FINC 3331 - Test 1
Fiala's Fish Farm had $80,000 in cash at year-end 2012 and $20,000 in cash at year-end 2013. Cash flow from long-term investing activities totaled $-50,000, and cash flow from financing activities totaled $190,000. What was the cash flow from operating activities? a. $240,000 b. $80,000 c. $-200,000 d. $-80,000 e. $200,000
$-200,000
In 2012, MacDonald and Sons had net income of $-60,000. If accounts payable decreased by $20,000, receivables and inventories fell by $10,000, and depreciation was $25,000, what was the firm's cash flow from operating activities? a. $-75,000 b. $-95,000 c. $-5,000 d. $-25,000 e. $-45,000
$-45,000
In 2012, MacDonald and Sons had net income of $-60,000. If accounts payable decreased by $20,000, receivables and inventories fell by $10,000, and depreciation was $25,000, what was the firm's cash flow from operating activities? a. $-95,000 b. $-25,000 c. $-75,000 d. $-45,000 e. $-5,000
$-45,000
Pruitt Corporation's income statement for the year 2012 is given below: Sales $17,000,000 Operating costs excluding depreciation 8,500,000 EBITDA $ 8,500,000 Depreciation 1,000,000 EBIT $ 7,500,000 Interest 2,500,000 EBT $ 5,000,000 Taxes (45%) 2,250,000 Net income $ 2,750,000 Calculate Pruitt's free cash flow for 2012 if it spent $3,300,000 on new fixed assets and net operating working capital increased by $800,000. a. $2,625,000 b. $-350,000 c. $1,025,000 d. $-975,000 e. $275,000
$1,025,000
The tax table for corporations is given below: Taxable income Tax on base of bracket Rate on amount above base $0 - 50,000 $0 15% $50,000 - 75,000 $7,500 25% $75,000 - 100,000 $13,750 34% $100,000 - 335,000 $22,250 39% $335,000 - 10,000,000 $113,900 34% $10,000,000 - 15,000,000 $3,400,000 35% $15,000,000 - 18,333,333 $5,150,000 38% $18,333,333 and up $6,416,667 35% Town, Inc. has a taxable income this year of $212,000. What is the firm's after-tax income? a. $146,070 b. $121,430 c. $107,070 d. $168,320 e. $129,320
$146,070
Consider the following balance sheet data for Jason's Furniture Stores: Cash $ 85,500 Accounts receivable 168,000 Inventories 326,000 Total current assets $ 579,500 Net fixed assets 292,500 Total assets $ 872,000 Accounts payable $ 61,000 Short-term bank note 130,000 Accrued wages and taxes 44,500 Total short-term liab. $ 235,500 Long-term debt 427,500 Common stock 70,000 Retained earnings 139,000 Total liabilities & equity $ 872,000 What is the firm's total equity? a. $209,000 b. $139,000 c. $663,000 d. $872,000 e. $70,000
$209,000
Nordquist Industries is forecasting the following income statement: Sales $15,500,000 Operating costs excluding depreciation 7,750,000 EBITDA $ 7,750,000 Depreciation 1,500,000 EBIT $ 6,250,000 Interest 1,500,000 EBT $ 4,750,000 Taxes (40%) 1,900,000 Net income $ 2,850,000 The CEO would like to see higher sales and a forecasted net income of $5,500,000. Assume that operating costs (excluding depreciation) are 50% of sales and that depreciation and interest expenses will increase by 20%. The tax rate will remain at 40%. What level of sales would generate $5,500,000 in net income? a. $25,533,333 b. $18,150,000 c. $30,333,333 d. $18,750,000 e. $19,410,962
$25,533,333
Meadow Industries is forecasting the following income statement: Sales $15,500,000 Operating costs excluding depreciation 7,750,000 EBITDA $ 7,750,000 Depreciation 1,000,000 EBIT $ 6,750,000 Interest 2,500,000 EBT $ 4,250,000 Taxes (30%) 1,275,000 Net income $ 2,975,000 The CEO would like to see higher sales and a forecasted net income of $7,000,000. Assume that operating costs (excluding depreciation) are 50% of sales and that depreciation and interest expenses will increase by 20%. The tax rate will remain at 30%. What level of sales would generate $7,000,000 in net income? a. $23,870,899 b. $32,000,000 c. $20,225,000 d. $19,525,000 e. $28,400,000
