Overview Of Finance Flashcards by Karie Whitehead

Trading on the New York Stock Exchange is executed without a specialist (i.e. market maker)

True or false

False

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Stocks and bonds are two types of financial instruments

True or false

True

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The matching principle in accrual accounting requires that:
a. Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized.
b. Expenses are matched to the year in which they are incurred.
c. Revenues are matched to the year in which they are booked.
d. Revenue should be large enough to match expenses.

a. Revenues be recognized when the earning process is complete and matches expenses to revenues recognized.

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A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid 60 days from now. The expense associated with the product is $300,000 of which $100,000 has not been paid to your supplier. Under accrual based accounting system, you will most likely report:
a. Revenues of $300,000 and expenses of $300,000.
b. Revenue of $300,000 and expenses of $200,000.
c. Revenues of $500,000 and expenses of $300,000.
d. Revenue of $500,000 and expenses of $200,000.

c. Revenues of $500,000 and expenses of $300,000.

Keyword: accrual based

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Economics is a subfield of finance. True or false.

False. Finance is a sub field of economics.

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Which of the following is not an example of firm?
- Cash
- machinery
-Labor
- financial market

Financial markets

Financial markets themselves are not capital. They are venues were capital can be raised through the issuance of stocks, bonds, and other financial instruments. Firm typically includes assets, like cash, and machinery that are used in the production process.

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Capital is defined as a financial asset
true or false

True

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Corporate finance is devoted to understanding various types of financial instruments. True or false.

True. Investment is devoted to understanding various types of financial instruments.

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Which of the following is an example of firm capital?
A. Bank deposit.
B. Cash.
C. The firms worth.
D. None of the above.

B. Cash.

Cash in an example of firm capital, as it is an asset, the firm can use immediately in its operations or to invest in other forms of capital machinery or equipment

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Corporate finance focuses on the decision-making by the management of firm.
True or false

True

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What are the three important areas of finance discussed in the overview of finance?
A. Corporate finance, investments, and financial institutions
B. Government finance,WAAC, and ratios
C. Neither of the above.

A. Corporate finance, investments, and financial institutions.

The 3 important areas of finance typically discussed are corporate finance (dealing with the capital structure of corporations, funding, and the actions that matter just take to increase the value of the firm), investments (involving asset, allocation, stock, valuation, and portfolio management), and financial institutions (focusing on the operations of banks and the financial services industry)

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Banks make money with interest rates they charged a borrowers less than interest rates they pay depositors.
True or false

False

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Stocks and bonds are two types of financial instruments.
True or false

True

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Stocks and bonds are two types of financial instruments.
True or false

True

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Stocks represent ownership in a particular company.
True or false

True

Does indeed represent a sheriff ownership in a company. Shareholders benefit from the companies, profits and growth.

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Companies can raise capital by issuing bonds or stocks.
True or false

True

Companies can access funding for operations or expansion by issuing stocks to raise equity capital or bonds to raise debt capital

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A stock is a debt instrument issued by corporations.
True or false

False

A stock represents ownership in a company

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A treasury bond is a debt instrument issued by corporations
True or false

True

A treasury bond is a debt instrument issued by governments

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A bond is a debt instrument issued by corporations or governments
True or false

True

A bond is a debt security, through which a corporation or government borrows funds from investors for a defined period at a variable or fixed interest rate

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A bond is similar to a loan

True or false

True

Bonds are similar to loans that they represent a borrowers promise to pay back a sum of money at fixed intervals with interest

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Primary financial markets or markets for issuers places in securities with investors

True or false

True

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What are the two ways a syndicate can place a bond?
A. Appreciative sale or negotiated sale.
B. Competitive sale or negotiated sale.
C. Public initial sale or appreciative sale.
D. Competitive sale or appreciative sale.

B. Competitive sale or negotiated sale.

A syndicate can place a bond through either competitive sale, we’re underwriters bid for the bonds, or negotiated sale, where the terms are directly negotiated with the issuer

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An IPO is a seasoned equity offering

True or False

False

An IPO, or initial public offering, is the first sale of stock by a company to the public. A seasoned equity offering refers to the sale of new shares by a company that has already gone public.

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An IPO occurs on the primary market.

