FIN 311 Unit 1
When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is closely held. True or False
True
Descriptions of Balance Sheet and Income Statement
Balance Sheet: Provides a snapshot of firms financial position at one point in time. Assets = Liabilities + Stockholder Equity Income Statement: Summarize a firm's revenues and expenses over a given period of time
Which of the following is an example of a capital market instrument
Corporate bonds (>1 year)
Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?
Corporations generally find it easier to raise large amounts of capital
Primary Market Transactions (IPOs - Initial Public Offerings)
Corporations raise new capital. Cash inflow to corporations When a corporation issues securities, cash flows from investors to the firm
Which of the following items cannot be found on a firm's balance sheet under current liabilities?
Cost of Good Sold
Factors/Changes that increase the Cash account on a balance sheet
Decrease in asset account Increase in liability or equity accounts Issuing/selling equity (common stock)
Direct Transfer of Capital vs. Indirect Transfer of Capital
Direct transfers occur when a business sells its securities directly to the savers in exchange for money. This procedure does not involve any financial institution. Indirect transfers occur through financial intermediaries or investment banks
Corporations (taxes, regulations, capital, liability)
Double taxation, highly regulated, Easy to raise capital, and Limited liability
Secondary Market Transaction
Existing , already outstanding securities, are traded among investors. No cash inflow to corporations (from investor to the firm) Involve the sale of "used securities from one investor to another Securities may be exchange traded or trade over-the-counter in a dealer market
What is a primary market transaction
Facebook issues 12,000 shares of new stock and sells them to the public through an investment banker (such as Goldman Sachs)
An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships. True or False
False
One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests
False
One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests True or False
False
One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger True or False
False
One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger. True or False
False
Primary markets are large and important, while secondary markets are smaller and less important True or False
False
The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time True or False
False
Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing." True or False
True
Which of the following mechanisms would be most likely to help motivate managers to act in the best interest of shareholders
Increase the proportion of of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%
Capital market instruments include both long-term debt and common stocks True or False
True
Capital market (long-term >1 year) instrument
Intermediate (1 to 10 years) and long term (>10 years) bonds and stocks Includes: US T-bonds, Corporate bonds, Stocks Relate to the markets where interest rates, along with stock and bond prices, are determined
Partnerships and Proprietorships (taxes, regulations, capital, liability)
No corporate income taxes, Subject to few regulations, Difficult to raise capital, and Unlimited liability
Proprietorship disadvantage
One of the disadvantages of a proprietorship is the proprietor is exposed to unlimited liability
Factors/Changes that increase Current Assets and hence Current Ratio ( issue debt and use the proceeding to buy Inventory)
Pay off Current Liabilities Sell-off Unproductive Assets Improve Current Asset by Rising Shareholder's Funds
Money Market (short-term <1 year) instruments
Short term (<1 year) highly liquid debt securities. Includes US T-bills
Money markets are markets for
Short-term debt securities such as Treasury bills and commercial paper
Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?
The company sold a new issue of common stock
Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?
The quick ratio increases
A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments True or False
True
A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors. True or False
True
An increase in a firm's total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin True or False
True