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Finance > Week 1 > Flashcards

Week 1 Flashcards

1
Q

What are the 4 major types of firms?

A
  1. Sole Proprietorship
  2. Partnership
  3. Limited Liability
  4. Corporation
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2
Q

What are the features of a limited liability company?

A
  • All owners have limited liability (all can run the firm)

- Owners are not liable for debts or liabilities

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3
Q

1.Which of the following statements regarding limited partnerships is true?
A) A limited partner’s liability is limited by the amount of his/her investment.
B) A limited partner is not liable until all the assets of the general partners have been exhausted.
C) A general partner’s liability is limited by the amount of his/her investment.
D) There is no limit on a limited partner’s liability.

A

A

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4
Q

A limited liability company is essentially:
A)just another name for a limited partnership.
B)a limited partnership without limited partners.
C)just another name for a corporation.
D)a limited partnership without a general partner

A

D

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5
Q

Who makes final decision in Corporations and tasks?

A

CFO

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6
Q

Whats the agency problem?

A

Managers may act in their own interest instead of the shareholders interest.

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7
Q

What are the goals of a corporation?

A
  1. Maximize shareholder value

2. ESG - Environmental, Social, Governance

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8
Q

Whats the difference between primary and secondary stock markets?

A

Primary stock markets: When a corporation itself issues new shares of stock and sells them to investors, they do so on the primary market (corporation to investor).-
Secondary stock markets: After the initial transaction in the primary market, the shares continue to trade in a secondary market between investors (investor to investor)

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9
Q 
A \_\_\_\_\_\_\_\_ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.
A)hostile takeover
B)shareholder action
C)liquidation
D)leveraged buyout
A

A

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10
Q

Which statement about the agency problem is NOT correct?

A)Shareholders often tie the compensation of top managers to the profits or perhaps the stock price.
B)The agency problem is commonly addressed in practice by limiting the amount of decisions managers must make for which their own self-interest substantially differs from the interests of the shareholders.
C)Managers have little incentive to work in the interest of shareholders when this means working against their own self-interest.
D)The agency problem arises because of the separation of ownership and control in a sole proprietorship.

A

D

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11
Q

What are bid-ask spreads?

A

The bid–ask spread is the difference between the prices quoted for an immediate sale and an immediate purchase for stocks, futures contracts, options, or currency pairs. The size of the bid–ask spread in a security is one measure of the liquidity of the market and of the size of the transaction cost. (higher outside trading hours e.g. night)

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12
Q

What are the purposes of the 4 financial statements?

A
  • Balance Sheet: → lists firm’s assets and liabilities to provide a snapshot of a firms financial position at a given point in time
  • Income Statement: → list of the firms revenues and expenses over a period of time → Net income = Revenues –Expenses -

Statement of Cash Flows: → utilizes information of both the income statement and the balance sheet, shows how much cash the firm generated and how it has been allocated over a period of time

-Statement of Stockholders equity: → breaks down the stockholders equity presented on the balance sheet into the amount that came from issuing shares vs retained earnings

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13
Q

What are the different ratios?

A

Profitability
• Used to understand a firm’s financial profitability
Liquidity
• Used to assess a firm’s ability to pay short term needs
Solvency/Interest Coverage
• Used to assess a firm’s ability to cover the interest payments
Leverage (Gearing)
• Used to assess a firm’s source of funding (whether the firm relies on debt to finance itself )
Valuation
• Help assessing the firm’s value

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14
Q

What’s the Sarbanes-Oxley Act?

A

Sarbanes-Oxley act: An Act To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.It describes specific criminal penalties for manipulation, destruction or alteration of financial records or other interference with investigations. Also known as the “Public Company Accounting Reform and Investor Protection Act” and “Corporate and Auditing Accountability, Responsibility, and Transparency Act”

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15
Q

The Sarbanes-Oxley Act (SOX) intended to improve the accuracy of information given to boards and shareholders in three ways. Which one is NOT one of the three ways?
A)By forcing companies to validate their internal financial control processes.
B)By stiffening penalties for providing false information.
C)By overhauling incentives and the independence in the auditing process.
D)By granting 10-30% of a penalty to whistleblowers.

