Financial Management
Certificates of deposit (CDs)
Issued by money-centered financial firms, these short- or medium-term insured debt instruments pay higher interest than a regular savings account. They are low-risk instruments and have low returns.
Atherton's EVA equals the additional profit created in excess of the after-tax operating income necessary to finance its total after-tax cost of capital, which is expressed in annual dollars.
It is computed by subtracting Atherton's annual dollar cost of capital from its net operating profit after taxes .
Selena and Mario run a law firm in Chicago. The firm has debt of $100,000, but Selena and Mario will not be held personally liable for the law firm's debt.
LLC/LLP (limited liability partnership)
Vision Tech's stock price is currently trading at $42 per share. The consensus among analysts is that the intrinsic value of Vision Tech's stock is $33 per share. Is Vision Tech more or less likely to receive a hostile takeover bid?
Less likely
Which of the following instruments are traded in the capital markets? Check all that apply.
Long-term bank loans Corporate bonds Do NOT apply: Certificates of deposit Commercial paper Treasury Bills
Depreciation expenses directly affect a company's taxable income. An increase in depreciation expense will lead to a _____ taxable income. It will ______ tax deducted from a company's earnings, thus leading to a _______ operating cash flow.
Lower, decrease, higher
Your boss asked you to analyze Green Hamster Manufacturing's performance for the past three years and prepare a report that includes a benchmarking of the company's performance. Using the company's last three years of financial reports, you've calculated its financial ratios, including the ratios of Green Hamster Manufacturing's competitors—that is, comparable ratios of other participants in the industry—and submitted the report. Along with calculating the ratios, what else is needed for your report?
Making observations and identifying trends that are suggested by the ratio analysis Identifying the factors that drive the trends in the ratios Both of the above (Correct)
The CFO is not responsible for which of the following departments? Check all that apply.
Marketing, Production CFO IS responsible for: Accounting, Treasury, Investments
Sheila saves $10,000 and buys a certificate of deposit (CD) that will mature in six months.
Money Markets (All financial transactions that are highly liquid and have a short-term (less than one year) maturity are traded in money markets.)
Vision Tech is a software company based out of San Francisco. Its stockholders are mostly individual investors and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Vision Tech's stock, would direct shareholder intervention be more or less likely to motivate the firm's management?
More likely
The __________ value, or difference between the machine's historical cost and its accumulated depreciation expense, is called its book value.
Net
A firm has $100 million in revenues. Does that mean it has generated a cash flow of $100 million?
No
Jacob owns Jacob's Tantalizing Tees, a T-shirt shop in a small college town in Virginia. With a staff of three part-time employees, Jacob operates the business in accordance with his personal goals, dreams, and capabilities. Does Jacob have an agency conflict to deal with?
No; as both the owner and operator of Jacob's Tantalizing Tees, Jacob has not created the necessary agency relationship through which an agency conflict can exist.
When the demand for an initial public offering (IPO) of securities exceeds the number of securities issued, the offering is deemed to be:
Oversubscribed
Different forms of businesses have different characteristics. Which of the following characteristics would apply to a sole proprietorship? Check all that apply.
Owned by single individual Subject to lower income taxes Subject to unlimited personal liability Less regulated Does not apply: Has unlimited life Can easily raise large amounts of capital
Shareholder's equity
Paid-in Capital + Retained Earnings Total Assets - Total Liabilities
Sadler started a business, based in a different state, with his uncle. Due to the business's underperformance, they had to close the business. Sadler, however, ended up losing his house due to a litigation claim.
Partnership (owners are subject to unlimited personal liability, which allows claims over the partners' personal assets.)
They are established by an employer to facilitate and organize employee retirement funds. They are asset pools that invest in securities that have a potential to give stable returns.
Pension funds
True or False: A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conflicts.
True
Indirect Transfers through Investment Banks
W2 Corp. needs capital to finance a new product line. It borrows money in the form of long-term bonds underwritten by an investment bank.
