Exam one study guide

Question 1

What is finance all about

Answer 1

Creation of value:

via investing in assets

Question 2

Two main decisions to make

Answer 2

1. Investment decision (Capital budgeting decision)

2. Financing decision

Question 3

What is firm’s objective?

Answer 3

Maximize shareholders wealth

Question 4

[Formula] Shareholder wealth =

Answer 4

outstanding of shares x market price of stock

Question 5

Is it true that corporations are managed in the interest of shareholders?

Answer 5

Yes

Question 6

Agency problem

Answer 6

conflict between principals and agents.
Principals: shareholders
Agents: managers

Question 7

How to ensure managers will act in the interest of shareholders?

Answer 7

agency costs to the principal. (Stock option)

Agency costs to the agents (bonding costs)

Question 8

Financial management team

Answer 8

Treasurer

Chief financial officer

Question 9

Is the firms objective to increase the current or future stock price?

Answer 9

current

Question 10

Corporate finance is about investment in _____ assets

Answer 10

real

Question 11

Individual investors invest in ____ assets

Answer 11

financial

Question 12

What is the pros of a corporation?

Answer 12

• legal entity
• limited liability
• Separation of ownership and management control
• Double taxation

Question 13

Is it possible that the market value of stock is
not the same as the accounting value in the
balance sheet? Which one is more important?

Answer 13

no they are different

market value is more important

Question 14

How does the active trading stocks issued by a firm in the stock market help the firm?

Answer 14

it helps with the business expansion

Question 15

Firms ______ spending units

Answer 15

deficit

Question 16

Individual investors _____ Spending units

Answer 16

surplus

Question 17

primary market

Answer 17

debt equity. Firms

Question 18

secondary market

Answer 18

financial asset. individual investors

Question 19

investment:

Answer 19

sacrifice current consumption

Question 20

Who are the two major players in an financial market?

Answer 20

Firms, individual investors

Question 21

best system is a

Answer 21

free market place system

Question 22

What market does individaul investors use to invest.

Answer 22

secondary market

Question 23

Is a money market temporary or long term?

Answer 23

temporary, 1 year.

Question 24

is a capital market temporary or long term

Answer 24

long term

Question 25

If they issue you long-term debt its called ______ market

Answer 25

primary

Question 26

Where do you invest in secondary markets?

Answer 26

exchanges, otc.

Question 27

What is a traditional investment company?

Answer 27

Hedge fund

Question 28

Why would someone seek out an investment company

Answer 28

funds are professional managed. Helps people who don't want to constantly look at the market

Question 29

Sometimes if you want \to exchange stocks you would need help from?

Answer 29

Brokerage firm | But sometimes you don't need their assistance

Question 30

Derivatives markets

Answer 30

contract between 2 parties | used for security.

Question 31

A necessary condition for the financial market places to contribute to the persistent economic wealth and growth?

Answer 31

Competitive, Efficient and Fair Financial Market | System!

Question 32

Sarbanes-Oxley Act of 2002

Answer 32

(Protect investors from the possibility of fraudulent | accounting activities.)

Question 33

What acts made there be too much regulation?

Answer 33

Dodd frank wall street reform | Consumer protection act

Question 34

What is a key component to the Dodd frank act

Answer 34

blocker rule restricts the way banks can invest, limit speculative trading and eliminating proprietary trading

Question 35

Derivative markets players (4)

Answer 35

1. households 2. business firms 3. government 4. financial intermediaries

Question 36

Balance sheet

Answer 36

snapshot of the firm's status of "investment" and "financing position" at a given time.

Question 37

Total value of assets

Answer 37

current assets, fixed assets (tangible fixed assets and intangible fixed assets)

Question 38

Total Value of Liabilities and Shareholders Equity

Answer 38

Current liability Long-term Debt Shareholders' equity

Question 39

Which 3 are Financing structure

Answer 39

current liabilities long term debt shareholders equity

Question 40

On the balance sheet, assets are listed in the ____ __ ______

Answer 40

order of liquidity

Question 41

Balance sheet identity

Answer 41

assets = liabilities + shareholders equity

Question 42

Most liquid asset:

Answer 42

Doesn't last for more than one year. Cash Accounts receivable inventory

Question 43

Current liabilities

Answer 43

Account payable | Notes payable

Question 44

What is considered long term debt

Answer 44

more than one year

Question 45

What's the ideal relationship between assets and liabilities

Answer 45

current asset should be more than liability

Question 46

What is network Capital?