A

D

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16
Q

Whats the Dodd-Frank act

A

Dodd-Frank act: An Act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

17
Q

If you buy shares of Siemens on the primary market:
A)you buy the shares from the New York Stock Exchange.
B)Siemens receives the money because the company has issued new shares.
C)you buy the shares from another investor who decided to sell the shares.
D)you buy the shares from the Federal Reserve.

A

B

18
Q

Which of the following statements about market value versus book value of equity is NOT correct?
A)The market value of equity is often referred to as the company’s market capitalization.
B)The book value of a stock does not depend on the historical cost of the firm’s assets, but it depends on what investors expect those assets to produce in the future.
C)The market value of a firm’s equity equals the number of shares outstanding times the firm’s share price.
D)The book value of equity is an inaccurate assessment of the true value of the firm’s equity.

A

B

19
Q

Which of the following statements is true?

A. A partner never has unlimited liability
B. The government cannot be a shareholder of a company
C. Corporations generate the least revenue on an aggregate level
D. Sole proprietorships are the most common form of companies

A

D

20
Q

Success Formula is a publicly listed company. Kacper, a market maker, lists an ask price of 10.15€ and a bid price of 10.05€. Nik wants to buy 10 shares. What does Nik have to pay?

A. 10.05€
B. 100.50€
C. 101.50€
D. 10.15€

A

C

21
Q

Which of the following is not a contra accoWhich of the following is not a contra account?

A. Accumulated amortization
B. Accumulated depreciation
C. Dividend payments
D. Retained earnings
unt?
A

D

22
Q

Which of the following statements on firm types or legal status of firms is FALSE?
A) A limited partner has no management authority and cannot legally be involved in
the managerial decision-making of the business.
B) A sole proprietorship is a special case of a limited partnership.
C) Private equity funds and venture capital funds are two examples of industries
dominated by limited partnerships.
D) There is no limit on a general partner’s liability.

A

B

23
Q

A corporation is best characterized by:
A) ownership and control that are both in the hands of the shareholders.
B) a lifetime that ends with the death of the CEO.
C) a legal identity separate from its owners.
D) shareholders that have unlimited liability.

A

C

24
Q

The Principal-Agent Problem does not imply that:
A) shareholder value may not be maximized.
B) business executives managing the company (CEO’s, CFO’s) follow their own
objective(s) which are not necessarily in line with the objective(s) of the
shareholders.
C) there is a conflict of interest between the company’s stakeholders.
D) ownership and control are both in the hands of the management.

A

D

25
Q

A liquid asset is first and foremost characterized by:
A) the fact that it has a book value but no market value.
B) a high volatility.
C) the fact that it can easily be traded in the market.
D) a large bid-ask spread.

A

C

26
Q 
The following accounting data are known and given for company Silly.inc.   
      Assets  $200 million 
  Shareholders’ Equity  $100 million 
  Sales  $300 million 
  Net Income  $15 million 
  Interest Expense  $2 million 
If Silly's shares are currently trading at $24.00 and Silly has 25 million shares outstanding, then Silly’s 
market-to-book ratio is closest to: 
A) 0.24 
B) 4 
C) 6 
D) 30
A

C

27
Q

How do you calculate the market to book ratio?

A

(share price x shares outstanding) / 100

28
Q

How do you calculate earnings per share? (EPS)

A

net income / number of shares outstanding

29
Q

Which statement about ratio analysis is FALSE?
A) Interest coverage ratios will be lower for companies with more (interest-bearing) debt on their
balance sheet (assume companies with equal EBIT).
B) Both leverage ratios and interest coverage ratios can be interpreted as measures of
bankruptcy or default risk.
C) Ratios help companies to compare themselves with their own past or with other
companies.
D) The calculation of ratios solely involves financial statement variables as input

A

D

30
Q

The Banana Company has sales of €29 million, total assets of €43 million, and total debt of €13
million. The (net) profit margin is 11 percent. What is the return on equity?
A) 7.42%
B) 10.63%
C) 11.08%
D) 14.28%

A

B

Book value of equity=43-13=30; Net income=net profit marginSales=0,1129=3,19;
ROE=Net income/book value of equity=3,19/30=10,633..%

31
Q 
Which of the following are subject to double taxation?
A) Corporation
B) Partnership
C) Sole proprietorship
D) A and B
A

A

Finance (14 decks)

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