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. NWC
later
Way for companies to reduce working capital by: Decreasing Accounts Receivables; Increasing Accounts Payable; Decreasing levels of inventory
Where a company sells an asset and then leases it back.
Net working capital


2. Two Basic Principles of Finance
Financing: how to get funds; Investing: what to do with funds
Size of firm; Degree of development of financial markets
Time Value of Money; Risk/Return: Greater risk - Greater returns
Form of financing where large capital expenditures are kept off a companies balance sheet; ex. Joint Ventures - R&D partnerships; Operating Leases


3. Callable Bonds
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)
Bond may be redeemed earlier by the issuer
Ease of transferring ownership - limited liability to debt - unlimited life of the business
holds that: neither Technical or Fundamental Analysis work - but Insider information can help beat the market


4. Operating Lease is...
Present to Future
Short term; Cancelable; Lessor is responsible; stays off balance sheet; for Financial lease the opposite is true.
Technical (charts - supply/demand of stocks); Fundamental (Analyze companies information: balance sheet - ect.); Insider Information
the issuer does something which causes the credit quality to go down


5. Double Dip Lease
how company raise money; uses money; transfers of money from savers to spenders
Hybrid of partnership and corporation. operates and taxed like a partnership but retains limited liability for owners - IRS may double tax if too 'corporation-like'
Cross Border Lease used to arbitrage tax law
Cost of good sold


6. Interest rates go from _____ to _____ value
The study of the relationship between business decisions and the value of the stock in the business
Present to Future
Cash flow to creditors
Size of firm; Degree of development of financial markets


7. Head and Shoulder refers to what type of stock analysis?
Make no periodic interest payments - Yield comes from the difference between purchase price and par value
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.
Technical
later


8. Capital Budgeting

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9. Book value vs. market value value for a firm's assets

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10. Selling on consignment
Way for companies to reduce working capital by: Decreasing Accounts Receivables; Increasing Accounts Payable; Decreasing levels of inventory
retailer gets inventory which he does not have to pay for until he sells it
unsecured promissory note with a fixed maturity date of 1 to 270 days; Issued by banks and corporations to meet short term debt obligations
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.


11. Corporate Finance
Profit is a vague term - this goal fails to consider whether short-run or long-run profit maximization is being considered
The study of the relationship between business decisions and the value of the stock in the business
Commodities (timber - oil - gold); Floating rate notes/bonds; TIP's (Treasury Inflation Protected Securities; Real Estate
Risk that the company will not be able to repay the interest or principle


12. Why might revenue and cost figures shown on an income statement not be representative of the actual cashflow?
One or more of the partners will be subject to liability - others will be limited but not actively involved in management. division of profits is relative.
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid
Over the counter
The balance sheet


13. Aagency costs
Use of debt in a firm's capital structure. more debt = greater degree of leverage
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.
Bond may be redeemed earlier by the issuer
Unexpected information; Information that effects the risk or return of an asset


14. Capital Structure (or Financial Structure)
Net working capital
The mixture of long-term debt and equity maintained by a firm to finance its operations
Way for companies to reduce working capital by: Decreasing Accounts Receivables; Increasing Accounts Payable; Decreasing levels of inventory
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


15. What incentives to managers in large corporations have to maximize share value?
Holder can exchange bond for common stock according to the conversion ratio
Tax bill divided by taxable income
Assets pledged as Collateral for non-payment of debt (collateral)
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)


16. What is an Annuity?
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)
Loan to finance everyday operations i.e. pay accounts payable - wages - etc. and not to buy long term assets
Way for companies to reduce working capital by: Decreasing Accounts Receivables; Increasing Accounts Payable; Decreasing levels of inventory
two companies combining resources in a partnership; i.e Sony-Ericsson


17. Letters of Credit
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
Long Term Bonds (w/ high - long term - & locked interest rate) ; Short Selling many types of stocks; Holding Cash; Gold
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid


18. What is an agency relationship?
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.
holds that: neither Technical or Fundamental Analysis work - but Insider information can help beat the market
Ease of transferring ownership - limited liability to debt - unlimited life of the business
Time Value of Money; Risk/Return: Greater risk - Greater returns


19. Different classifications of Financial Markets
Senior secured; Senior unsecured - Senior Subordinated - Subordinated
Unique and Highly complex financial service transaction between a Bank and a Company
By: Claims; Maturity; Seasoning of claims; Time of Delivery; Organizational Structure
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond


20. Types of Stock Analysis
type of risk where interest rate rises and price of bond decreases
Technical; Fundamental
Risk that the company will not be able to repay the interest or principle
Technical (charts - supply/demand of stocks); Fundamental (Analyze companies information: balance sheet - ect.); Insider Information


21. Marginal tax rate
Earnings before interest and taxes
A firm's short-term assets (ie cash - inventory) and liabilities (ie accounts payable to suppliers)
states that: one Dollar today will be worth more in the future
Rate of the extra tax you would pay if you earned one more dollar


22. Things financial manager should keep in mind when evaluating income statement
To maximize the current value per share fo the existing stock
Over the counter
Use of debt in a firm's capital structure. more debt = greater degree of leverage
GAAP - cash v. noncash items - time and costs


