Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Financial Management > C124 > Flashcards

C124 Flashcards

1
Q

If accounts receivable increases, what is impact on CFO?

A

CFO decreases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Are actual taxes paid the same as shown on GAAP income statement?

A

No. Actual taxes: IRS rules Income statement: GAAP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Which decisions require using subjective estimates?

A

​Economic life of a new asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

If there is a 30% chance of a recession, what is the probability of expansion?
​

A

70% - - the sum of the probabilities must equal 100%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How much interest is paid on a 6% bond over 2 years and 3 months?
​

A

6% x 1000 = $60 per year $60 x 2.25 = $135

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How does a “prudent investor” select investments?
​

A

Seeks the highest return for “appropriate” amount

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What do points on the Efficient Frontier measure?
​

A

The maximum return for a given level of risk; maximum Return-to-risk ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is Beta?
​

A

Measure of a stock’s risk relative to the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Why are accurate forecasts important?
​

A

Plan for resources for production; accurate evaluation of capital projects

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Which ratio is used in valuing a private company?
​

A

PE ratio in the “Comparable Multiples” method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the 3 costs associated with holding inventory?

A

​Product, storage, and opportunity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What risk is eliminated by a diversified portfolio?
​

A

Idiosyncratic risk – risk affecting a single firm

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the impacts of outsourcing?

A

​Fewer U.S. jobs and lower priced products

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the impacts of tariffs?
​

A

More U.S. jobs and higher product costs for consumers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What securities are exempt from federal income taxation?
​

A

Municipal bond interest is tax-exempt. Treasury securities ARE taxable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Why would a firm prefer to issue bonds rather than stock?

A

​Debt has lower required return; debt interest is tax deductible

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Impact on APY as the number of interest payments per year increase?

A

​APY increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the present value of future cash flows of a stock called?

A

​Intrinsic value = it is the “real” value of the stock; PV of cash to investor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What indicates if a stock is a “good investment”?

A

The price of the stock is less than the “intrinsic value”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

In event of bankruptcy, what is the order of claims settlement?

A

Creditors, bonds, subordinated debt, Preferred stock, Common stock.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is a spontaneous account?

A

​One that changes with the level of sales - - current assets & liabilities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is a discretionary account?
​

A

One that changes due to management decision - - bonds outstanding.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

If the financial ratios of 2 firms are compared, what is it called?

A

​Cross-sectional analysis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What financial structure causes profitability to be more volatile?

A

Leverage: higher leverage ratios mean more volatile profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

If debt is cheaper than equity, why not all debt?

A

​Bankruptcy risk: equity is the cushion against bankruptcy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

If interest rates increase, what is the impact on WACC?

A

​Required returns on debt and equity increase - - thus WACC increases.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

The Prospectus contains what information?

A

​Audited financial statements, description of security, operating info.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is the purpose of the SEC?
​

A

To ensure that US investors in the U.S. markets are well informed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Why would totally domestic firm worry about international trade?

A

Competition from foreign firm imports to US

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

If a firm’s ROE is greater than ROA, what does that mean?

A

The firm uses debt financing wisely to increase profitability.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What is term that refers to corporate managers acting in their own interests rather than the stockholders?
​

A

Agency Cost. How to avoid? Tie compensation to stock price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What is a “secured loan” or “secured bond”?
​

A

Firm pledges collateral to back the loan or bond, eliminating bankruptcy risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What is “free cash flow”?
​

A

Cash flows from operations minus cash necessary for reinvestment in PPE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Why would APY be greater than APR?
​

A

Interest payments more frequently than annually

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What determines when revenue is “recognized” on the income statement?

A

When the product is shipped or delivered to the customer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What is possible bad side-effect of a high sales-to-inventory ratio?

A

​Lost sales because of lack of inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

What type of security can be exchanged for stock?

A

​Convertible bond

38
Q

What are the results of a firm moderately increasing leverage?

A

​Increased ROE, increased profit volatility, and decrease in WACC.

39
Q

What is goal of IFRS (International Financial Reporting Standards)?

A

Create a uniform set of accounting rules across countries.

40
Q

What is difference between Gordon Growth and CAPM?
​

A

CAPM: statistically measured; Growth model is just conceptual.

41
Q

How does a good credit rating from S&P and Moody’s affect the firm?

A

​Lowers the cost of financing.

42
Q

What are the 4 categories of financial ratios?

A

​Liquidity, efficiency, financing, profitability

43
Q

What are the 3 pitfalls of using financial ratios?

A

​Seasonal, timing, accounting

44
Q

Why does a firm hold cash?

A

“Operating balance”: pay bills; “Reserve balance”: for unforeseen cash needs.

45
Q

What permits the sales of securities without detailed SEC registration?

A

​Rule 144A (in U.S. markets) and Reg S (in foreign markets)

46
Q

The market risk premium for stocks is compensation for what?

A

​Systematic risk: that is, risk that cannot be diversified away.