Answer 46

the difference between current asset and current liability

Question 47

+ or - for network capital

Answer 47

it should be positive

Question 48

Companies should invest in what?

Answer 48

network capital

Question 49

Once the current asset disappear it becomes? Once the current liability disappear it becomes?

Answer 49

Net Working Capital; | doesn't become anything

Question 50

After the current liability disappears what is left?

Answer 50

long-term debt | shareholders' equity

Question 51

After the current liability disappears and there is only long-term debt and shareholders' equity. What is that called?

Answer 51

Capital structure

Question 52

What does the balance sheet provides

Answer 52

the book value of the assets, liabilities, and equity.

Question 53

______ _____ is the price at which the assets, liabilities, or equity can actually be bought or sold now.

Answer 53

Market value.

Question 54

Which is more important in the financial decision-making process (Market value or Book value)

Answer 54

Market value

Question 55

Difference between net fixed asset and fixed asset

Answer 55

net fixed asset - takes out depreciation fixed asset - still has depreciation

Question 56

Income statement | You generally report ______ first and then deduct any ______ for the period

Answer 56

revenues | expenses

Question 57

What is net sales or net value

Answer 57

Revenue

Question 58

What is EBIT

Answer 58

earning before interest and taxes

Question 59

What is EBT

Answer 59

earning before taxes

Question 60

What is EAF? What is it under.

Answer 60

Earning after taxes Income tax = EAF

Question 61

How do you get EBIT?

Answer 61

Net sales (Revenue) - Cost of goods sold - Depreciation = earning before interest and taxes (EBIT)

Question 62

How do you get EBT?

Answer 62

Earning before interest and taxes - interest paid = Taxable income (EBT)

Question 63

How do you get earning after taxes ?

Answer 63

Taxable income - taxes = net income

Question 64

What are the expenses after Earning after taxes or Net income?

Answer 64

Dividends | Retained earnings

Question 65

What should you do with cash?

Answer 65

You should invest into the company. There is no point of holding cash.

Question 66

How do you get total current assets on your balance sheet?

Answer 66

Cash + AR + Inventory

Question 67

How do you get total assets on your balance sheet?

Answer 67

Net fixed assets + Current Total assets.

Question 68

How do you get current liabilities on your balance sheet?

Answer 68

Account payable + Notes payable

Question 69

How do you get total liabilities and owners equity?

Answer 69

Current total liabilities + Long term Debt + Owners equity (Common stock and paid-in surplus + retained earnings )

Question 70

Marginal tax

Answer 70

the percentage paid on the next dollar earned

Question 71

average tax rates

Answer 71

the tax bill / taxable income

Question 72

Look at marginal tax Schedule

Answer 72

Review of financial statements (6)

Question 73

_____ ___ is one of the most important information that investors can derive from financial statements

Answer 73

Cash flow

Question 74

What is operating cash flow

Answer 74

operating cash flow after tax flow tax flow from sasets

Question 75

What is OCF?

Answer 75

Operating cash flow

Question 76

What does OCF show ?

Answer 76

shows the operating side cash flows available for | creditors and shareholders.

Question 77

What is the formula for OCF?

Answer 77

OCF = EBIT + Depreciation – Taxes

Question 78

What is ATCF?

Answer 78

After tax cash flow

Question 79

What does ATCF show ?

Answer 79

shows CF available for shareholders

Question 80

What is the formula for ATCF?

Answer 80

ATCF = OCF – Interest pmt

Question 81

Cash Flow From Assets =

Answer 81

= Operating Cash Flow – Net Capital Spending – Changes in NWC

Question 82

Cash Flow From | Assets (CFFA)

Answer 82

Cash Flow to Creditors + Cash Flow to Stockholders

Question 83

Look at the last slide for replacement chapter 4

Answer 83

8

Question 84

Perpetuity –

Answer 84

infinite series of equal | payments

Question 85

Annuity –

Answer 85

finite series of equal payments | that occur at regular intervals

Question 86

If the first payment occurs at the end of the period, it is called an 

Answer 86

ordinary annuity

Question 87

If the first payment occurs at the beginning of | the period, it is called an

Answer 87

annuity due

Question 88

For a given interest rate – the _____ the | time period, the lower the present value

Answer 88

longer

Question 89

For a given time period – the _____ the | interest rate, the smaller the present value

Answer 89

higher