$28,400,000
Consider the following balance sheet data for Miguel's Home Accessories: Cash & equivalents $ 90,500 Accounts receivable 230,500 Inventories 366,500 Total current assets $ 687,500 Net plant & equip. 511,000 Total assets $ 1,198,500 Accounts payable $ 78,000 Short-term bank note 200,500 Accruals 93,000 Total current liabilities $ 371,500 Long-term debt 275,500 Common stock 250,000 Retained earnings 301,500 Total liabilities & equity $ 1,198,500 What is the firm's total equity? a. $301,500 b. $551,500 c. $1,198,500 d. $647,000 e. $250,000
$551,500
R.V. Motors had $70,000 in cash at year-end 2012 and $15,000 in cash at year-end 2013. Cash flow from long-term operating activities totaled $-210,000, and cash flow from investing activities totaled $90,000. What was the cash flow from financing activities? a. $-175,000 b. $-35,000 c. $-65,000 d. $65,000 e. $175,000
$65,000
In its most recent financial statements, Westhouse Corp. reported $88 million of net income and $497 million of retained earnings. The previous retained earnings were $480 million. How much dividends were paid to shareholders during the year? a. $0 b. $105 million c. $71 million d. $17 million e. $66 million
$71 million
In its most recent financial statements, Westhouse Corp. reported $47 million of net income and $364 million of retained earnings. The previous retained earnings were $390 million. How much dividends were paid to shareholders during the year? a. $73 million b. $26 million c. $21 million d. $0 e. $63 million
$73 million
Consider the following balance sheet data for Tom's Computer Stores: Cash $ 81,000 Receivables 227,000 Inventories 369,500 Total current assets $ 677,500 Net fixed assets 320,000 Total assets $ 997,500 Accounts payable $ 73,000 Short-term bank note 148,000 Accruals 48,500 Total current liabilities $ 269,500 Long-term bonds 239,500 Common stock 200,000 Retained earnings 288,500 Total liabilities & equity $ 997,500 At the present time, how large a check could be written without it bouncing? a. $677,500 b. $81,000 c. $227,000 d. $997,500 e. $288,500
$81,000
Melton Corporation's income statement for the year 2012 is given below: Sales $16,000,000 Operating costs excluding depreciation 9,000,000 EBITDA $ 7,000,000 Depreciation 2,000,000 EBIT $ 5,000,000 Interest 2,000,000 EBT $ 3,000,000 Taxes (30%) 900,000 Net income $ 2,100,000 Calculate Melton's free cash flow for 2012 if it spent $4,300,000 on new fixed assets and net operating working capital increased by $300,000. a. $-3,100,000 b. $-1,100,000 c. $-500,000 d. $900,000 e. $1,500,000
$900,000
Consider the following balance sheet data for Tom's Computer Stores: Cash & equivalents $ 94,500 Accounts receivable 147,500 Inventories 215,000 Total current assets$ 457,000 Net fixed assets 437,500 Total assets $ 894,500 Accounts payable $ 95,000 Notes payable 108,000 Accrued wages and taxes 47,500 Total short-term liab. $ 250,500 Long-term debt 331,000 Common stock 120,000 Retained earnings 193,000 Total liabilities & equity $ 894,500 At the present time, how large a check could be written without it bouncing? a. $94,500 b. $457,000 c. $193,000 d. $894,500 e. $147,500
$94,500
The tax table for corporations is given below: Taxable income Tax on base of bracket Rate on amount above base $0 - 50,000 $0 15% $50,000 - 75,000 $7,500 25% $75,000 - 100,000 $13,750 34% $100,000 - 335,000 $22,250 39% $335,000 - 10,000,000 $113,900 34% $10,000,000 - 15,000,000 $3,400,000 35% $15,000,000 - 18,333,333 $5,150,000 38% $18,333,333 and up $6,416,667 35% Ashbrook, Inc. has a taxable income this year of $169,000. What is the firm's average tax rate? a. 52.17% b. 15.92% c. 39% d. 38.07% e. 29.09%
29.09%
Closely Held Corporation
A corporation that is owned by a few individuals who are typically associated with the firm's management.