Identify the form of capital market efficiency under the efficient market hypothesis described in the following statement: Current market prices reflect all information contained in past price movements. This statement is consistent with:
Weak form efficiency
When referring to an individual asset, such as a piece of equipment, book value refers to the asset's
historical value or original purchase price
Weak form efficiency
implies that current market prices reflect all relevant historical and current information, such as past and current price movements. In this situation, investors will be unable to earn above-average returns simply by examining the company's past and current stock price trends.
Strong form efficiency
implies that current market prices reflect all relevant information, whether it is known publicly or privately. This means that investors (even corporate insiders) will not be able to earn above-average returns, because any information that they may trade on has already been incorporated in the current stock price.
Suppose a firm with the 25% tax rate needs to pay $1 in dividends to its shareholders. What is the pretax income it should have to pay this dividend?
$1.33 Thus, under the 25% tax rate, a firm would need $1 / (1 - 0.25) = $1.33
Isabella deposited $1,400 in a savings account at her bank. Her account will earn an annual simple interest rate of 6.6%. If she makes no additional deposits or withdrawals, how much money will she have in her account in 13 years?
$2,601.20 Interest Earned in One Year x Number of Years (6.6% x $1,400.00) per year x 13 years = 1,201.20 Initial Investment (PV00) + Total Interest Earned (I) $1,400.00 + $1,201.20 $2,601.20
What is Smith's earnings per share (EPS) for the trailing 12 months?
$2.09 P/E Ratio = Price per Share/EPS 24.70 = $51.63/EPS EPS = $51.63/24.70 $51.63 found by "Last Trade" top left $24.70 found by "P/E(ttm)" bottom right
Blue Hamster Manufacturing Inc. just reported earnings after tax (also called net income) of $9,000,000 and a current stock price of $28.50 per share. The company is forecasting an increase of 25% for its after-tax income next year, but it also expects it will have to issue 2,500,000 new shares of stock (raising its shares outstanding from 5,500,000 to 8,000,000). If Blue Hamster's forecast turns out to be correct and its price/earnings (P/E) ratio does not change, what does the company's management expect its stock price to be one year from now? (Round any P/E ratio calculation to four decimal places.)
$24.50 per share EPS = Net Income/Shares Outstanding $9,000,000/5,500,000 shares = $1.64 P/E Ratio = Price per Share/EPS P/E Ratio = $28.50/$1.64 = 17.3780x Expected EPS = Expected Net Income/Outstanding Shares Next Year $11,250,000/8,000,000 = $1.41 Expected Stock Price = Expected EPS × P/E Ratio $1.41 × 17.3780 = $24.50 per share
Now, assume that Isabella's savings institution modifies the terms of her account and agrees to pay 6.6% in compound interest on her $1,400 balance. All other things being equal, how much money will Isabella have in her account in 13 years?
$3,213.45 $1,400 x (1 + 0.0660)^13 $1,400 x (1.066)^13
How much did the price increase today over yesterday's closing price?
$5.43 At the close of yesterday's trading, Smith's stock price was $46.20 per share, and today it closed at $51.63. So the stock's price increased by $5.43 per share
Quick Ratio
(Current Assets - Inventories) / Current Liabilities
Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios. Check all that apply.
*A higher operating margin than the industry average indicates either lower operating costs, higher product pricing, or both. *If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. DON'T CHECK: *An increase in a company's earnings means that the profit margin is increasing. *If a company issues new common shares but its net income does not increase, return on common equity will increase.
Ratios Calculated Year 1 Year 2 Year 3 Price-to-cash-flow 1.20 1.56 1.75 Inventory turnover2.40 2.88 3.23 Debt-to-equity0.60 0.64 0.77 Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report? Check all that apply.
*An improvement in the inventory turnover ratio could likely be explained by the new sales-forecasting strategies that led to better inventory management. *A plausible reason why Cold Goose Metal Works Inc.'s price-to-cash-flow ratio has increased is that investors expect higher cash flow per share in the future. NOT: *The market value of Cold Goose Metal Works Inc.'s common shares declined over the three years. *The company's creditworthiness has improved over these three years as evidenced by the increase in its debt-to-equity ratio over time.
Which of the following are characteristics of a perpetuity? Check all that apply.
