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Zuo-mba finance 614 > Dump Course Packet Q's Pre-Midterm > Flashcards

Dump Course Packet Q's Pre-Midterm Flashcards

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1
Q

What is a corporation?

A

A corporation is a legal entity that can enter into contracts.

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2
Q

Who owns a corporation?

A

Shareholders own the corporation.

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3
Q

Who runs the corporation?

A

Managers run the corporation as caretakers for the Shareholders.

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4
Q

Does the makeup of the shareholders affect the operation of the corporation?

A

The makeup of the shareholders can change without affecting the operation of the corporation.

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5
Q

What are most well-known companies?

A

Most companies that you have heard of are public corporations, meaning they have a wide shareholder base and their ownership claims (stock) trade on a public exchange.

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6
Q

What is the role of financial managers in corporations?

A

Caretakers of the shareholders’ money.

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7
Q

What decisions do financial managers make about projects?

A

Pick which projects to invest in.

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8
Q

How do financial managers decide how to fund projects?

A

How to pay for these projects (debt vs. equity) and what the overall mix of debt and equity should be for the firm.

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9
Q

What is another responsibility of financial managers?

A

Ensure that the firm has enough money to meet its obligations and invest in all profitable projects.

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10
Q

What are the 2 principal decisions in financial management?

A
  1. Investment or capital budgeting decisions (real assets): Pick which projects to invest in.
  2. Capital structure (Financing) decisions (financial assets): How to pay for these projects (debt vs. equity) and what the overall mix of debt and equity should be for the firm.
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11
Q

What questions arise in investment decisions?

A

In what should we invest? Should we expand, shrink, or diversify?

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12
Q

What questions arise in capital structure decisions?

A

How much cash should we raise? How should we raise cash? What types of financial claims should we have? How much cash should we return to investors?

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13
Q

Why is finance important?

A

Any time your company needs to spend money on something to help it make money in the future, you will need to use finance to determine whether it is worth it.

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14
Q

Why does someone in marketing need finance?

A

Decide whether an ad campaign is worth the cost. Determine the value of a brand.

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15
Q

Why does someone in IT need finance?

A

Decide whether your company should invest in new managerial software. Decide whether to invest in a new, faster server.

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16
Q

Why does someone in accounting need finance?

A

Investors and lenders will use the financial statements you put together to conduct financial analyses. Knowing how your numbers are used will make you a better accountant.

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17
Q

Why does someone in operations need finance?

A

Investment decisions are some of the most important decisions an operations manager makes. You need to use finance to evaluate investment decisions.

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18
Q

What information is contained in the balance sheet, income statement, and statement of cash flows?

A

Investors and other stakeholders in the firm need regular financial information to help them monitor the firm’s progress. Accountants summarize this information in a balance sheet, income statement, and statement of cash flows. The balance sheet provides a snapshot of the firm’s assets and liabilities. The assets consist of current assets that can be rapidly turned into cash and fixed assets such as plant and machinery. The liabilities consist of current liabilities that are due for payment within a year and long-term debts. The difference between the assets and the liabilities represents the amount of the shareholders’ equity.

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19
Q

Why use market values in place of book values?

A

Market Value of Equity (Market Capitalization) is Market Price per Share x Number of Shares Outstanding. It cannot be negative and often differs substantially from book value as valuable assets may not be on the balance sheet.

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20
Q

Why is accounting numbers important?

A

Accounting numbers are important in determining taxes.

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21
Q

Why is free cash flow important?

A

Market value of a firm equals the present value of expected free cash flow the firm will generate in the future. This is because free cash flow represents the amount of cash flow that can be paid to the firm’s owners (stockholders and creditors). The underlying objective of decision-making is to maximize shareholders’ wealth, so free cash flow is an important idea.

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22
Q

What is free cash flow?

A

Free cash flow is the amount of cash flow generated by a company’s operations net of investment in working capital and long-term assets.

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23
Q

What is the interest rate or required rate of return?

A

Interest rate or required rate of return is the return investors require in order for them to invest their money.

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24
Q

What determines an interest rate or required return?

A

Real rate of interest, Expected inflation, Risk.

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25
Q

What is a perpetuity?

A

Perpetuity: a special case of multiple cash flows where there is a level cash payment (c or pmt) that goes on forever. The cash payment is infinite, or perpetual.

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26
Q

What is an annuity?

A

Annuities: a level stream of cash flows that ends at some point. The equal payment mortgage or installment credit agreement are common examples of annuities.

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27
Q

What are the three rules of time travel in finance?

A
  1. Only the present value (PV) is known for certain.
  2. All future cash flows are uncertain.
  3. Given the first two rules, we should expect to be compensated for bearing risk.
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28
Q

How do you calculate the Present Value (PV) of a perpetuity with growing cash flows?

A

It’s similar to the Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate.

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29
Q

What is the difference between an annuity and a perpetuity?

A

An annuity is a level stream of cash flows that ends at some point, while a perpetuity is a constant cash payment that goes on forever.

