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C214 Financial Management (VCC2 Terms)
Economics is a subfield of Finance - False Which of the following is not an example of firm capital? - Financial markets Capital is defined as a financial asset. - True Corporate finance is devoted to understanding various types of financial instruments. - False Which of the following is an example of firm capital? - Cash Corporate finance focuses on the decision making by the management of the firm. - True What are the three important areas of finance discussed in this section? - Corporate Finance, Investments, and Banking/financial institutions Banks make money when interest rates they charge to borrowers are less than interest rates they pay depositors. - False Stocks and bonds are two types of financial instruments. - True Stock represents ownership in a particular company. - True Companies can raise capital by issuing bonds or stocks. - True A stock is a debt instrument issued by corporations. - False A Treasury bond is a debt instrument issued by corporations. - False
A bond is a debt instrument issued by corporations or governments. - True A stock is a share of ______________ in a particular company. - ownership A bond is similar to a loan. - True Primary financial markets are markets where issuers place new securities with investors. - True What are the two ways a syndicate can place a bond? - Competitive sale or negotiated sale An IPO is a seasoned equity offering. - False An IPO occurs on the primary market. - True Syndicates are generally made up of investment banks and other institutional investors. - True While competitive sales allow underwriters to submit bids to purchase bonds, negotiated sales do not. - False NASDAQ is the world's largest secondary financial market. - False Auction markets have a physical location. - True Dealer markets have a physical location. - False Nasdaq is an example of an auction market. - False Stocks that are listed on dealer markets generally have a single dealer for each stock. - False
Which of the following best explains the role of prices? - All of these choices Efficient markets are those in which prices are volatile. - False Efficient markets will often have mispriced securities. - False Inefficient markets are those in which prices will respond quickly to new information. - False Inefficient markets will often have mispriced securities. - True Because in an efficient market all available information is built into the price of a stock - investment patterns and trends to "get rich quickly" are not easily discernable and it is difficult to predict the price - True In an inefficient market, prices will slowly respond to new information. - True Suppose you bought a stock for $45 one year ago. Today the stock is currently priced at $47.42. If the stock does not pay a dividend, what is the dollar return for this stock? - 2. 47.42-45 = 2. Suppose you bought a stock for $45 one year ago. Today the stock is currently priced at $47.42. If the stock does not pay a dividend, what is the percentage return for this stock? -. (47.42-45)/45 = 0.0538 or 5.38% Suppose you bought a stock for $22.10 one year ago. Today the stock is currently priced at $22.08. The stock recently paid a $4 dividend, what is the dollar return for this stock? - 3.
Suppose you bought a stock for $22.10 one year ago. Today the stock is currently priced at $22.08. The stock recently paid a $4 dividend, what is the percentage return for this stock? -. (22.08-22.10 + 4)/22.10 = 0.1801 or 18.01% Suppose you bought a stock for $101.44 one year ago. Today the stock is currently priced at $109.54. If the stock does not pay a dividend, what is the dollar return for this stock? - 8. 109.54-101.44 = 8. Suppose you bought a stock for $101.44 one year ago. Today the stock is currently priced at $109.54. If the stock does not pay a dividend, what is the percentage return for this stock? -. (109.54-101.44)/101.44 = 0.0799 or 7.99% Suppose you bought a stock for $19.84 one year ago. Today the stock is currently priced at $18.45. The stock recently paid a $3.50 dividend, what is the percentage return for this stock? -. (18.45-19.84+3.50)/19.84 = 0.1064 or 10.64% Firms with high unexpected earnings usually exhibit large positive returns on the earnings announcement day. - True Firms with low unexpected earnings usually exhibit large positive returns on the earnings announcement day. - False The goal of the firm is to ___________ shareholder value. - Maximize Firms that are maximizing shareholder value will generally see increases in the firm's stock price. - True
An example of agency costs is a firm's decision to invest in a project because management enjoys working on the project. - True An example of agency costs is management spending company money on unprofitable goods and services. - True An example of agency costs is increased costs incurred because of higher levels of production. - False Cash accounting offers a superior method of analyzing a company. - False The income statement is the most easily interpreted of the basic financial statements. - False The income statement is usually regarded as the most difficult to analyze and interpret. The basic equation of an income statement is: - Revenues - expenses = net income Revenues minus cost of goods sold is: - Gross Profit. On the income statement, Cost of Goods Sold includes: - Direct materials and direct labor associated with production Which of the following best describes the guiding principle for revenue recognition within accrual accounting system: - Revenue is reported when the earnings process is complete A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid 60 days. The expense associated with the product is $300,000, of which $100,000 has not been paid to your supplier. Under accrual based accounting system, you will most likely report: - revenues of $500,000 and expenses of $300,000. The basic equation for the balance sheet is: - Equity = Assets - Liabilities
