Quiz 1 Flashcards
(74 cards)
1
Q
The study of the relationship between business decisions and the market value in the business
A
Corporate finance
2
Q
3 types of decisions financial managers make:
A
- Capital budgeting
- Capital structure
- Working capital management
3
Q
3 major forms of business in the United States:
A
- Sole proprietorship
- Partnership
- Corporation
4
Q
What is the goal of financial management?
A
To maximize the current market value of the existing stock
5
Q
Ownership stake in a company
A
Stock
6
Q
A share in the ownership of the company
A
A share of stock
7
Q
Stock is also referred to as
A
Equity
8
Q
Number of shares issued by a company that are actually owned by someone
A
Outstanding stock
9
Q
Financial market where transaction takes places directly between issuer and investor
A
Primary markets
10
Q
Financial market where transaction takes place between investors
A
Secondary markets
11
Q
How does a small company sell its stock?
A
The owners themselves find an investor willing to buy the shares, negotiate a price, and the investor pays the company directly for the stock
12
Q
How does a large company sell its stock?
A
Companies that meet certain size requirements can have their stock listed on an exchange
13
Q
Pros of issuing stock?
A
- The company does not have to pay money back to purchasers of stock
- Easier for good companies to attract investors who want an ownership stake, higher returns
14
Q
Cons of issuing stock?
A
- Current owners are giving up a piece of their stake in the company
- Equity investors usually require a higher potential return than bond investors
- Dividends are not tax-deductible, unlike interest payments on loans or bonds
15
Q
Features of common stock
A
- Voting rights
- Proxy voting
- Clases of stock
16
Q
A contract between a borrower and investor
A
bond
17
Q
Interest payments made by the company are __ __
A
tax deductible
18
Q
T/F
Bond holders do not have an ownership stake in the company
A
True
They are just lenders and not owners
19
Q
T/F
Bonds can be traded between investors the same way as stocks
A
True
20
Q
Pros of bonds?
A
- Selling bonds does not force current owners to give up management or ownership control of the company
- Unlike stock, bonds have a limited life
- Since the company can deduct interest payments from income for tax purposes, the cost to the company of issuing and holding debt in the form of bonds is typically lower than that of stock
21
Q
Cons of bonds
A
- Usually, periodic interest payments must be made. This reduces the company’s liquidity, and can even force the company into bankruptcy
- Unlike stockholders, the company is obligated to make a payment to bondholders at a specified period of time
- May be harder to sell bonds than stock in certain circumstances
22
Q
Investment grade bond ratings (2):
A
- High Grade
- Medium Grade
23
Q
Non investment grade bond ratings (2):
A
- Low grade
- Very low grade
24
Q
Aaa and AAA bonds capacity to pay is __
A
extremely strong
25
Aa and AA bonds capacity to pay is __
very strong
26
Moody's A and S&P A bonds capacity to pay is __ but _______
strong
| more susceptible to changes in circumstances
27
Moody's Baa and S&P BBB capacity to pay is __ but adverse conditions will have ___
adequate
| more impact on the firm's ability to pay
28
Ba and B and BB and B are considered possible that the capacity to pay will ___
degenerate
29
Moody's C and D and S&P C and D are income bonds with no ____
interest being paid
30
In terms of bonds, D=
default with principal and interest in arrears
31
Above bonds can also be known as ___ or __ bonds
"High Yield"
| "Junk"
32
Pool money from many investors to buy individual securities
Mutual funds
33
T/F
Mutual fund managers help investors gain exposure to companies with no charge
False
They charge a fee for the service
34
T/F Mutual funds happen within a broad category of security and type
False
Mutual funds focus on one type of security (stocks or bonds) and have a particular focus within that security type (large company stocks, government bonds)
35
3 things to consider when examining a balance sheet (from a Finance perspective)
Liquidity
Debt vs. equity
Market value vs. book value
36
Liquidity refers to the ease and quickness with which assets can be converted to ______
cash quickly and without a significant loss in value
37
The more liquid a firm's assets, the less likely the firm is to ____
experience problems meeting short-term obligations
38
Liquid assets frequently have _____ than fixed assets
lower rates of return
39
Equity holders are entitled to only the ____
residual value
40
Creditors have the first claim to a firms ____
cash flow
41
The balance sheet provides the ____ of the assets, liabilities, and equity
book value
42
____ value is the price at which the assets, liabilities, or equity can actually be bought or sold
Market
43
How big the company's equity is based on the current price of the stock
Market Capitalization
44
Market cap formula
number of shares outstanding * current price of the stock on the market
45
When is revenue recognized?
At the time of sale
46
Expenses charged against revenues that do not directly affect cash flow
Noncash items
47
noncash items (3):
1. Depreciation
2. Amortization
3. Deferred taxes
48
Amount of cash flow available for distribution to investors
Cash flow from assets
49
Positive cash flow =
firm generates more than enough cash to cover its operating needs
50
Ratios allow for better comparison through __ or between __
time
| companies
51
T/F
Ratios are only used internally
False
They are used internally and externally
52
Current assets / current liabilities
Current ratio
53
(current assets-inventory)/(current liabilities)
Quick ratio
54
Cash / current liabilities
Cash ratio
55
Measures a company's debt relative to other parts of the balance sheet
Long-term solvency ratios
56
Measures how liquid a company is, or how able they are to meet their obligations over the next 12 motnhs
Liquidity ratios
57
(Total assets - total equity) / total assets
Total debt ratio
58
Measures how likely a company is to meet its interest obligations
Coverage ratios
59
Earnings before interest and taxes / interest
Times interest earned
60
(EBIT + depreciation) / interest
Cash coverage
61
Net income / sales
profit margin
62
net income / total assets
return on assets
63
net income / total equity
return on equity
64
price per share / earnings per share
PE ratio
65
price per share / sales per share
price-sales ratio
66
price per share / book value per share
Market-to-book ratio
67
Why evaluate financial statements?
-Performance evaluation
Planning for the future
-Investment potential
-Lending evaluation
68
Potential benchmarking problems
- Difficult for diversified firms
- No underlying theory
- Globalization and international competition makes comparison more difficult
- Varying accounting procedures
- Different fiscal years
- Extraordinary events
69
Elements of financial policy (4):
1. Investment in new assets
2. Degree of financial leverage
3. Cash paid to shareholders
4. Liquidity and working capital requirements
70
Dimensions of financial planning (3):
- Planning horizon
- Aggregation
- Assumptions and scenarios
71
What is a major drawback to Corporations?
Double taxation
72
Which of the following is an advantage of a sole proprietorship?
A. Unlimited life
B. Double taxation
C. Unlimited liability
D. Easier to start and run/less paperwork
D. Easier to start and run/less paperwork
73
T/F
In a partnership, if there are 20 partners and one dies, you can still keep the partnership going with the remaining 19 partners
False
74
What is the main goal of financial management?
To maximize the value of the firm to the owners
