Finance Test 1

Front 1

For an issuer, what is an advantage of preferred stock over common stock?

Back 1

fixed cost to firm, avoid sharing control

Front 2

for an issuer, what is an advantage of stock over debt

Back 2

cant be forced into bankrubtcy for missing a dividend payment

Front 3

what is a disadvantage for an issuer for stock over debt

Back 3

dividends are not tax deductable

Front 4

for an investor, what is an advantage of preffered stock over common stock

Back 4

more reliable income

Front 5

for an investor, what is an advantage of stock over debt

Back 5

tax-most of the dividend income received is tax deductable

Front 6

for an investor, what is a disadvantage ofpreffered over common

Back 6

returns on preferred stocks are limited

Front 7

what is face value

Back 7

amount owedto holders if firm is liquidated

Front 8

preferred stock features

Back 8

limited voting rights, callable, non-participating

Front 9

to issuer, what is an advantage of common stock

Back 9

no maturity, improves debt ratio, no required fixed payments

Front 10

to issuer, what is a disadvantage of common stock

Back 10

higher issue cost and returns that debt, potential loss of control

Front 11

residual claim

Back 11

lowest claim priority in bankruptcy

Front 12

preemptive right

Back 12

first shot at new stock issue to maintain proportinal ownership if desired

Front 13

cumulative voting

Back 13

seats are elected jointly, allows minority representation

Front 14

how are preferred dividends set

Back 14

in contract

Front 15

ROE

Back 15

what the firm earns on its investment

Front 16

if ROE is greater than R

Back 16

firm has good projects and should continue to fund them

Front 17

enterprise value

Back 17

is unlevered, meaning it has no debt

Front 18

WACC

Back 18

weighted average cost of capital

Front 19

pros of a comparable

Back 19

easy way to incoroporate info about the industry, alternative to discounted cash flows

Front 20

cons of a comparable

Back 20

hard to incorporate firm specific information, doesnt incorporate what you can do with the asset

Front 21

weak form efficient market

Back 21

price reflects historical price

Front 22

semi strong efficient market

Back 22

prices reflect all publicly available informatino

Front 23

strong form efficient market

Back 23

prices reflect all information

Front 24

random stock prices change supports what

Back 24

weak form efficiency

Front 25

percent of sales approach

Back 25

assumes most accounts grow with sales

Front 26

pro-forma statements

Back 26

examine historical and economic data

Front 27

owners equity account should be consistent with what

Back 27

retained earnings

Front 28

the change in cash account should be consistent with what

Back 28

cash flows

Front 29

liquidation value

Back 29

terminate project and sell assets separatley

Front 30

replacement value

Back 30

current cost to replace assets

Front 31

what is the horizon value also known as

Back 31

terminal, continuation or residual value

Front 32

why do you exclude interest on EBIT

Back 32

its in the cost of capital

Front 33

when does forecasting underestimate growth

Back 33

when it is in an expansion phase

Front 34

when does forecasting overestimate growth

Back 34

when it is in a contraction phase

Front 35

short-horizon planning

Back 35

time series model

Front 36

long-horizon planning

Back 36

regression model

Front 37

what does profit margin show

Back 37

operating efficiency

Front 38

what does total asset turnover show

Back 38

asset use efficiency

Front 39

what does financial leverage show

Back 39

chose of optimal debt ratio

Front 40

what does dividends show

Back 40

chose of how to pay shareholders vs reinvesting in the company

Front 41

conservative capitol management

Back 41

use long term financing for part of temporary current assets

Front 42

aggressive capitol management

Back 42

use short term financing for part of permanent assets

Front 43

MACRS

Back 43

modified accelerated cost recovery system

Front 44

if an asset is sold for book value

Back 44

no tax consequences

Front 45

if an asset is sold above book value

Back 45

operating gain

Front 46

if an asset is sold below book value

Back 46

operating loss

Front 47

sole proprietorship

Back 47

an organization form with only one owner

Front 48

partnership

Back 48

more than one owner

Front 49

LLC

Back 49

limited liability company

all owners have limited liability

Front 50

corporation

Back 50

legally separate from its owners. so it is protected under US constitution from seizure

