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Business Corporate Finance

Instructions:

Answer 50 questions in 15 minutes.
If you are not ready to take this test, you can study here.
Match each statement with the correct term.
Don't refresh. All questions and answers are randomly picked and ordered every time you load a test.

This is a study tool. The 3 wrong answers for each question are randomly chosen from answers to other questions. So, you might find at times the answers obvious, but you will see it re-enforces your understanding as you take the test each time.

1. Corporation
The acquisition of long-term investments. the value of the cash flow generated by an asset exceeds the cost of that asset.
Business created as a distinct legal entity composed of one or more individuals or entities; a legal "person" separate and distinct from its owners; complicated to form - subject to taxes
Cash flow to stockholders
FV = PV(1 + r)^t r = interest rate t = # of periods

2. Bond Risk
The large OTC market is NASDAQ
Class (minorities); Geographical location; types of industry; Size; Exporting Firms
Matches those who wish to buy with those who wish to sell
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond

3. How to calculate FV of a single payment?
Claims to wealth and legal structure; Saving and Investment Process; Monetary System
Do not consider market emotions; assumes that the market is honest (true information); effects of third parties
Short term Debt Instruments only (Less than 1 year maturity)
FV = PV(1 + r)^t r = interest rate t = # of periods

4. Capital Budgeting

5. Fundamental principles of Finance
Banks; Insurance Companies; Mutual Funds; Pension Funds
By: Claims; Maturity; Seasoning of claims; Time of Delivery; Organizational Structure
Time Value of Money; Risk/Return
Overreaction and correction; Delayed reaction; Efficient market reaction

6. GAAP (Generally Accepted Accounting Principles)
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk
Holder can exchange bond for common stock according to the conversion ratio
The common set of standards and procedures by which audited financial statements are prepared
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer

7. Securitization
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)
The speed and ease with which an asset can be converted to cash. liquidity reduces financial distress but holding liquid assets are generally less profitable.
Matches those who wish to buy with those who wish to sell

8. Noncash items
Exchange Traded Fund - Mixture of stocks and mutual funds
Business owned by a single individual. PROs: easy and inexpensive to form - individual retains all profits CONs: individual has unlimited liability to debt - the organization is limited to the life of the owner - capital is often limited to owner'
Expenses charged against revenues that do not directly affect cash flow - such as depreciation
Ease of transferring ownership - limited liability to debt - unlimited life of the business

9. Tools used for Technical Analysis
Moving Average; Cash positions of funds; Amount of short selling
Short term Debt Instruments only (Less than 1 year maturity)
Senior security provided for companies in financial distress or under bankruptcy
Exists whenever someone (the principal) hires another (the agent) to represent his or her interests. In a corporation - the stockholders are the principal - and management is the agent of the stockholders.

10. A Bond offering statement contains...
later
Long Term Bonds (w/ high - long term - & locked interest rate) ; Short Selling many types of stocks; Holding Cash; Gold
Where a business sells its account receivables
Name of Issuer; Par Value; Maturity Date; Coupon Rate; Coupon Payments; Current Market Interest Rate; Current Market Price; Bond Indenture (legal note); Credit Rating.

11. Bond
later
A security issued by a corporation or a government; represents a promise to pay its bondholder a fixed sum of money (principal) at future maturity date; along with periodic interest payments (coupons)
Exchange Traded Fund - Mixture of stocks and mutual funds
Pure discount loans; Interest only loans; Amortized loans

12. Types of Stock Analysis
Technical; Fundamental
Equity money provided by investors for start up firms with long term growth potential
Future to Present
Over the counter

13. Present value means _____ money on a time line
Commodities (timber - oil - gold); Floating rate notes/bonds; TIP's (Treasury Inflation Protected Securities; Real Estate
Way for companies to reduce working capital by: Decreasing Accounts Receivables; Increasing Accounts Payable; Decreasing levels of inventory
Ease of transferring ownership - limited liability to debt - unlimited life of the business
earlier

14. Stock Prices adjust to new information in these ways...
Claims to wealth and legal structure; Saving and Investment Process; Monetary System
Where a company sells an asset and then leases it back.
Most desirable source of Financing; a way for companies to generate cash internally; Net Income + Depreciation and Amortization
Overreaction and correction; Delayed reaction; Efficient market reaction

15. Discount rates go from _____ to ______ value
Expressed on balance sheet but generally not what the assets are worth. market value is the true value of a firm's worth. standard accounting principles focus on historical costs bc they can be precisely measured where market is difficult to estimate
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)
Unexpected information; Information that effects the risk or return of an asset
Future to Present

16. What makes a Bond Price Change?
Size of firm; Degree of development of financial markets
Movement of Interest Rate; Credit Risk; Features of the bonds. FYI - Long Term Bonds have more price risk
Time Value of Money; Risk/Return
GAAP - cash v. noncash items - time and costs

17. How to invest in Inflation

18. What incentives to managers in large corporations have to maximize share value?
Preferred; Common
Size of firm; Degree of development of financial markets
The large OTC market is NASDAQ
Managers in large corporations have incentive to maximize share value because their compensation is often tied to stock value - and prospects for promotion are tied to performance (or they could be replaced if stock price flounders)

