Midterm 4 Part 6

Question 1

What is a depreciation expense?

Answer 1

It’s just the amount that your asset has depreciated within a given period

Question 2

True or False: Depreciation expenses are tax deductible

Answer 2

True

Question 3

What does CAFE stand for?

Answer 3

Corporate average fuel economy

Question 4

What does CAFE mean?

Answer 4

It is a deal between the U.S. and oil companies to make sure that vehicles travel a certain distance on a gallon of oil (ensures economic minimum)

Question 5

What is the Modigliani and Miller model?

Answer 5

The sum of two corporations is worth more than both parts

Question 6

True or False: Sunk costs are considered in current operations calculations

Answer 6

FALSE

Question 7

True or False: Sunk costs are fixed costs

Answer 7

True

Question 8

What does OCF stand for?

Answer 8

Operating cash flow

Question 9

What is OCF?

Answer 9

It is the normal amount of cash generated by a company’s business operations

Question 10

What is a paper loss?

Answer 10

It is essentially the MV - BV equation. The loss happens when the market value does not match the book value

Question 11

What is a c corp?

Answer 11

The owners are taxed separately from the business entity

Question 12

What is a hurtle rate?

Answer 12

It is the minimum amount of return an investor requires

Question 13

What is bad debt?

Answer 13

Money that you have to write off because it’s uncollectable (like if they went out of business and can’t pay you back)

Question 14

What is a bad debt expense?

Answer 14

The AR that you can’t collect (because it’s bad debt)

Question 15

True or False: The government gives you a tax break for buying a house and owning your home

Answer 15

True

Question 16

How do you get a write off for your mortgage payment?

Answer 16

You file something with the IRS

Question 17

True or False: Personal loans are tax deductible

Answer 17

False

Question 18

True or False: Other than personal loans, most loans are tax deductible

Answer 18

True

Question 19

What is a reverse mortgage?

Answer 19

It is the ability to take out a loan against the equity of your house (if you own house).

Question 20

What is a good faith estimate?

Answer 20

It is the document that estimates the costs of getting a reverse mortgage.

I think it can technically be anything though. Like any instance where you would need an estimate of possible costs of the agreement.

Question 21

True or False: You give up earnest money BEFORE doing inspections

Answer 21

Pretty sure it’s true.

You have an inspection contingency in place, so that if the inspection fails, you get your earnest money back.

Question 22

True or False: When a firm is in a steady state, there is zero growth

Answer 22

True

Question 23

Why is it important to know the value of a firm in the merger and acquisition market?

Answer 23

Because if you want to buy a company, you want to know how much the entire thing is worth.

Also consider MnM

Question 24

What is an IPO?

Answer 24

Initial public offering. It is when a privately held company issues stocks publicly for the first time (when a private company goes public)

Question 25

What does LTV stand for?

Answer 25

Loan to value

Question 26

What is a loan to value ratio?

Answer 26

It is a ratio that determines if the loan amount matches the market value of the asset.

Question 27

What is a market cap?

Answer 27

It is the value of stocks held by all stockholders. The value of the firm being held by stockholders.

Question 28

True or False: It's best to have a larger market cap

Answer 28

True

Question 29

Why are larger market caps better?

Answer 29

Because they usually represent well established companies with good histories

Question 30

What is the Earnings yield ratio?

Answer 30

E/P It is the inverse of the P/E ratio.

Question 31

When would you use the Earnings yield ratio?

Answer 31

It can be used to determine which assets are under priced or over priced, it determines optimal asset allocation

Question 32

When would you use the M/B ratio? market to book

Answer 32

When you are trying to see how the market values a particular asset.

Question 33

Which types of companies use M/B ratio most often?

Answer 33

Companies with tangible assets that have an easily definable market and book value. Like real estate

Question 34

Where would a CEO's salary be on a balance sheet.

Answer 34

Under current liabilities - maybe

Question 35

Why are smaller companies usually the ones who don't take the CEO's salary into account when valuing a company?

Answer 35

Because they're usually being run by a single person who just takes what's left of the profits at the end of the month rather than pay a set salary. Larger corporations have better systems in place and follow legal rules more closely.

Question 36

What is the DOW?

Answer 36

It is an index fund that tracks the 30 most prominent companies

Question 37

True or False: The more synergy two companies have when merging, the more efficient the new company will be

Answer 37

True

Question 38

Examples of synergies

Answer 38

1. Increased revenues 2. Combined talent 3. Combined technology 4. Cost reductions

Question 39

What is the MACRS schedule?

Answer 39

Year 1: 33.3 % Year 2: 44.5 % Year 3. 14.8 % Year 4. 7.4 %

Question 40

What is P/EBITDA used for?

Answer 40

Entrepreneurial finance

Question 41

True or False: DCF valuation is concerned with intrinsic valuation

Answer 41

True