Thirty years ago, your firm purchased a parcel of land for $100,000. You still own the land. The current market price of the land is $1,000,000. Under accrual accounting, which of the following adjustment should be made to recognize the current value of the land? - There is no adjustment to be made. A firm purchased equipment three years ago for $500,000. The equipment is the only fixed asset the firm has ever owned. If the firm claimed depreciation of $20,000 the first year, $35,000 the second year and $32,500 the third year, the Gross Fixed Assets should be equal to: - $500, GROSS fixed assets represent the original cost of the firm's fixed assets before accumulated depreciation. Inventory is the most liquid component of current assets. - False Of the major components comprising current assets (i.e., cash, marketable securities, accounts receivable, and inventory), inventory is usually the least liquid. On the balance sheet, Gross Fixed Assets represent: - The original cost of the fixed assets currently owned by the firm. Current liabilities are reported in order of: - Maturity (shortest first) Retained earnings represent the accumulated net income of the firm less dividends paid. - True Current liabilities represent money owed by a firm that requires payment within one year. - True TellAll reports retained earnings of $1122 and $1402 for 20x1 and 20x2, respectively. Additionally, the firm paid dividends of $200 and $225 in 20x1 and 20x2, respectively. What was TellAll's net income for 20x2? - $ New RE = Old RE + NI - Div; 1402 = 1122 + NI - 225; NI = 505
The income statement represents a snapshot of the firm at one point in time. - False The income statement represents the result of operations over a period of time. Tax expense as shown on the income statement is the amount of cash the firm paid to the taxing authority during the period. - False Income tax expense (aka provision for taxes) is rarely the actual amount of tax paid during the period. The tax provision on the income statement is calculated as if the tax code is identical to financial accounting standards. In reality, the tax code differs in many ways from financial accounting. Hence, the actual tax liability can be higher or lower than the reported income tax expense Accrual accounting recognizes: - Revenues when the earnings process is complete and matches expenses to revenues recognized. An income statement always provides an accurate measure of a firm's cash flows. - False he income statement may help you understand firm operations, but net income does not necessary show cash to the company. Retained earnings represents: - The cumulative amount of the firm's earnings not distributed to shareholders Notes Payable carry an explicit interest cost - True Current assets are listed in order of: - The most liquid to the least liquid. A firm reported retained earnings of $305 in 20x2. For 20x3, the firm reports retained earnings of $ and pays dividends of $25. What was net income in 20x3? - $ New RE = Old RE + NI - Div; 400 = 305 + NI - 25; NI = 120
When a firm purchases short-term U.S. Treasury securities, they are generally included on the balance sheet as: - Marketable Securities Earnings Before Interests and Taxes (EBIT) is also called: - Operating Income The use of the historical cost principle on the balance sheet means: - That most assets are stated at the original cost less depreciation A firm reported retained earnings of $300 in 12/31/2012. For 12/31/2013, the firm reports retained earnings of $400 and pays dividends of $25. What was their net income in 2013? - 125 Beg RE = 300, NI = 125, Div = -25, End RE = 400 A basic equation for the balance sheet is_______. - Equity = Assets - Liabilities Why is the balance sheet known as a permanent statement? - The other statements are reset at the end of the fiscal year. How do you calculate the change in retained earnings? - Net income - Dividends Which of the following is generally true? - Operating income and EBIT are the same Which components are part of total assets? - Cash accounts receivable, inventory, long term assets Which components are part of current assets? - Inventory, cash, accounts receivable, short term investments Which components are part of total liabilities? - Bonds, accounts payable, mortgage
CFO is calculated for a single period, so we need depreciation expense for that period and not total accumulated depreciation. Additionally, while changes in accounts receivable are included in the calculation of CFO we need to examine all operating accounts not just this one. A change in notes payable will impact CFO. - False Solution: A change in notes payable will NOT impact CFO (Note: notes payable is a financing variable; hence, changes in notes payable impact CFF). Which of the following represent operating asset accounts considered in the calculation of CFO? - Accounts receivable and inventory Accounts payable and accrued wages are operating liabilities; as such, they are not operating assets. Cash is an asset, but is not considered in the calculation of CFO. Brighton and DarkTec are identical companies: both companies sell computers to identical clients, recognize the same amount of revenue, and purchased the same capital equipment at the same cost at the beginning of this year. However, Brighton's sales are 1/3 on credit while 2/3 of DarkTec's sales are on credit. In addition, while both companies use straight-line depreciation, Brighton calculates depreciation of the new equipment based on an 8-year useful life while DarkTec calculates depreciation based on 10-year life (i.e. Depreciation Expense = Cost of Machine/Life of the Machine). Assume both companies had exactly the same balance sheets at the beginning of the year. Which of the following statements is most likely correct? - DarkTec has a higher net income than Brighton. Brighton should have lower account receivables than DarkTec since it has lower credit sales (and presumably the same collection rate since both firms have identical clients). There is nothing in the problem to indicate that interest expense will be different for the two firms. All else equal, DarkTec's net income will be higher because of lower depreciation expense stemming from the longer assumed asset life. An increase in inventory will decrease CFO. - True An increase in an operating asset such as inventory represents an outflow of cash attributable to CFO.
