FIN 330 Test One Chapters

In traditional finance, the primary goal of the managers of a corporation (or firm) is to: A) promote, primarily, the interests of the community in which the company operates. B) provide employees with a code of ethics. C) provide the greatest bonuses to the corporation's executives and employees, through profit-sharing arrangements. D) maximize shareholder wealth. E) evaluate investment projects with a system that always selects the correct opportunity for their firm.

D) maximize shareholder wealth

This technique, used by most large corporations with substantial U.S. operations, allow companies to legally shift earnings from other states to Delaware, where they are not taxed for state income tax purposes on non-physical incomes (royalties received for patents, trademarks, copyrights, and trade secrets) generated outside of the state. This technique is called the:

Delaware loophole

Transaction costs matters

For investors with a finite amount of money to spend on investment activities, transaction costs need to be carefully considered since they diminish the number of securities that may be purchased

Major types of ratios

Includes: -Liquidity -Solvency -Profitability -Efficiency

You deposit $10,500 in your investment account today. Your investment account provides an annual rate of return of 9.25%, and all of your dividends, interest, and capital gains are reinvested each year (i.e., compounding occurs). Assuming you do not withdraw any funds and do not deposit any additional funds, how much will be in your account in 35 years?

N: I/Y: PV: PMT: FV: CPT(FV):

Separate tax paying entity

Only one major business structure is a separate taxable entity; the C corporation is considered a legal "person" created by the state.; the IRS treats C corporations as separate taxable entities that pay taxes based on net income each year

A pass-through entity for purposes of federal income taxation, this form of business has 1 or more owners, but not more than 100. The owners have limited liability as to the debts of the business organization.

S corp

Describe the differences in tax treatment between S corporations and C corporations.

S corporations because they are smaller only pay taxes on income at the shareholder level and not the corporation level. C corps receive double taxation at both the corporate and shareholder level

Over-the-counter (OTC) markets

A decentralized market, without a central physical location, where market participants trade with one another through various communication modes such as the telephone, email and proprietary electronic trading systems

NASDAQ

A global electronic marketplace for buying and selling securities, as well as the benchmark index for U.S. technology stocks

Research analyst (for a mutual fund)

A person who prepares investigative reports on equity securities; the research conducted by the research analyst is in an effort to inquire, examine, find or revise facts, principles and theories

Goals of financial analysis

All businesses aim to maximize their profits, minimize their expenses and maximize their market share; A company's most important goal is to make money and keep it.

Sales for a firm are $500,000, cost of goods sold are $400,000, and interest expenses are $20,000. What is the gross profit margin? A) 16.0% B) 20.0% C) 4.0% D) 25.0% E) 30.0%

B) 20%

1. What is a firm's debt ratio if its total assets are $100,000, equity is $70,000, current liabilities are $10,000, and total liabilities are $40,000? A) 425% B) 40% C) 30% D) 236.7% E) 100%

B) 40%

______ ratios measure the efficiency with which assets are converted to sales or cash. A) Liquidity B) Activity C) Profitability D) Market E) Financing

B) Activity

1. Current asset values may be estimated by calculating: A) the future value of all cash flows expected from the asset. B) a sum of all cash flows forecasted from the use and/or sale of the asset. C) the cash flows expected from the asset without adjusting for the time value of money. D) only the present value of the cash flows to be received in the first two years since later cash flows are too uncertain to be considered. E) the present value of all future cash flows expected from the asset.

B) a sum of all cash flows forecasted from the use and/or sale of the asset.

A firm raises capital to expand its operations by selling stock in the: A) secondary market. B) primary market. C) futures market. D) options market. E) federal funds market. F) money market.

B) primary market

1. Liquidity ratios measure: A) The solvency of the company. B) The ability of the company to generate tax liabilities. C) The ability of the company to generate cash and pay bills. D) The profitability of the company.

C) The ability of the company to generate cash and pay bills.

1. Most people prefer to receive money today rather than ten years from now because A) U.S. prices have been falling recently and a dollar received today will buy more than one received in the future. B) future investment returns are expected to be less variable than current ones. C) receiving cash today enables one to take advantage of current investment opportunities. D) people are unsure about their future employment prospects and wish to provide themselves with a source of future income. E) most people are afraid they will spend future cash payments foolishly. A) U.S. prices have been falling recently and a dollar received today will buy more than one received in the future.

C) receiving cash today enables one to take advantage of current investment opportunities.

