FIN 3104 Chapter Notes - Chapter 1: Cash Flow, Stock Market, Barometer

34 views2 pages

purpleduck94

22 Sep 2016

School

Virginia Tech

Department

Finance, Insurance, Business Law

Course

FIN 3104

Professor

Keown

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

The fundamental goal of a business is the create value for the company"s owners. All financial decisions ultimately affect the firm"s stock price. Changes in the economy also affect the firm"s stock prices. 5 principles that form the foundations of finance. Frozen made money on both the movie and other merchandise. 3: risk requires a reward: investors want a return that satisfies two requirements: An additional return for taking a risk. 5: conflicts of interest cause agency problems: managers make decisions that actually lead to a decrease in the value of the firm"s shares. This is frequently because the managers" own interests are best served by ignoring shareholder interests: agency problems problems and conflicts resulting from the separation of the management and ownership of the firm. Provides liquidity to the mortgage market and makes it possible for banks to loan more money to homebuyers. Capital budgeting the decision making process with respect to investment in fixed assets.

Related Questions

The goal of the firm is to ____ because _____. Answer maximize shareholders' wealth; it considers all risks invest funds in real estate; the return is longer maximize shareholders' profit; it is a short term outlook closely matching management goals Mike is paying $8,000 a year on his mortgage at 6% nominal annual interest. He has 15 more years to make payments. He wants to sell his house today. The lowest [minimum] price he can sell the house without losing any money on the house would be about ___. Answer $120,000 $ 50,000 $77,698 $ 186,208 A firm's net income before tax, EBT [NIBT] (on the income statement) is affected by _____. Answer taxes interest dividends Common Stock as listed on the Balance Sheet could include which of the following? Answer A) retained earnings B) additional paid in capital over par value C) preferred capital Both A) and B) If an asset is sold for ___ than its basis, the tax effect would be ____. Answer A) more; capital gain and depreciation recapture B) less; depreciation recapture C) more; capital loss Both A) and B) The main reason for a firm to have assets is to _______. Answer generate revenue match the liabilities and equity both of the above be able to borrow money and pay its debts none of the above The only risk you would NOT have in loaning money to the United States Government (Uncle Sugar) is _____ risk. Answer liquidity maturity default A(n) ____ shows _____. Answer balance sheet; sources and uses of funds income statement; net income as of a specific date cash flow statement; how well the firm is doing relative to its competition You can compare dollars _____ because ______. Answer computed using equations; any math is always correct at any point in time; time is never a factor if they are at nominal value; that is when decisions are made only at the same point in time; dollars can be invested to earn interest There ___ a tax benefit to the company with paying preferred dividends because _______. Answer is; investors can write them off is not; investors declare them as income is; the company can use the payments as an expense is not; the company cannot use the payments as an expense XYZ issued a 6% coupon, $1,000 par, 30 year to maturity bond. It is now 6 years to maturity. What is the price of the bond if the yield to maturity [market interest rate] is 10%? Answer $1,000 $659.46 $825.79 $705.33 The valuation process can be described as ______. Answer calculating the present value of an expected future cash flow using the investor's required rate of return as the discount rate calculating the future value of an expected future cash flow using the investor's required rate of return as the discount rate amortizing the value of the asset over its holding period The ______ is the minimum required rate of return a firm must earn on its investments. Answer net present value opportunity cost of capital or weighted average cost of capital. internal rate of return gross profit margin The value of an asset is the _____ dollar price someone is willing to pay for it. Answer usual maximum minimum Companies use ____ in capital budgeting project analysis because ________. Answer accounting profit; that is the total net income after tax cash flow; that is what the owners would receive from the project and reinvest accounting profit; that is what the owners would receive from the project and reinvest after tax cash flow; that is the result of prudent accounting When borrowing money, you want to know the ____ interest rate because ____. Answer nominal; it is the easiest to find. effective; it is the true cost of borrowing risk free; that is what the government pays Fed funds; that is what you would pay the bank Cash available to pay out to the investors after the firm pays for new investments or additions to working capital is _____. Answer a statement of cash flows operating after tax cash flow free cash flow net income An organization that raises money from investors and provides financing for individuals and businesses is a ___. Answer factor federal government regulatory unit state government taxing authority financial intermediary Negatives/cons of the Net Present Value (NPV) technique include: Answer least conservative reinvestment assumption multiple rates of return for non-conventional cash flows all of the above none of the above A fixed exchange rate means a country _____. Answer can only use gold coins as money is limited in the amount of paper money it can print can print money as the economy demands Your company is considering an investment with the following expected cash flows: Initial Investment = $407,596 Operating Cash Flows = $73,428 per year Terminal Cash Flow = $11,872. The company's WACC is 11% for similar risk projects. The proposed project would have an expected life of 9 years. Your boss asks you to do the analysis. You would tell your boss this proposed project ___ because ____. Answer is acceptable; NPV is about $3,620 is acceptable; NPV is zero should be rejected; NPV is about -$5,660 [negative $5,660]. should be rejected; NPV is zero All ratios are ___ and a reason to analyze ratios is ____. Answer good; to continue to look productive good and bad; because seemingly good ratios can be masking something bad bad; to try to rework the numbers to have them look good basically irrelevant; there really is no need to analyze financial statements When analyzing financial statements, ratio analysis gives ____ and provides insight into ____. Answer very little useful information; practically nothing good practice in logical thinking; what has occurred and the logic behind it financiers something to do during slow periods; how the financier spends his time accountants a reason to provide financial statements; why accountants do what they do while at work Given: Economic State[i]: Good Average Expected Return[i]: 10% 8% Probability[i]: 30% 70% What is the Standard Deviation? Answer 3% 8.4% 0.92% 5.6% Chapter 9: XYZ has a projected project to install a new press. The expected cash revenue is $175,000 per year. Expected yearly expenses are: Operatinf costs of $50,000; Rental of $17,000; Utilities of $20,500; and Depreciation of $10,000. The tax rate is 35%. What is the expected After-Tax Operating Cash Flow for the first year? Answer $65,500 $60,375 $77,500 $97,500 A stock just paid a dividend of $1.60 per year. The dividend is expected to grow at 3% per year indefinately. Equally risky stocks offer expected rates of return of 8%. What should be the stock price? Answer 53.33 $16.00 $32.96 None of the above. A plot of the CAPM is the _____. Answer wrong thing to do Security Market Line a function showing how to calculate TVM All of the above. Derivatives are used to ___. Answer divide one number by another find old ways to do things hedge risk none of the above With the end of the Gold Standard in the 1970's, what new risk did business face in the international market? Answer Comjpetition Exchange rate Worker compensation Property taxes One of the positive aspects [pros] of a Floating Exchange Rate System is ____. Answer money can be printed as needed to support financial/economic growth no/reduced inflation economic growth is reduced as a result of reduced liquidity [lower money supply] business planning is more difficult A(n) ____ contract obligates the seller to execute the contract and the contract is executed. Answer backwards forward future option What policies did countries institute after the Great War that help lead to the Great Depression? Answer A. Mandatory military service B. Trade restrictions C. High tariffs D. Isolationism Only B., C. and D. All of the above

