If an asset increases, is it a cash inflow or outflow?Outflow – – firm must pay for the asset it acquiredIf a liability or equity increases, is it a cash inflow or outflow?InflowWhich will be larger: actual taxes payable or accounting income tax expenseAccounting tax expense will be higher; actual taxes based on IRS rules willbe lowerWhich financial ratios measure “efficiency”?Asset turnover and Fixed Asset turnoverWhich decision requires using subjective estimates?Economic life of a new asset and depreciation of assetIf there is a 30% chance of a recession, what is the probability of expansion?70% – – the sum of the probabilities must equal 100%What is the yield to maturity of a bond?The return earned from purchase date to maturityHow much interest is paid on a 5% bond over 2 years and 6 months? (Simple Interest)5% x 1000 = $50 per year $50 x 2.5 = $125If a firm buys a 30-day CD, where is it carried on the balance sheet?Cash and ST in Current assetsHow does a “prudent investor” select investments?Seeks the highest return for “reasonable” amount of riskWhat is the difference between WACC and CAPM’s required return?CAPM includes only equity required return; WACC includes debt & equityWhat do points on the Efficient Frontier measure?The maximum return for a given level of risk; maximum Return-to-risk ratio
What is Beta?Measure of volatility of a stock’s risk relative to the marketWhy are accurate forecasts important?Plan for resources to support salesWhich leverage measure shows the impact of EBIT changes on pre-tax profit (EBT)Financial leverageWhich ratios are used in working capital management?Cash ratio, Current ratio – – ratios containing current assets and/or current liabilitiesWhich ratio is used in valuing a private company?PE ratioWhat are the 4 costs associated with holding inventory?Product, storage, holding, and opportunityWhat risk is eliminated by a diversified portfolio?Idiosyncratic risk – risk affecting a single firmWhat is the “secondary market”?Investors trading securities among themselves after initial issuance of securitiesWhat are the impacts of outsourcing?Fewer jobs and lower priced productsWhat are the impacts of tariffs?More jobs and higher product costs for consumersWhich item is transferred from the income statement to the balance sheet?Depreciation expenseIf two companies use different inventory valuation methods, what is that called?An “accounting difference”
What securities are exempt from federal income taxation?Municipal bondsWhy would a firm prefer to issue debt rather than stock?Debt has lower required return; debt interest is tax deductible; avoid dilution of ownershipWhat happens to APY as the number of interest payment periods per year increase?APY increasesWhat is the present value of future cash flows of a stock called?Intrinsic valueIf market price is greater than intrinsic value, should you buy or sell?SellIn event of bankruptcy, what is the order of claims settlement?Secured debt, senior debt, subordinated debt, Preferred stock, Common stockWhat is a spontaneous account?One that changes with the level of sales – – current assets & liabilitiesWhat is a discretionary account?One that changes due to management decision – – bonds outstandingIf the financial ratios of 2 firms are compared, what is it called?Cross-sectional analysisHow can a firm encourage customers to pay early?“Discounts” for early paymentIf a loan does not require collateral, what is it called?Unsecured loanWhat transaction do firms use to offset foreign exchange risk?Hedging
If the debt ratio increases, what is the likely impact on ROE?It increasesWhy is an Annuity Due more valuable than an Ordinary Annuity?Cash payments are received earlier – – beginning of year rather than end ofyearWhat discount rate is used to calculate net present value in capital budgeting?WACC or the “required return”What financial structure causes profitability to be more volatile?LeverageIf debt is cheaper than equity, why not all debt?Bankruptcy risk; equity is the cushion against bankruptcyThe Degree of Financial Leverage reflects what?Firm’s reliance on debt.What is a leveraged buyout?A firm issues debt to buy another firmIf interest rates increase, what is the impact on WACC?Required returns on both debt and equity increase – – thus WACC increases.Why is the required return on stocks higher than bonds?Higher riskThe DuPont formula expands the ROE definition into what 3 ratios?Net Margin, Total Asset Turnover, and Financial LeverageWhat cash balance supports daily operations, that is, spontaneous accounts?Operating balance, as opposed to Reserve balanceWhat type of debt has a lower claim than bonds in bankruptcy proceedings?Subordinated debentures, i.e. subordinated debt