19. What is an agency relationship?
The mixture of long-term debt and equity maintained by a firm to finance its operations
Exists whenever someone (the principal) hires another (the agent) to represent his or her interests. In a corporation - the stockholders are the principal - and management is the agent of the stockholders.
Expressed on balance sheet but generally not what the assets are worth. market value is the true value of a firm's worth. standard accounting principles focus on historical costs bc they can be precisely measured where market is difficult to estimate
Market where Corporate Debt is sold. Short term/Long term

20. Equity Market
NYSE
Equity money provided by investors for start up firms with long term growth potential
Was enacted to protect investors from corporate abuses. among other things - it requires an auditor- and officer-approved assessment of the company's internal control structure and financial reporting in their annual report.
Markets where common or preferred stocks are sold in either the Primary or Secondary Markets

21. Corp. Finance involves
Time Value of Money; Risk/Return
how company raise money; uses money; transfers of money from savers to spenders
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk
Managers in large corporations have incentive to maximize share value because their compensation is often tied to stock value - and prospects for promotion are tied to performance (or they could be replaced if stock price flounders)

22. Joint Venture
Risk that inflation increases since the bond was issued
two companies combining resources in a partnership; i.e Sony-Ericsson
An intermediary who does not own the object being sold; acts as a middle man; receives a fee for services
the issuer does something which causes the credit quality to go down

23. Inflation Risk
Short term; Cancelable; Lessor is responsible; stays off balance sheet; for Financial lease the opposite is true.
Example of Agency problem - conflict of interest between the principal and the agent. They come about when the managers take actions to promote their own self interests to the detriment of the shareholders.
Risk that inflation increases since the bond was issued
Over the counter

24. Which type of stocks carry voting rights?
The study of the relationship between business decisions and the value of the stock in the business
the Coupon rate is periodically adjusted to the current interest rate
Common
Substitute for buying an asset

25. Double Dip Lease
To maximize the current value per share fo the existing stock
GAAP - cash v. noncash items - time and costs
Cross Border Lease used to arbitrage tax law
Name of Issuer; Par Value; Maturity Date; Coupon Rate; Coupon Payments; Current Market Interest Rate; Current Market Price; Bond Indenture (legal note); Credit Rating.

26. Call Risk
Equity money provided by investors for start up firms with long term growth potential
Over the counter
Cash flow to stockholders
Risk that the bond will be called back by bond issuer if interest rates fall to much

27. Working Capital Management
Was enacted to protect investors from corporate abuses. among other things - it requires an auditor- and officer-approved assessment of the company's internal control structure and financial reporting in their annual report.
Way for companies to reduce working capital by: Decreasing Accounts Receivables; Increasing Accounts Payable; Decreasing levels of inventory
Assets pledged as Collateral for non-payment of debt (collateral)
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control

28. Principle Financial Intermediaries
Risk that the bond will be called back by bond issuer if interest rates fall to much
Ease of transferring ownership - limited liability to debt - unlimited life of the business
Banks; Insurance Companies; Mutual Funds; Pension Funds
holds that: neither Technical or Fundamental Analysis work - but Insider information can help beat the market

29. What are some of the shortcomings of the goal of profit maximization?
Time Value of Money; Risk/Return: Greater risk - Greater returns
Expenses charged against revenues that do not directly affect cash flow - such as depreciation
The balance sheet
Profit is a vague term - this goal fails to consider whether short-run or long-run profit maximization is being considered

30. Interest rates go from _____ to _____ value
Length; Payment Method (Amortized or Single Bullet); Collateral Protection; Bank Obligation to lend ( Committed or Not Committed); Frequency of borrowing; Pricing (Euribor Rate)
Present to Future
Cross Border Lease used to arbitrage tax law
Exchange Traded Fund - Mixture of stocks and mutual funds

31. EBIT
Risk that the company will not be able to repay the interest or principle
Way for companies to reduce working capital by: Decreasing Accounts Receivables; Increasing Accounts Payable; Decreasing levels of inventory
Earnings before interest and taxes
Cross Border Lease used to arbitrage tax law

32. Bank loans are based on what conditions?
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid
Length; Payment Method (Amortized or Single Bullet); Collateral Protection; Bank Obligation to lend ( Committed or Not Committed); Frequency of borrowing; Pricing (Euribor Rate)
Present to Future
Sole Proprietorship; Partnership (Limited Liability Company); Public Company/Corporation (through IPO)

33. Risks of Financial Theories
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
Do not consider market emotions; assumes that the market is honest (true information); effects of third parties
Long term Debt and Equity Instruments only (more than 1 year maturity)
Government; Personal; Corporate

34. Off Balance Sheet Financing
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control
Form of financing where large capital expenditures are kept off a companies balance sheet; ex. Joint Ventures - R&D partnerships; Operating Leases
Future Value of single payment; Present Value of Single Payment; Future Value of unequal series of Payments; Present Value of unequal series of Payments; Future value of annuity; Present value of annuity
Unique and Highly complex financial service transaction between a Bank and a Company

35. Project Finance
Net working capital
Size of firm; Degree of development of financial markets
Technical; Fundamental
Where financing is secured by the projects assets - including revenues. Creditors do not have claims against the sponsors assets.