When financial ratios are compared to financial ratios from previous years, a ________ analysis is conducted. A) cross-time B) SIC code C) time series D) cross-sectional E) None of the above

C) time series

Return on Assets (ROA)

Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage

Primary purpose of capital markets

Capital markets are vital to the functioning of an economy, since capital is a critical component for generating economic output

This is the "top" accounting or finance job in many corporations. A CPA certification or MBA degree is strongly recommended, in order to be able to secure this position, along with years of experience as a mid-level financial manager and/or CPA.

Chief Financial Officer (CFO)

Common Stock

Common stockholders are on the bottom of the priority ladder for ownership structure; in the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debtholders are paid in full

Current ratio

considers the current total assets of a company (both liquid and illiquid) relative to that company's current total liabilities

Commercial bank

a bank that offers services to the general public and to companies

Investment bank

a bank that purchases large holdings of newly issued shares and resells them to investors

Perpetuity

a bond or other security with no fixed maturity date

Market Order

a buy or sell order to be executed immediately at current market prices

Preferred Stock

a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock

Outstanding Stock

a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders

The principal-agent problem in corporations

a conflict of interest inherent in any relationship where one party is expected to act in another's best interests; refers to a conflict of interest between a company's management and the company's stockholders

Limited Liability Company

a corporate structure whereby the members of the company cannot be held personally liable for the company's debts or liabilities

Bonds

a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate

Limit Order

a direction given to a broker to buy or sell a security or commodity at a specified price or better

Fiduciary Duty of Loyalty

a director's responsibility to act at all times in the best interests of the company.

equity multiplier

a financial leverage ratio that measures the amount of a firm's assets that are financed by its shareholders by comparing total assets with total shareholder's equity

Gross Profit Margin

a financial metric used to assess a company's financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold

Income statement

a financial statement that reports a company's financial performance over a specific accounting period

Statement of Cash Flows

a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities

S Corp

a form of corporation that meets specific Internal Revenue Code requirements, giving a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership

Pension fund

a fund from which pensions are paid, accumulated from contributions from employers, employees, or both

Board of Directors

a group of individuals that are elected as, or elected to act as, representatives of the stockholders to establish corporate management related policies and to make decisions on major company issues

balloon payment

a large payment due at the end of a balloon loan, such as a mortgage, commercial loan or other amortized loan

Flow-through entity

a legal business entity that passes income on to the owners and/or investors; a common device used to limit taxation by avoiding double taxation

Corporation

a legal entity that is separate and distinct from its owners;enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes

loan amortization

a loan where the principal of the loan is paid down over the life of the loan according to an amortization schedule, typically through equal payments

Securities exchange

a marketplace in which securities, commodities, derivatives and other financial instruments are traded

Times interest earned ratio

a measure of a company's ability to honor its debt payments; calculated as EBIT

Quick Ratio

a measure of how well a company can meet its short-term financial liabilities

Credit union

a nonprofit-making money cooperative whose members can borrow from pooled deposits at low interest rates

Dealers

a person or firm in the business of buying and selling securities for their own account, whether through a broker or otherwise; defined by the fact that it acts as principal in trading for its own account, as opposed to a broker who acts as an agent in executing orders on behalf of its clients

Entrepreneur

a person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so.

Financial analyst

a person whose job is to assess the financial condition of a business or asset to determine if it is a sound investment.

Tax Bracket

a range of incomes taxed at a given rate

Market-to-book ratios

a ratio used to find the value of a company by comparing the book value of a firm to its market value

Financing ratios

a relative magnitude of two selected numerical values taken from an enterprise's financial statements

Annuity due

a repeating payment that is made at the beginning of each period

Time-series analysis

a sequence of measurements of the same variable collected over time

U.S. Treasury bills (a.k.a. T-bills)

a short-term debt obligation backed by the Treasury Dept. of the U.S. government with a maturity of less than one year, sold in denominations of $1,000 up to a maximum purchase of $5 million

Balance sheet

a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period

New York Stock Exchange (NYSE)

a stock exchange based in New York City that is considered the largest equities-based exchange in the world, based on total market capitalization of its listed securities

Financial system

a system that allows the exchange of funds between lenders, investors, and borrowers

State Corporate income tax

a tax imposed on a corporation's profit by the state in which they are conducting business

Federal corporate income tax

a tax imposed on a corporations profits by the national government

Federal personal income taxes

a tax imposed on an indivdual's income by the federal government

Double Taxation (of C Corp profits)

a taxation principle referring to income taxes paid twice on the same source of earned income

Cross-sectional analysis

a type of observational study that analyzes data collected from a population, or a representative subset, at a specific point in tim

