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