True or False

True

The IPO does occur on the primary market, were new issues of securities are sold to initial buyers

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Syndicates are generally made up of investment bank and other institutional investors True or false

True Syndicate involved in IPO’s are typically composed of investment banks and other institutional investors that underwrite and distribute new securities

Syndicates are generally made up of investment bank and other institutional investors True or false

True Syndicate involved in IPO’s are typically composed of investment banks and other institutional investors that underwrite and distribute new securities

While competitive sales allow underwriters to submit bids to purchase bonds, negotiated sales Do Not. True or false

False Competitive sales do indeed involve under submitting events to purchase bonds, negotiated sales involve direct negotiation with the issue and do not include competitive Bidding

NASDAQ is the world’s largest secondary financial market. True or false

True The NYSE is the world’s largest secondary financial market

Auction markets have a physical location True or false

True auction markets, like the New York Stock Exchange, have physical locations, where buyers and sellers come to together to trade securities

Dealer markets have a physical location. True or false

False Actions have a physical location. Dealer markets, Do Not.

NASDAQ is an example of an auction market True or false

False NASDAQ is an example of a dealer market

Stocks that are listed on dealer market generally have a single dealer for each stock True or false

False That are listed on market generally have multiple dealers for each stock

When dealers have to compete with one another, transaction cost generally ___________. A. Remain constant. B. Increase. C. Do Nothing. D. Decrease.

D. Decrease. When dealers compete with one another, transaction cost 10 to decrease due to the competitive pressure to offer better prices and lower fees to attract business

Markets are where prices are determined True or false

True Markets are indeed, for price, determined through interaction, buyers and sellers establishing the value of traded securities

The NYSE specialist has an objective to provide liquidity to the market True or false

True The NYSE specialist (now known as a designated market maker) indeed has an objective to provide liquidity to the market, ensure there is a buyer for seller and vice versa

The NYSE specialist will charge a higher price to sellers of the stock and a lower price to the buyer of the stock True or false

False The NYSE specialist will charge a lower price to the seller of the stock and a higher price to the buyer of the stock

The price of stock is $56.75, although the price for stock is $56.71. What is the bid ask spread?

$0.04

The ask price of stock a is $215.54 for the bid price for stock a is $215.14. What is the bid-ask spread?

$0.40

The bid-ask spread is compensation to the specialist for providing liquidity to the market True or false

True The bid-ask spread represents the difference between the highest price A buyer is willing to pay and the lowest price The seller is willing to accept. It compensate the specialist for the risk of providing liquidity.

What are the two types of orders that are used by investors? A. Market orders, and limit orders. B. Credit orders, and limit orders. C. Debit orders and equity orders. D. Market orders, and timely orders.

A. Market orders, and limit orders. Investors commonly used market orders to buy or sell at the best available current price, and the limit orders to specify a particular price at which they are willing to buy or sell a security

Market orders are_________ sensitive while limit orders are __________ sensitive. A. Price; market. B. Market; price. C. Time; perception. D. Time; price

D. Time; price Orders are time sensitive because they are executed as quickly as possible at the current market price. Limit orders are price sensitive because they’re executed only at the specified price or better

A market order to sell stock with execute at the current ask price True or false

False The order with execute the current bid price

A limit order to buy a stock at $101.55 with execute at the current ask price True or false

False The order would execute when they ask price is at or below $101.55

In order to buy a stock at $101.55 would execute when they ask price is at or below $101.55 True or false

True A limit order to buy a stock at $101.55 will execute only if the stock price falls to $101.55 or lower

Traditionally, the goal of the firm is __________ shareholder value. A. Preserve. B. Maximize. C. Protect.

B. Maximize Traditionally, the primary goal of a firm is the maximize shareholder value, which often lead to an increase in the stock price, reflecting your company’s growth and profitability

Firms that are maximizing shareholder value generally increases in the firm stock prices True or false

True When affirm successfully maximize the shareholder value, this typically results in an increase in the firm stock price as the market recognizes the firms improved performance and future prospects

What is a way firms can maximize shareholder value? A. Provide raises to all employees to improve morale. B. Invest in new machinery that will be profitable C. Invest in projects that will improve visibility of the firm. D. Increase sales of products, even if that loss.