In a stock portfolio, why might the investor sell the “winners” and keep the “losers”?Aversion to realizing losses; prefer to gamble on a recoveryMore recent research on MM shows what?The debt-equity ratio does affect WACC and the value of the firmThe Prospectus contains what information?Description of security being issued, risk factors for investorWhat is APY for a savings account paying 6% APR and daily compounding?(1 + .06/365) ^ 365 = 1.0618 – 1 = .0618What is the purpose of the SEC?To ensure that US public companies are transparent to promote efficient marketsWhy would totally domestic firm worry about global finance?Competition from foreign firm imports to USIf a firm automates its production line, what ratio increases?Fixed Asset TurnoverWhat balance sheet items would cause the Current Ratio to change?Cash, Inventory, Accounts Receivable, Accounts Payable, Accrued Expenses What is term that refers to corporate managers acting in their own interests rather than the stockholders?Agency CostWhat are 3 functions of prices?Convey information, affect incentives, and affect distribution of incomeWhat is a “secured loan” or “secured bond”Firm pledges collateral to back the loanWhat is net working capitalCurrent assets (excluding cash) minus current liabilities
What information is needed in capital budgetingCash flows (initial, differential, & terminal) and the discount rate.What is “free cash flow”Cash flows from operations minus cash necessary for reinvestment in PPEWhy would APY be greater than APRInterest compounded more frequently than annuallyWhat are the two ways a stock investor can profit from buying stockDividends and capital gainsAccording to the efficient market hypothesis, why might a stock price increaseNew information that causes investors to expect higher profitsAccording to the Gordon Growth model, what would cause a stock price to increaseIncrease in the expected growth rate of dividends or a reduced required returnAccording to the CAPM, what would cause the required return on a stock to increaseIncrease in Beta or an increase in the risk-free rateWhat is the Matching principle?Expenses incurred to support revenue generation must be recognized in same periodWhat determines when revenue is “recognized” on the income statementWhen the product is shipped to the customer, not actual receipt of cash from customerWhy might a company choose to decrease salesBecause sales exceed SGR & limited access to financingWhat is possible bad side-effect of a high sales-to-inventory ratioLost sales because of lack of inventory
What is difference between municipal bonds and Treasury bondsTreasury issued by Federal government; municipal issued by state-local governmentsWhat type of security can be exchanged for stock?Convertible bondIf a machine is purchased, what items are added to gross PPEThe cost of the asset and shipping & installation expenses (defined by GAAP)What are the results of a firm increasing leverage?Increased profit, increased profit volatility, and possibly increased required returnIf investors expect a recession, what happens to the risk premium on bonds and stockRisk premiums increaseWhat are two ways a firm can sell securities to a syndicateCompetitive sales and negotiated saleWhat are bid and ask pricesBid: price dealer quotes to buy security Ask: price dealer quotes to sell a securityWhat are 3 types of global finance riskExchange rate, country, and politicalWhat is IFRS (International Financial Reporting Standards)Same set of accounting rules across countries: US companies must use GAAPWhat are the 3 advantages of using ratio analysis?Standardize: compare different size firms; flexible: not GAAP; Focus: quickly discover weaknessIf there is 5% inflation, how much would a $100 product cost in 1 year?100 x 1.05 = $105 Inflation increases the cost of the product.
