454 Final Flashcards
There is a conflict of intrest between stockholders and bond holders because______.
Stockholders have a limited downside and an unlimited upside.
Which examples involve only implicit opportunity costs (not explicit costs)?
A firm withholding licensing rights from others to gain a competitive advantage
A company using a spare machine for a new project
A real estate company using a rental apartment as its own office
Sunk costs are costs that _____
have been incurred in the past and cannot be recouped fully
What are types of real options?
-Option to expand
-Option to abandon
-Option to wait/delay
NOT OPTION TO BUY The option to buy an asset at a fixed price is a financial option, not a real option.
What is a disadvantage of using NPV analysis for capital budgeting?
It ignores real options
Sensitivity analysis examines the impact of _______ on a decision criterion, such as NPV.
changing one variable
The balance sheet shows a company’s _____ _____.
assets and liabilities; at one point in time
Net working capital equals _____.
current assets minus current liabilities
The income statement shows a company’s _____.
revenue and expenses over a period of time
Which statements are true (for a firm without non-operating income or expenses)? EBIT _____.
-does not include interest payments
-is the same as operating income
Costs directly associated with producing the product, such as wages and the cost of raw materials, are called ____, while other costs such as rents and salaries are called ______.
cost of goods sold; SG&A
Net working capital formula
NWC = Current assets - Current liabilities
What are the requirements for valuing a company or project from comparables?
-Comparable firms or projects have similar values.
-You can identify a measure that is relevant for valuation.
-You can find a very comparable firm or project.
NOT : THE MARKET IS EFFICENT
What are the main problems with valuation by price-earnings ratios?
-Different companies might use different accounting methods.
-Corporate debt changes the price-earnings ratio.
-It is difficult to find comparable firms.
The profit margin is a measure of _____.
operating efficiency
Return on equity (ROE), which is a measure of profitability, can be calculated as
After-tax profits divided by the book value of equity
The term capital structure refers to the company’s _____.
use of interest-bearing debt and equity
Which types of loans or securities are secured by collateral?
-Asset-backed securities
-Mortgage securities
-Auto loans
NOT: Debentures
Which of these effectively serves as a floor for the market price of a convertible bond?
The higher of the straight-debt value and the conversion value
Which of the following events would make it more likely that a company would call a callable bond?
Market interest rates decrease significantly.
Which statements are true about common stock?
-Stockholders have limited liability: the most they can lose in the event of failure of the corporation is their original investment.
-Stockholders are the last in line of all those who have a claim on the assets or income of the corporation (residual claim).
-Common stock is an ownership share in a corporation.
The executive board comprises the top managers of a company: CEO, CFO, COO, CMO, etc.
-The board of directors has a fiduciary duty to shareholders.
-The board of directors appoints and monitors the executive board.
-Shareholders elect the board of directors.
NOT Shareholders supervise the executive board.
The claim that preferred shareholders have on the assets and income of a firm is _____ that of creditors and _____ that of common shareholders.
below; above
A convertible preferred stock is similar to a convertible bond in a number of respects. Which of these is a major point of difference between the two instruments?
The time to maturity is not finite in case of convertible preferred stock.