bluemarten153

1.Ellison corporation acquires redstone corporation because redston has unused production facilities that Ellison needs. This is an example of

a.diversification

b. vertical integration

c. Horizontal integration

d. None of the above

2. Synergy may result from which of the following?

a. Enhanced cash flow

b. Diversification

c. Excess cash

d. All of the above

3.Which of the following is not a qualitative factor?

a. Product users

b. Industry maturity

c. Sales of growth

d. Barriers to entry

e. None of the above

4.Present value calculations

a. Can help the creation of value

b. Can provide managers with a means of identifying the best investment choices.

c. Do not help in the creation of value

d. A and b

e. B and c

5. Which of the following ratios makes firm comparisons difficult?

1. EPS

2. Payout

3. Return on assets

4. ROE

5. None of the above

6. Breakeven EBIT analysis leads to

a. Issuance of debt

b. Issuance of stock

c. Both a and b

d. Either a or b

e. None of the above

7. If the bondâs coupon rate is greater than the general interest rates in the market, the bond will set at a

A. premium

b. discount

c. neither a nor b

8. As the interest rate used to discount future cash flows is decreased, present value of the future inflows

a. Increases

b. Decreases

c. Stays the same

9. The ______________ matches revenues with expenses for the entire accounting period

a. Balance sheet

b. Cash flow statement

c. Statement of retained earnings

d. Income statement

e. None of the above

10. What performing sensitivity analysis

a. Statistical methods should not be employed

b. Electronic spreadsheets make the job more manageable

c. Assumptions should be changed one at a time

d. All of the above

e. B and c

11.Jones is saving for a new outboard motor. He needs to have 10,000 4 years from now. How much must he set aside not have 10,000, 4 years from now if money compounds at 12% annually.

