Module 2 Flashcards
Why do firms need the financial system?
to obtain long term funds, accommodate near term cash inflows and outflows, to facilitate short term cash management policies
What is the hurdle rate?
the cost of financing
Financial institutions are intermediaries that channel the savings of individuals, businesses, and governments into loans or investments.
true
Investment banks make loans that individuals and businesses use to buy goods or expand business operations, which in turn leads to more deposited funds that make their way to bank
false
The capital market is where firms obtain external short term financing.
false
The shadow banking system has escaped regulation primarily because it does not accept traditional bank deposits. As a result, many of the shadow banking institutions have been able to employ higher market, credit and liquidity risks, and have higher capital requirements.
false
From investors’ perspectives, the role of capital markets is to be an efficient market that allocates funds to their most productive uses.
true
a liquid market
has many available buyers and sellers and comparatively low transaction costs
Francis Galton’s discovery was
a diverse collection of independently deciding individuals is likely to make better value decisions than individuals or even experts
An efficient market (Links to an external site.) allocates funds to their most productive uses as a result of competition among wealth-maximizing investors and determines and publicizes prices that are believed to be close to their true value.
true
As described in “The 2008 Credit Crisis Visualized,” the financial system, commonly known as Wall Street, brings together
investors and homeowners (borrowers)
As described in “The 2008 Credit Crisis Visualized,” low interest rates
incentivized banks to increase leverage
Financial leverage is borrowing money to amplify the outcome of a ________.
deal
A collateralized debt obligation (CDO) bundles house payments and creates safe, okay, and risky investment vehildes.
true
From” The Inside Job” trailer - One criticism leveled at investment banks following the 2008 financial crisis was they were having massive private gains at the expense of public losses.
true
From “The Big Short,” the antagonists (those betting against the big banks) individually or together
sought to profit from the greed and stupdity of big banks, argued fraud has never worked (long term), argued there is not diffrence between stupid and illegal
Lending discrimination occurs when lenders base credit decisions on factors related to the applicant’s creditworthiness.
false
Lending discrimination happens when lenders base credit decisions on factors other than the borrower’s creditworthiness, including any of the protected classes defined under federal law. Today, what three federal laws offer protection against lending discrimination?
The Fair Housing Act, The Community Reinvestment Act, and the Equal Credit Opportunity Act
What practice made it impossible for many members of minority groups to qualify for loans to buy and improve homes?
redlining
Suppose Fidelity Investments requires applicants for its financial advisor positions to have the Chartered Financial Analyst (CFA) designation, hires no Black financial advisors, and very few Blacks have the CFA designation. The disparity in Fidelity’s hiring of White versus Black financial advisors is most likely attributable to
statistical discrimination
From Professor Charles’ youtube talk in the e-text. Suppose you have two labor markets with different sets of employers and with different average prejudice against Blacks levels. Therefore, discrimination against Blacks will be worse, as measured by wage gaps between Whites and Blacks, in the labor market with the highest average level of prejudice against Blacks.
false
From Professor Charles’ youtube talk in the e-text. Professor Charles’ research shows that average prejudice levels over the past 50 years have decreased dramatically but wage and promotion differences persist but at a lower level.
true
Finance is mainly a backward-looking summary of past decisions.
false
The market value of an assets is its cost at the time of purchase
false
Book values have the disadvantage that they change unpredictably and may not be easy to measure.
false
Revenues or Sales ←money received by the firm
- Expenses ← debts to suppliers and employees
- ??? ← accounting item to estimate a reduction in the value of an asset with the passage of time, due in particular to wear and tear
= EBIT ←Earnings before Interest and Taxes
- Interest Expense ← Money owed to banks or bondholders
= EBT ←Earnings before taxes
- Tax ← debt to the government
= Net Income ←Net Income
depreciation expense
Select all the different methods that can be used to compute depreciation expense.
Straight-line Depreciation, Accelerated Cost Recovery System (ACRS), Modified Accelerated Cost Recovery System (MACRS)
Depreciation represents a change in cash holdings so it impacts earnings after taxes.
false
The top corporate tax rate is … percent for 2018 and after.
21
Operating Cash Flow (OCF) = X – Y+ Z
OCF = EBIT - taxes + depreciation
Net income is determined by accounting items such as depreciation and represents actual changes in the cash available to a firm.
false
Which of these are liquidity ratios?
quick ratio, current ratio, cash ratio
Liquidity (Links to an external site.) is the ability to convert assets into cash quickly and cheaply.
true
The purpose of liquidity ratios is to determine a company’s ability to pay off current debt obligations by raising external capital.
false
Liquidity ratios measure a company’s ability to pay debt obligations and its margin of safety through the calculation of metrics including the cash ratio, the quick ratio, the water ratio, and the current ratio
false
Which of these are leverage ratios?
Debt/Equity Ratio Debt Ratio Long-term Debt Ratio Equity Multiplier Quick Ratio
Leverage may increase both the risk and the return to a firm’s shareholders.
true
Which of these are Turnover ratios?
Inventory Turnover Ratio
Total Asset Turnover Ratio
Days’ Sales in Inventory
Receivables Turnover
Firms with higher turnover ratios are generally more operationally efficient than firms with lower turnover ratios.
true
Which of these are profitability ratios?
ROE, net profit margin, ROA
Profitability ratios give measures of how the firm’s accounting measures of profits are related to its other accounting items. A Profit Margin is the firm’s profit per dollar of assets and there are three main profit margin measures.
false
Which of these are market ratios?
Market-to-Book Ratio
Market Capitalization
Earnings Per Share
P/E Ratio
The market value of healthy companies exceed their book value. After all, if managers are not creating value investors will close the business and liquidate (sell) the assets and be better off.
true
Which are payout and growth rate ratios?
Sustainable Growth Rate
Internal Growth Rate
Retention Ratio
Dividend Payout Ratio
According to the letter to shareholders in Berkshire Hathaway’s 2019 Annual Report, Berkshire seeks to buy new businesses that
are available at a sensible price
are run by able and honest managers
earn good returns on the net tangible capital required in their operation
What tools can be used to solve time value of money problems?
Excel spreadsheet
Manually by a mathematical formula
Tables of TVM factors
Financial calculator
Which of the following is NOT true about the time value of money concept?
The general approach is to take money received in the future as a benchmark and compare that to how much the same amount of money is worth now.
You should never compare cash flows occurring at different times without first discounting them to a common date.
true
The advantage to savers and investors of receiving compound interest rather than simple interest is that future values are larger because interest is earned on accumulated interest payments. Also, the difference in future values becomes smaller as time goes by.
false
Future values are positively related to interest rates and time - the bigger the interest rate and the more compounding periods, the greater the future value will be.
true
There is a linear relationship between future values and the number of compounding periods for any present value and non-zero interest rate.
false
An ordinary (deferred) annuity is an annuity for which the cash flow occurs at the beginning of each period.
false
A ______ is a special type of annuity with infinite life, providing continual annual cash flow.
perpetuity
Other things being equal, the more frequent the compounding period, the:
higher the future value