*The value of a perpetuity is equal to the sum of the present value of its expected future cash flows. *The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows. NOT: *A perpetuity is a stream of unequal cash flows. *The value of a perpetuity cannot be determined.
A local bank's advertising reads: "Give us $45,000 today, and we'll pay you $800 every year forever." If you plan to live forever, what annual interest rate will you earn on your deposit?
1.78%
One year later, Blue Hamster's shares are trading at $52.08 per share, and the company reports the value of its total common equity as $39,200,000. Given this information, Blue Hamster's market-to-book (M/B) ratio is
10.63 x BVPS = Common Equity/Shares Outstanding $39,200,000/8,000,000 shares = $4.90 M/B Ratio = Market Price per Share/BVPS $52.08 per share/$4.90 = 10.63
Obviously, the lifetime membership isn't a good deal if you only remain a member for a couple of years, but if you remain a member for 40 years, it's a great deal. Suppose that the appropriate annual interest rate is 7.4%. What is the minimum number of years that Lloyd must remain a member of the ADLA so that the lifetime membership is cheaper (on a present value basis) than paying $600 in annual membership dues? (Note: Round your answer up to the nearest year.)
12 years Excel =NPER(rate, pmt, pv,[fv],[type]) = NPER(..074,600,-5000,0,1)
During World War II, Coca-Cola Co. cut off all syrup sales to Germany in 1940, resulting in no sales from 1943 to 1945. If Coca-Cola's sales had grown from 1939 to 1945 at the same rate that they grew between 1934 and 1939, its sales in 1945 would have been approximately ___________. (Hint: Use sales data from 1939 as the present value.)
149.42 million cases
Polk Software Inc. has a quick ratio of 2.00x, $30,825 in cash, $17,125 in accounts receivable, some inventory, total current assets of $68,500, and total current liabilities of $23,975. The company reported annual sales of $200,000 in the most recent annual report. Over the past year, how often did Polk Software Inc. sell and replace its inventory?
9.73x Inventory Turnover Ratio = Sales/Inventories Inventories = Current Assets - (Cash + Accounts Receivable) = $68,500 − ($30,825 + $17,125) OR Inventories = Current Assets - (Quick Ratio × Current Liabilities)
Annuity due
A cash flow stream that is created by a lease that requires the payment to be paid on the first of each month and a lease period of three years.
Ordinary annuity
A cash flow stream that is created by an investment or loan that requires its cash flows to take place on the last day of each quarter and requires that it last for 10 years.
Companies have the opportunity to use varying amounts of different sources of financing, including internal and external sources, to acquire their assets, debt (borrowed) funds, and equity funds. Which of the following is considered a financially leveraged firm?
A company that uses debt to finance some of its assets (Companies that function without the use of borrowed money are said to have no leverage and are called unleveraged companies.)
Time value of money
A concept that maintains that the owner of a cash flow will value it differently, depending on when it occurs.
Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply.
A firm's ratios can lead to conflicting conclusions—some ratios might be "good" and some "bad." Inflation can distort balance sheet data. Do NOT check: Ratio analysis is conducted using benchmarking techniques.
Amortized loan
A loan in which the payments include interest as well as loan principal.
Discounting
A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate.
Opportunity cost of funds
A rate that represents the return on an investor's best available alternative investment of equal risk.
Amortization schedule
A schedule or table that reports the amount of principal and the amount of interest that make up each payment made to repay a loan by the end of its regular term.
Perpetuity
A series of equal (constant) cash flows (receipts or payments) that are expected to continue forever.
The last trade time is shown to be at 4:00 PM Eastern Time. The abbreviation "ttm" stands for "trailing twelve months," and the number shown reflects data from the previous 12 months. The abbreviation "3m" reflects data from the previous 3 months. What exchange does Smith Enterprises trade on?
AMEX Graph shows "Smith Enterprises (AMEX: SME)" at the top left hand corner. SME is the ticker symbol for the company.
Total Current Liabilities
Accounts Payable + Accruals + Notes Payable
Income Statement
Accounts for all revenues and expenses over an accounting period.
