Final Study Guide

Question 1

Loan from investor to firm

Answer 1

Bond

Question 2

Firm pays interest payments periodically until the bond

Answer 2

matures plus the bond price

Question 3

Ownership in the corporations

Answer 3

Stocks

Question 4

The goal of a corporation is to

Answer 4

Enhance long run stock value

Question 5

Balance risk vs.

Answer 5

Profit

Question 6

Essentials for success

Answer 6

Equity, productive employees and capital equipment, customer demand

Question 7

Corporations are simply

Answer 7

passthrough legal entities

Question 8

The benefits and costs of corporations are shared by

Answer 8

Shareholders, employees, and customers

Question 9

Management makes self-interest to benefit themselves rather than achieving organizational goals

Answer 9

Agency cost

Question 10

Principles of financial decision making

Answer 10

Efficient market prices
Balancing risk and return
Time value of money

Question 11

Competitive, liquid, transparent, standardized

Answer 11

Efficient market prices

Question 12

Return must compensate for risk

Answer 12

Balancing risk and return

Question 13

Risk premium for buying a riskier stocks or bonds or securities

Answer 13

Risk Aversion

Question 14

The value of money depends upon size, timing, and certainty of receipt

Answer 14

Time value of money

Question 15

Financial Markets involve two types of firms

Answer 15

Non-Financial (Walmart, Microsoft, GM) that sell stocks and bonds
Financial Firms (BlackRock, fidelity) that manage pensions, 401k, and buy stocks and bonds

Question 16

IPO stands for

Answer 16

Initial Public Offering

Question 17

Selling for the first time in the primary market

Answer 17

Initial Public Offering

Question 18

Disclosure of potential risks and returns

Answer 18

Prospectus

Question 19

Group of investment banks underwriting security issuance

Answer 19

Syndicate

Question 20

Firm issues stock/bonds to be bought by the investors

Answer 20

Primary Markets

Question 21

Every time they issue bonds or stock, they do so where

Answer 21

in the Primary Markets

Question 22

Corporations get cash

Answer 22

Cash inflow

Question 23

Stock/bonds are traded among investors; the firm is not involved

Answer 23

Secondary Markets

Question 24

Competitive bid/as from many buyers and sellers

Answer 24

Auction Market

Question 25

The New York Stock Exchange is an example of

Answer 25

Auction Market

Question 26

A dealer buys and sells securities upon investor inquiry

Answer 26

Dealer Market

Question 27

NASDAQ is an example of a

Answer 27

Dealer Market

Question 28

10K Reports are filed

Answer 28

Annually

Question 29

10 Q Reports are filed

Answer 29

Quarterly

Question 30

Assets = Liabilities + Equity

Answer 30

Balance Sheet

Question 31

Increase in asset = cash outflow

Answer 31

Balance sheet

Question 32

Increase in liability/equity = cash flow

Answer 32

Balance Sheet

Question 33

Sales Revenue - Cost of Goods Sold =

Answer 33

Gross Profit

Question 34

Gross Profit - Operating Expense - Depreciation =

Answer 34

EBIT

Question 35

EBIT - Interest =

Answer 35

EBIT minus taxes

Question 36

EBIT minus taxes (@25%)=

Answer 36

Net Income

Question 37

Net Income/sales =

Answer 37

Net Margin

Question 38

Dividends Paid + Added to Retained Earnings =

Answer 38

Net Income

Question 39

Dividends Paid/ Net Income =

Answer 39

Payout Ratio

Question 40

The Statement of Cash Flows includes

Answer 40

Cash Flow from Operations (CFO) Cash Flow from Investments (CFI) Cash Flow from Financing (CFF)

Question 41

CFO is cash earned by

Answer 41

Producing and selling the firm's products

Question 42

CFO =

Answer 42

Net Income + Depreciation Expense - ((Increase in Current Assets - Decrease in Current Assets) - (Increase in Current Liabilities - Decrease in Current Liabilities))