a.$6310

b. $6355

c. $6332

d. $6106

e. None of the above

12.A firms dividend policy impacts the firmâs ability to finance through

a. Retained earnings

b.Stock issue

c. Long term debt

d. None of the above

13. Synergy between two companies

a. Is the complimentary situation where value is created in the joining o the firms

b. May result in the improvement of the acquirers bottom line

c. Could be defined by purely qualitative benefits

d. A and c

e. B and c

15. The percentage of net income that a company distribution in dividends is referred to as the

a. EPS

b. Payout ratio

c. ROA

d. ROE

e. None of the above

16. The statement that shows investment is the firms and the distributions to owners is the

a. Income statement

b. Balance sheet

c. Statement of retained earnings

d. None of the above

17. Which of the following methods results in a net present value of zero?

a. IRR

b. Payback

c. Discounted payback

d. None of the above

18. Ivy company acquires Reynolds company. Reynolds is in a totally unrelated business to Ivy. This is an example of

a. Vertical integration

b. Horizontal integration

c. Diversification

d. None of the above

19. Which of the following limits a firmâs ability to raise equity through retained earnings?

a. Set divided policy

b. Low p/e

c. High p/e

d. None of the above

20. Testing the validity of your calculations by subjecting them to change is known as

a. Qualitative testing

b. Horizontal analysis

c. Vertical analysis

d. Sensitivity analysis

e. None of the above

21. Gadsen acquires digital corporation which is upstream in the marketing chain. This is an example of

a. Diversification

b. Vertical integration

c. Horizontal integration

d. None of the above

22. Which of the following methods help to âsizeâ the investment?

a. Payback

b. Present value payback

c. Present value index

d. IRR

e. None of the above

22. Aspect company acquires Penn company which is downstream in the production chain. This is an example of

a. Diversification

b. Vertical integration

c. Hortizontal integration

d. None of the above

23.The âefficient marketâ theory means to be reasonable because

a.There are fewer financial analysts valuing securities

b.There are hundreds of investors trying to make money from improperly valued securities, and the market forces which result in driving stock prices to fair value.

c. A and b

d. None of the above

24. Economic value is the same as

a. Book value/ net asset value

b. Owners equity

c. None of the above

25.When projected assets are more than projected liabilities and owners equity the plug will be

a. Notes payable

b. Notes receivable

c. Cash

d. None of the above

26. In a new issue, the ____ are those funds that remain after the neccessry fees have been deducted

a.Working capital

b.Free cash flow

c.Net proceeds

d.None of the above

27.A discount factor

a.Is the same as compounding future cash flows

b.Performs the reverse function of a compounding interest rate

c.Allows investors to quantify a figure which will assist them in comparing alternative investments

d.B and c

e.A, b, and c

28.Which of the following ratios is not a liquidity ratio?

a.ROE

b.Current

c.Quick

d.Receivable turnover

e.None of the above

29.Adrian Ardeel is saving for a new guitar. How much must Adrian set aside now to receive $4000, 7 years from now using a compound interest rate of 7% annually.

a.$2400

b.$2491

c.$2411

d.$2500

e.None of the above

30.The bondâs yield to maturity calculation is similar to a ______ calculation

a.NPV

b.IRR

c.Payback

d.Discounted payback

e.None of the above

31.Eric sets aside $100. If this money compounds at a 5%annual rate how much will Eric have 6 years from now?

a.$110

b.$121

c.$134

d.$138

e.None of the above

32.Which of the following methods does not consider the time value of money?

