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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. Corporate Finance (defined)
Do not consider market emotions; assumes that the market is honest (true information); effects of third parties
The study of the relationship between business decisions and the value of the stock in the business
Banks; Insurance Companies; Mutual Funds; Pension Funds
type of risk where interest rate rises and price of bond decreases

2. What is the capital budgeting decision?
The process of planning and managing a firm's long-term investments
The acquisition of long-term investments. the value of the cash flow generated by an asset exceeds the cost of that asset.
Security; Seniority; Features (putable bond)
Cash flow to creditors

3. How to calculate FV of a single payment?
FV = PV(1 + r)^t r = interest rate t = # of periods
Use of debt in a firm's capital structure. more debt = greater degree of leverage
Do not consider market emotions; assumes that the market is honest (true information); effects of third parties
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)

4. Bridge Financing
Way to maintain liquidity while waiting for an anticipated inflow of cash
holds that: you cannot get superior returns from Technical Analysis; Fundamental analysis could beat the market
Financing: how to get funds; Investing: what to do with funds
Long Term Bonds (w/ high - long term - & locked interest rate) ; Short Selling many types of stocks; Holding Cash; Gold

5. Securitization
Profit is a vague term - this goal fails to consider whether short-run or long-run profit maximization is being considered
Bond holder can 'Put Back' the bond with the issuer - In case interest rates rise or issuers credit quality decreases
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
Buys/sells securities for their own benefit - directly with customers -

6. General partnership
Partners receive equal profits and liability
Where a business sells its account receivables
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
type of risk where interest rate rises and price of bond decreases

7. Liquidity
later
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
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.

8. EBIT
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
Sole Proprietorship; Partnership (Limited Liability Company); Public Company/Corporation (through IPO)
Business formed by 2 or more individuals or entities.
Earnings before interest and taxes

9. Why might revenue and cost figures shown on an income statement not be representative of the actual cashflow?
Tax bill divided by taxable income
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)
Cash flow to creditors

10. Goal of Financial Management
The study of the relationship between business decisions and the value of the stock in the business
To maximize the current value per share fo the existing stock
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)

11. Things financial manager should keep in mind when evaluating income statement
Loan from one company to another used to buy goods from the company providing the loan
Form of financing where large capital expenditures are kept off a companies balance sheet; ex. Joint Ventures - R&D partnerships; Operating Leases
The process of planning and managing a firm's long-term investments
GAAP - cash v. noncash items - time and costs

12. Call Risk
The study of the relationship between business decisions and the value of the stock in the business
Business formed by 2 or more individuals or entities.
Risk that the bond will be called back by bond issuer if interest rates fall to much
Unique and Highly complex financial service transaction between a Bank and a Company

13. Capital Structure (or Financial Structure)
The mixture of long-term debt and equity maintained by a firm to finance its operations
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)
More efficient inventory management - increase in AR collections - etc.
Cost of good sold

14. Floor Plan Financing
when a retailer gets financing from a bank for his inventory; i.e. financing for cars in a car dealership
Risk that inflation increases since the bond was issued
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)
type of risk where interest rate rises and price of bond decreases

15. Fundamental principles of Finance
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.
Time Value of Money; Risk/Return
Risk that the bond will be called back by bond issuer if interest rates fall to much
The study of the relationship between business decisions and the value of the stock in the business

16. Commercial Paper
Cash flow from assets
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'
unsecured promissory note with a fixed maturity date of 1 to 270 days; Issued by banks and corporations to meet short term debt obligations
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.

17. CFC
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk
Profit is a vague term - this goal fails to consider whether short-run or long-run profit maximization is being considered
An intermediary who does not own the object being sold; acts as a middle man; receives a fee for services
Cash flow to creditors

18. What is an Annuity?
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
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)
Over the counter

19. Type of information that affects Stock Price greatly
Name of Issuer; Par Value; Maturity Date; Coupon Rate; Coupon Payments; Current Market Interest Rate; Current Market Price; Bond Indenture (legal note); Credit Rating.
Class (minorities); Geographical location; types of industry; Size; Exporting Firms
Unexpected information; Information that effects the risk or return of an asset
A way for seller of goods and services to have third parties sell his goods or services under license

20. Strong Form
Soft Loans; Guarantees; Grants; Taxes; Equity Financing
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)
when a retailer gets financing from a bank for his inventory; i.e. financing for cars in a car dealership
NYSE

21. What affects Bid/Ask Spread?
Volatility of price movement; Liquidity of the market; Interest costs
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)
earlier
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid

22. The coupon rate of a bond is based off...
The large OTC market is NASDAQ
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond
Common
Security; Seniority; Features (putable bond)

23. Leases
A way for seller of goods and services to have third parties sell his goods or services under license
Where financing is secured by the projects assets - including revenues. Creditors do not have claims against the sponsors assets.
Buys/sells securities for their own benefit - directly with customers -
Substitute for buying an asset

24. Double Dip Lease
Loan from one company to another used to buy goods from the company providing the loan
Technical; Fundamental
Financing: how to get funds; Investing: what to do with funds
Cross Border Lease used to arbitrage tax law

25. Two types of stocks
Preferred; Common
An intermediary who does not own the object being sold; acts as a middle man; receives a fee for services
Use of debt in a firm's capital structure. more debt = greater degree of leverage
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.

