FINA5320

Accredited Investor

1) Net worth of $1,000,000 or more (excluding primary residence) 2) $200000+ of income ($300,000 joint spousal) in last 2 years with reason to assume the same in coming year 3) Individuals holding Series 7, 65, 82 licenses (until 2 years after termination)4) Family offices with at least $5000,000 in assets under management

Partnerships must have ____non corporate characteristics to be classified a partnership by the IRS otherwise it will be taxed by the IRS as a corporation.

3 of 6

Asset Management Ratios (Efficiency Ratios)

A set of ratios that measure how effectively a firm is managing its assets. Also called efficiency ratios.

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

Agency Problem

What are agency problems and how do they come about? What are agency costs?

An agency problem is a conflict of interest and they come about when there is a conflict of interest between the principal and the agent.

What is the Capital Budgeting Decision?

Choosing investment opportunities that are worth more to the firm then they cost to acquire. The essence of capital budgeting is evaluating the size, timing, and risk of future cash flows.

Given a stated interest ratewhich form of compounding will yield the highest effective rate of interest?,

Continuous Compounding

An interest rate that is compounded monthlybut is expressed as if the rate were compounded annuallyis called the _____ rate.

Ear rate

What is the difference between a general and a limited partnership?

In a limited partnership the limited partner is only responsible for what they have contributed already and are not responsible for any business debts. In a general partnership all partners have theoretical unlimited liability.

Current Ratio

Indicates the extent to which current liabilities are covered by the current assets; it is found by dividing current assets by current liabilities.

Profitability Index

Measure of an investment or project's attractiveness. NPV of future cash flows/Initial Investment

discounted payback

No of years to break-even in a project. Shows the profitability of a project using the time value of money

Which one of these characteristics best describes the primary advantage of being a limited partner rather than a general partner?

Personal financial liability limited to the capital invested

All cash flows and the income tax consequences (including tax losses) of real estate ownership "flow through" directly to the individuals' tax return in a:

Sole proprietorship

What is the goal of financial management?

The goal of financial management is to maximize the current value per share of the existing stock

C Corporation

The most common type of corporation which is a legal business entity that offers limited liability to all of its owners who are called stockholders Cons- income tax is subject to tax at both corporate and individual levels (double taxation).

Which one of these best fits the description of an agency cost?

The payment required for an outside audit of the firm

PV vs Annuity

The present value of an annuity is the current value of future payments from an annuity, A future annuity is one that begins to pay out after its accumulation period

Limited liability partnership (LLP)

This form is most frequently used by legal and accounting professionals. These firms generally do not have large numbers of owners. Most typically they have fewer than 100 owners. Virtually every function within a firm is in some way connected with the receipt or disbursement of cash. Individuals plan monitor and assess the financial aspects of their activities over a given period through the consideration of cash inflows and outflows.

Price/Cash Flows Ratio

This shows how much investors are willing to pay per dollar of cash flow.

Which one of the following is defined as a firm's short-term assets and its short-term liabilities?

Working Capital

Which one of the following is a current liability?

a note payable in 9 month

Developing a general economic outlook

assists in the identification of industries and firms that might be good investment opportunities.

The process of planning and managing a firm's long-term assets is called:

capital budgeting

The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the

cash flow to stockholders

For a firm to create value it must

create more cash flow than it uses

An annuity stream of cash flow payments is a set of:

equal cash flows occurring at equal periods of time over a fixed length of time.

An annuity stream of cash flow payments is a set of

equal cash flows occurring each time period over a fixed length of time

Non Cash Items

expenses which do not directly affect cash flows.

Cash flow from assets is also known as the firm's

free cash flow

A business entity operated and taxed like a partnership but with limited liability for the owners is called a

limited liability company

LLC Advantages include

more equity capital than is available to a sole proprietorship relatively easy to start (although written agreements are essential) and income taxed once at personal tax rate.Disadvantages include unlimited liability for general partners dissolution of partnership when one partner dies or wishes to sell low liquidity.

A major drawback of S corporations for some investor groups is that they must not have

more than 100 shareholders.

Which one of these is most apt to be a fixed cost?

office salaries

Which term relates to the cash flow which results from a firm's ongoing normal business activities?,

operating cash flows

A perpetuity differs from an annuity because:

perpetuity flows never ceases

Agency costs

refers to the costs of the conflict of interest between stock holders and management.

Shareholders probably have the most interest in which one of the following sets of ratio.

return on equity and price-earnings

The total asset turnover ratio measures the amount of

sales generated by every $1

Disadvantages of corporate ownership

separation of ownership and management (agency costs) and double taxation. Recent tax laws reduce the level of double taxation, but it has not been eliminated.

The cheapest business entity to form is typically the

sole proprietorship

The sources and uses of cash over a stated period of time are reflected on the:

statement of cash flows

All else constant the net present value of a typical investment project increases when:

the required rate of return decreases

The higher the degree of financial leverage employed by a firm

the:, higher the probability that the firm will encounter financial distress.

Activities of a firm which require the spending of cash are known a

uses of cash