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32 Cards in this Set
- Front
- Back
What are the three ways a company can finance a project? |
Equity---> Shareholder, Stockholder, Investor Debt---> bond, loan, creditor Retained Earnings---> use company earnings |
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Which of the following is a working capital decision? (hint: think day to day activities.) A. How should the firm raise additional capital to fund its expansion? B. What Debt-Equity Ratio is best suited to the firm? C. What is the cost of debt Financing? D. Which type of debt is best suited to finance the inventory? E. How much cash should the firm keep in reserve? |
E. How much cash should the firm keep in reserve. |
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Financial Leverage does what: |
Increases the potential return to shareholders |
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How do companies align managements priorities with shareholders' interests and therefore reduce agency conflicts? |
Thru compensating executive managers and the CEO with shares of stock and performance bonuses instead of fixed salaries. |
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Corporations have a relative disadvantage compared to sole proprietorships and partnerships in that: |
Corporations suffer from double taxation since income earned as dividends by shareholders is also taxed by the government. |
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This tax rate applies to the next dollar of taxable income that a firm earns. |
Marginal Tax Rate |
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Financial Ratios calculated from the financial statements are often used by: |
- Bank managers to decide whether to extend a loan to a company - Firm CEO's and executives to decide if they can spend cash and safely raise additional capital - Potential shareholder to decide whether they should buy stock |
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Provides a better guide to the actual worth of an asset than does Book Value. |
Market Value |
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Companies sometimes switch their inventory management schemes from FIFO to LIFO in order to: |
Manage their earnings and portray a higher profit by paying less tax |
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When comparing financial ratios such as ROA and Turnover ratios across different companies it is important that we take into account what? |
That we compare companies from similar industries so that we are comparing apples to apples. |
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What is the maximum growth rate that a firm can achieve without any additional external financing? |
Internal Growth Rate |
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What increases the Future Value of a lump sum investment made today? |
Increasing the interest rate and the time period. |
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Annuities Due have payments that occur when? |
At the beginning of each time period |
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When comparing savings accounts, you should select the account that has the: |
Highest EAR |
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Rule of 72's equation |
(r) X (t) = 72 |
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Suppose you have a bond with a $1,000 Face Value and it pays you $70 coupon payments annually. the bond has a YTM of 8% compounded annually. This Bond will trade in the market at: |
A Discount |
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A call provision (Callable Bond) grants the bond issuer the: |
Option of repurchasing this bond from the bond holder at a pre-specified price prior to maturity. |
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Junk Bonds, rated at BB and below are also called: |
High Yield Bonds |
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Bonds usually trade on what type of markets? |
OTC dealer markets |
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This type of security has no priority (the least seniority) in a bankruptcy proceeding. |
Common Stocks |
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What increases the current value of a stock? |
An increase in the capital gains yield |
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This form of securities don't have listing requirements and don't file financial statements with the SEC. |
Penny Stocks |
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What defines the internal rate of return for a project? |
Discount Rate that results in a zero Net Present Value for the project. |
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The constant dividends growth model states that: |
The growth rate must be less than the required rate of return. |
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In regards to the historical record of stock returns, which companies produce the highest returns? |
Small-Company Stocks |
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Defined as a bell-shaped frequency distribution that is defined by its mean and standard deviation. |
Normal Distribution |
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Market prices reflect all publicly available information. This is regarding what hypothesis? |
The Efficient Market Hypothesis |
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Taking advantage of an anomaly or mis-priced securities to make a positive return. |
Arbitrage Opportunity |
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Risk that affects a large number of securities. |
Systematic Risk |
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Security-Specific Risk, Diversifiable Risk, and Unique Risk are all forms of what form of Risk? |
Unsystematic Risk |
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Suppose you have a portfolio of two stocks with a correlation of 1, then portfolio theory tells us: |
The Portfolio will have the same risk as holding the stocks individually |
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Stocks usually exhibit what types of prices and returns on fridays? |
Higher Returns and Prices |