Stocks

a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings

Describe the various jobs, or roles, that a commercial banker might undertake within a large commercial bank, such as Bank of America.

accepts deposits, offers checking account services, makes business, personal and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses

Dividends received deductions

an American federal tax deduction applicable to certain corporations that receive dividends from related entities

Sarbanes- Oxley Act (SOX)

an act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations

Partnership

an arrangement in which two or more individuals share the profits and liabilities of a business venture; the partners assume the risk of the business

Brokers

an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor

Investment banker

an individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other entities, or who works in a large bank's division that is involved with these activities, often called an investment bank

Fixed Income Securities

an investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity

Efficient markets hypothesis

an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information

Mutual fund

an investment vehicle made up of a pool of funds collected from shareholders that trades in diversified holdings and is professionally managed

Money market mutual funds (MMMF's)

an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper

Shareholder

any person, company or other institution that owns at least one share of a company's stock

Agency Costs

arise because of core problems, such as conflicts of interest, between shareholders and management

Dupont ratio analysis

assets are measured at their gross book value rather than at net book value to produce a higher return on equity

What form of business organization is the most common in the United States, as to the number of businesses? What form of business organization has the largest footprint in the United States, as to the amount of annual sales?

Sole proprietorship; corporations

Describe the roles and responsibilities of shareholders, directors and officers in a corporation. Include, as part of your answer, a description of the fiduciary duties of loyalty and due care. In connection with the fiduciary duty of due care, what is the "business judgment rule" and how does it operate to protect fiduciaries?

The leaders are responsible for making sure that their decisions are in the best interest of their sharholders and that those decisions are made with the best possible information available and the shareholders should expect the best decisions to be made and be patient about the results

Authorized Stock

The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation

Risk and return are generally inversely related

There is no guarantee that taking greater risk results in a greater return. Rather, taking greater risk may result in the loss of a larger amount of capital. A more correct statement may be that there is a positive correlation between the amount of risk and the potential for return

Describe the types of issues a personal financial adviser might address with her or his client.

They need to focus on responding to their clients' personal needs, rather than just focusing energy on selling their clients on products or investment strategies, even if they believe those strategies may be beneficial over the long term

Cash Flow is king

You need cash to flow in and out to operate a business, you cant make money without spending money but you should spend it wisely

Standard deduction (for an individual or married couple) vs. itemized deductions

deciding whether you would like to receive an deduction on the entirety or on individual items

common-sized financial statements

displays all items as percentages of a common base figure; this type of financial statement allows for easy analysis between companies or between time periods of a company

Describe the dividends received deduction (DRD) and how it operates. Provide an example of how a parent company can avoid taxation of dividends the parent receives from a subsidiary corporation.

dividends received deduction is a break given to corporations that own shares of other corporations so that they are not tripled taxed on any income they receive

Maximum Maturity of Securities that trade on the money markets

less than one year

This exists when it is easy to buy and sell a security. A high volume of trading activity in the security is generally required.

liquidity

Treasury Stock

may have come from a repurchase or buyback from shareholders, or it may have never been issued to the public in the first place

"Cash is king."

may refer to the importance of cash flow in the overall fiscal health of a business; without cash the business is not thriving

Liquidity ratios

measure a company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio and operating cash flow ratio

Operating profit margin

measurement of what proportion of a company's revenue is left over after paying for variable costs of production

Return on Equity (ROE)

measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested

An investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities, including (possibly) stocks, bonds, money market instruments and similar assets.

mutual fund

Delaware tax loophole

occurs when a corporation is registered in the state of Delaware to take advantage of the fact that this state does not tax on income of subsidiaries to companies

The principal-agent problem in corporations

occurs when one person or entity is able to make decisions on behalf of, or that impact, another person or entity

Personal financial advisor

professionals who help individuals manage their finances by providing advice on money issues such as investments, insurance, mortgages, college savings, estate planning, taxes and retirement, depending on what the client requests help with

Profitability ratios

ratios that let a business know how well they are making money against how much money they are spending

Sole Proprietorship

refers to a person who owns the business and is personally responsible for its debts

principal amount

refers to the initial size of a loan

Fiduciary Duty of Care

requires directors to make business decisions after taking all available information into account, and then act in a judicious manner that promotes the company's best interests

Thrift savings bank

savings and loans associations

"ordinary" annuity

series of equal payments made at the end of consecutive periods over a fixed length of tim

Issued Stock

shares are the authorized shares sold to and held by the shareholders of a company, regardless of whether they are insiders, institutional investors or the general public, as shown in the company's annual report

information asymmetry

sometimes referred to as information failure, is present whenever one party to an economic transaction possesses greater material knowledge than the other party