Investment decisions involves what two attributes?Allocation of money and multiple time periodsWhat is difference between Gordon Growth and CAPM?Gordon assumes a required return; CAPM: required return depends on measured risk of a stockHow does a good credit rating from S&P and Moody’s affect the firm?Lowers the cost of financing. a credit downgrade increases the cost of financingIf a firm’s risk-return line is above the market risk-return line, what happens?The firm’s stock price will increase to reduce it expected return to the market levelThe current condition of any firm is tied to what?Past Investment decisions – – i.e. capital budgetingWhat does capital budgeting do?Process of selecting long term assets that enhance firm valueWhat are 3 methods of evaluating capital projectsIRR, NPV, and PaybackHow does inflation affect the evaluation of a capital project?Inflation will increase expenses, costs, and revenues over timeAs the maturity date of a bond approaches, what happens to the priceIt will converge to a par price at maturityWhy do firms recognize a depreciation expense?Reflects wear-and-tear on equipment; reduces taxesWhat are the 4 categories of financial ratios?Liquidity, efficiency, financing, profitabilityWhat are the 4 pitfalls of using financial ratios?Seasonal, timing, accounting, interpretation
Trading on the NYSE is executed without a specialist (i.e. a market maker). True or False?
False
Stocks and Bonds are two types of financial instruments. True or False?
True
When revenue is matched with cost of sales in an Income statement it is called?
Matching principle
Basic balance sheet equation is what?
Equity = Assets – Liabilities
Why is the balance sheet known as the permanent statement?
Because the other statements are reset at the end of the fiscal year.
How do you calculate the change in retained earnings?
Net income-dividends
Sales – Cost of Sales – other expenses =
Operating Income or EBiT
Name four accounts that are part of total assets?
Cash, Accounts receivable, inventory, long term assets
Name three accounts that are part of total liabilities?
Bonds, accounts payable and mortgage
Name four accounts that are part of current assets?
Inventory, cash, accounts receivable and short term investments.
Name three accounts that are only included in cash flow from financing?
Common stock, dividends paid and bonds payable
Define the statement of cash flows?
Calculated for the same period of time as the incomes statement is calculated based on the income statement and changes in the balance sheet is one of the three basic accounting statements.
When fixed assets increase what happens to cash?
Cash will decrease
What is the purpose of the statement of cash flows?
Explains the change in cash over the course of the specified time frame.
Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely?
The firm has too little inventory resulting in lost sales or stock-outs.
If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio?
Higher
The Operating Income Return on Investment (OIROI) uses what elements on the income statement?
EBIT and total assets
Why would a company be interested in the Total Asset Turnover (TAT) ratio?
To see how efficient are at producing sales
What annual interest will be paid for a zero coupon bond?
0%
What is the most significant characteristic of subordinated debt?
Senior debt is paid off first
If a company wants to increase its debt capital, how will they raise the funds?
Sell bonds
What is the lowest level investment bond
BBB
What can cause the bond price to fluctuate?
A change in the bond rating, a change in the financial condition, general change in interest rates.
What does a company use as security for a bond?
Credit worthiness
Under the efficient market hypothesis, what will companies endeavor to do?
Maximize profits for a given level of risk
What does the beta coefficient represent?
It is a statistically derived measure of volatility.
If an investor knows the idiosyncratic risk, the investor knows the?
Beta Coefficient
Why is the depreciation expense taken out of the net income calculation, yet added back at the end?
Because depreciation expense is tax deductible.
Why would we reject a project based on NPV?
The NPV is a negative number
Why would we reject a project based on IRR?
The discount rate is higher than the IRR
What are two key elements of differential cash flow?
Depreciation expense and net income
Why is the NPV preferred over the IRR?
It measures the dollar value and is more reliable.
When a company uses more leverage as evidenced by a higher degree of either financial or operating leverage, what effect does it have on changes in profitability?
Higher leverage leads to higher profitability for a given sale level.
What does the degree of financial leverage indicate?
The reliance on debt
If a company has a high degree of financial leverage, what does that tell us about the firms risk profile?
Financial leverage also means that more financing is done through debt, not equity. Higher profits to shareholders.
What is the cash cycle?
The amount of time to regenerate cash.
Why is float important to understand?
To time cash expenditures
What should a company do to manage its working capital?
Collect quickly and pay slowly
Name what characterizes increased collection float?
Increased float indicates slower processing time.
In regards to Accounts Payable Balances, what is a good policy?
Paying off A/P on the last day due is a good policy.