Publicly Owned Corporation
A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management.
Financial Services Corporation
A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking.
Over-the-Counter (OTC) Market
A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities.
Sarbanes-Oxley Act
A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.
Corporation
A legal entity created by a state, separate from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability
Amortization
A noncash change that represents a decline in value of intangible assets.
Limited Liability Company (LLC)
A popular type of organization that is a hybrid between a partnership and a corporation.
Annual Report
A report issued annually by a corporation to its stockholders. It contains basic financial statements as well as management's analysis of the firm's past operations and future prospects.
Statement of Cash Flows
A report that shows how items that affect the balance sheet and income statement affect the firm's cash flows.
S Corporation
A special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation.
Statement of Stockholder's Equity
A statement that shows by how much a firm's equity changed during the year and why this change occurred.
Progressive Tax System
A tax system where the tax rate is higher on higher incomes.
If people were to lose faith in the safety of our financial institutions... a. it would become more difficult for firms to raise capital. b. capital investment would slow down. c. unemployment would rise. d. the output of goods and services would fall. e. All of the above are correct.
All of the above are correct.
Created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
Alternative Minimum Tax (AMT)
A noncash change that represents a decline in value of intangible assets.
Amortization
Intrinsic Value
An estimate of a stock's "true" value based on accurate risk and return data. The intrinsic value can be estimated, but not measured precisely.
Marginal Investor
An investor whose views determine the actual stock price.
Investment Bank
An organization that underwrites and distributes new investment securities and helps businesses obtain financing.
Proprietorship
An unincorporated business owned by one individual.
Partnership
An unincorporated business owned by two or more persons.
A report issued annually by a corporation to its stockholders. It contains basic financial statements as well as management's analysis of the firm's past operations and future prospects.
Annual Report
Derivatives
Any financial asset whose value is derived from the value of some other "underlying" asset.
Which of the following must be true in order for the Balance Sheet to properly "balance"? a. Assets = Liabilities + Equity b. Equity = Assets / Liabilities c. Assets = Equity * Liabilities d. Equity = Assets + Liabilities e. Liabilities = Assets + Equity
Assets = Liabilities + Equity
Taxes paid divided by taxable income.
Average Tax Rate
What are the four financial statements contained in most annual reports?
Balance Sheet, Income Statement, Statement of Shareholder's Equity, Statement of Cash Flows
Derivative securities are used for... a. hedging (reducing risk). b. speculating (increasing risk). c. Both a and b d. Neither a nor b
Both a and b (hedging (reducing risk) and speculating (increasing risk)
The profit from the sale of a capital asset for more than its purchase price.
Capital Gain
The loss from the sale of a capital asset for less than its purchase price.
Capital Loss
Long-Term Corporate Bonds - Money Market Security or Capital Market Security?
Capital Market Security
The financial markets for stocks and for intermediate- or long-term debt (one year or longer).
Capital Markets
Common Stock - Money Market Security or Capital Market Security?
Capital Security
Preferred Stock - Money Market Security or Capital Market Security?
Capital Security
Ordinary corporate operating losses can be carried backward for 2 years to offset taxable income in a given year.
Carryback
Ordinary corporate operating losses can be carried forward for 20 years to offset taxable income in a given year.
Carryforward
CF
Cash Flow
A corporation that is owned by a few individuals who are typically associated with the firm's management.
Closely Held Corporation
The traditional department store of finance serving a variety of savers and borrowers.