Generally speaking, the operating accounts relevant to the calculation of CFO are located at the top of both the asset and financing side of the balance sheet. - True True - there are important exceptions, but conceptualizing the current assets as operating asset accounts and the current liabilities as operating liabilities is useful for building intuition. When calculating CFF, most of the data can be located at the bottom of the asset side of the balance sheet. - False The answer is False. The bottom of the asset side of the balance sheet (long-term assets) is most closely associated with CFI. CFF comes from the liabilities and equity side of the balance sheet. A firm with positive CFO should be considered healthy. - False Positive CFO is usually a key component in firm health, but positive CFO by itself says little about a firm. The firm in an industry with the largest CFO is the industry's top performer. - False Having the largest CFO might merely be a function of size. Best" is multi-dimensional. The firm reporting the largest CFO might be historically successful but now be struggling/shrinking because of a lack of innovation, market dynamics, etc. Further, having the largest CFO in the buggy whip industry does not reveal much about performance. Dividing CFO among the owners of a firm is a sustainable policy. - False CFO doesn't allow for required reinvestment. Which of the following accurately describes the calculation of Free Cash Flow to the Firm? - FCFF = EBIT*(1-tax rate) + Depreciation - CAPEX - Increases in NWC
Depreciation expense is a significant source of difference between net income and CFO because: - Depreciation expense is non-cash expense on the income statement associated with the acquisition of long-lived assets. For visualization purposes, it is correct to think of balance sheet accounts relevant to CFI as being on the bottom of the financing side. - False CFI accounts are generally non-current assets (i.e., bottom of the asset side of the balance sheet). Increases in operating assets and decreases in operating liabilities will decrease CFO. - True Increases in assets consume cash as do decreases in operating liabilities. While looking at XYZ Corp's two most recent balance sheets, you notice inventory decreased by $100,000. The firm has a tax rate of 40%. To calculate Cash Flow from Operations, you will: - Add $100,000 to CFO A decrease in an operating asset represent a cash inflow associated with CFO. The tax rate does not impact the question. Assuming no asset disposals, CFI is equal to the change in Net PP&E. - False Assuming no asset disposals, CFI is the change in GrossPP&E. Equivalently, CFI is equal to the change in Net PP&E plus depreciation expense. A firm can sustain negative CFO indefinitely by borrowing, selling equity, and/or by selling assets. - False Firms can sustain negative CFO in the short-run buy borrowing, etc. In the long run, the firm will run out of assets to sell and lenders will refuse to lend. A firm cannot sustain negative CFO forever. Increases in operating balance sheet accounts will decrease CFO. - False
Increases in operating ASSET accounts will decrease CFO, but increases in operating LIABILITY accounts (i.e., A/P) will increase CFO. When calculating CFO, which of the following is correct? - Add an increase in accrued wages An increase in an operating liability such as accounts payable or accrued wages represent an inflow to the firm. Which one of the following items should NOT be included in the calculation of CFF? - Change in Retained Earnings Change in retained earnings is accounted in CFO by adding net income and CFF by subtracting dividends paid. When calculating CFO, you generally include the changes in all current assets and current liabilities. - False Most current asset and current liability accounts are operating accounts; hence, changes are included in the calculation of CFO. However, Operating assets do not include all current assets. Cash is the notable exception. Operating liabilities do not include notes payable (changes in notes payable are included in CFF). Note that there are other exceptions, but they are beyond the scope of this discussion. Assuming no asset disposals, depreciation expense is equal to: - The change in accumulated depreciation FCFF can sustainably be distributed to the providers of capital. - True The calculation of FCFF uses NOPAT instead of Net Income because FCFF is the cash available to both debt holders and equity holders. - True The answer is true. NOPAT (i.e. EBIT x [1-tax rate]) is determined before cash is divided into cash to debt holders (i.e., interest payments) and cash to equity holders.