Free cash flow can be used for various reasons, including distributing it to stockholders and debtholders. Which of the following is not a use of free cash flow?
Acquiring operating assets
Annual percentage rate
An interest rate that reflects the return required by a lender and paid by a borrower, expressed as a percentage of the principal borrowed.
Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 6.80%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price?
An investment that matures in six years NOT: An investment that matures in five years
Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company's performance. If you wanted to conduct a trend analysis, you would:
Analyze the firm's financial ratios over time NOT: Compare the firm's financial ratios with other firms in the industry for a particular year
You bought 1,000 shares of Tund Corp. stock for $60.59 per share and sold it for $82.35 per share after a few years. How will your gain or loss be treated when you file your taxes?
As a capital gain taxed at the long-term tax rate
Managers at a bank need to decide on the interest rate that they must charge for the loans that they make to their prime customers.
Capitol Markets
Which of the following asset classes is generally considered to be the most liquid?
Cash
Cold Goose's pool of relatively liquid assets, which are available to support the company's current and future sales, decreased from Year 1 to Year 2. This statement is false , because:
Cold Goose's total current asset balance actually increased from $11,250 million to $14,062 million between Year 1 and Year 2
Statement #3: If Cold Goose ever goes bankrupt, its common stockholders will be paid off first, then its debtholders and preferred stockholders. This statement is incorrect , because:
Common shareholders are treated as residual investors
Radford is a small company that manufactures automobile bearings. Managers at the company must make decisions on the kind and the cost of equipment to buy.
Corporate Finance
DDX Co. is a shipping company. Nicholas owned 1,000 shares of DDX stock. He found better opportunities and sold his entire stake in DDX to another investor.
Corporation (Ownership in corporations can be transferred)
Current Ratio
Current Assets / Current Liabilities
Uneven Cash Flows
Debbie has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years. Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange-traded fund.
Green Penguin Pencil Company has a total asset turnover ratio of 8.50x, net annual sales of $25 million, and operating expenses of $11 million (including depreciation and amortization). On its balance sheet and income statement, respectively, it reported total debt of $1.75 million on which it pays a 11% interest rate. To analyze a company's financial leverage situation, you need to measure the firm's debt management ratios. Based on the preceding information, what are the values for Green Penguin Pencil's debt management ratios?
Debt Ratio = 59.52% Times-interest-earned ratio = 72.73% Total Asset Turnover Ratio = Sales / Total Assets 8.50 times = $25 million / Total Assets Total Assets = $25 million / 8.50 times = $2.94million Debt Ratio = $1.75 million / $2.94 million = 59.52% TIE Ratio = EBIT / Interest Charges EBIT = Total Sales - Total Operating Costs EBIT = $25 million - $11 million Interest Charges = Interest Rate × Debt Outstanding Interest Charges = 11% × $1.75million
Which of the following statements are true? Check all that apply.
In this example (Jing Foodstuffs current ratio and quick ratio is higher than N&B) Jing Foodstuffs Corporation has a better ability to meet its short-term liabilities than N&B Equipment Company. If a company's current liabilities are increasing faster than its current assets, the company's liquidity position is weakening. An increase in the quick ratio over time usually means that the company's liquidity position is improving and that the company is managing its short-term assets well. DON'T CHECK: Compared to N&B Equipment Company, Jing Foodstuffs Corporation has less liquidity and a lower reliance on outside cash flow to finance its short-term obligations. An increase in the current ratio over time always means that the company's liquidity position is improving.
Operating Margin
EBIT / Sales
Basic Earning Power
EBIT / Total Assets
Simple interest?
FV = PV + (PV x I x N)
Compound interest?
FV = PV x (1 + I)^N
Debt or financial leverage ratios help analysts determine whether a company has sufficient cash to repay its short-term debt obligations.
False
Which of the following is true about finding the present value of cash flows?
Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return.
Which of the following statements is true about market value ratios?
Low P/E ratios could mean that the company has a great deal of uncertainty in its future earnings (Generally, companies with low P/E ratios are considered to be undervalued—although this is not always true.)