Commercial Bank
Most investors expect the same cash flows (on average) from Companies X and Y. They are reasonably sure that Company X's cash flows will be very close to their expected value. However, Company Y's cash flows may be much higher or much lower than their expected value. All other things being equal, which stock should have the higher price? a. Company Y b. Company X c. Both should be about the same
Company X
A legal entity created by a state, separate from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability
Corporation
Which of the following could explain why a business might choose to operate as a corporation rather than a sole proprietorship or partnership? a. Less of a corporation's income is generally subject to taxes. b. Corporations generally face fewer regulations. c. Corporate investors enjoy unlimited liability. d. Corporations generally find it easier to raise capital.
Corporations generally find it easier to raise capital.
Alternative Minimum Tax (AMT)
Created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
Working Capital
Current assets
Net Working Capital
Current assets minus current liabilities.
Net Operating Working Capital (NOWC)
Current assets minus non-interest-bearing current liabiliities.
Include all facilities that are needed to conduct security transactions not conducted on the physical location exchanges.
Dealer Markets
Which of the following instruments could be traded in a money market transaction? a. Common stocks b. Dealer commercial paper c. Preferred stocks d. Long-term corporate bonds
Dealer commercial paper
The change to reflect the cost of assets depleted in the production process. It is not a cash outlay.
Depreciation
Any financial asset whose value is derived from the value of some other "underlying" asset.
Derivatives
Earnings before Interest, Taxes, Depreciation, and Amortization
EBITDA
EBIT
Earnings Before Interest & Taxes
EPS
Earnings Per Share
EBITDA
Earnings before Interest, Taxes, Depreciation, and Amortization
Operating Income
Earnings from operations before interest and taxes (i.e. EBIT).
EVA
Economic Value Added
Excess of NOPAT over capital costs.
Economic Value Added (EVA)
Which of the following would NOT help to ensure that management's and stockholders' interests are aligned? a. Direct intervention by institutional shareholders (such as TIAA-CREF) who are unhappy with the firm's performance b. The threat of a hostile takeover c. Eliminating stock-based compensation and paying the CEO a large fixed salary instead d. Having a board of directors that will fire the CEO for poor performance
Eliminating stock-based compensation and paying the CEO a large fixed salary instead
Economic Value Added (EVA)
Excess of NOPAT over capital costs.
T/F Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns.
False (Derivatives can be used either to reduce risks or to speculate.)
T/F Hedge funds have traditionally been highly regulated
False (Hedge funds are largely unregulated because hedge funds target sophisticated investors.)
T/F A larger bid-ask spread means that the dealer will realize a lower profit
False (S larger bid-ask spread means the dealer will realize a higher profit.)
A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking.
Financial Services Corporation
Physical Location Exchanges
Formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities.
FCF
Free Cash Flow
The amount of cash that could be withdrawn without harming a firm's ability to operate and to produce future cash flows.
Free Cash Flow (FCF)
The markets in which participants agree today to buy or sell an asset at some future date.
Futures Markets
The act of selling stock to the public at large by a closely held corporation or its principal stockholders.
Going Public
GrossFA
Gross Fixed Assets
Which of the following is correct? a. The efficient market hypothesis assumes that all investors are rational. b. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns. c. A larger bid-ask spread means that the dealer will realize a lower profit. d. Hedge funds generally charge higher fees than mutual funds. e. Hedge funds have traditionally been highly regulated.
Hedge funds generally charge higher fees than mutual funds.
Dealer Markets
Include all facilities that are needed to conduct security transactions not conducted on the physical location exchanges.
Reports summarizing a firm's revenues, expenses, and profits during a reporting period, generally a quarter of a year.
Income Statements
Roth IRAs
Individual retirement arrangements in which contributions are not tax deductible but the future income and capital gains within these accounts are not taxed if the money is withdrawn after age 59½.
Traditional IRAs
Individual retirement arrangements in which qualified contributions are tax deductible and income and capital gains on investments within the account are not taxed until the money is withdrawn after age 59½.
Corporate Raiders
Individuals who target corporations for takeover because they are undervalued.
The market for stocks of companies that are in the process of going public.
Initial Public Offering (IPO) Market
Which of the following is/are tax-deductible expense(s) for a corporation? a. Dividends paid on the corporation's stock b. Interest paid on the corporation's bonds c. Both interest and dividends paid d. Neither interest nor dividends paid
Interest paid on the corporation's bonds
An organization that underwrites and distributes new investment securities and helps businesses obtain financing.
Investment Bank
Which of the following actions are most likely to directly increase cash as shown on a firm's balance sheet? a. It reports a large loss for the year. (Assume the loss is not due to a large depreciation expense.) b. It issues $3 million of new common stock. c. It increases the dividends paid on its common stock. d. It buys new plant and equipment at a cost of $5 million.
It issues $3 million of new common stock.
Which of the following actions are most likely to directly increase cash as shown on a firm's balance sheet? a. It reports a large loss for the year. (Assume the loss is not due to a large depreciation expense.) b. It buys new plant and equipment at a cost of $5 million. c. It repurchases $3 million of its own common stock. d. It reduces the dividends paid on its common stock.
It reduces the dividends paid on its common stock.
Stockholder's Equity
It represents the amount that stockholders paid the company when shares were purchased and the amount of earnings the company has retained since its origination.
A popular type of organization that is a hybrid between a partnership and a corporation.
Limited Liability Company (LLC)
Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It provides personal asset protection from business debts and liabilities but is taxed as a partnership.
Limited Liability Partnership (LLP)
The tax rate applicable to the last unit of a person's income.
Marginal Tax Rates
MVA
Market Value Added
The excess of the market value of equity over its book value.
Market Value Added (MVA)
Primary Markets
Markets in which corporations raise capital by issuing new securities.
Secondary Markets
Markets in which securities and other financial assets are traded among investors after they have been issued by corporations.
Public Markets
Markets in which standardized contracts are traded on organized exchanges.
Private Markets
Markets in which transactions are worked out directly between two parties.
Commercial Paper - Money Market Security or Capital Market Security?
Money Market
Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts.
Money Market Funds
U.S. Treasury Bills - Money Market Security or Capital Market Security?
Money Market Security
The financial markets in which funds are borrowed or loaned for short periods (less than one year).
Money Markets
Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.
Mutual Funds
Money Market Funds
Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts.
________ is an example of a dealer market, where stocks are traded _____ a centralized trading floor.
NASDAQ ... without
NetFA
Net Fixed Assets
NI
Net Income
The profit a company would generate if it had no debt and held only operating assets.
Net Operating Profit After Taxes (NOPAT)
NOWC
Net Operating Working Capital
Earnings from operations before interest and taxes (i.e. EBIT).
Operating Income
Carryback
Ordinary corporate operating losses can be carried backward for 2 years to offset taxable income in a given year.
Carryforward
Ordinary corporate operating losses can be carried forward for 20 years to offset taxable income in a given year.
Mutual Funds
Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.
A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities.
Over-the-Counter (OTC) Market
An unincorporated business owned by two or more persons.
Partnership
Formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities.
Physical Location Exchanges
Markets in which corporations raise capital by issuing new securities.
Primary Markets
Markets in which transactions are worked out directly between two parties.
Private Markets
A tax system where the tax rate is higher on higher incomes.
Progressive Tax System
An unincorporated business owned by one individual.
Proprietorship
Markets in which standardized contracts are traded on organized exchanges.
Public Markets
A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management.
Publicly Owned Corporation
Income Statements
Reports summarizing a firm's revenues, expenses, and profits during a reporting period, generally a quarter of a year.
They represent the cumulative total of all earnings kept by the company during its life.
Retained Earnings
RE
Retained earnings (?)
Individual retirement arrangements in which contributions are not tax deductible but the future income and capital gains within these accounts are not taxed if the money is withdrawn after age 59½.
Roth IRAs
A special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation.
S Corporation
Markets in which securities and other financial assets are traded among investors after they have been issued by corporations.
Secondary Markets
__________ form efficiency suggests that stock prices fully reflect all publicly available information about a firm, but not "insider" information. a. Semi-weak b. Weak c. Strong d. Semi-strong
Semi-strong
Limited Liability Partnership (LLP)
Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It provides personal asset protection from business debts and liabilities but is taxed as a partnership.
The markets in which assets are bought or sold for "on-the-spot" delivery.
