business
2. Gives insight into the business
3. A snapshot of the business’ health

Question 22

What is on the Balance Sheet?

Answer 22

1. Total Assets
2. Total Liabilities
3. Shareholder’s Equity

Question 23

What is Net Working Capital?

Answer 23

1. Generally a positive in a financially healthy firm
2. Gives an indication of liquidity

Question 24

The cash that keeps the business running

Answer 24

Net Working Capital

Question 25

The stuff: - Machines - Buildings - Warehouses

Answer 25

Fixed or Long-Term Assets/Tangible

Question 26

Not stuff: - Goodwill - Accruals

Answer 26

Intangible Assets

Question 27

Liabilities longer than a year

Answer 27

Long-term

Question 28

Liabilities less than a year

Answer 28

Current

Question 29

Cash Flow from Assets Equation

Answer 29

CFC + CFS

Question 30

Refers to cash generated from a firm's normal business activities

Answer 30

Operating Cash Flow

Question 31

Refers to the net spending on fixed assets

Answer 31

Capital Spending

Question 32

Is measured as the net change in current assets relative to current liabilities for the period being examined and represents the amount spent on net working capital

Answer 32

Change in NWC

Question 33

Change in NWC only happens each year

Answer 33

Correct

Question 34

DuPont System focuses on

Answer 34

1. Expense Control: (P.M) 2. Asset Utilization: (TATO) 3. Debt Utilization: (E.M)

Question 35

ROE equation

Answer 35

ROA * EM or PM * TATO * EM

Question 36

ROA Equation

Answer 36

PM * TATO