Front 51

how many times do shareholders of a corporation pay tax

Back 51

twice

Front 52

agency costs are born by who

Back 52

the agent

Front 53

cost of equity is what

Back 53

the required return

Front 54

cost of debt is what

Back 54

interest rate

Front 55

stocks are what contracts

Back 55

equity contracts

Front 56

bonds are what contracts

Back 56

debt contracts

Front 57

separation theorim

Back 57

value of an investment does not depend on cosnumption preferences

Front 58

arbitrage

Back 58

taking advantage of price differentials between markets by buying and selling equivalent goods. AKA making a profit with zero risk

Front 59

law of one price

Back 59

if equal trade opportunities trade at the same time in two markets, they must trade at the same price.

Front 60

compound interest

Back 60

interest paid on both principal amount and previously earned interest

Front 61

simple interest

Back 61

interest paid only on principal

Front 62

annuity

Back 62

a series of cash flows made at the end of a period for a set period of time

Front 63

annuity due

Back 63

a series of cash flows made at the beginning of a period for a set period of time

Front 64

perpetuity

Back 64

series of equal cash flows made at the end of a period forever

Front 65

growth perpetuity

Back 65

series of cash flows made at the end of a period forever that grow at a constant rate

Front 66

the more often interest compunds,

Back 66

the faster money grows

Front 67

APR

Back 67

annual percentage rate. this is the annual rate quoted by law

Front 68

effective annual rate

Back 68

this is the annual rate that would give us the same end of investment wealth at the end of the period

Front 69

amortized loan

Back 69

repayment of principal over time plus interest

Front 70

pure loan discount

Back 70

borrow receives money today and pays a lump sum(principal plus interest) once at the end of the period

Front 71

interest only loan

Back 71

borrow only pays interest each period and pays the principal back after maturity

Front 72

treasury bills are

Back 72

pure discount loans

Front 73

deferred annuity

Back 73

a series of cash flows that begin more than 1 period in the future

Front 74

collateral

Back 74

secured by financial securities

Front 75

mortgage

Back 75

secured by real property or land

Front 76

debentures

Back 76

unsecured

Front 77

notes

Back 77

unsecured debt with original maturity less than 10 years

Front 78

seniority

Back 78

subordinate debt paid after senior claims

Front 79

discount bond

Back 79

bond price less than face value

Front 80

yield to maturity

Back 80

rate an investor earns if bond is held to maturity

Front 81

pure discount(zero coupon bond)

Back 81

get face value only

Front 82

perpetual console bonds

Back 82

only get coupons

Front 83

level coupon bonds

Back 83

get both coupon and face value of bond

Front 84

if a bonds yield to maturity has not changed then

Back 84

IRR equals yield to maturity

Front 85

price of a discount bond will move towards

Back 85

face value

Front 86

bonds are coupon debt

Back 86

with yield to maturity greater than 10 years

Front 87

notes are coupon debt

Back 87

with yield to maturity less than 10 years

Front 88

bills are

Back 88

pure discount bonds with YTM less than 1 yr

Front 89

real rate of inflation

Back 89

change in purchasing power after adjusting for inflation

Front 90

nominal rate of interest

Back 90

quoted rate of interest

Front 91

bonds of strong companies have what kind of LPS

Back 91

low

Front 92

longer time to maturity means

Back 92

higher interest rate, and lower reinvestment risk rate

Front 93

MRP is more affected by

Back 93

interest rate

Front 94

the price of a longer term bond will

Back 94

change more than a shorter term one

Front 95

the price of a lower coupon bond will

Back 95

change more than a higher one

Front 96

normal upward sloping yield

Back 96

short term are less than long term ones

Front 97

what does an inverted yield curve show

Back 97

interest rates are going to decline in the future

this is a negative forecast for the economy