47
Q

What happens if a firm adopts a project with a negative NPV?

A

Since the value of the firm is decreased, the stock price falls.

48
Q

If a bond’s yield is greater than the coupon rate, what is its price?

A

​Discount price

49
Q

What does the Modigliani-Miller (M&M) theory state?

A

​The debt-equity ratio does not affect WACC.

50
Q

What does recent evidence say about the M&M theory?

A

​The debt-equity ratio does affect WACC.

51
Q

If forecasted sales is greater SGR, what actions might a firm take?

A

​Sell bonds or stock and reduce dividend payouts.

52
Q

Are “sunk costs” included in the Initial Cash Flow of a capital project?

A

​No. Sunk costs have already been incurred, before evaluating the project.

53
Q

Which type of stock has voting rights?

A

​Common stock has voting rights; preferred stock does not.

54
Q

Which type of stock has voting rights?

A

​Common stock has voting rights; preferred stock does not.

55
Q

What are two ways to incent customers to pay sooner?

A

Discount for early payment; shorter period for full payment (i.e., shorter credit cycle)

56
Q

Firm A has greater operating leverage than firm B. If sales of both increase, what is impact?

A

​Firm A’s profit increases more than Firm B’s profit

57
Q

What items appear in an income statement, but not in statement of cash flows?

A

Accrual items such as depreciation expense and credit sales.

58
Q
  1. Investment grade bonds have what Standard & Poor’s rating?
A

BBB or higher. Below BBB is deemed as “junk bonds”

59
Q

If a bond is down- graded (i.e., from AAA to A), what happens?

A

The price drops to increase the required return to compensate for increased risk.

60
Q

If corporate income tax rates increase, what is impact on WACC?

A

WACC decreases because the after-tax cost of bonds decreases.

61
Q

Diversification can eliminate what type of risk?

A

It eliminates idiosyncratic risk, but not systematic risk.

62
Q

What ratios are used in Working Capital Management?

A

Ratios that contain a current asset and/or current liability

63
Q

Capital budgeting require what 3 cash flows?

A

Initial cash outlay, yearly cash inflows, terminal cash flow

64
Q

Which security includes to right to vote in annual meetings?

A

Common stock

65
Q

What technique reduces risk in an investment portfolio?

A

Diversification

66
Q

What is a leveraged buyout?

A

Firm uses debt to buy another firm.

67
Q

Who oversees the systematic risk in banks?

A

FSOC Financial Stability Oversight Council

68
Q

Which cash flow statement refers to daily operations?

A

Cash Flow Operations

69
Q

If a firm changes the mix of bonds and stock, what impact on WACC?

A

It changes. I may increase or decrease

70
Q

What item is added to the balance sheet from the income statement?

A

Depreciation expense is added to Accumulated Depreciation

71
Q

What is impact of inflation?

A

Increases the cost of items; decreases the “real value” of cash flows

72
Q

What should a company do to manage working capital?

A

Collect quickly and pay slowly.

73
Q

What technique is used to reduce risk?

A

Hedging through futures, forwards, or swaps

74
Q

What are “recorded entries” versus “estimated entries”?

A

Purchase price of machine is “recorded”; depreciation is “estimated”

75
Q

Why would a firm’s stock price increase more than the industry average?

A

The firm’s profits from operations were better.

76
Q

How does WACC affect a firm’s growth rate?

A

A low WACC means there are more profitable investment opportunities

77
Q

The Prospectus includes what information?

A

Audited financial statements and firm business risks.

78
Q

Sarbanes Oxley requires what information to be disclosed?

A

Off-balance sheet risk, annual audit of internal controls.

79
Q

What does the Volker rules state?

A

Prohibits hedge fund investments by banks.

80
Q

What does FINRA do?

A

Monitor sales practices by securities dealers

81
Q

Why are investors more willing to sell stocks with gains than stocks with losses?

A

Investors are reluctant to acknowledge losses; hope for price rebound.

82
Q

What types of investments are most liquid?

A

Short term securities such as Treasury bills

83
Q

If a firm elects to skip scheduled dividends on preferred stock, what must it do?

A

Pay skipped preferred stock dividends before paying any common stock dividends.

84
Q

Why is it difficult to determine the value of a stock?

A

Uncertainty about the right inputs to the formulas

85
Q

What is Pecking Order Theory?

A

Preferred order of financing: retained earnings, debt, and lastly equity.

86
Q

What is “dividends in arrears”?

A

The firm elects to delay paying preferred stock dividends

87
Q

What security is referred to as a “hybrid”?

A

Preferred stock: has features like bonds and common stock

88
Q

How is the value of a firm measured in the “replacement cost” method?

A

Firm value based on the current market prices of the firm’s assets.

89
Q

The replacement cost method works for what type of assets?

A

Tangible assets with a market value; not intangible assets

90
Q

What types of borrowing does not required collateral?

A

“Unsecured” bonds/loans as opposed to “secured” bonds/loans

Financial Management (1 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions