Concepts quizlet PDF

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A basic equation for the balance sheet is: a. Equity = Assets - Liabilities b. Liabilities = Equity + Assets c. Assets = Liabilities - Equity d. Assets = Equity - Liabilities A company's trial balance shows $900 in long-term debt. On which financial statement should this be shown? D. The balance sheet A credit agency recently downgraded a company's debt. What is the impact on the cost of debt? A. The cost of capital will increase B. The cost of capital will decrease C. The cost of equity will decrease D. The cost of capital will remain the same A special interest group in the U.S. has been lobbying intensely for protectionism through increased tariffs and trade restrictions, with the argument that it will save jobs in the industry they represent. What is the most likely result if they are successful? A. Employees and shareholders of the domestic industry that produce the protective goods will be hurt and the nation will benefit. B. The overall economy will benefit from trade restrictions and tariffs. C. Removing the trade restrictions and tariffs will result in a net economic loss to the overall U.S. economy. D. Employees and shareholders of the domestic industry that produce the protected goods will benefit and the nation will be hurt. An analyst is comparing the ratios of two firms and needs to address accounting differences. What would be considered an accounting difference between the two firms? A. The firms have different auditors B. The firms use different inventory methods C. The firms have different fiscal years D. The firms are in different industries b Company A has a high degree of business risk. What will be the effect on the company's EBIT if the company suffers a slight decrease in sales? A. Large increase in EBIT B. Large decrease in EBIT C. Small decrease in EBIT D. Small increase in EBIT Company A offers trade credit of 2% 10 / net 30 and Company B offers trade credit at net 30. What can be said about the credit policies of each company? a. Company B has a looser credit policy b. Company A keeps more of its Accounts Receivable c. Company A can attract more customers d. Company B can attract more customer Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements apply? a. Company A is less liquid than Company B b. Company B invests in more working current assets c. Company A uses better working capital management d. Company B has a more conservative cash policy Company A's inventory is larger than Company B. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint? a. Company B has lower inventory float b. Company A has more cash in hand c. Company B might have higher inventory turnover d. Company A has tighter credit. Dealer markets have a physical location.

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Diversification protects against a. Systematic risk b. Market risk c. Idiosyncratic risk d. Inflation risk Dodd-Frank regulates which segment of the U.S. Economy? a. Fannie Mae and Freddie Mac (Housing financing) b. Banking Industry c. Multi-level Marketing Industry

d. Automobile Industry Economists forecast the probability of recession at 22%. During periods of recession, returns for a company have been -2%. Returns for the company have been 18% during an expansionary period. What is the forecast probability of an expansionary period? A. 80% B. 78% C. 76% D. 82% FINRA (Financial Industry Regulatory Authority) does the following: (pick one) a. No foreign bribery by corporations b. Regulates bond prices c. Establishes Credit Unions d. Prosecutes naughty stock brokers e. Regulates Hedge Funds d Firm A has a lower degree of business risk than Firm B. What will happen if there is a 1% increase in sales for both firms? A. It will result in a greater percentage in Firm A's operating income B. It will result in a greater percentage in Firm Bs operating income C. It will result in a greater percentage in Firm Bs operating income D. It will result in a greater percentage in Firm As operating income Firms A and B are in the same industry. For the year 2013, Firm A has a gross margin of .45 and Firm B has a gross margin of .36. Which conclusion would an analyst draw when comparing Firm A to Firm B? A. Firm A has a more efficient production process B. Firm A has higher depreciation expense C. Firm A has lower depreciation expense D. Firm A has less efficient production process For calculating cash flows, why is depreciation added to Net Income? a. To offset taxes b. Depreciation is a non-cash deduction c. To determine pre-tax income d. None of the above For the year 2013, a firm has a return on equity (ROE) that is greater than return on assets (ROA). Which conclusion would an analyst draw from these numbers? A. The firm is ineffectively using debt. B. The firm is ineffectively managing their inventory C. The firm is effectively managing their inventory D. The firm is effectively using debt How are the Security and Exchange Commissions' Regulation S and Rule 144A similar? A. Both use incentives and penalties to ensure fair dealings between large financial institutions and small investors. B. Both allow firms to raise capital without registering with the SEC if certain conditions are met C. Both are intended to increase transparency of financial markets D. Both encourage specialized training by individuals designated to sell securities How do increases in market interest rates affect a firm's cost of capital? A. The cost of debt decreases B. The cost of equity decreases C. The cost of debt increases D. The cost of equity increases How do you calculate the change in Retained Earnings? a. Ending Retained Earnings - Change in Cash b. EBIT divided by Total Assets + Dividends c. EBIT - Change in Cash - Dividends d. Net Income - Dividends How does the weighted average cost of capital affect a company's growth opportunities? A. The higher the cost of capital, the greater the growth opportunities B. Only the cost of debit will affect growth opportunities C. The lower the cost of capital, the lower the growth opportunities D. The lower the cost of capital, the greater the growth opportunities How is a short-term receivable, with the maturity of less than one year, carried on the balance sheet? A. As a current asset B. As a current liability

C. As owner's equity D. As a long-term liability How is the value of a project determined in the capital budgeting process? A. The net present value of the incremental before-tax cash flows B. The future value of the incremental tax cash flows C. The net present value of the incremental tax cash flows D. The future value of the incremental before-tax cash flows If a company has a high degree of financial leverage, what does that tell us about the firm's risk profile? a. Low Risk b. Appropriate Risk c. Higher ability to pay debt d. Higher profits to shareholders If a company makes its product in a foreign country where labor costs are much lower, what happens? a. Profits and domestic employment goes up b. Costs go up and domestic employment goes down c. Costs stay the same and domestic employment increases d. Profits go up and domestic employment decreases. If a company produces and sells a product only in the U.S., what international developments may affect its sales? a. Fluctuating exchange rates b. Imports of competing products c. Immigration policy d. Inflation in Europe If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? a. higher b. lower c. the same d. it doesn't matter If a firm cannot access markets sufficiently to meet their DFN, what strategies might they use? a. Slow sales growth b. Lower dividend payout c. Increase the net margin d. All of the above. If a firm's financial and operating leverage is high, what is the implication? a. The firm is more profitable b. Profits are more volatile as sales fluctuate c. The firm is less profitable d. The two leverages offset each other - - neutral impact b If a firm's goal is to maximize stockholder wealth, which would the firm avoid? a. Stock buybacks b. Risky long-term investments c. Investments with negative NPV d. Transparency in financial statements c If a product is made 100% domestically, what can affect its domestic market? a. International exchange rates b. International competition c. Product tariffs d. International political regulations If an industry, such as autos, has very high fixed costs and very cyclical sales, what is the implication for financial leverage? a. Use high financial leverage to offset high fixed costs b. Use low financial leverage to offset high operating leverage c. It has no implication at all d. None of the above If an investor knows the idiosyncratic risk, the investor knows the: a. Profit Margin percentage b. Beta Coefficient c. Operating Leverage d. Free Cash Flow

If debt is less costly than equity, why don't firms maximize debt use? a. Excessive debt inceases risk of banruptcy b. Restricted by Federal tax regulations c. It reduces the benfits of financial leverage d. It increases operating leverage If market interest rates rise, what impact does it have on a given bond? a. Its price decreases b. It will have a discount price c. No impact since the coupon rate is fixed d. Its price increases If the coupon rate on a particular bond is higher than the market rate of return, at what will the bond sell? A. At a premium B. A the risk-free rate C. At par D. At a discount If the current coupon rate on a bond is 6% and the bond is selling at a 5% discount, what is the yield to maturity on the bond? A. Equal to 5% B. Equal to 6% C. Less than 6% D. Greater than 6% If the debt ratio increases, what effect does that have on ROE? a. ROE increases b. ROE decreases c. ROE is unchanged d. Cannot be determined If the value of a dollar increases, the price of imports: a. Increases b. Decreases c. Stays the same d. Fluctuates If two annuities have the same payments and term, why is an Annuity Due more valuable than an Ordinary Annuity? a. The have equal value b. Annuity Due payments occur earlier c. Annuity Due uses a lower discount rate d. Ordinary annuities are consider more risky If two companies have earnings of $2,000,000, and Company X has a multiple of 1.2 and Company Z has a multiple of 2.0, what can we estimate about the value of each company? a. The value is the same b. The value of Company X is higher c. The value of Company Z is higher d. The relative value can't be determined If you are assessing a firm's ability to meet short term obligations, you would use which ratio? a. Debt ratio b. Quick ratio c. Gross margin d. Financial leverage If you wanted to evaluate a non-public company, what sources would you use? a. The financial statements filed with the SEC b. The latest stock price quoted in the Wall Street Journal c. The PE of a comparable public company d. The book value of equity in its balance sheet In an efficient market, new information will move prices almost immediately (T/F) In an inefficient market, prices will slowly respond to new information. T

T

In cash flow statements, which section reflects so-called "spontaneous" accounts which vary with sales? a. Cash flow operations b. Cash flow investing c. Cash flow financing d. Cash flow Sales In regards to Accounts Payable balances, which of the following is true:

a. Higher Accounts Payable is better than a lower balance b. Paying off A/P as soon as possible is good policy c. Increased Accounts Payable means faster collections d. Paying off A/P on the last day due is good policy Inefficient markets are those in which prices will respond quickly to new information Inefficient markets will often have mispriced securities. T

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Investors will often sell as stock that has gains rather than a stock that is suffering losses in their portfolio, despite subsidized tax relief when selling at a loss. What are the logic defying behavioral implications of such a decision? A. Selling a stock at a gain results in dollar cost averaging benefits B. Maintaining winning positions in the portfolio enhances future portfolio growth rate C. Investors hate taking a loss, especially when they can realize a gain. D. Selling an equity position at any point results in a favorable tax benefit. Junk bonds are those whose rating is below a. AAA b. AA c. A d. BBB Modigilani and Miller's initial capital structure theory suggested that in the absence of taxes, bankruptcy costs and transaction costs, the firm's capital structure would not affect the weighted average cost of capital (WACC). What has been proven by subsequent research and inclusion of factors omitted in the initial theory? A. A firm's capital structure does affect the weighted average costs of capital, and thus a firm's value. B. Modigliani and Miller's initial work has proven accurate in determining a firm's value. C. Financing decisions do not affect a firm's value D. Taxes are the only factor that impacts the weighted average cost of capital and a firm's value PV ordinarily is less than FV. What would cause the opposite? a. Compounding b. Negative interest rates c. The exchange rate d. The Federal Reserve Some companies offer discounts to customers in order to give incentive for paying earlier than the due date. Which two terms incentivize customers to accept trade discounts? Choose 2 A. Sales commission B. Amount of discount C. Cash cycle D. Day's sales in receivables E. Length of the credit period Supply and demand factors suggest the slope for an individual asset in the portfolio will equal the slope of the market portfolio itself. What is the significance of this equalization? A. The entire risk-return slope will decrease over time B. Investors will be forced to frequently shift their portfolios C. Investors will be incentivized to hold the market portfolio D. The slope of the individual assets in a portfolio will diverge to increase diversification. Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? a. The firm has lower liquidity than the industry average. b. The firm has too much inventory thus impairing overall liquidity. c. The firm has too little inventory resulting in lost sales or stock-outs. d. The firm has low sales volume. The fundamental concept underlying the valuation of all financial assets is: a. The application of the PE ratio b. Use of the Gordon Model c. The present value of anticipated cash flows. d. The future value of cash flows The interest rate on a corporate bond does not reflect a. Risk b. Inflation c. Face Value d. U.S. Treasury rates The matching principle in accrual accounting requires that:

a. Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized. b. Expenses are matched to the year in which they are incurred c. Revenues are matched to the year in which they are booked d. Revenues should be large enough to match expenses a The OIROI (Operating Income Return on Investment) uses what elements on the income statement? a. Operating Income, EBIT, Total Liabilities b. EBIT, Total Assets c. Sales, Total Assets, Equity d. Net Margin, Total Current Assets The SEC requires the following to file audited financial statements: a. All companies b. All for-profit companies c. All publicly-traded corporations d. There is no such requirement The SEC Securities & Exchange Commission requires companies to do the following: (pick two) a. Register all public offerings b. Change CEOs on a regular basis c. Regulates stock sales d. Prohibits foreign bribery e. Regulates the Money Supply The SEC Securities & Exchange Commission requires public companies to do the following: a. File audited financial statements with SEC b. Change CEOs on a regular basis e. Regulates the Money Supply d. Prohibits foreign bribery The SGR measures: a. Historical dividend growth rate b. Sales growth rate c. Potential sales growth with internal funding d. None of the above The stock price of a company increases and the market is deemed efficient. What assumption can be made? A. A new, patented, product was introduced to the market. B. New machinery was purchased with a useful life of 20 years. C. Management is optimizing its resources and operating efficiently. D. Management hired new employees and invested in a training program. The value of a corporation is best measured by a. Equity on the Balance Sheet b. Assets minus Liabilities on the Balance Sheet c. Market capitalization d. Its book value Thinking about levels of market efficiency quadrants. Which investment option should be selected assuming a prudent investor wants to maximize their expected return E(R)? Quad 1; Quad 2; Quad 3; Quad 4 A. A B. B C. C D. D E. E To assess firm efficiency, which ratio would you use? a. Asset turnover b. Operating margin c. Debt ratio d. None of the above Under which three conditions would a firm decide to reduce the growth rate? Choose 3 A. When investors are dissatisfied with the dividend payout ratio B. When additional investor capital is not available C. When the company's borrowing limits have reached the maximum allowed by the lender D. When capacity has been reached E. When customers are dissatisfied with the company's products

What advantage does the Gordon Growth Model have compared to the capital asset pricing model (CAPM)? A. It is highly accurate in predicting future growth B. It requires assumptions about growth that benefit fast-growing companies C. It provides an easier to understand and relatively accurate forecast when growth rates are stable D. It requires the use of accurate known factors, such future as growth rates. What are 3 components required in calculating weighted average cost of capital (WACC)? A. The market cap of the company B. The desired growth rate C. The amount and required return for common equity, preferred equity and debt D. The marginal tax rate E. The value of preferred stock and debt F. The firm's market value G. The combined total expected growth rate What are discretionary accounts? A. Accounts that require management to deliberately increase or decrease B. Accounts that increase automatically with sales C. Accounts that include current assets D. Accounts that only appear on an income statement What are secondary markets? A. Markets where securities are traded subsequent to the initial offering. B. Markets were securities are issued for the first time. C. Markets were securities are issued through a competitive sale. D. Markets where securities are issued through a negotiated sale. What are the practical disadvantages of the Gordon model for equity valuation? a. How to use if no dividends are paid b. Must project dividends "forever" into the future. c. Does not address the appropriate discount rate d. All of the above What do cash flows from financing activities generally relate to? A. A firm's purchase and sale of long-term assets B. A firm's non-cash transactions C. A firms' debt and equity transactions D. A firms sale of goods and services What do investors, entrepreneurs and other market participants rely on the SEC to do? A. Determine safety and efficiency of investment by US and foreign investors B. Regulate the Money Supply C. Prohibit foreign bribery D. Require Private Firms to Register What does Beta measure? a. The default risk of a stock b. The relative riskiness of an individual stock c. Indicates the market value of the stock d. Stocks to avoid purchasing What does net income measure that the cash flow from operating activities does not? A. Credit sales to customers B. Payments made to suppliers of goods and services C. Depreciation expenses D. Payments to employees or other expenses What does the beta coefficient represent? a. It is a statistically-derived measure of volatility b. It is the Expected Return minus the Growth Rate c. It is the volatility of the Risk Free Return d. It is the expected return for a basket of preferred stocks What does the Degree of Financial Leverage indicate? a. The firms cash balance b. The cost of financed assets c. The reliance on debt d. The reliance on assets

What does the Sarbanes-Oxley Act require companies to do? a. Have a board of dire...