Test your basic knowledge |

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. Callable Bonds
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
Bond may be redeemed earlier by the issuer
Form of financing where large capital expenditures are kept off a companies balance sheet; ex. Joint Ventures - R&D partnerships; Operating Leases
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)

2. Two Basic Principles of Finance
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond
Technical
Time Value of Money; Risk/Return: Greater risk - Greater returns
Volatility of price movement; Liquidity of the market; Interest costs

3. What are some of the shortcomings of the goal of profit maximization?
Class (minorities); Geographical location; types of industry; Size; Exporting Firms
holds that no investor can beat the market and that doing research is useless
Profit is a vague term - this goal fails to consider whether short-run or long-run profit maximization is being considered
To maximize the current value per share fo the existing stock

4. What is an ETF?
Exchange Traded Fund - Mixture of stocks and mutual funds
the Coupon rate is periodically adjusted to the current interest rate
Time Value of Money; Risk/Return
Market where Corporate Debt is sold. Short term/Long term

5. Head and Shoulder refers to what type of stock analysis?
Technical
Equity money provided by investors for start up firms with long term growth potential
the Coupon rate is periodically adjusted to the current interest rate
Risk that inflation increases since the bond was issued

6. Commercial Paper
the issuer does something which causes the credit quality to go down
Partners receive equal profits and liability
State owned institutions which act as finance companies for private domestic entities conducting business abroad
unsecured promissory note with a fixed maturity date of 1 to 270 days; Issued by banks and corporations to meet short term debt obligations

7. Floating Rate
the Coupon rate is periodically adjusted to the current interest rate
later
earlier
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

8. Sarbanes-Oxley AKA 'Sarbox'

9. NWC
Net working capital
Expenses charged against revenues that do not directly affect cash flow - such as depreciation
Senior security provided for companies in financial distress or under bankruptcy
Soft Loans; Guarantees; Grants; Taxes; Equity Financing

10. How to invest in Inflation

11. Call Risk
Risk that the bond will be called back by bond issuer if interest rates fall to much
Cash flow from assets
NYSE
The acquisition of long-term investments. the value of the cash flow generated by an asset exceeds the cost of that asset.

12. Franchising
Time Value of Money; Risk/Return: Greater risk - Greater returns
Substitute for buying an asset
Loan from one company to another used to buy goods from the company providing the loan
A way for seller of goods and services to have third parties sell his goods or services under license

13. Levels of Market Efficiency
Risk that the bond will be called back by bond issuer if interest rates fall to much
Weak Form Efficiency - Semi Strong Form - Strong Form
The acquisition of long-term investments. the value of the cash flow generated by an asset exceeds the cost of that asset.
Common Stock; Preferred Stock; Long Term Government Bonds

14. Core Elements of Financial Management
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control
retailer gets inventory which he does not have to pay for until he sells it
Time Value of Money; Risk/Return
Commodities (timber - oil - gold); Floating rate notes/bonds; TIP's (Treasury Inflation Protected Securities; Real Estate

15. CFS
holds that: neither Technical or Fundamental Analysis work - but Insider information can help beat the market
Future to Present
The acquisition of long-term investments. the value of the cash flow generated by an asset exceeds the cost of that asset.
Cash flow to stockholders

16. Strong Form
The common set of standards and procedures by which audited financial statements are prepared
The large OTC market is NASDAQ
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)
Form of financing where large capital expenditures are kept off a companies balance sheet; ex. Joint Ventures - R&D partnerships; Operating Leases

17. Noncash items
Expenses charged against revenues that do not directly affect cash flow - such as depreciation
earlier
A financial statement summarizing performance over a period of time.
Rate of the extra tax you would pay if you earned one more dollar

18. Different classifications of Financial Markets
Earnings before interest and taxes
Government; Personal; Corporate
Size of firm; Degree of development of financial markets
By: Claims; Maturity; Seasoning of claims; Time of Delivery; Organizational Structure

19. Export Credit Agencies
Where financing is secured by the projects assets - including revenues. Creditors do not have claims against the sponsors assets.
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond
State owned institutions which act as finance companies for private domestic entities conducting business abroad
Future to Present

20. What incentives to managers in large corporations have to maximize share value?
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)
The balance sheet
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.
Unexpected information; Information that effects the risk or return of an asset

21. Types of Cash Flows
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
To maximize the current value per share fo the existing stock
the Coupon rate is periodically adjusted to the current interest rate
Long term Debt and Equity Instruments only (more than 1 year maturity)

22. 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.
Time Value of Money; Risk/Return
the issuer does something which causes the credit quality to go down
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

23. A Bond offering statement contains...
Unexpected information; Information that effects the risk or return of an asset
NYSE
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer
Name of Issuer; Par Value; Maturity Date; Coupon Rate; Coupon Payments; Current Market Interest Rate; Current Market Price; Bond Indenture (legal note); Credit Rating.