a.IRR

b.NPV

c.Payback

d.None of the above

33.Assessing key ratios of the company is an example of

a.Qualitative analysis

b.Quantitative analysis

c.Price level effect

d.Fixed cost

e.None of the above

34.The ratio which may observers use to quantify the stock markets opinion of a firm is the

a.ROE

b.EPS

c.D/E

d.P/E

e.None of the above

35.A bond which is valued at par has a yield to maturity which is _____ to its coupon rate

a.Equal to

b.Greater than

c.Less than

d.None of the above

36.Many coverage ratios include

a.Sinking fund obligations

b.Dividends

c.Both a and b

d.None of the above

37.The cost of capital can be defined as

a.The weighted average cost of attracting investors to the firm

b.The price of obtaining funding for the firm weighed according to target ratios in the capital structure

c.Less than the weighted average that investors in the firm require

d.A and b

e.A, b, and c

38.Most bonds pay interest

a.Monthly

b.Quarterly

c.Semiannually

d.Annually

e.None of the above

39.The quantitative method that often serves as an indicator of a firms ability to meet contractual obligations is

a.Receivables turnover

b.Inventory turnover

c.ROE

d.Coverage ratio

e.None of the above

Seven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned his position as manager of cost systems for Davis, Cohen, and OâBrien Public Accountants and started Track Software, Inc. In the 2 years preceding his departure from Davis, Cohen, and OâBrien, Stanley had spent nights and weekends developing a sophisticated cost-accounting software program that became Trackâs initial product offering. As the firm grew, Stanley planned to develop and expand the software product offerings, all of which would be related to streamlining the accounting processes of medium- to large-sized manufacturers. Although Track experienced losses during its first 2 years of operationâ2009and 2010âits profit has increased steadily from 2011 to the present (2015). The firmâs profit history, including dividend payments and contributions to retained earnings, is summarized in Table 1. Stanley started the firm with a $100,000 investment: his savings of $50,000 as equity and a $50,000 long-term loan from the bank. He had hoped to maintain his initial 100 percent ownership in the corporation, but after experiencing a $50,000 loss during the first year of operation (2009), he sold 60 percent of the stock to a group of investors to obtain needed funds. Since then, no other stock transactionshave taken place. Although he owns only 40 percent of the firm, Stanley activelymanages all aspects of its activities; the other stockholders are not active in managementof the firm. The firmâs stock was valued at $4.50 per share in 2014 and at $5.28 per share in 2015.

Stanley has just prepared the firmâs 2015 income statement, balance sheet, and statement of retained earnings, shown in Tables 2, 3, and 4, along with the 2014 balance sheet. In addition, he has compiled the 2014 ratio values and industry average ratio values for 2015, which is applicable to both 2014 and 2015 and
are summarized in Table 5. He is quite pleased to have achieved record earnings of $48,000 in 2015, but he is concerned about the firmâs cash flows. Specifically, he is finding it more and more difficult to pay the firmâs bills in a timely manner and generate cash flows to investors, both creditors and owners. To gain insight into these cash flow problems, Stanley is planning to determine the firmâs 2015 operating cash flow (OCF) and free cash flow (FCF). Stanley is further frustrated by the firmâs inability to afford to hire a software developer to complete development of a cost estimation package that is believed to have âblockbusterâ sales potential. Stanley began development of this package 2 years ago, but the firmâs growing complexity has forced him to devote more of his time to administrative duties, thereby halting the development of this product. Stanleyâs reluctance to fill this position stems from his concern that the added $80,000 per year in salary and benefits for the position would certainly lower the
firmâs earnings per share (EPS) over the next couple of years. Although the projectâs success is in no way guaranteed, Stanley believes that if the money were spent to hire the software developer, the firmâs sales and earnings would significantly rise once the 2- to 3-year development, production, and marketing process was completed. With all these concerns in mind, Stanley set out to review the various data to develop strategies that would help ensure a bright future for Track Software. Stanley
believed that as part of this process, a thorough ratio analysis of the firmâs 2015 results would provide important additional insights.â

a. (1) On what financial goal does Stanley seem to be focusing? Is it the correct

goal? Why or why not?

(2) Could a potential agency problem exist in this firm? Explain.

b. Calculate the firmâs earnings per share (EPS) for each year, recognizing that the

number of shares of common stock outstanding has remained unchanged since

the firmâs inception. Comment on the EPS performance in view of your response

in part a.

FIN 3104 Chapter Notes - Chapter 1: Cash Flow, Stock Market, Barometer

Document Summary

Get access

Related Documents

FIN 3104 Lecture Notes - Lecture 3: S&P 500 Index, Cash Flow, Sunk Costs

FIN 3104 Lecture Notes - Lecture 1: Profit Maximization, Capital Budgeting, Microeconomics

FIN 3104 Lecture Notes - Lecture 1: Apple Juice, Cash Flow, Sole Proprietorship

Related Questions