Exam 1 vocab

Question 1

The following are advantages to incorporating a business: (3)

Answer 1

Easier access to financial markets to raise capital through the sale of stocks and bonds // Limited liability // Becoming a legal entity that can have a life in perpetuity

Question 2

A __________ is elected by, and represents the interests of the shareholders of the organization

Answer 2

board of directors

Question 3

__________ ___________ are expected to make capital budgeting and other decisions that are in the best interest of the corporation’s shareholder

Answer 3

Corporate managers

Question 4

Sound judgement and effective decision-making are important attributes for ___________ ___________ because they represent the means to the desired end, to maximize the firm’s stock price, which in turn maximizes shareholder wealth

Answer 4

financial managers

Question 5

Initially, most corporations are __________ ______. They are referred to in this way because their stock is held only by a small group of investors.

Answer 5

closely held

Question 6

A corporate bond is an example of a __________ ________.

Answer 6

financial asset

Question 7

A decision to expand into a new line of products, at a cost of $5 million, would be considered a __________ ___________ ___________.

Answer 7

capital budgeting decision

Question 8

When a corporation decides to issue long-term debt in order to pay for the acquisition of real assets, it has made a ____________ decision.

Answer 8

financing

Question 9

A manager’s compensation plan that offers financial incentives for increases in quarterly profitability may create __________ _________, because short-term, not long-term profits become the focus.

Answer 9

agency problems

Question 10

___________ _____________ generate the largest value for the firm’s shareholders and create the greatest sustainable competitive advantage for a corporation.

Answer 10

Ethical strategies

Question 11

Commercial banks, investment banks, savings and loan associations, mutual savings banks, credit unions, life insurance companies, hedge funds, and mutual funds and pension funds, are all examples of ___________ ________________.

Answer 11

financial intermediaries

Question 12

A _________ ___________ is utilized when securities are initially issued by a corporation to raise capital.

Answer 12

primary market

Question 13

You can buy silver in a _______________ ____________.

Answer 13

commodities market

Question 14

Compared to buying stocks and bonds directly, the advantages of investing in a mutual fund are __________ ________________ and __________________ ______________

Answer 14

efficient diversification, professional management

Question 15

US corporate equities are held primarily by ___________, either directly or through the mutual funds.

Answer 15

households

Question 16

US bonds and other debt securities are held primarily by ____________ __________, such as banks, insurance companies, pension funds and mutual funds.

Answer 16

institutional investors

Question 17

A _________ _______________ that generates a 10% rate of return is worthwhile if corporate bonds of similar risk offer lower rates of return.

Answer 17

capital investment

Question 18

A ____________ _________ portrays the value of a firms’ assets, liabilities and stockholders’ equity at a particular point in time.

Answer 18

balance sheet

Question 19

When a firm uses cash to pay accounts payable, cash is credited and accounts payable is debited. Total assets are reduced and total liabilities are reduced, _____ ___ _______ ____ _____ _________ (i.e. equity).

Answer 19

with no change to net worth

Question 20

Net working capital is a measure of a company’s ___________.

Answer 20

liquidity

Question 21

According to ____, assets are typically recorded on the balance sheet at ___________ _____, less ____________.

Answer 21

GAAP, historical cost, appreciation

Question 22

_____________ ____________ is used to allocate a proportion of the historical cost of an asset to each year of its useful life.

Answer 22

Depreciation expense

Question 23

The results of operations for a corporation’s fiscal year would be reflected on its _________ ___________.

Answer 23

income statement

Question 24

Perhaps the best method for estimating the _______ _________ _______ of shareholders’ equity is to multiply the number of shares outstanding by the current price per share.

Answer 24

total market value

Question 25

A ___________-_____ balance sheet portrays all of the items on the balance sheet as a percentage of the firm’s total assets, and a ___________-_____ income statement portrays all of the items on the income statement as a percentage of the firm’s total revenues.

Answer 25

common-size

Question 26

_____ _____ _____ is a cash flow that is available for distribution to all of the companies investors (____________ and _________) after paying current expenses (other than interest) and taxes, maintaining adequate working capital, and making the investments necessary for growth.

Answer 26

Free cash flow, stockholders, creditors

Question 27

BONUS - how are assets, liabilities, and equity affected in order for them to be considered SOURCES of funds?

Answer 27

Assets - decrease
Liabilities - increase
Equity - increase

Question 28

BONUS - how are assets, liabilities, and equity affected in order for them to be considered USES of funds?

Answer 28

Assets - increase
Liabilities - decrease
Equity - decrease