You decide also to conduct a qualitative analysis based on the factors summarized by the American Association of Individual Investors (AAII). According to your understanding, a company with one key customer is considered to be ________ risky than companies with several customers.
More
Which of the following statements is not true about mortgages?
Mortgages always have a fixed nominal interest rate. NOT: The ending balance of an amortized loan contract will be zero. The payment allocated toward principal in an amortized loan is the residual balance—that is, the difference between total payment and the interest due. Mortgages are examples of amortized loans.
Time value of money calculations can be solved using a mathematical equation, a financial calculator, or a spreadsheet. Which of the following equations can be used to solve for the present value of a perpetuity?
PMT/r
Return on Common Equity
Net Income / Common Equity
Profit Margin
Net Income / Sales
Return on Total Assets
Net Income / Total Assets
What is the most commonly used base item for a common size income statement?
Net sales
If a firm takes steps that increase its expected future ROE, its stock price will _______________ increase.
Not necessarily
Future value
One of the four major time value of money terms; the amount to which an individual cash flow or series of cash payments or receipts will grow over a period of time when earning interest at a given rate of interest.
Which of the following is true about present value calculations?
Other things remaining equal, the present value of a future cash flow decreases if the discount rate increases.
The inventory turnover ratio across companies in the software industry is 8.2705x. Based on this information, which of the following statements is true for Polk Software Inc.?
Polk Software Inc. is holding less inventory per dollar of sales compared with the industry average.
ROE
Profit Margin × Total Assets Turnover × Equity Multiplier
Based on your understanding of the uses and limitations of ROE, which of the following projects will a manager likely choose if his or her bonus is solely based on the ROE of the next project?
Project Y, with 40% ROE and a small investment, generating low expected cash flows NOT: Project X, with 35% ROE and a large investment, generating high expected cash flows
Investments and loans base their interest calculations on one of two possible methods: the ____________ interest and the ___________ interest methods.
Simple, compound
Christopher is self-employed and reports all of his income and expenses in his personal income tax return.
Sole Proprietorship
Based on your understanding of the different items reported on the balance sheet and the information they provide, which statement regarding Cold Goose Metal Works Inc.'s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?
The company's debts are listed in the order in which they are to be repaid.
The process for converting present values into future values is called compounding . This process requires knowledge of the values of three of four time-value-of-money variables. Which of the following is not one of these variables?
The inflation rate indicating the change in average prices
Referring to these data, which of the following conclusions will be true about the companies' ROEs?
The main driver of Company C's superior ROE, as compared with that of Company A's and Company B's ROE, is its greater use of debt financing. (C's Equity Multiplier was highest)
Northern Services Inc. The Purchasing Policy Guidelines of the Northern Services Inc. indicate that the company is committed to procuring its goods, products, and services from a diversified pool of vendors, contractors, and service providers. Despite these guidelines, Northern's purchasing manager prefers to maintain a small cadre of suppliers that he knows and trusts. How would you expect this situation to affect the assessment of Northern's financial condition and performance?
The purchasing manager's behavior should be expected to increase Northern's riskiness by increasing its exposure to potential supply shortages or mistimed deliveries.
Which of the following investments that pay will $15,500 in 8 years will have a lower price today?
The security that earns an interest rate of 8.25%. NOT: The security that earns an interest rate of 5.50%.
Net Fixed Assets
Total Assets - Total Current Assets
Equity Multiplier
Total Assets / Total Common Equity
All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year.
True
All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest.
True
Everything else held constant, an account that earns compound interest will grow more quickly than an otherwise identical account that earns simple interest.
True
Market value or market based ratios help analysts figure out what investors and the markets think about the firm's growth prospects or current and future operational performance.
True
One possible explanation for an increase in a firm's profitability ratios over a certain time span is that the company's income has increased.
True
Which of the following is true about the leveraging effect?
Under economic growth conditions, firms with relatively more leverage will have higher expected returns.
Can a company's shares exhibit a negative P/E ratio?
Yes (Remember, share prices cannot be negative, but companies can incur negative earnings (a loss). This can lead to a negative EPS, and therefore, a negative P/E ratio. A negative P/E ratio means that investors are willing to buy a share of a company that has been losing money on every share of its stock.)
