Final (Ch. 2)

Question 1

Book vs Market Value

Answer 1

• The goal of financial management should be to maximize the market value not the book value

Question 2

Net Income

Answer 2

• Net Income is not cash flow because depreciation is deducted from it

Question 3

Marginal Tax Rate

Answer 3

• 35% to corporations
• Different from average tax rate; marginal is more relevant
• It is the amount of tax payable on the next dollar earned

Question 4

Cash Flow Identity

Answer 4

• Cash flow from assets equals cash flow to creditors and stockholders

Question 5

Net working Capital

Answer 5

• Current assets less current liabilities

Question 6

Liquidity

Answer 6

• Speed and ease at which an asset can be converted to cash

Question 7

Financial Leverage

Answer 7

• Use of debt in a firms capital structure

Question 8

Income Statement

Answer 8

• Measures performance over a certain time

Question 9

Cash Flow from Assets

Answer 9

1. Operating Cash Flow
2. Capital Spending
3. Change in networking capital

Question 10

Operating Cash Flow

Answer 10

• Cash generated from a firm’s normal business activities