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FI 311 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Advantages of sole proprietorship (4)

A
  • Easiest to start
  • Least regulated
  • Single owner keeps all the profit
  • Taxed once as personal income**
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2
Q

Disadvantages of sole proprietorship (4)

A
  • Limited to life of owner**
  • Equity capital limited to owner’s personal wealth
  • Unlimited liability
  • Difficult to sell ownership interest
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3
Q

Advantages of Partnership (4)

A
  • Two or more owners
  • More capital available
  • Relatively easy to start
  • Income taxed once as personal income
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4
Q

Disadvantages of partnership (3)

A
  • Unlimited liability
  • Partnership dissolves
  • Difficult to transfer ownership
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5
Q

Advantages of corporation (4)

A
  • Limited liability**
  • Unlimited life
  • Transfer of ownership is easy
  • Easier to raise capital
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6
Q

Disadvantages of corporation (2)

A
  • More paperwork

- Double taxation**

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7
Q

What is the goal of financial management?

A

The goal of financial management is to maximize the current market value of the existing stock.

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8
Q

Ownership stake in a company

A

Stock

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9
Q

A share in the ownership of the company

A

A share of stock

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10
Q

% of outstanding stock you own =

A

% of the company you own

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11
Q

Number of shares issued by a company that are actually owned by someone

A

Outstanding stock

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12
Q

Stock is also referred to as __

A

Equity

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13
Q

3 Features of Common Stock:

A
  • Voting rights
  • Proxy voting
  • Classes of stock
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14
Q

First shot at new stock issue to maintain proportional ownership if desired

A

Preemptive right

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15
Q

Other rights of common stock:

A
  • Share proportionally in dividends paid
  • Share proportionally in remaining assets after liquidation
  • Preemptive right
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16
Q

Current liabilities (short-term debt) (3):

A
  • Accounts payable
  • Loans outstanding
  • Current portion of long-term debt (payable in the next 12 months)
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17
Q

Long-term liabilities =

A

Bonds outstanding

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18
Q

A contract between a borrower and investor

A

Bond

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19
Q

T/F

Interest payments made by the company are tax deductible.

A

True

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20
Q

T/F

Bond holders have an ownership stake in the company.

A

False

They are just lenders and not owners.

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21
Q

T/F

Bonds can be traded between investors the same way as stocks.

A

True

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22
Q

Capacity to pay is extremely strong

A

Aaa and AAA bonds

23
Q

Capacity to pay is very strong

A

Aa and AA bonds

24
Q

Capacity to pay is strong, but more susceptible to changes in circumstances

A

A and A bonds

25
Q

Capacity to pay is adequate, adverse conditions will have more impact on the firm’s ability to pay

A

Baa and BBB bonds

26
Q

Capacity to pay will degenerate

A

Ba and B

BB and B

27
Q

Income bonds with no interest being paid or default with principal and interest in arrears

A

C and D bonds

28
Q

Differences between debt and equity (5)

A

Debt:

  • Not an ownership interest
  • Creditors do not have voting rights
  • Interest is considered a cost of doing business and is tax deductible
  • Creditors have legal recourse if interest or principal payments are missed
  • Excess debt can lead to financial distress and bankruptcy

Equity:

  • Ownership interest
  • Common stockholders vote for the board of directors and other issues
  • Dividends are not considered a cost of doing business and are not tax deductible
  • Dividents are not a liability of the firm, and stockholders have no legal recourse if dividends are not paid
  • An all equity firm can not go bankrupt merely due to debt since it has no debt
29
Q

The ease and quickness with which assets can be converted to cash quickly and without a significant loss in value

A

Liquidity

30
Q

Pro and Con of liquidity:

A
  • The more liquid a firm’s assets, the less likely the firm is to experience problems meeting short-term obligations
  • Liquid assets frequently have lower rates of return than fixed assets
31
Q

The balance sheet provides the ___ value of the assets, liabilities, and equity

A

Book

32
Q

The price at which the assets, liabilities, or equity can actually be bought or sold

A

Market value

33
Q

How do you find the marginal tax rate?

A

Current taxable income + $1 = bracket they fall in

34
Q

How do you find the marginal tax rate?

A

Current taxable income + $1 = bracket they fall in

35
Q

The interest is earned on interest as well as principal

A

Compound interest

36
Q

Present value formula =

A

PV = FV / (1+r)^t

37
Q

The longer you have to wait to get the cash flow, the ___

A

worse it is

38
Q

The higher the interest rate the _____

A

lower the present value

39
Q

The most you should pay is __

A

present value

40
Q

Infinite series of equal payments

A

Perpetuity

41
Q

Debt security, usually an interest-only loan

A

Bond

42
Q

Face value (per value) =

A

typically $1,000

43
Q

Stated interest payment made on the bond

A

Coupon payment (pmt)

44
Q

Stated in the indenture (contract). Equals: Annual coupon payments / face value of the bond

A

Coupon rate

45
Q

Specified date on which the principal amount of the bond will be repaid

A

Maturity

46
Q

A bond that sells for more than its face value

A

Premium bond

47
Q

A bond that sells for less than its face value

A

Discount bond

48
Q

If a bond sells at face value, its Yield to Maturity is ____

A

equal to its coupon rate

49
Q

Premium bond YTM is ____ than the coupon rate

A

lower

50
Q

Discount bond YTM is ____ than the coupon rate

A

higher

51
Q

Discount bond YTM is ____ than the coupon rate

A

higher

52
Q
  • The firm will pay a constant dividend forever
  • This is like preferred stock
  • The price is computed using the perpetuity formula
A

Constant dividend - or zero growth model

53
Q
  • The firm will increase the dividend by a constant percent every period
  • The price is computed using the growing perpetuity model
A

Constant dividend growth - Gordon growth model

FI 311 (3 decks)

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