Annuity Payments
You deposit a certain equal amount of money every year into your pension fund. Aakash borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest.
Ian loaned his friend $20,000 to start a new business. He considers this loan to be an investment, and therefore requires his friend to pay him an interest rate of 7% on the loan. He also expects his friend to pay back the loan over the next four years by making annual payments at the end of each year. Ian texted and asked that you help him calculate the annual payments that he should expect to receive so that he can recover his initial investment and earn the agreed-upon 7% on his investment. Calculate the annual payment and complete the following capital recovery schedule:
chegg excel
If the stock price of Krit Corp. decreases in the next two years, Wilson's wealth in Krit Corp. will
decrease
In a state of market equilibrium, the intrinsic value of the stock will be ____________ the market price of the stock.
equal to
Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with ____ debt ratios.
low (A high debt ratio would mean that the firm has taken on a lot of debt to finance its assets, making it difficult for it to take on more debt.)
If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the _____________ , the total asset turnover ratio, and the ___________
net profit margin, equity multiplier
If compensation for senior management is based on short-term performance of the firm, in the short run the firm is likely to:
overstate it's earnings
Oops! When you went in to make your deposit, the bank representative said the amount of required deposit reported in the advertisement was incorrect and should have read $67,500. This revision, which will
reduce the interest rate earned on your deposited funds, will adjust your earned interest rate to 1.19% . Took picture - PV bank deposit
And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's ___________ effectiveness in using the company's assets, and _________________
use of debt versus equity financing, control over its expenses
Cash and Equivalents
Total Current Assets - Accounts Receivable - Inventories
A company exhibiting a high liquidity ratio is likely to have enough resources to pay off its short-term obligations.
True
Asset management or activity ratios provide insights into management's efficiency in using a firm's working capital and long-term assets.
True
Annual Report
Is required by the SEC and includes the audited document that shows the company's financial results for the past year and management's discussion about the future outlook and plans.
Dual Purposes Products Co. reported net sales of $300 million last year and generated a net income of $66.00 million. Last year's accounts receivable increased by $32 million. What is the maximum amount of cash that Dual Purposes Products Co. received from sales last year?
$268.00 million Net Sales - Increase in Accounts Receivable ($300 - $32) million = $268.00 million
Krit Corp. is a US manufacturing company based in the Midwest. As an investor, Wilson bought 150 shares of stock in Krit Corp. The stock price of Krit Corp. is currently trading at $37.50 per share. Wilson's total wealth in Krit Corp. is:
$5,625.00 Number of Shares that Wilson Owns * Market Price per Share = 150 shares * $37.50
What should be the firm's IPO offer price?
$59 The market-clearing price in a Dutch auction is the highest price at which all the shares will be sold. The maximum offer price that WAC can set is $59 if it wants to sell all 500,000 shares through the Dutch auction.
If the market maker is willing to purchase the entire block of 1,500 shares from Adele and, from that block, resell 1,000 shares to Jorge, then the market maker's net profit from Jorge's transaction—excluding any inventory effects—will be
$700.00 multiplying the dealer's bid-ask spread ($0.70 per share) by the number of shares traded (1,000 shares)
NOW Inc. released its annual results and financial statements. Grace is reading the summary in the business pages of today's paper. In its annual report this year, NOW Inc. reported a net income of $164 million. Last year, the company reported a retained earnings balance of $561 million, whereas this year it increased to $660 million. How much was paid out in dividends this year?
65 million Net Income - (Ending Retained Earnings - Beginning Retained Earnings) $164 - ($660 - $561) million
Investing Activity
A company buys some common stock in its supplier's firm with its extra cash.
Operating Activity
A company reports a 10% increase in its accounts payable from the last month. D and W Co. sells its last season's inventory to a discount store.
Direct Transfers
A small startup firm has each of the partners contribute $50,000 in capital to help the company make payroll for the next three months. Steve's grandfather loans him $30,000 to start a small coffee shop in the East Village in Manhattan.