State personal income taxes

taxes imposed on an individuals income by the state government in which they reside

principal balance

the amount due and owing to satisfy the payoff of the underlying obligation, less interest or other charges

Marginal tax rate

the amount of tax paid on an additional dollar of income; will increase as income rises

Average collection period

the average number of days between 1) the date that a credit sale is made, and 2) the date that the money is received from the customer

Liquidity

the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price

Personal exemptions

the dollar amount that each individual taxpayer is able to deduct for him or herself or a dependent each year

Law of one price

the economic theory that the price of a given security, commodity or asset has the same price when exchange rates are taken into consideration

Financial analysis

the examination of a business from a variety of perspectives in order to fully understand the greater financial situation and determine how best to strengthen the business

Secondary market (for securities)

the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold.

Initial public offering (IPO)

the first time that the stock of a private company is offered to the public

Return

the gain or loss of a security in a particular period

Rate of Return

the gain or loss on an investment over a specified time period, expressed as a percentage of the investment's cost

(personal) taxable income

the gross income of an individual or corporation, less any allowable tax deductions;the amount of your income that is subject to income tax

Bid Price

the highest price that a prospective buyer is willing to pay for the security

President (Chief Executive Officer)

the highest-ranking executive in a company, and their primary responsibilities include making major corporate decisions, managing the overall operations and resources of a company, and acting as the main point of communication between the board of directors and corporate operations

Time value of Money

the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity

Yield

the income return on an investment, such as the interest or dividends received from holding a particular security

Ask Price

the lowest price a prospective seller is willing to accept for a security

Foreign Exchange Market

the market in which participants are able to buy, sell, exchange and speculate on currencies

Accounts receivable turnover

the number of times per year that a business collects its average accounts receivable

Capital markets

the part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments

Primary market (for securities)

the part of the capital market that deals with issuing of new securities

Net profit margin

the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company's total revenue

Earnings per share

the portion of a company's profit allocated to each outstanding share of common stock

compounding

the process where the value of an investment increases because the earnings on an investment, both capital gains and interest, earn interest as time passes

interest rate

the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding

Price earnings

the ratio of a company's stock price to the company's earnings per share

Total asset turnover

the ratio of the value of a company's sales or revenues generated relative to the value of its assets

Debt ratio

the ratio of total - long-term and short-term - debt to total assets, expressed as a decimal or percentage

limits on use ratio

the ratio of total balances on a consumer's credit cards to the total credit limits on these cards, expressed as a percentage

Combined marginal income tax rate (fed and state)

the state tax rate multiplied by the complement to the federal rate all added to the federal rate. ex. [ .06 x (1-.35) ] +.35 = 38.9%

Average tax rate

the tax rate you pay when you add all sources of taxable income and divide that number into the amount of taxes you owe

present value

the value in the present of a sum of money, in contrast to some future value it will have when it has been invested at compound interest

future value

the value of an asset at a specific date in the future

Governance

the way a corporation polices itself

Chicago Mercantile Exchange

the world's second-largest exchange for futures and options on futures and the largest in the U.S

Finance manager

they produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization

The primary goal of the managers of a corporation

to maximize shareholder wealth

C Corp

under United States federal income tax law, refers to any corporation that is taxed separately from its owners

Debt equity ratio

used to measure a company's financial leverage, calculated by dividing a company's total liabilities by its stockholders' equity

Limited Partnership

when two or more partners unite to jointly conduct a business in which one or more of the partners is liable only to the extent of the amount of money that partner has invested

Money Market

where financial instruments with high liquidity and very short maturities are traded

Activity ratio

financial analysis tools used to measure a business' ability to convert its assets into cash

Inventory management

he supervision of non-capitalized assets (inventory) and stock items

The first time that the stock of a private company is offered to the public. Often a process undertaken by smaller, younger companies seeking capital to expand, this process can also be done by large privately owned companies looking to become publicly traded.

initial public offering (IPO)

This type of firm underwrites new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors. This type of firm also provides guidance to issuers regarding the issue and placement of stock.

investment bank

The purpose of the assets of a corporation

Assets are reported on a company's balance sheet, and they are bought or created to increase the value of a firm or benefit the firm's operations

Chief Financial Officer

duties include tracking cash flow and financial planning as well as analyzing the company's financial strengths and weaknesses and proposing corrective actions

The Fiduciary duties of directors and officers to their corporation

includes: Fiduciary Duty of Loyalty and Fiduciary Duty of Care