36. Floating Rate
Difference between a firm's current assets and its current liabilities``
Length; Payment Method (Amortized or Single Bullet); Collateral Protection; Bank Obligation to lend ( Committed or Not Committed); Frequency of borrowing; Pricing (Euribor Rate)
Form of financing where large capital expenditures are kept off a companies balance sheet; ex. Joint Ventures - R&D partnerships; Operating Leases
the Coupon rate is periodically adjusted to the current interest rate

37. Zero coupon bonds
Example of Agency problem - conflict of interest between the principal and the agent. They come about when the managers take actions to promote their own self interests to the detriment of the shareholders.
Make no periodic interest payments - Yield comes from the difference between purchase price and par value
Most desirable source of Financing; a way for companies to generate cash internally; Net Income + Depreciation and Amortization
Exists whenever someone (the principal) hires another (the agent) to represent his or her interests. In a corporation - the stockholders are the principal - and management is the agent of the stockholders.

38. Franchising
how company raise money; uses money; transfers of money from savers to spenders
A way for seller of goods and services to have third parties sell his goods or services under license
Pure discount loans; Interest only loans; Amortized loans
Where a business sells its account receivables

39. Venture Capital
Equity money provided by investors for start up firms with long term growth potential
Was enacted to protect investors from corporate abuses. among other things - it requires an auditor- and officer-approved assessment of the company's internal control structure and financial reporting in their annual report.
State owned institutions which act as finance companies for private domestic entities conducting business abroad
Cross Border Lease used to arbitrage tax law

40. Broker
Short term; Cancelable; Lessor is responsible; stays off balance sheet; for Financial lease the opposite is true.
Commodities (timber - oil - gold); Floating rate notes/bonds; TIP's (Treasury Inflation Protected Securities; Real Estate
An intermediary who does not own the object being sold; acts as a middle man; receives a fee for services
Expenses charged against revenues that do not directly affect cash flow - such as depreciation

41. What are Stakeholders?
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)
By: Claims; Maturity; Seasoning of claims; Time of Delivery; Organizational Structure
Holder can exchange bond for common stock according to the conversion ratio
Markets where common or preferred stocks are sold in either the Primary or Secondary Markets

42. Dealer
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread
Rate of the extra tax you would pay if you earned one more dollar
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)
Future Value of single payment; Present Value of Single Payment; Future Value of unequal series of Payments; Present Value of unequal series of Payments; Future value of annuity; Present value of annuity

43. Corporate Finance
Length; Payment Method (Amortized or Single Bullet); Collateral Protection; Bank Obligation to lend ( Committed or Not Committed); Frequency of borrowing; Pricing (Euribor Rate)
Was enacted to protect investors from corporate abuses. among other things - it requires an auditor- and officer-approved assessment of the company's internal control structure and financial reporting in their annual report.
how company raise money; uses money; transfers of money from savers to spenders
The study of the relationship between business decisions and the value of the stock in the business

44. NWC
Net working capital
Pure discount loans; Interest only loans; Amortized loans
Expressed on balance sheet but generally not what the assets are worth. market value is the true value of a firm's worth. standard accounting principles focus on historical costs bc they can be precisely measured where market is difficult to estimate
Moving Average; Cash positions of funds; Amount of short selling

45. Capital Structure (or Financial Structure)
Short term Debt Instruments only (Less than 1 year maturity)
Expressed on balance sheet but generally not what the assets are worth. market value is the true value of a firm's worth. standard accounting principles focus on historical costs bc they can be precisely measured where market is difficult to estimate
Claims to wealth and legal structure; Saving and Investment Process; Monetary System
The mixture of long-term debt and equity maintained by a firm to finance its operations

46. Future Value means ______ money on a time line
later
The common set of standards and procedures by which audited financial statements are prepared
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)

47. Capital Markets
NYSE
Long term Debt and Equity Instruments only (more than 1 year maturity)
when a retailer gets financing from a bank for his inventory; i.e. financing for cars in a car dealership
Most desirable source of Financing; a way for companies to generate cash internally; Net Income + Depreciation and Amortization

48. Financial leverage

49. Levels of Market Efficiency
Technical
Weak Form Efficiency - Semi Strong Form - Strong Form
Bond may be redeemed earlier by the issuer
Managers in large corporations have incentive to maximize share value because their compensation is often tied to stock value - and prospects for promotion are tied to performance (or they could be replaced if stock price flounders)

50. Capital Market Instruments
Common Stock; Preferred Stock; Long Term Government Bonds
Overreaction and correction; Delayed reaction; Efficient market reaction
Unique and Highly complex financial service transaction between a Bank and a Company
type of risk where interest rate rises and price of bond decreases