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30
Q

How can the present value of an annuity be useful?

A

It can help determine the amount needed in a retirement account at retirement, calculate monthly payments for consumer bank loans based on an interest rate and number of periods, and evaluate capital budgeting situations where equipment produces equal cash flow for a fixed number of periods at a set interest rate.

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31
Q

How is the Present Value (PV) of an annuity calculated?

A

Using the formula: PV = c * [(1 - (1 + r/m)^(-n*m)) / (r/m)] where c is the level cash payment, r is the nominal annual interest rate, m is the number of compounding intervals per year, and n is the number of years receiving cash payments.

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32
Q

What is the purpose of the Future Value (FV) annuity formula?

A

It helps determine how much one will have in a retirement account if a specific payment (the annuity) is placed into an account at the end of each time period (month or year).

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33
Q

How can the FV annuity formula assist a corporation with bonds?

A

A corporation can determine how much it must pay yearly (sinking fund) for a certain number of years at a set rate of return to repay bondholders when the bonds mature.

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34
Q

How can the FV annuity formula help in planning for a child’s college education?

A

By knowing the desired amount for a future college education, one can determine the amount to pay (the annuity) into a college fund at the end of each period for a set number of periods at a fixed interest rate.

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35
Q

How can a business owner use the FV annuity formula for a loan with a balloon payment?

A

The owner can determine how much to invest at the end of each time period for a certain number of periods at a fixed interest rate to ensure the balloon payment can be made.

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36
Q

Is it possible to derive formulas algebraically to solve for variables C and N from the FV formula?

A

Yes, it’s possible to algebraically derive formulas to solve for the variables C (payment per period) and N (number of years) from the FV formula.

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37
Q

What is inflation?

A

Inflation is an overall general rise in the price level of goods and services.

38
Q

How does inflation impact the purchasing power of cash flows?

A

The purchasing power of cash flows declines at the rate of inflation over time.

39
Q

What is the difference between nominal and real interest rates?

A

Nominal interest rates are actual interest rates (as quoted on bonds, loans, etc.), while real interest rates are nominal rates adjusted for inflation, indicating how much your purchasing power is increasing.

40
Q

What is the relationship between real rate, nominal rate, and inflation rate?

A

1 + real rate = (1 + nominal rate) / (1 + inflation rate)

41
Q

What is the Annual Percentage Rate (APR)?

A

APR is the interest rate that is annualized using simple interest.

42
Q

How is the Effective Annual Interest Rate (EAR) defined?

A

EAR is the interest rate that is annualized using compound interest. It represents the rate at which funds will grow over the course of a year.

43
Q

Is the EAR always higher than the APR?

A

Yes, the EAR is always equal to or higher than the APR.

44
Q

What is a bond?

A

A bond is a long-term loan to a company or government made by investors (or bondholders). The borrower (company) receives funds today and agrees to make a series of coupon payments until the maturity date of the bonds.

45
Q

What is Par Value in the context of bonds?

A

Par Value is the principal amount to be paid at maturity, usually $1000 per bond.

46
Q

How is the Coupon payment of a bond determined?

A

Coupon payment is the interest payment, determined by the coupon rate and is fixed throughout the life of a bond. It is calculated as: Coupon rate * par = coupon payment.

47
Q

What is Maturity in the context of bonds?

A

Maturity is the amount of time that will pass until the par value is paid.

48
Q

What is the economic value of a bond based on?

A

The economic value of a bond is the present value of its cash flows.

49
Q

What are the characteristics of a corporation?

A

A corporation is a legal entity, separate from its owners, has limited liability, has a life that is not limited by the life of its owners, and has easy transfer of ownership.

50
Q

What does it mean when a corporation is ‘public’?

A

A ‘public’ corporation is one whose shares are traded on public exchanges, allowing for a wide base of shareholders.

51
Q

How does the board of directors fit into the structure of a corporation?

A

The board of directors is elected by the shareholders to oversee the management and ensure that shareholder interests are protected.

52
Q

What is the importance of shareholders’ voting rights in a corporation?

A

Shareholders’ voting rights allow them to have a say in corporate decisions such as electing directors and approving major corporate actions.

53
Q

How do financial managers ensure the maximization of shareholders’ wealth?

A

Financial managers analyze investment opportunities, make financing decisions, and design strategies to maximize shareholders’ returns.

54
Q

What are some of the tools used in financial analysis?

A

Financial managers use balance sheets, income statements, cash flow statements, and other financial metrics to analyze a firm’s performance.

55
Q

How does diversification play a role in investment decisions?

A

Diversification allows investors to spread risk by investing in various assets or asset classes, reducing the impact of any single asset’s poor performance.

56
Q

What is the significance of the debt-equity ratio in capital structure decisions?

A

The debt-equity ratio indicates how much of the company’s financing is from debt versus equity. It provides insights into the company’s leverage and risk.

57
Q

How does finance assist human resources professionals?