Spot Markets
A report that shows how items that affect the balance sheet and income statement affect the firm's cash flows.
Statement of Cash Flows
Which of the following is NOT one of the four financial statements contained in most annual reports? a. Statement of Cash Flows b. Income Statements c. Balance Sheet d. Statement of Stockholders' Equity e. Statement of Financial Assets
Statement of Financial Assets
A statement that shows by how much a firm's equity changed during the year and why this change occurred.
Statement of Stockholder's Equity
It represents the amount that stockholders paid the company when shares were purchased and the amount of earnings the company has retained since its origination.
Stockholder's Equity
Which of the following assets are traded in financial markets? a. Automobiles b. Stocks and bonds c. Household furniture d. All of the above
Stocks and bonds
__________ form efficiency suggests that stock prices fully reflect all information about a firm, including that which is known only to insiders.
Strong
Average Tax Rate
Taxes paid divided by taxable income.
________ is an example of a physical location exchange, where stocks are traded _____ a centralized trading floor. a. NASDAQ ... on b. NASDAQ ... without c. The New York Stock Exchange (NYSE) ... without d. The New York Stock Exchange (NYSE) ... on
The New York Stock Exchange (NYSE) ... on
________ is an example of a physical location exchange, where stocks are traded _____ a centralized trading floor. a. NASDAQ ... without b. NASDAQ ... on c. The New York Stock Exchange (NYSE) ... without d. The New York Stock Exchange (NYSE) ... on
The New York Stock Exchange (NYSE) ... on
Which of the following is correct? a. The efficient market hypothesis assumes that all investors are rational. b. The New York Stock Exchange is an example of a stock exchange that has a physical location. c. Hedge funds have traditionally been highly regulated. d. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns. e. A larger bid-ask spread means that the dealer will realize a lower profit.
The New York Stock Exchange is an example of a stock exchange that has a physical location.
Hostile Takeover
The acquisition of a company over the opposition of its management.
Going Public
The act of selling stock to the public at large by a closely held corporation or its principal stockholders.
Free Cash Flow (FCF)
The amount of cash that could be withdrawn without harming a firm's ability to operate and to produce future cash flows.
Depreciation
The change to reflect the cost of assets depleted in the production process. It is not a cash outlay.
Market Value Added (MVA)
The excess of the market value of equity over its book value.
Capital Markets
The financial markets for stocks and for intermediate- or long-term debt (one year or longer).
Money Markets
The financial markets in which funds are borrowed or loaned for short periods (less than one year).
Capital Loss
The loss from the sale of a capital asset for less than its purchase price.
Initial Public Offering (IPO) Market
The market for stocks of companies that are in the process of going public.
Given these properties, is this Market Efficient/Inefficient? Is it Weak/Semi-Strong/Strong? • You can earn abnormal returns by using publicly available information. • It is possible to beat the market with fundamental analysis and/or by carefully examining public information about companies in newspapers, press releases, SEC filings, announcements, etc. • The market may or may not be efficient in the weak form. • The market is inefficient in the strong form.
The market is NOT efficient in the semi-strong form.
Given these properties, is this Market Efficient/Inefficient? Is it Weak/Semi-Strong/Strong? • It is possible to beat the market with insider information. • The market may or may not be efficient in the weak and/or semi-strong forms.
The market is NOT efficient in the strong form.
Given these properties, is this Market Efficient/Inefficient? Is it Weak/Semi-Strong/Strong? • You can earn abnormal returns by using past price and volume information. • It is possible to beat the market via "charting" techniques and/or technical analysis. • There may be "momentum" or "mean reversion" in stock returns. • The market is also inefficient in the semi-strong and strong forms.
The market is NOT efficient in the weak form.
Given these properties, is this Market Efficient/Inefficient? Is it Weak/Semi-Strong/Strong? • You cannot earn abnormal returns by using publicly available information. • Trying to beat the market via fundamental analysis is a waste of time. • The only way to beat the market is using insider information. • The market is also weak form efficient. • The market may or may not be strong form efficient.
The market is efficient in the semi-strong form.
