BEC - FINANCIAL MANAGEMENT

PV of ordinary annuity

(present value of a single amount/ future value of a single amount/PV of ordinary annuity/ FV of ordinary annuity): equal amounts received at the end of each period; "annuity in areas; determines value now of a series of equal payments to be received at the end of equal intervals over a future period

future value of a single amount

(present value of a single amount/ future value of a single amount/PV of ordinary annuity/ FV of ordinary annuity): value at some future date of a single amount invested now; assumes annual "compounding (i.e. interest is earned on unpaid interest)

present value of a single amount

(present value of a single amount/ future value of a single amount/PV of ordinary annuity/ value at some future date of a series of equal amounts to be paid at the end of equal intervals)value now of a single amount to be received in the future

APR

= effective interest rate for a fraction of a year x number of fractions of year; legally required basis for interest rate disclosure in the U.S.

Black Scholes Model

Black Scholes Model/Binomial Option Pricing Model (BOPM): developed to value options under specific circumstances, including European call options; stocks pay no dividends; stock prices that increase in small increments; risk-free rate of return is constant; discounting the exercise price

Binomial Option Pricing Model (BOPM

Black Scholes Model/Binomial Option Pricing Model (BOPM): uses 'tree' diagram to estimate values at a number of time points between the valuation date and the expiration date

nominal

If the real rates of interest are the same, the country with the higher __________(nominal/effective) interest rate is expected to experience a higher rate of inflation

<

RRR ___ (=/>/<) ERR; beta < 1; moves less than benchmark; less volatile; Less risk than class of asset

=

RRR ___ (=/>/<) ERR; beta = 1; Asset being valued moves in line with benchmark; same level of systematic risk as the class of asset

>

RRR ___ (=/>/<) ERR; beta > 1; asset being valued moves greater than benchmark; more volatile; more risk than that class of assets

<

Required rate of return on debt (cost of debt) is _____(</>) than on preferred or common stock

TRUE

TRUE/FALSE: beta is the relationship between asset return and benchmark return

lower

The lower the WACC, the_______(lower/higher) the required revenue needed to earn a profit and the easier it is to increase shareholder value.

1 and 2

U.S. GAAP levels of inputs for valuation purposes is based on observable inputs for level 1, 2, and/or 3?

real interest

______________- (real interest/nominal interest) rates are in terms of goods; adjusted for inflation

systematic

a beta of .4 implies ________ (systematic/unsystematic) risk is higher than the market portfolio

minimize

a company will seek to _________(minimize/maximize) WAAC

option

a type of contract that entitles owner to buy or sell an asset at a stated price within a specified period

american

american/ european - a option contract that can be exercised any time before expiration

european

american/ european -a option can be exercised only at maturity date

long-term

an expected reduction in inflation in the future would be reflected in a lower ________(long-term/short-term) rate of return.

systematic risk

beta measures systematic risk or unsystematic risk?

yes; yes

common-size F/S are useful in making comparisons between entities? ____ (yes/no); over time? ____ (yes/no)

common stock

cost of _______________(preferred stock/common stock/ debt): rate of return that must be paid to attract and retain common SHs' investment; determined by:perceived risks, expected dividends, orxpected price appreciation

preferred stock

cost of _______________(preferred stock/common stock/ debt: rate of return that must be paid to attract and retain preferred SHs' investment; characteristics of both debt and equity; like debt - dividends expected and paid before common dividends; like equity - possible claim to additional dividends and ownership;

cost of capital

cost of capital or cost of debt: cost of L-T funds used in an operation; major L-T sources of capital funding include: L-T debt, preferred stock, common stock; each source of capital funding has a cost associated with it

cost of debt

cost of capital or cost of debt: rate of return that must be paid to attract and retain lender's funds; rate of return is dete

less

cost of debt is ________ (less/more) risky than equity

more; less

cost of preferred stock is _________ (less/more) riskier than debt but _________ (less/more) riskier than common stock

cost

cost or expense: amount paid in cash or other resources for a good or service

expense

cost or expense: the portion of cost that relates to the portion of a good or service that has been used up

differential/incremental cost

differential/incremental cost or opportunity cost: cost that are different between two or more alternatives; only cost that are different between projects are relevant in making decisions; costs that are the same are not relevant (ex: fixed costs)

net cost of borrowing/net proceeds

effective interest rate =

effective interest rate

effective interest rate or simple interest rate: annual interest rate implicit in the relationship between the net proceeds of a borrowing and the dollar cost of that borrowing

business valuation

estimation of the economic value of a business entity of portion thereof; uses: buying or selling business, developing a buy/sell agreement, estate purposes, etc

greater

higher risk free rate = greater or smaller value?