23. General partnership
Partners receive equal profits and liability
Common
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)


24. Sarbanes-Oxley AKA 'Sarbox'

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25. Future Value means ______ money on a time line
Markets where common or preferred stocks are sold in either the Primary or Secondary Markets
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)
later
Exchange Traded Fund - Mixture of stocks and mutual funds


26. Equity Market
Markets where common or preferred stocks are sold in either the Primary or Secondary Markets
Expenses charged against revenues that do not directly affect cash flow - such as depreciation
A firm's short-term assets (ie cash - inventory) and liabilities (ie accounts payable to suppliers)
Unexpected information; Information that effects the risk or return of an asset


27. Limited partnership
Where a company sells an asset and then leases it back.
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.
One or more of the partners will be subject to liability - others will be limited but not actively involved in management. division of profits is relative.
The study of the relationship between business decisions and the value of the stock in the business


28. How to calculate FV of a single payment?
FV = PV(1 + r)^t r = interest rate t = # of periods
A firm's short-term assets (ie cash - inventory) and liabilities (ie accounts payable to suppliers)
More efficient inventory management - increase in AR collections - etc.
Matches those who wish to buy with those who wish to sell


29. Dealer
Short term government debt; Certificates of Deposits (CD's); Commercial Paper (CP)
Time Value of Money; Risk/Return: Greater risk - Greater returns
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
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread


30. Partnership
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
Business formed by 2 or more individuals or entities.
Security; Seniority; Features (putable bond)
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk


31. Bond Risk
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond
Holder can exchange bond for common stock according to the conversion ratio
The study of the relationship between business decisions and the value of the stock in the business
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)


32. Auction market
Cash flow from assets
holds that: neither Technical or Fundamental Analysis work - but Insider information can help beat the market
Matches those who wish to buy with those who wish to sell
the Coupon rate is periodically adjusted to the current interest rate


33. Levels of Market Efficiency
Equity money provided by investors for start up firms with long term growth potential
Weak Form Efficiency - Semi Strong Form - Strong Form
Loan from one company to another used to buy goods from the company providing the loan
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer


34. Putable Bonds

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35. Types of Financing: Sale and Leaseback
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer
Where a company sells an asset and then leases it back.
Soft Loans; Guarantees; Grants; Taxes; Equity Financing
Bond holder can 'Put Back' the bond with the issuer - In case interest rates rise or issuers credit quality decreases


36. Convertible bond
holds that no investor can beat the market and that doing research is useless
GAAP - cash v. noncash items - time and costs
Holder can exchange bond for common stock according to the conversion ratio
Volatility of price movement; Liquidity of the market; Interest costs


37. Getting Government Sponsored Financing depends on...
Holder can exchange bond for common stock according to the conversion ratio
Ease of transferring ownership - limited liability to debt - unlimited life of the business
Class (minorities); Geographical location; types of industry; Size; Exporting Firms
Pure discount loans; Interest only loans; Amortized loans


38. LLC (Limited Liability Corporation)

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39. Leases
the issuer does something which causes the credit quality to go down
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread
Claims to wealth and legal structure; Saving and Investment Process; Monetary System
Substitute for buying an asset


40. Equity Issuance
Direct or Private Placement; Public Offering; Rights Issue
Hybrid of partnership and corporation. operates and taxed like a partnership but retains limited liability for owners - IRS may double tax if too 'corporation-like'
Risk that the bond will be called back by bond issuer if interest rates fall to much
Class (minorities); Geographical location; types of industry; Size; Exporting Firms


41. What is a dealer market?
two companies combining resources in a partnership; i.e Sony-Ericsson
Buys/sells securities for their own benefit - directly with customers -
A financial statement summarizing performance over a period of time.
Tax bill divided by taxable income


42. Securitization
Loan to finance everyday operations i.e. pay accounts payable - wages - etc. and not to buy long term assets
how company raise money; uses money; transfers of money from savers to spenders
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
Soft Loans; Guarantees; Grants; Taxes; Equity Financing


43. Present value means _____ money on a time line
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)
the issuer does something which causes the credit quality to go down
earlier
Cash flow from assets


44. What are the risks of investing in a Bond?
Ease of transferring ownership - limited liability to debt - unlimited life of the business
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk
Cash flow to stockholders
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.


45. Sole Proprietorship

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46. Franchising
Loan to finance everyday operations i.e. pay accounts payable - wages - etc. and not to buy long term assets
holds that: neither Technical or Fundamental Analysis work - but Insider information can help beat the market
The balance sheet
A way for seller of goods and services to have third parties sell his goods or services under license


47. OTC
Cost of good sold
Market where Corporate Debt is sold. Short term/Long term
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
Over the counter


48. Working Capital

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49. Types of Finance
Government; Personal; Corporate
Weak Form Efficiency - Semi Strong Form - Strong Form
Over the counter
Tax bill divided by taxable income


50. Fundamental principles of Finance
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer
Use of debt in a firm's capital structure. more debt = greater degree of leverage
Length; Payment Method (Amortized or Single Bullet); Collateral Protection; Bank Obligation to lend ( Committed or Not Committed); Frequency of borrowing; Pricing (Euribor Rate)
Time Value of Money; Risk/Return