Given these properties, is this Market Efficient/Inefficient? Is it Weak/Semi-Strong/Strong? • You cannot beat the market even if you use insider information. • The market is also weak and semi-strong form efficient.
The market is efficient in the strong form.
Given these properties, is this Market Efficient/Inefficient? Is it Weak/Semi-Strong/Strong? • You cannot earn abnormal returns by using past price and volume information. • Trying to beat the market via "charting" techniques and/or technical analysis is a waste of time. • The fact that a stock price went up or down yesterday, last week, last month, or last year indicates nothing (good or bad) about which direction it is likely to go tomorrow, next week, next month, or next year. • The market may or may not be semi-strong and/or strong form efficient.
The market is efficient in the weak form.
Spot Markets
The markets in which assets are bought or sold for "on-the-spot" delivery.
Futures Markets
The markets in which participants agree today to buy or sell an asset at some future date.
Net Operating Profit After Taxes (NOPAT)
The profit a company would generate if it had no debt and held only operating assets.
Capital Gain
The profit from the sale of a capital asset for more than its purchase price.
Equilibrium
The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying and selling a stock.
Market Price
The stock value based on perceived but possibly incorrect information as seen by the marginal investor.
Investors expect a company to announce a 12 percent increase in earnings, but instead the company announces a 1 percent increase. If the market is semistrong-form efficient, which of the following should happen? a. The stock's price increases slightly because the company had a slight increase in earnings. b. The stock's price stays the same because earnings announcements have no effect if the market is semistrong-form efficient. c. The stock's price falls because the earnings increase was less than expected.
The stock's price falls because the earnings increase was less than expected.
Investors expect a company to announce a 9 percent increase in earnings, but instead the company announces a 2 percent increase. If the market is semistrong-form efficient, which of the following should happen? a.The stock's price stays the same because earnings announcements have no effect if the market is semistrong-form efficient. b. The stock's price falls because the earnings increase was less than expected. c. The stock's price increases slightly because the company had a slight increase in earnings.
The stock's price falls because the earnings increase was less than expected.
What is Finance?
The system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities.
Marginal Tax Rates
The tax rate applicable to the last unit of a person's income.
Commercial Bank
The traditional department store of finance serving a variety of savers and borrowers.
Retained Earnings
They represent the cumulative total of all earnings kept by the company during its life.
What is the main financial goal of a company?
To create value for Investors
Individual retirement arrangements in which qualified contributions are tax deductible and income and capital gains on investments within the account are not taxed until the money is withdrawn after age 59½.
Traditional IRAs
T/F Hedge funds typically have large minimum investments and are marketed to institutions and individuals with high net worths.
True (Hedge funds have large minimum investments and are marketed to institutions and individuals with high net worths. Hedge funds take on risks that are considerably higher than that of an average individual stock or mutual fund.)
T/F The New York Stock Exchange is an example of a stock exchange that has a physical location
True (The NYSE is a physical location exchange with a tangible physical location that conducts auction markets in designated securities.)
Which of the following instruments could be traded in a money market transaction? a. U.S. Treasury bills b. Long-term corporate bonds c. Common stocks d. Preferred stocks
U.S. Treasury bills
Another name for a company's current assets
Working Capital
Could a firm with negative free cash flow (FCF) still be highly valued by investors? a. No. b. Yes, if its operating activities are the source of the negative cash flow. c. Yes, since low FCF is usually due to financing costs. d. Yes, if it has made significant capital expenditures.
Yes, if it has made significant capital expenditures.
Could a firm with negative free cash flow (FCF) still be highly valued by investors? a. Yes, if its operating activities are the source of the negative cash flow. b. Yes, since low FCF is usually due to financing costs. c. Yes, if it has made significant capital expenditures. d. No.
Yes, if it has made significant capital expenditures.