beta

in the CAPM formula the ________(beta/RFR) measure of systematic risk as reflected by the volatility of an investment or other asset; measure the volatility of an asset when compared to a benchmark for the whole class of the assets

financial management

is the identification and implementation of strategies designed to maximize a firm's value; involves S-T and and L-T financial decisions

1

level ____ (1,2, or 3) of U.S. GAAP's hierarchy of inputs that is the best and most reliable; quoted price in active markets;

3

level ____ (1,2, or 3) of U.S. GAAP's hierarchy of inputs that is the lowest; more judgements; least desirable; unobservable; entity's assumption or internal data; used only when observable inputs are not available

2

level ____ (1,2, or 3) of U.S. GAAP's hierarchy of inputs that next best; observable items being valued, either directly or indirectly; other than quoted prices describe in level ;

market

market/ income/ cost approach: a approach for developing fair value that is the sales comparison approach; uses prices and other relevant info generated by market info. and transactions for items identical or comparable to item being valued

income

market/ income/ cost approach: a approach for developing fair value that uses valuation techniques to convert future amounts of economic benefits or sacrifices of economic benefits to determine what the future amounts are worth at the valuation date; ex: discounted cash flows

cost approach

market/ income/ cost approach: a approach for developing fair value that uses valuation techniques to determine the amount to acquire or construct a substitute item; more limited; useful for specialized items

more riskier

more volatile asset (beta) = ____________ (more riskier/less riskier)

negative interest rate

negative interest rate or stated interest rate: the owner pays another party interest for holding and using the owner's funds; primarily a monetary policy approach; encourages businesses and individuals to spend, lend, or invest funds rather than pay to have those funds held by a financial institution

perpetual annuity

ordinary annuity/ annuity due/ perpetual annuity: payments occur "forever"

annuity due

ordinary annuity/ annuity due/ perpetual annuity: value of a series of equal amounts to be paid at equal intervals w payments at the beginning of each period

sunk

purchase price and depreciation are sunk or product costs?

put option

put option/ call option: contact entitles owner to put (or sell) an asset at a stated price

call option

put option/ call option: contract entitles owner to call (or buy) an asset at a stated price

debt

required rate of return = cost of _______ (debt/capital)

stated interest rate

stated interest rate or simple interest rate: annual rate of interest specified (stated) in contract; ex: rate per loan agreement or bond coupon rate; does not consider compounding effects for frequency of payments

sunk cost

sunk cost or opportunity cost: cost of resources that have been incurred in the past and cannot be changed by the current or future decisions; not relevant in making decisions

f

t/f a company with a high WAAC is attractive to potential SH's

weighted average cost of capital (WAAC)

the Rate of return of each source of capital weighted by its share of total capital; its the minimum the firm must eArn on its investments

inflation risk

the difference between real and nominal interest rates is inflation risk or default risk?

frequency of compunding

the difference between the stated rate and the effective rate is the rate of inflation or frequency of compounding?

FV

the higher the interest rate, the higher the ______ (PV/FV)

PV

the higher the interest rate, the lower the _______(PV/FV)

basic component of interest

the real risk-free rate = the (basic component of interest/assumes the inflation is expected)

market capitalization

the value of a company as determined by the total value of its outstanding shares pf stock in the market which it is traded

longer

the_________ (shorter/ longer) the annuity = the higher PV

true

true/false: cost and expense can occur at the same time and different times

false

true/false: is balance of payments used in financial management

capital asset pricing model (CAPM)

uses a measure of systematic risk in establishing an appropriate rate of return for investments in assets; incorporates both: time value of money - using risk-free rate of return; element of risk - using risk measures called beta

IC

what is not a function of financial management financing, capital budgeting, risk management, or IC?

[1-(i/p)]^4-1

what is the EAPR formula?

both

when valuing a specific item the location, condition, or both should be considered?

income approach

which U.S. GAAP fair value approach converts future amounts to current amounts: market approach or income approach?

comparable sales

which is not an income approach to the valuation of a business: discounted cash flow, free cash flow, comparable sales, earnings multiple?

C/S

which is the riskiest: C/S, P/S, or debt?

market approach

which of the following U.S. GAAP approaches to determining value is most likely to provide the best evidence to fair value market approach or income approach?

monthly

which will have a higher effective interest rate, a loa compounded annually or monthy?