Question 43

Examples of Current Assets

Answer 43

Accounts Receivable Inventory Prepaid Expenses

Question 44

Examples of Current Liabilities

Answer 44

Accounts Payable Accrued Expenses

Question 45

Current assets are also referred to as

Answer 45

Operating Expenses

Question 46

Current Liabilities are also referred to as

Answer 46

Operating Liabilities

Question 47

CFF is cash raised by

Answer 47

selling bonds and stocks

Question 48

CFF =

Answer 48

Increase in stock + Increase in bonds - Dividend paid

Question 49

CFI is cash spent for

Answer 49

Investing projects

Question 50

Bill paying capacity

Answer 50

Liquidity

Question 51

Ratios dealing with liquidity

Answer 51

Current Ratio Quick Ratio

Question 52

Revenue Per Asset

Answer 52

Efficiency

Question 53

Ratios dealing with efficiency

Answer 53

Total Asset Turnover Fixed Asset Turnover

Question 54

Debt Vs. Equity

Answer 54

Financing

Question 55

Ratios dealing with financing

Answer 55

Debt Equity Financial Leverage

Question 56

Net Income

Answer 56

Profitability

Question 57

Ratios dealing with profitability

Answer 57

Return on Equity Return on Assets

Question 58

Trend Analysis, Cross Sectional, and Goals

Answer 58

Financial Ratio Analysis

Question 59

Compares ratios of a firm over time

Answer 59

Trend Analysis

Question 60

Compares firm to competitors

Answer 60

Cross Sectional

Question 61

Internal performance goals

Answer 61

Goals

Question 62

The value of money depends on when you receive it

Answer 62

Time Value of Money (TVM)

Question 63

The value of cash today

Answer 63

Present value

Question 64

The value of cash in future

Answer 64

Future Value

Question 65

The metric that translates between PV and FV

Answer 65

Interest Rate

Question 66

The rate of increase in a cash balance per period

Answer 66

Interest rate

Question 67

PV * (1 + interest rate)

Answer 67

FV

Question 68

PV * (1+ inflation rate)

Answer 68

FV

Question 69

FV/(1+Interest Rate)

Answer 69

PV

Question 70

When the Market rate is equal to the coupon rate, bonds will sell at

Answer 70

par value

Question 71

When the market rate is greater than the coupon rate, bonds will sell at

Answer 71

a discount

Question 72

When the market rate is less than the coupon rate, bonds will sell at

Answer 72

a premium

Question 73

PV of future cash flows, discounted at the risk-adjusted required return

Answer 73

Bond & Stock Price

Question 74

A loan from an investor

Answer 74

Bond

Question 75

Investor becomes part owner

Answer 75

Stock

Question 76

Principal of a bond

Answer 76

Face Value of the Bond

Question 77

Principal of stock

Answer 77

Price of stock

Question 78

Interest of a bond is

Answer 78

a legal obligation of the firm

Question 79

Dividends of stock are distributed

Answer 79

at the discretion of the firm

Question 80

Maturity of bond

Answer 80

Principal repaid to the investor

Question 81

Maturity of stocks

Answer 81

none

Question 82

Pricing of both stocks and bonds

Answer 82

Vary with the market

Question 83

Liquidity of both stocks and bonds

Answer 83

Can be sold to other investors

Question 84

If not mentioned in the question, FV for a bond is

Answer 84

$1000

Question 85

Bonds: Annual Interest Payment =

Answer 85

Coupon Rate * Face Value

Question 86

A bond's price and yield keeps changing based on the

Answer 86

supply and demand of the market

Question 87

Coupon rate at par price

Answer 87

yield

Question 88

If price increase, yield

Answer 88

increases

Question 89

If price decreases, yield

Answer 89

decreases

Question 90

If the bond yield increases from 4-5%, the price drops. This drop in price caused by the 1% increase in yield is called

Answer 90

Duration

Question 91

Long term bonds have a

Answer 91

Higher Duration and Greater Price Volatility

Question 92

Bond's required return is the yield necessary to compensate for risk

Answer 92

Required return for a bond

Question 93

What factors affect a bond's required yield?

Answer 93

Treasury Yields Credit Risk Economy Term Collateral Taxes