26. Future Value means ______ money on a time line
Where financing is secured by the projects assets - including revenues. Creditors do not have claims against the sponsors assets.
later
Length; Payment Method (Amortized or Single Bullet); Collateral Protection; Bank Obligation to lend ( Committed or Not Committed); Frequency of borrowing; Pricing (Euribor Rate)
holds that: you cannot get superior returns from Technical Analysis; Fundamental analysis could beat the market

27. A good financial system must have...
Claims to wealth and legal structure; Saving and Investment Process; Monetary System
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
Way for companies to reduce working capital by: Decreasing Accounts Receivables; Increasing Accounts Payable; Decreasing levels of inventory
holds that: neither Technical or Fundamental Analysis work - but Insider information can help beat the market

28. Equity Market
Matches those who wish to buy with those who wish to sell
Length; Payment Method (Amortized or Single Bullet); Collateral Protection; Bank Obligation to lend ( Committed or Not Committed); Frequency of borrowing; Pricing (Euribor Rate)
Markets where common or preferred stocks are sold in either the Primary or Secondary Markets
Security; Seniority; Features (putable bond)

29. Types of Cash Flows
Government; Personal; Corporate
Short term government debt; Certificates of Deposits (CD's); Commercial Paper (CP)
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
Risk that inflation increases since the bond was issued

30. Debt Market
Partners receive equal profits and liability
Market where Corporate Debt is sold. Short term/Long term
Common Stock; Preferred Stock; Long Term Government Bonds
Tax bill divided by taxable income

31. COGS
Cost of good sold
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'
More efficient inventory management - increase in AR collections - etc.
Risk that the bond will be called back by bond issuer if interest rates fall to much

32. Core Elements of Financial Management
Use of debt in a firm's capital structure. more debt = greater degree of leverage
Weak Form Efficiency - Semi Strong Form - Strong Form
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control
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'

33. Types of Financing: Sale and Leaseback
Where a company sells an asset and then leases it back.
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer
Way to maintain liquidity while waiting for an anticipated inflow of cash
holds that no investor can beat the market and that doing research is useless

34. Efficient Market Hypothesis
Cash flow to stockholders
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'
the Coupon rate is periodically adjusted to the current interest rate
holds that no investor can beat the market and that doing research is useless

35. Two Basic Principles of Finance
Time Value of Money; Risk/Return: Greater risk - Greater returns
Technical; Fundamental
Loan to finance everyday operations i.e. pay accounts payable - wages - etc. and not to buy long term assets
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.

36. Types of Stock Analysis
Equity money provided by investors for start up firms with long term growth potential
holds that: you cannot get superior returns from Technical Analysis; Fundamental analysis could beat the market
Technical; Fundamental
Tax bill divided by taxable income

37. What are the risks of investing in a Bond?
Holder can exchange bond for common stock according to the conversion ratio
Name of Issuer; Par Value; Maturity Date; Coupon Rate; Coupon Payments; Current Market Interest Rate; Current Market Price; Bond Indenture (legal note); Credit Rating.
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk
Revenues - expenses = income

38. Debtor in Possession (DIP)
Partners receive equal profits and liability
Sole Proprietorship; Partnership (Limited Liability Company); Public Company/Corporation (through IPO)
Commodities (timber - oil - gold); Floating rate notes/bonds; TIP's (Treasury Inflation Protected Securities; Real Estate
Senior security provided for companies in financial distress or under bankruptcy

39. Money Market Instruments

40. Putable Bonds

41. Capital Market Instruments
Common Stock; Preferred Stock; Long Term Government Bonds
retailer gets inventory which he does not have to pay for until he sells it
Time Value of Money; Risk/Return
Expenses charged against revenues that do not directly affect cash flow - such as depreciation

42. Different classifications of Financial Markets
By: Claims; Maturity; Seasoning of claims; Time of Delivery; Organizational Structure
Name of Issuer; Par Value; Maturity Date; Coupon Rate; Coupon Payments; Current Market Interest Rate; Current Market Price; Bond Indenture (legal note); Credit Rating.
Loan to finance everyday operations i.e. pay accounts payable - wages - etc. and not to buy long term assets
holds that no investor can beat the market and that doing research is useless

43. LLC (Limited Liability Corporation)

44. Inflation Risk
Do not consider market emotions; assumes that the market is honest (true information); effects of third parties
Risk that inflation increases since the bond was issued
the Coupon rate is periodically adjusted to the current interest rate
Long term Debt and Equity Instruments only (more than 1 year maturity)

45. Sole Proprietorship

46. Stock Prices adjust to new information in these ways...
Overreaction and correction; Delayed reaction; Efficient market reaction
Pure discount loans; Interest only loans; Amortized loans
states that: one Dollar today will be worth more in the future
Technical; Fundamental

47. Present value means _____ money on a time line
holds that no investor can beat the market and that doing research is useless
Moving Average; Cash positions of funds; Amount of short selling
earlier
Government; Personal; Corporate

48. Financial Statement showing a firm's accounting value on a particular date - a 'snapshot'
The balance sheet
Direct or Private Placement; Public Offering; Rights Issue
Size of firm; Degree of development of financial markets
Cash flow to creditors

49. Forms of Business Organization
Sole Proprietorship; Partnership (Limited Liability Company); Public Company/Corporation (through IPO)
Time Value of Money; Risk/Return: Greater risk - Greater returns
A financial statement summarizing performance over a period of time.
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.

50. Security for a bond
Technical (charts - supply/demand of stocks); Fundamental (Analyze companies information: balance sheet - ect.); Insider Information
Buys/sells securities for their own benefit - directly with customers -
Assets pledged as Collateral for non-payment of debt (collateral)
Long Term Bonds (w/ high - long term - & locked interest rate) ; Short Selling many types of stocks; Holding Cash; Gold