U.S Treasury Bills
Backed by the U.S. government, these financial instruments are short-term debt obligations with a maturity of less than one year. They are considered risk-free investments.
Can the firm meet all its short-term obligations using its current assets?
Balance Sheet
Financial update as of June 15 •Your existing business generates $87,000 in EBIT. •The corporate tax rate applicable to your business is 25%. •The depreciation expense reported in the financial statements is $16,571. •You don't need to spend any money for new equipment in your existing cafés; however, you do need $13,050 of additional cash. •You also need to purchase $6,960 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit. •It is also estimated that your accruals, including taxes and wages payable, will increase by $4,350.
Based on your evaluation you have $73,121 in free cash flow. [$87,000 x (1 - 0.25)] + $16,571 - $0 - [$13,050 + $6,960) - ($6,960 + $4,350)]
Jorge, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Adele, is willing to sell 1,500 shares of the same stock. Unfortunately, Jorge and Adele don't know one another and must complete their transactions using the stock exchange's market-making dealer. XYZ's market maker is willing to sell her shares for $25.70 per share and purchase additional shares for $25.00 per share. Select the most appropriate values in the following table:
Bid price - $25.00 Ask price - $25.70 Bid-ask spread - $0.70 (The difference between the bid price and the ask price, $0.70 ($25.70 - $25.00), is called the bid-ask spread.)
Statement #2: In Year 2, Cold Goose Metal Works Inc. was profitable. This statement is true , because:
Cold Goose's retained earnings account increased between the end of Years 1 and 2
From a corporation's point of view, does the tax treatment of dividends and interest paid favor the use of debt financing or equity financing?
Debt financing
Statement of Stockholders' equity
Details changes in the capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings.
Free Cash Flow (FCF)
EBIT(1 - Tax) + Depreciation - [(Capital Expenditures + Increase in Net Working Capital)]
Indirect Transfers through Financial Intermediaries
Elliot invests $25,000 by purchasing 1,000 shares of an emerging markets mutual fund. This mutual fund invests in companies in Brazil, India, and China. He bought the mutual fund from the mutual fund company.
Which of the following best describes shareholders' equity?
Equity is the sum of shareholders' capital provided by shareholders and retained earnings.
Common stocks
Issued by corporations, these financial instruments give their holders a class ownership in a company. They are considered the most risky but provide higher expected returns.
They are a pool of assets that trade like stocks on an exchange. They track a group of stocks, such as all stocks in an index or stocks of companies in emerging markets.
Exchange traded funds
True or False: The efficient markets hypothesis holds only if all investors are rational.
False
These financial conglomerates provide a range of services, such as investment banking, commercial banking, and financial advising.
Financial services corporations
OK, it's better to evaluate the performance of Atherton's management by using the company's EVA rather than the book value of its shareholders' equity because the better the managerial decisions being made, the
GREATER the after-tax net operating income earned, the GREATER the difference between this net operating income and the cost of capital needed to generate that income, and the GREATER the EVA, or true economic profit, earned by the company.
Net Sales
Green Caterpillar's sales are expected to increase by 25% from Year 1 to Year 2, from $10,000,000 to $12,500,000, calculated as $10,000,000 x (1 + 0.25).
Balance Sheet
Has three segments that when analyzed together give an idea of what the company owns and what it owes.
The process in which derivatives are used to reduce risk exposure is called
Hedging
A bank purchased a credit default swap from another financial institution to protect itself against the default of one of its borrowers. In this example, the bank is _________
Hedging (A bank is hedging when it purchases a credit default swap that offers protection against the default of one of its borrowers.)
According to a tax law established in 1969, taxpayers must pay the ___________ of the Alternative Minimum Tax (AMT) or regular tax.
Higher
As a technical trader, you will be analyzing investor psychology and making investment decisions based on how investors behave during certain situations.
Investments
In turn, Atherton's annual cost of capital is calculated by multiplying its total
Investor-supplied
Mr. and Mrs. Smith buy a new house in Walnut Creek, California. They paid the entire amount, $800,000, in cash.
