Exam 1
Financial markets (CF)
Cash flows to and from the firm
A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets?
Current Assets= 520+190+70= $780
Net working capital (NWC) is defined as:
Current assets - Current liabilities
A stakeholder is:
any person or entity other than a stockholder or creditor who potentially has a claim on the cash flow of a firm.
Dealer market
several traders that carry an inventory and provide prices at which they stand ready to buy(bid) and sell(ask) the securities EX: NASDAQ
S-corporation and LLC
taxed like a partnership with liability like a corporation
Book Value
the real value in an open market
Average tax rate
the tax bill/ taxable income varies
Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:
was facilitated in the secondary market
Agency problem
Conflict of interest between principal and agent
Chief Financial Officer (CFO)
Top financial manager within a firm
Which one of the following is defined as a firm's short-term assets and its short-term liabilities?
Working Capital
Controller
oversees taxes, cost accounting, financial accounting and data processing
Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 35 percent. What is the net income?
Net Income= (687,000-492,000-26,000-42,000)x(1-.35)= $82,550
Marginal tax rate
percentage paid on the next dollar earned
Auction market
physical location where buyers and sellers are matched, with little dealer activity.
Treasurer
oversees cash management, credit management, capital expenditures, and financial planning
Current liabilities (right side)
-Acc. payable -Notes payable Long term liabilities: -long-term debt
Managerial compensation
-Incentives can be used to align management and -Stockholder interests The incentives need to be structured carefully to make sure that they achieve their goal
Which one of the following statements related to annuities and perpetuities is correct?
A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.
Your credit card company charges you 1.65 percent interest per month. What is the annual percentage rate on your account?
APR= 0.0165x12= 19.80% (1.65/100=0.0165)
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?
Balance sheet
Capital Structure
mix debt(borrow) and equity(ownership interest) used by a firm. - how should we pay for our assets -should we use debt or equity
Which one of the following is a capital budgeting decision?
Deciding whether or not to purchase a new machine for the production line
Which one of the following is a capital structure decision?
Determining how much debt should be assumed to fund a project
Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is 34%. The firm does not have any interest expense. What is the operating cash flow?
Earnings before interest and tax= 1,349,800-903,500-42,700= $403,600 Tax= 4003,600x.34= $137,224 Operating Cash Flow= 403,600+42,700-137,224= $309,076
An ordinary annuity is best defined by which one of the following?
Equal payments paid at regular intervals over a stated time period
This morning, you borrowed $9,500 at 8.9% annual interest. You are to repay the loan principal plus all of the loan interest in one lump sum four years from today. How much will you have to repay?
FV= $9,500x(1+0.089)^4= $13,360.88 or N=4 I/Y= 8.9 PV=9,500 calculate for FV=13,360.88
two types of Partnership
General partnership- all partners share in gain or losses and have unlimited liability for all partnership debts. Limited partnership- one or more run the business and have unlimited liability. the other is limited to their contribution and can't help run the business.
The common set of standards and procedures by which audited financial statements are prepared is known as the:
Generally Accepted Accounting Principles (GAAP)
Which one of the following parties has ultimate control of a corporation?
Shareholders
Which of the following are included in current liabilities?
I. Note payable to a supplier in eight months III. Account payable to a supplier that is due next week
The percentage of the next dollar you earn that must be paid in taxes is referred to as the ___ tax rate.
Marginal
Partnership
Multiple owners, not incorporated -Advantage: more equity capital than is available to sole proprietorship, easy start ,income taxed once at personal tax rate -Disadvantage: unlimited liability for general partners, dissolution of partnership if one dies or leaves, low liquidity
You want to borrow $47,170 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,160, but no more. Assume monthly compounding. What is the highest rate you can afford on a 48-month APR loan?
N= 48 I/Y= ? PV= 47,170 PMT= -1,160 FV= 0 Compute for I/Y =.6983710995 then multiply by 12 APR= 8.38
Which one of the following statement concerning NASDAQ is False?