What would be a good source of information to determine replacement cost?
Building Appraisal
Dodd-Frank Act regulates which segment of the U.S economy?
Banking industry
What is the regulatory body that overseas the systematic risk in banking?
Financial stability oversight council
The SEC securities and Exchange Commission requires companies to do the following three things:
Register all public offerings, regulate stock sales and ensure transparency through uniform reporting.
What does the Sarbanes-Oxley Act require companies to do?
Have internal control audits, senior management responsible for signing off on statements and places restrictions on auditors.
Financial Industry Regulatory Authority (FINRA) does the following?
Licenses stock brokers and audits brokerage firms.
If a product is made 100% domestically, what can affect its domestic market?
International competition
If a company makes a product in a foreign country where labor costs are much lower, what happens?
Profits go up and domestic employment decreases.
If the value of a dollar increases, the price of imports does what?
Decreases
Why would a farmer buy a hedge when he signs a contract to sell products oversees?
To reduce currency risk
The goal of a corporation is to?
Minimize risk
Which of the following is not a requirement for an efficient market?
Liquidity
The value of money depends upon?
The timing of receipts, certainty of receipt and riskiness of receipt.
What is the purpose of the SEC 10-K filing?
Prevent monopolies
Which line item is not part of net working capital?
Bonds
Increase in accounts payable, decrease in accounts payable and increase in inventory are examples of cash flow. True/False
False
Net margin is defined as?
Retained earnings / sales
Which item is transferred from the income statement to the balance sheet?
Depreciation expense and addition to retained earnings
What item is added to net income to calculate net cash flow?
Depreciation expense
Which cash flow statement represents cash earned by producing and selling the product?
Cash flow operations
Which ratio reflects a firms reliance on debt financing?
Financial leverage
Which action causes a cash outflow?
Increase in inventory
If two firm use different money valuation methods, it is called?
Accounting Difference
What thee things affect the required return on a security?
Perceived riskiness
Financial decisions of the firm
Trading in financial markets
Which is the most frequent type of transaction in financial markets?
Secondary markets
Which of the 5 white financial function keys represents a series of cash disbursements?
PMT
If payments are made semi-annually, which key inputs must be adjusted?
PMT, I/Y and N
Which can be defined as change in value of cash over time?
Interest rate, inflation rate, and discount rate
Which signifies a need to change the calculator to begin mode?
Recurring payments made at the beginning of the year.
Why is an annuity due more valuable than an ordinary annuity?
Payment are received earlier
Which is always larger?
Future value
If you wanted to create an annuity with annual adjustments for inflation, you would use:
Perpetual growth annuity
Which ratio will always be smaller?
Net margin
If net working capital increases, it causes?
A cash outflow
What feature distinguishes bonds from stocks?
Periodic cash payments must be made to investors and capital gains can be realized by investors.
Yield on a bond can best be described as?
Rate of increase in value if investment
When is the bond yield equal to the coupon rate?
At pr price
For a semi annual pay bond, which inputs must be adjusted?
N, I/Y and PMT
Which describes the relationship between price and yield?
Price increases cause yield decreases
Which does not affect a bonds required yield?
Expected growth rate
A bonds duration causes?
Market risk
If a bonds price is at a discount, then?
Bond yield is more than the coupon rate
What is the difference between common and preferred stock?
Preferred stock dividends are fixed
If rating agencies downgrade a bond from AAA to BBB, what happens?
The bonds price decreases
What are the two sources of profit to an investor?
Dividends and capital gains
Which best describes the market risk premium?
Excess return over risk free rate
What best describes beta?
Stock price volatility relative to market feasibility
Which is not a means of eliminating idiosyncratic risk?
Buy a low beta stock
The required return on stocks is derived from?
Systematic risk
A prudent investor would seek?
Maximize return for investor’s risk tolerance
A stock whose return is affected substantially by a recession is?
High beta stock
Which factor does not affect WACC?
Efficiency ratio
Which factor does not impact a stocks price?
Maturity date
If the firm believes that the market under-values its stock, it should?