A

Finance can assist HR professionals in budgeting for salaries, benefits, training, and other personnel-related expenses.

58
Q

What are the limitations of accounting numbers?

A

Accounting numbers, while standardized, may not capture all the economic realities. They are also subject to manipulation through accounting choices.

59
Q

What are the key components in the calculation of free cash flow?

A

Free cash flow components include operating cash flows minus investments in working capital and long-term assets.

60
Q

How does the risk factor into the determination of the required rate of return?

A

Risk influences the required rate of return as investors demand higher returns for taking on greater risks.

61
Q

What are the implications of not meeting the required rate of return?

A

Not meeting the required rate of return can result in decreased stock prices and a loss of investor confidence.

62
Q

How does the concept of time value of money relate to finance?

A

The time value of money concept states that a dollar received today is worth more than a dollar received in the future due to its potential earning capacity.

63
Q

What are the key differences between simple and compound interest?

A

Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal and also on the accumulated interest.

64
Q

What are the risks associated with bonds?

A

Bonds carry risks such as interest rate risk, credit risk, and liquidity risk.

65
Q

How does the credit rating of a company impact its bonds?

A

A company’s credit rating indicates its creditworthiness. Lower ratings often mean higher interest rates for the company’s bonds due to increased perceived risk.

66
Q

What is the difference between a bond’s yield to maturity and its coupon rate?

A

Yield to maturity reflects the total return expected if a bond is held to maturity, while the coupon rate is the annual interest rate established when the bond is issued.

67
Q

What role does the Federal Reserve play in determining interest rates?

A

The Federal Reserve influences interest rates by setting the federal funds rate and through open market operations.

68
Q

How does inflation impact the real value of money?

A

Inflation erodes the real value of money, reducing the purchasing power of cash flows.

69
Q

How do central banks attempt to control inflation?

A

Central banks use tools like interest rate adjustments and open market operations to influence inflation.

70
Q

What is the significance of the Fisher Effect in finance?

A

The Fisher Effect describes the relationship between nominal interest rates, real interest rates, and inflation.

71
Q

How is the term structure of interest rates determined?

A

The term structure of interest rates, or the yield curve, represents the relationship between bond yields and their maturities.

72
Q

What are the implications of a flat or inverted yield curve?

A

A flat or inverted yield curve can signal economic uncertainty or an impending recession.

73
Q

What factors influence the market price of a bond?

A

The market price of a bond is influenced by its coupon rate, maturity, credit rating, and current market interest rates.

74
Q

Who selects the senior management team in a corporation?

A

The board of directors selects the senior management team.

75
Q

Who monitors the senior management team’s performance?

A

The board of directors monitors the senior management team’s performance.

76
Q

Who has the authority to fire the senior management team?

A

The board of directors has the authority to fire the senior management team.

77
Q

Can individual persons be shareholders?

A

Yes, individual persons can be shareholders.

78
Q

Name some types of institutional shareholders.

A

Institutional shareholders include pension funds, mutual funds, and insurance companies.

79
Q

How does the board of directors ensure the protection of shareholder interests?

A

The board of directors oversees the management and makes key corporate decisions.

80
Q

Why are stockholders’ voting rights crucial in a corporation?

A

Stockholders’ voting rights allow them to influence corporate decisions, such as electing directors.

81
Q

How do financial managers maximize shareholder returns?

A

By analyzing investment opportunities, making informed financing decisions, and designing strategic plans.

82
Q

Name a few tools used in financial analysis by managers.

A

Financial managers use tools like balance sheets, income statements, and cash flow statements.

83
Q

What is the goal of diversification in investment?

A

Diversification aims to spread risk by investing in various assets, reducing the impact of poor performance from any single asset.

84
Q

Why is the debt-equity ratio significant?

A

It provides insights into a company’s leverage, indicating how much financing comes from debt versus equity.

85
Q

How can finance assist HR professionals?

A

Finance helps HR in budgeting for salaries, benefits, and other personnel-related expenses.

86
Q

What’s the difference between accounting numbers and economic realities?

A

While accounting numbers are standardized, they may not always capture all economic realities and are subject to manipulation.

87
Q

What’s the significance of free cash flow for a firm?

A

Free cash flow represents the cash that can be paid to a firm’s owners, reflecting the firm’s profitability.

88
Q

Why is risk an essential factor in determining the required rate of return?

A

Investors demand higher returns for taking on greater risks.

89
Q

How does the time value of money influence finance?

A

It states that a dollar now is worth more than a dollar in the future due to its potential earning capacity.

90
Q

What risks are associated with bonds?

A

Bonds have risks such as interest rate risk, credit risk, and liquidity risk.

91
Q

How does a company’s credit rating influence its bond prices?

A

Lower credit ratings often lead to higher interest rates for the company’s bonds due to increased risk perception.

92
Q

What’s the role of the Federal Reserve in interest rates?

A

The Federal Reserve sets the federal funds rate and influences interest rates through open market operations.

Zuo-mba finance 614 (8 decks)

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