A(n) ___________ must restrict its membership to people who share some kind of "common bond" such as working for the same employer or living in the same geographical area.
credit union
Suppose Congress changes the tax laws so that a firm's depreciation expense doubles. (The firm's percentage tax rate does not change, however.) Assuming there are no changes in sales, other operating costs, or interest charges, the firm's net income will ________, and its cash flow will ________. a. decrease ... increase b. increase ... decrease c. decrease ... decrease d. increase ... increase
decrease ... increase
Lisa is a big believer in "charting." Every day, she spends time analyzing patterns of upward and downward movements in stock prices, aiming to time her buying and selling strategically to earn superior rates of return. From this, it is clear that Lisa... a. believes the stock market is semistrong-form efficient. b. does not believe the stock market is efficient (even in the weak form). c. believes the stock market is weak-form efficient. d. believes the stock market is strong-form efficient.
does not believe the stock market is efficient (even in the weak form).
Patricia is a big believer in "charting." Every day, she spends time analyzing patterns of upward and downward movements in stock prices, aiming to time her buying and selling strategically to earn superior rates of return. From this, it is clear that Patricia...
does not believe the stock market is efficient (even in the weak form).
The shares of stock in an initial public offering (IPO) typically... a. go almost exclusively to institutional investors who purchase large blocks of shares. b. go almost exclusively to investors who have previously bought shares of stock in the company. c. are divided about equally between institutional and household investors. d. go almost exclusively to households who each purchase a small allotment of shares.
go almost exclusively to institutional investors who purchase large blocks of shares.
Generally speaking, only "sophisticated investors" with high net worths and high incomes are allowed to invest money in... a. credit unions. b. mutual funds. c. commercial banks. d. pension funds. e. hedge funds.
hedge funds
Generally speaking, only "sophisticated investors" with high net worths and high incomes are allowed to invest money in..
hedge funds.
The initial return of an initial public offering (IPO) is typically ____. Long-run IPO performance is typically ____. a. high ... good b. low ... poor c. low ... good d. high ... poor
high ... poor
Suppose Congress changes the tax laws so that a firm's depreciation expense is cut in half. (The firm's percentage tax rate does not change, however.) Assuming there are no changes in sales, other operating costs, or interest charges, the firm's net income will ________, and its cash flow will ________. a. decrease ... increase b. increase ... decrease c. increase ... increase d. decrease ... decrease
increase ... decrease
Is a stock's "true" long-run value more closely related to its intrinsic value or to its current price?
its Intrinsic Value
A fee paid when purchasing or selling shares in a mutual fund is called a(n)
load
A fee paid when purchasing or selling shares in a mutual fund is called a(n)... a. freight b. load c. encumbrance d. tip e. weight
load
When we say that shareholder wealth maximization should be the primary goal of a corporation, we are assuming that... a. the firm must also minimize the risk of bankruptcy. b. the firm must also maximize sales. c. management is not purposely concealing important information from investors. d. gains to stockholders occur at the expense of overall societal welfare.
management is not purposely concealing important information from investors.
Corporations can raise funds by issuing new securities (e.g. stocks, bonds) in the _________ market. a. secondary b. primary c. money d. options e. tertiary
primary
Suppose that a person earning $21,000 this year would pay $2,520 in taxes, while a person earning $109,000 would pay $30,520 in taxes. Based solely on this information, it appears that tax rates are... a. regressive. b. progressive. c. flat.
progressive.
Suppose that a person earning $23,000 this year would pay $6,900 in taxes, while a person earning $118,000 would pay $14,160 in taxes. Based solely on this information, it appears that tax rates are... a. progressive. b. flat. c. regressive.
regressive.
Kelly and Nicole open up a day care together. Their business is formed as a general partnership, so that they both invest $15,000 (i.e. a total of $30,000) and share equally in the profits or losses. They also obtain a $20,000 business loan from the bank. Unfortunately, the day care business does not succeed. The first year, it incurs a loss of $50,000 and folds, at which point Nicole decides to flee the country, leaving behind no personal assets of any kind. The bank can hold Kelly liable for up to... a. $0, since she cannot lose more than the $15,000 she invested. b. twice the amount of the loan -- i.e. $40,000. c. her half of the loan -- i.e. $10,000. d. the entire amount of the loan -- i.e. $20,000.
the entire amount of the loan -- i.e. $20,000..