NASDAQ is an auction market
You just signed a consulting contract that will pay you $38,000, $52,000, and $85,000 annually at the end of the next three years, respectively. What is the percent value of these cash flows given a 10.5 percent discount rate?
PV= [38,000/(1+0.105)^1] + [52,000/(1+0.105)^2] + [85,000/(1+0.105)^3] =$139,975
you would like to establish a trust fund that will provide $120,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate fo return is only 5.75 percent. How much money must you deposit today to fund this gift for your heirs?
PV=$120,000/0.0575= $2,086,957 (5.75%/100=0.0575)
Capital Budgeting
Process of planning and managing a firm's investments in fixed assets (looks for long-term investments or projects)
Depreciation:
Reduces both taxes and net income
Which one of the following statements concerning interest rates is correct?
The effective annual rate equals the annual percentage rate when interest is compounded annually.
Corporate control
The threat of a takeover may result in better management
growing annuity
consistent growth rate
A business created as a distinct legal entity and treated as a legal "person" is called a: (one or more owner)
corporation
Corporation (Limited liability company)
distinct legal entity composed of one or more owners -Advantages: limited liability, unlimited life, separation of ownership and management, liquidity, ease of raising capital -Disadvantages: Separation of ownership&management and double taxation, new laws reduced level of double taxation but didn't eliminated it.
Annuity
finite series of equal payments that occur at regular intervals (first payment at the end is ordinary annuity, at the beginning is annuity due)
Perpetuity
infinite series of equal payments
Income Statement
like a video of the firm's operations for a specified period of time -report revenues then deduct expenses -GAAP
Working Capital Management
managing short-term assets and liabilities -how do we manage the day-to-day finances of the firm
financial management
maximize the current value per share of the existing stock
An Amortized loan
may have equal or increasing amounts applied to the principle from each loan payment
A business owned by a solitary individual who has unlimited liability for its debt is called a:
Sole Proprietorship
You have your choice of two investment accounts. -Investment A is a 5-year annuity that features end-of-month $2,500 payments and has an interest rate of 11.5 percent compounded monthly. -Investment B is a 10.5 percent continuously compounded lump sum investment, also for five years. How much would you need to invest in B today for it to be worth as much as investment A five years from now?
-FVA=(1+(0.115/12))^(5x12) -1, then /(0.115/12) then x$2500= $201,462.23 -PV= $201,462.23e^(-1x0.0105x5)= $119,176.06
Fixed assets (left side)
-Net plant and equipment
revenues
-Net sales -COGS -Depreciation
agency relationship
-Principal hires an agent to represent his/her interests -Stockholders (principals) hire managers (agents) to run the company
Corporate Finance
-capital budgeting -capital structure -working capital
Current assets (Left side)
-cash -accounts receivable -inventory
Owners' equity (right side)
-common stock (paid in surplus) -Retained earnings
agency costs
-direct cost -indirect cost
Which form of business structure is most associated with agency problems?
Corporation
Sole Proprietorship
a business owned by on person -Advantage: ease of start-up, lower regulation, owner keeps all profits, taxed once on personal income -Disadvantage: limited life, limited equity capital, UNLIMITED liability and low liquidity
Balance sheet
a snapshot of the firm's assets and liabilities at a given point in time Assets=Liability+Stockholders' Equity
Liquidity
ability to convert to cash quickly w/o a sig. loss in value -less likely for financial distress -lower return
Market Value
accounting value that takes accounting value of assets
Which one of the following accounts is the most liquid?
accounts receivable
Secondary market
the market where securities that have already been issued are traded between investors (the stock exchanges, New York Stock exchange, over-the-counter market like NASDAQ (goal is to trade between investors)
Publicly traded companies
-file regular reports to Securities and Exchange Commission -reports filled electronically at SEC site EDGAR
Statement of Cash flow
-important piece of info to finance managers from financial statement - Cash generated from utilizing assets and how it's paid to those that finance the purchase of assets
Expenses
-interest paid -taxes (21%) -dividends -add. retained earnings
Primary market
The market in which securities are sold by the company. Public and Private placements of securities, SEC registration, and underwriters.(goal is to raise capital)