Buy back stock
A firm is a good investment if?
It’s price is less than intrinsic value
Why does a firm calculate WACC?
It is the cost of financing the firm
Which is a difference between stocks and bonds?
Increased required return always reduces price
Which is the correct order in terms of lowest to highest required return?
Secured bonds, preferred stock, common stock
Which measures sales growth that can be financed internally?
SGR
Why are accurate sales forecast desirable?
To plan resource acquisition
What components of ICF are included in Gross PPE?
Cost of asset, shipping & installation installment
If an equipment salvage value is greater than book value?
There is a tax cash outflow
A potential project should be adopted if?
IRR is greater than WACC
A firm will have volatile profits if?
It has high operating leverage, high financial leverage and high combined cash leverage.
Which firm is more likely to use high financial leverage?
Firm with stable sales and manual production
Excess leverage will likely result in?
Increased WACC and reduced stock price
Why might a firm by back stock?
Increase leverage and boost the stock price
Which ratio might be used in working capital management?
Quick ratio
How might a firm incentivize customers to pay sooner?
Larger discount
Which ratio is used to value a private firm?
PE
The SEC regulates financial markets to achieve what goal?
Protect investors, increase transparency and increase market efficiency.
The Accredited Investor designation is used for?
Rule 144A and Hedge Funds
FX hedging is used to?
Promote exports
A strong dollar has what effect?
Increases imports
Relatively high interest rates in the U.S has what effect?
Strong dollar
If a firms combined leverage is high, what is the implication?
Profits are more volatile as sales fluctuate
Why would a company buy back outstanding stock?
To boost the price of stock, increase financial leverage and lack of investment opportunities.
Which can beat be described as a present value problem.
Valuation of bonds, valuation of stock and evaluation of potential investment.
What attributes of cash should be considered in evaluating investments?
Size of cash flow, timing of cash flow and risk of cash flow.
Firms use sensitivity analysis because?
To anticipate impact of erroneous forecasts
If IRR is greater than WACC and adopted project?
Increases shareholder value
If a firm increases leverage?
Indeterminate impact on price
Role of the Federal Reserve Act of 1913
Federal regulation to deal with bank runs and recessions
Role of McFadden Act of 1927?
Federal regulation designed to provide greater accessibility for bank customers
Role of Glass-Steagall Banking Act 1933?
Federal Regulation to curb bank failures by separating commercial/ consumer banks from investment banks
Garn-St. Germain Act of 1982?
Loosened restrictions on what financial institutions could do to the U.S with regard to products they could offer.
Role of Dodd Frank Act 2010?
Federal regulation to regain control of financial institutions by the federal government after the 2008 meltdown.
Role of Securities Act of 1933?
Resulted from Great Depression. Required firms to register with the SEC to sell public securities.
Role of Securities Act of 1933 Rule 144A?
A safe harbor by the SEC to sell private capital to accredited investors.
Roles of Sarbanes Oxley Act of 2002?
Federal regulations resulting from corporate frauds such as Enron and designed to protect investors from fraud.
Role of the Financial Industry Regulatory Authority (FINRA)?
It is a private regulatory corporation
What specific legislation permits companies to sell stock without registration?
Rule 144A
What Act controls IPO’s?
Securities act of 1933
Which act re-regulated the banking industry?
Dodd Frank Act
What is EDGAR?
Electronic Data Gathering Analysis and Retrieval System
Which Act monitors markets systemic risk?
Dodd Frank Act
What organization was created to bring structure to investment offerings?
The Securities and Exchange Commission (SEC)
Which Act brought wild bankers under control?
National Banking Act of 1863
Which Act set up a division between consumer banking and commercial banking?
Glass Stegall Banking Act of 1933
Which Act was created to support the banking system and was intended to keep small banks from failing?
Glass Stegall Banking Act of 1933
Which Act was created to improve internal control practices at corporations and increase the role of public accountants in doing so?
Sarbanes Oxley Act
What organization was created to provide self policing in the investment industry?
Securities and Exchange Commission