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Finance > Chapter 2 > Flashcards

Chapter 2 Flashcards

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1
Q

What is arbitrage?

A
  • Riskless profit
  • If the same good has two different prices in two different markets an investor could create a profit without any form of risk.
  • Can be exploited when law of one price does not hold
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2
Q

Whats the compounding value of money?

A
  • Used to calculate the value of a cash flow in the future

- Takes interest on interest payments into account

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3
Q

Whats the discounting value of money?

A
  • Calculates the present value

- Value of a future cash flow today

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4
Q

What is the net present value?

A

The NPV of an investment is the equivalent of the cash you would receive/pay today
→ Therefore as long as the NPV is positive, the project is a good investment

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5
Q

How do you calculate the ROI?

A

Profit / Initial Investment

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6
Q

Whats an annuity?

A
  • Constant finite cash flow stream
  • Same value each period
  • Finite life
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7
Q
  1. By evaluating cost and benefits using competitive market prices, we can determine whether a
    decision will make the firm and its investors wealthier. This central concept is called:
    A) the Law of One Price.
    B) the Present Value.
    C) the Valuation Principle.
    D) the Internal Rate of Return.
A

C

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8
Q

How do you calculate the net present value? (NPV)

A

net cash flow / (1 + discount rate)

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9
Q

Which of the following statements regarding bonds and bond markets is FALSE?
A) The coupon payment of a coupon bond equals the coupon rate times the bond price.
B) Prior to its maturity date, the price of a pure discount bond is always below its face value (assume a
strictly positive yield to maturity).
C) A coupon bond that trades at a premium has a yield to maturity below the coupon rate.
D) Treasury bills are U.S. government bonds with a maturity of up to one year.

A

A

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10
Q

The firm’s revenues and expenses over a period of time are reported on the firm’s
A) income statement or statement of financial performance.
B) income statement or statement of financial position.
C) balance sheet or statement of financial performance.
D) balance sheet or statement of financial position

A

A

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11
Q 
The statement of financial performance is also known as the 
A) balance sheet.
B) income statement.
C) statement of cash flows.
D) statement of stockholder's equity
A

B

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12
Q

The firm’s asset turnover measures
A) the value of assets held per dollar of shareholder equity.
B) the return the firm has earned on its past investments.
C) the firm’s ability to sell a product for more than the cost of producing it.
D) how efficiently the firm is utilizing its assets to generate sales

A

D

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13
Q

The firm’s equity multiplier measures
A) the value of assets held per dollar of shareholder equity.
B) the return the firm has earned on its past investments.
C) the firm’s ability to sell a product for more than the cost of producing it.
D) how efficiently the firm is utilizing its assets to generate sales

A

A

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14
Q 
If Alex Corporation takes out a bank loan to purchase a machine used in production and everything else stays the same, its equity multiplier will \_\_\_\_\_\_\_\_, and its ROE will \_\_\_\_\_\_\_\_.
A) increase; increase
B) decrease; decrease 
C) increase; decrease 
D) decrease; increase
A

A

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15
Q

The DuPont Identity expresses the firm’s ROE in terms of
A) profitability, asset efficiency, and leverage.
B) valuation, leverage, and interest coverage.
C) profitability, margins, and valuation.
D) equity, assets, and liabilities

A

A

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16
Q 
Suppose Novak Company experienced a reduction in its ROE over the last year. This fall could be attributed to
A) an increase in Net Profit Margin.
B) a decrease in Asset Turnover. 
C) an increase in Leverage. 
D) a decrease in Equity. Answer: B
A

B

17
Q

If Moon Corporation’s gross margin declined, which of the following is true?
A) Its cost of goods sold increased.
B) Its cost of goods sold as a percent of sales increased.
C) Its sales increased.
D) Its net profit margin was unaffected by the decline

A

B

18
Q 
Which of the following is not a section on the cash flow statement? 
A) Income generating activities
B) Investing activities
C) Operating activities 
D) Financing activities
A

A

19
Q

Which of the following is not a reason why cash flow may not equal net income?
A) Amortization is added in when calculating net income.
B) Changes in inventory will change cash flows but not income.
C) Capital expenditures are not recorded on the income statement.
D) Depreciation is deducted when calculating net income

A

A

20
Q

Which of the following adjustments to net income is not correct if you are trying to calculate cash flow from operating activities?
29
Copyright © 2011 Pearson Education, Inc.
A) Add increases in accounts payable
B) Add back depreciation
C) Add increases in accounts receivable
D) Deduct increases in inventory

A

C

21
Q

Which of the following adjustments is not correct if you are trying to calculate cash flow from financing activities?
A) Add dividends paid
B) Add any increase in long term borrowing
C) Add any increase in short-term borrowing
D) Add proceeds from the sale of stock

A

A

22
Q

In addition to the balance sheet, income statement, and the statement of cash flows, a firm’s complete financial statements will include all of the following except:
A) Management discussion and Analysis
B) Notes to the financial statements
C) Securities and Exchange Commission’s (SEC) commentary
D) Statement of stockholders’ equity

A

C

23
Q

Off-balance sheet transactions are required to be disclosed
A) in the management discussion and analysis.
B) in the auditor’s report.
C) in the Securities and Exchange Commission’s commentary.
D) in the statement of stockholders’ equity.

A

A

24
Q

The Sarbanes-Oxley Act (SOX) stiffened penalties for providing false information by
A) requiring the CEO and CFO to return bonuses or profits from the sale of stock that are later shown to be due to misstated financial reports.
B) imposing large compliance costs on small companies.
C) requiring auditing firms to have long-standing relationships with their clients and receive lucrative auditing and consulting fees from them.
D) putting strict limits on the amount of non-audit fees (consulting or otherwise) that an accounting firm can earn from a firm that it audits.

A

A

Finance (14 decks)

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