24. Things financial manager should keep in mind when evaluating income statement
GAAP - cash v. noncash items - time and costs
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'
how company raise money; uses money; transfers of money from savers to spenders
The mixture of long-term debt and equity maintained by a firm to finance its operations

25. What is the OTC market for stocks called?
The large OTC market is NASDAQ
Difference between a firm's current assets and its current liabilities``
Unique and Highly complex financial service transaction between a Bank and a Company
Size of firm; Degree of development of financial markets

26. Present value means _____ money on a time line
earlier
Make no periodic interest payments - Yield comes from the difference between purchase price and par value
Assets pledged as Collateral for non-payment of debt (collateral)
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)

27. 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
Cost of good sold
Revenues - expenses = income

28. Interest rates go from _____ to _____ value
Present to Future
Risk that the bond will be called back by bond issuer if interest rates fall to much
NYSE
Common

29. Securitization
Moving Average; Cash positions of funds; Amount of short selling
earlier
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
Unexpected information; Information that effects the risk or return of an asset

30. EBIT
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)
Expenses charged against revenues that do not directly affect cash flow - such as depreciation
Where a business sells its account receivables
Earnings before interest and taxes

31. Semi Strong Form
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)
holds that: neither Technical or Fundamental Analysis work - but Insider information can help beat the market
Present to Future
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

32. What are Stakeholders?
Tax bill divided by taxable income
Claims to wealth and legal structure; Saving and Investment Process; Monetary System
Loan from one company to another used to buy goods from the company providing the loan
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)

33. Letters of Credit
Weak Form Efficiency - Semi Strong Form - Strong Form
Time Value of Money; Risk/Return
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer
Long Term Bonds (w/ high - long term - & locked interest rate) ; Short Selling many types of stocks; Holding Cash; Gold

34. Goal of Financial Management
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control
More efficient inventory management - increase in AR collections - etc.
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

35. What is the capital budgeting decision?
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
The acquisition of long-term investments. the value of the cash flow generated by an asset exceeds the cost of that asset.
By: Claims; Maturity; Seasoning of claims; Time of Delivery; Organizational Structure
Technical; Fundamental

36. Capital Budgeting

37. Capital Markets
Soft Loans; Guarantees; Grants; Taxes; Equity Financing
Time Value of Money; Risk/Return
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread
Long term Debt and Equity Instruments only (more than 1 year maturity)

38. Venture Capital
Direct or Private Placement; Public Offering; Rights Issue
Equity money provided by investors for start up firms with long term growth potential
Financing: how to get funds; Investing: what to do with funds
Where a company sells an asset and then leases it back.

39. Corp. Finance involves
A financial statement summarizing performance over a period of time.
Senior security provided for companies in financial distress or under bankruptcy
how company raise money; uses money; transfers of money from savers to spenders
Bond may be redeemed earlier by the issuer

40. Operating Lease is...
Pure discount loans; Interest only loans; Amortized loans
Short term; Cancelable; Lessor is responsible; stays off balance sheet; for Financial lease the opposite is true.
Business formed by 2 or more individuals or entities.
The balance sheet

41. Fundamental principles of Finance
Time Value of Money; Risk/Return
A financial statement summarizing performance over a period of time.
Direct or Private Placement; Public Offering; Rights Issue
Soft Loans; Guarantees; Grants; Taxes; Equity Financing

42. Two types of stocks
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid
Volatility of price movement; Liquidity of the market; Interest costs
Preferred; Common
Partners receive equal profits and liability

43. Bond Risk
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond
Pure discount loans; Interest only loans; Amortized loans
Partners receive equal profits and liability
Short term; Cancelable; Lessor is responsible; stays off balance sheet; for Financial lease the opposite is true.

44. Default Risk
Risk that the company will not be able to repay the interest or principle
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
Common
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)

45. Equity Issuance
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'
Exchange Traded Fund - Mixture of stocks and mutual funds
Direct or Private Placement; Public Offering; Rights Issue
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)

46. Inflation Risk
Where a company sells an asset and then leases it back.
later
The acquisition of long-term investments. the value of the cash flow generated by an asset exceeds the cost of that asset.
Risk that inflation increases since the bond was issued

47. Corporate Finance (defined)
Cash flow from assets
the issuer does something which causes the credit quality to go down
The study of the relationship between business decisions and the value of the stock in the business
Size of firm; Degree of development of financial markets

48. What makes a Bond Price Change?
The mixture of long-term debt and equity maintained by a firm to finance its operations
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.
Movement of Interest Rate; Credit Risk; Features of the bonds. FYI - Long Term Bonds have more price risk
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.

49. What is the order of Seniority?
Senior secured; Senior unsecured - Senior Subordinated - Subordinated
Moving Average; Cash positions of funds; Amount of short selling
Common
Present to Future

50. How to calculate FV of a single payment?
FV = PV(1 + r)^t r = interest rate t = # of periods
Expenses charged against revenues that do not directly affect cash flow - such as depreciation
Unexpected information; Information that effects the risk or return of an asset
Security; Seniority; Features (putable bond)