Physical asset markets (Physical asset markets involve the exchange of tangible (real) physical assets, such as commodities, automobiles, real estate, computers, and machinery. Real estate is a physical asset; it is specific, immobile, and tangible.)
Statement of Cash Flows
Provides details about the flow of funds from operating, investing, and financing activities.
How heavy was the trading of Smith's stock today relative to the normal level of trading?
Relatively light trading The average daily trading volume for the previous three months is 1,921,518 shares. Today's trading volume was 1,419,317, which is much less than the average daily volume. Therefore, today saw relatively light trading in Smith's stock. Volume and Average Volume is listed in the graph
Which of the following statements best describes free cash flow?
Residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working-capital expenditures
An investor holding 3,000 shares of stock of Strata Corp. sells them to another investor.
Secondary Markets (Transactions between the first buyer of securities and the issuer of securities take place in the primary markets. All subsequent trading of those securities happens in the secondary market)
The owners of a corporation are the ____________ of the company . The primary goal of the corporate management team is to ____________ the shareholders' wealth by _____________ the ____________ over the long run.
Shareholders, maximize, maximizing, company's stock price
You need gasoline now, so you drive to the gas station and purchase 10 gallons of gasoline.
Spot markets (Spot markets, also called cash markets, handle transactions that come into effect immediately and when contractual fulfillments are executed completely. Needing gasoline, you drive to the gas station and buy gasoline at a certain price. The transaction takes place immediately (on-the-spot), so this is a spot market transaction)
Does the firm generate enough internal funds to support anticipated investment, or does additional outside capital need to be raised?
Statement of Cash Flows
Financing Activity
The Yum chain of restaurants conducts an initial public offering to raise funds for expansion.
Consider that there is a weak form of efficiency in the markets. A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $4.50, but insiders know that, with this new drug, earnings will increase and drive the EPS to $5.00. What will happen when the company releases its next earnings report?
There will be some volatility in the stock price when the earnings report is released, but it is difficult to determine the impact on the stock price. However, the prices will eventually adjust to the news announcement.
Money market mutual funds
These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated.
Retained Earnings
Total Common Equity - Common Stock
When a company issues stock or shares to the public for the first time, it is referred to as
an initial public offering
Well, because Atherton's book value DOES NOT CHANGE with changes in the market price of the firm's shares, the firm's book value CANNOT reflect management's efforts to maximize the shareholder wealth
and therefore SHOULD NOT be used to evaluate management's performance.
In contrast, when the term refers to the entire company, it means the total value of the company's shareholders' equity as reported in the firm's
balance sheet
The difference between the price at which a dealer will sell a certain security and the price at which a dealer will buy a security is called the
bid-ask spread
So, what makes this value important to investors is that it is a historical value that can change—but only due to a couple of events, including the repurchase of Treasury stock, the sale of new common or preferred shares, and the payment of
dividends . Equally important, it WILL NOT change in response to changes in the market prices of the firm's shares.
A stock market is a public market for trading a company's
equities
The Sarbanes-Oxley Act, passed by Congress in 2002, requires CEOs and CFOs to certify that the firm's:
financial statements are accurate
Semistrong form efficiency
implies that the current market prices reflect all relevant publicly available information. If semistrong form efficiency characterizes a market, then investors cannot beat the market by making trades based on information reported in today's Wall Street Journal or in a CNN news report, since the information is immediately incorporated in the company's current share price.
In an attempt to minimize agency problems in a company (potential conflict of interest between the company's managers and shareholders), attractive compensation packages are created to retain and encourage managers. In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the ____________ value of the company's stock price.
long run
For the past 40 years, companies have attempted to attract, retain, and encourage managers by developing attractive compensation packages. These compensation packages have also been intended to reduce potential agency conflicts between these managers and the firm's shareholders. In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the ____________ value of the company's common stock price.
long-term
An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.'s stock should be $45.69 per share, but Mandalays Inc.'s stock is trading at $40.12 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently:
undervalued (stock of Mandalays Inc. is trading at $40.12 per share, which is less than the intrinsic value of $45.69 per share. A stock trading at a price below its intrinsic value is considered to be undervalued)