B. Invest in new machinery that will be profitable. Investing in new machinery that increases productivity and profitability is away firms maximize shareholder value. The focus is on profitable investments that yield a positive return

Privately health companies and publicly traded companies will always maximize, shared or value in the same way True or false

False

What are ways firms can maximize shareholder value? A. Hire employees to improve production and profitability. B. Invest in new research and development that will be profitable. C. Invest into projects that will improve the profitability of the firm. D. All of the above.

D. All of the above.

Agency cost are cost that are incurred when management does not act in the best interest of shareholders True or false

True Agency cause arise from complex of interest between the goals of shareholders and the actions of management, which may not always align with maximizing shareholder value

Firms try to mitigate agency cost by aligning managers, interest with shareholders interest True or false

True To reduce agency cost, firms often try to align the interest of managers with those of shareholders, such as through stock based compensation, bonuses tied to performance, or other incentive mechanisms

Agency costs are commonly mitigated by increasing management compensation True or false

False

Agency costs are commonly mitigated by compensating management with company stock. True or false

True Granting stock options or shares to management is a common way to align their interest with those of shareholders, potentially reducing agency cost as it incentivizes managers to focus on increasing the company stock value

What issue(s) are associated with the firm goal to maximize shareholder value? A. Agency cost and high profit returns. B. Potential unethical behavior C. Agency cost, and potential unethical behavior. D, the goal is unattainable

C, agency costs, and potential unethical behavior A focus on maximizing shareholder value can sometimes lead to agency cost or create incentives for management to engage in unethical behavior to boost short term profits or the stock price

Maximizing, shareholder value ethically getting improved society generally by __________. A. Employ additional workers B. Creating growth and leading to increase production by other firms. C. Increasing the profitability of other firms because of increased consumption. D. All of the above.

D. All of the above.

An example of agency costs is a firm decision to invest in a project because management enjoys working on the project True or false

True If management chooses to invest in a project for personal interest rather than the profitability or benefit of the shareholders, it is an example of agency costs

An example of agency cost is management spending company money on unprofitable goods and services True or false

True When management spends company resources on goods or services that do not contribute to profitability or shareholder value, this represents agency cost S

An example of agency cost is increased, cost incurred because of higher levels of production True or false

False Agency cost occur when management does not act in the best interest of shareholders

A bond that a company issues to raise capital is a form of _________. A. Equity. B. Stock C. Derivative D. Debt

D. Debt A bond is a form of debt financing, as it requires the company to repay the borrowed funds to bond holders.

If the price of a particular stock begins to heavily fluctuate, then the specialist will __________ the spread. A. Maintain B. Increase C. Reduce D. None of the above

B. Increase The specialist widen the spread in response to high volatility to mitigate the increased risk

A stock is a share of ____________ in a particular company. A. Ownership B. Accruals C. Taxes D. Debts

A. Ownership

If providing liquidity becomes more risky, then dealers will ___________ the spread. A. Narrow B. Increase C. Decrease D. None of the above

B increase Dealers increase the spread to compensate for the higher risk of providing liquidity

What type of bond placement typically requires a more thorough interview process? A. Competitive sale B. Accelerated C. Reverse competition D. Negotiated sale

D. Negotiated sale Negotiated in interview to select an underwriter due to the complexity and tailored nature of the bond issuance

Traditionally, what is the goal of the firm? A. To limit the amount of pollution emitted into the environment. B. To employ as many people as possible. C. To maximize stakeholder value. D. To maximize shareholder value.

D. To maximize shareholder value

In 2019, the business roundtable release the statement suggesting that the goal of the firm should focus more on _____________. A. Ignoring shareholder value and making decision decisions. B. Shareholder profits. C. Increasing the firm stock price. D. Considering how firm decisions affect all stakeholders of the firm.

D. Considering how firm decisions affect all stakeholders of the firm.

Which of the following is listed as an issue related to maximizing shareholder value? A. Focusing primarily on profit might lead to ethical behavior. B. Focusing on profit might lead to fewer IPOs in the primary market. C. Trading volume on the New York Stock Exchange is increasing. D. The level of liquidity on financial markets might decrease.

A. Focusing primarily and profit might lead to unethical behavior.