Finance 311 Exam 1

Which of the following best describes shareholders' equity? A) Equity is the difference between the company's assets and liabilities B) Equity is the initial claim on value of the assets before the firm pays off its liabilities

A) Equity is the difference between the company's assets and liabilities

Ratios that help determine the efficiency with which a company manages its day-to-day tasks and assets are called _____________________ ratios

Asset Management or Activity

Spot Market

Assets are bought and sold for "on-the-spot"

NYSE

Auction Market

True or False: "Going Public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares

False

True or False: The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world

False

Yum Brands distributes dividends to its common stockholders for the first time

Financing Activity

According to a tax law established in 1969, taxpayers must pay the _________ of the Alternative Minimum Tax (AMT) or regular tax

Higher

A pharmaceutical company buys marketing rights to sell drugs exclusively in East Asian markets

Investing Activity

This would increase its current ratio

Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash

Financial Services Corporations

Large conglomerates that combine many different financial institutions within a single corporation

Ratios that help determine whether a company can access its cash and pay its short-term obligations are called ___________ ratios

Liquidity

Market Value of Equity (MVE, Market Capitalization)

Market Price per Share x Number of Shares Outstanding Cannot be negative and often differs substantially from book value of equity

Stockholder's Equity

The difference between the value of the firm's assets and liabilities (Assets - Liabilities)

You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. What is this type of transaction?

This is an example of a direct transfer of capital

Indirect Finance

Through a broker

Total Liabilities

Total Debt + ( Accounts Payable + Accruals)

True or False: A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock

True

True or False: As they are generally defined, money market transactions involve debt securities with maturities of less than one year

True

True or False: Other things held constant the more debt a firm uses, the lower its return on total assets will be

True

True or False: The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by it beginning-of-year price

True

Ratios that help assess a company's ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed invested financial capital are called _________________ ratios

debt or financial leverage management

Income Statement

Summarizes a firm's revenues and expenses over a given period of time

Statement of Stockholders' Equity (SSE)

Shows how much of the firm's earnings were retained (not paid out as dividends)

Which of the following statements best describes free cash flow? A) Cash flows generated by operating the business B) Residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working-capital expenditures

B) Residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working-capital expenditures

Book Value of Equity

Book Value of Assets - Book Value of Liabilities Could be negative and many of the firm's valuable assets may not be captured on the balance sheet

Future Markets

Buyers and sellers agree today to buy or sell assets at a future date

Private Equity Funds

Buys and manage entire firms. Acquire public companies with the aim of reselling following a restructuring

To offset taxable income in a given year, ordinary corporate operating losses can be

Carried back for 2 years and carried forward for 20 years

Credit Unions

Cooperative associations where members share a common bond. Such as employees of a corporation or organization

Net Operating Working Capital

Current Assets - (Current Liabilities - Notes Payable)

Net Working Capital

Current Assets - Current Liabilities

NASDAQ

Dealer Market

Exchange Traded Funds (ETFs)

Similar to Mutual Funds. Buy a specific portfolio or index. Such as S&P 500, Technology etc. Sell their own shares to public

_______________ ratios examine the market value of a company's share price, its profits and cash dividends, and the book value of the firm's assets and relate them to other data items to determine how the firm is perceived in the stock market

Market-value or market-based

Capital Markets

Markets for intermediate (1 to 10 years) and long term bonds and stocks

Primary Markets

Markets in which corporations raise new capital

Secondary Markets

Markets in which existing, already outstanding securities are traded among investors

Methods to reduce agency conflict

Method of Compensation, Threat of a Takeover, Board of Directors, Employee Stock Ownership Plans

Dividends Paid

Net Income - (Ending Retained Earnings - Beginning Retained Earnings)

If a firm has a lot of net cash flow, does that mean the firm's balance sheet cash amount must be high?

No

Direct Finance

No intermediaries

A company records a decrease in its total raw materials inventory from the previous year

Operating Activity

Ruth Enterprises distributes a holiday bonus to all its employees

Operating Activity

If the Company issues new shares

Primary Market

______________ ratios help measure a company's ability to generate income and profits based on its invested capital

Profitability

Balance Sheet

Provides a snapshot of a firm's financial position at one point in time. Assets = Liabilities + Stockholder's Equity

Statement of Cash Flow

Reports the impact of a firm's activities on cash flows over a given period of time

Pension Funds

Retirement plans financed by corporations and government agencies. Managed by banks or insurance companies and invested in bonds, stocks, and mortgages

Money Markets

Short-Term (<1 year) highly liquid debt securities

Total Debt

Short-term debt + Long term debt