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Business Corporate Finance

Instructions:

Answer 50 questions in 15 minutes.
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Match each statement with the correct term.
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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. Two Basic Principles of Finance
type of risk where interest rate rises and price of bond decreases
Time Value of Money; Risk/Return: Greater risk - Greater returns
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)
Form of financing where large capital expenditures are kept off a companies balance sheet; ex. Joint Ventures - R&D partnerships; Operating Leases

2. Operating Lease is...
holds that: neither Technical or Fundamental Analysis work - but Insider information can help beat the market
Short term; Cancelable; Lessor is responsible; stays off balance sheet; for Financial lease the opposite is true.
the Coupon rate is periodically adjusted to the current interest rate
Moving Average; Cash positions of funds; Amount of short selling

3. A good financial system must have...
Claims to wealth and legal structure; Saving and Investment Process; Monetary System
states that: one Dollar today will be worth more in the future
Buys/sells securities for their own benefit - directly with customers -
Name of Issuer; Par Value; Maturity Date; Coupon Rate; Coupon Payments; Current Market Interest Rate; Current Market Price; Bond Indenture (legal note); Credit Rating.

4. Leases
Buys/sells securities for their own benefit - directly with customers -
Substitute for buying an asset
State owned institutions which act as finance companies for private domestic entities conducting business abroad
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.

5. Commercial Paper
Buys/sells securities for their own benefit - directly with customers -
unsecured promissory note with a fixed maturity date of 1 to 270 days; Issued by banks and corporations to meet short term debt obligations
Bond holder can 'Put Back' the bond with the issuer - In case interest rates rise or issuers credit quality decreases
The balance sheet

6. Types of Finance
Most desirable source of Financing; a way for companies to generate cash internally; Net Income + Depreciation and Amortization
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread
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.
Government; Personal; Corporate

7. What are the risks of investing in a Bond?
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid
Holder can exchange bond for common stock according to the conversion ratio
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk
type of risk where interest rate rises and price of bond decreases

8. Things financial manager should keep in mind when evaluating income statement
Time Value of Money; Risk/Return: Greater risk - Greater returns
Loan to finance everyday operations i.e. pay accounts payable - wages - etc. and not to buy long term assets
GAAP - cash v. noncash items - time and costs
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control

9. OTC
Security; Seniority; Features (putable bond)
Unique and Highly complex financial service transaction between a Bank and a Company
Pure discount loans; Interest only loans; Amortized loans
Over the counter

10. Head and Shoulder refers to what type of stock analysis?
The acquisition of long-term investments. the value of the cash flow generated by an asset exceeds the cost of that asset.
Assets pledged as Collateral for non-payment of debt (collateral)
A way for seller of goods and services to have third parties sell his goods or services under license
Technical

11. Tools used for Technical Analysis
holds that: neither Technical or Fundamental Analysis work - but Insider information can help beat the market
More efficient inventory management - increase in AR collections - etc.
Present to Future
Moving Average; Cash positions of funds; Amount of short selling

12. NWC
Most desirable source of Financing; a way for companies to generate cash internally; Net Income + Depreciation and Amortization
Risk that the bond will be called back by bond issuer if interest rates fall to much
when a retailer gets financing from a bank for his inventory; i.e. financing for cars in a car dealership
Net working capital

13. GAAP (Generally Accepted Accounting Principles)
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
An intermediary who does not own the object being sold; acts as a middle man; receives a fee for services
A financial statement summarizing performance over a period of time.
The common set of standards and procedures by which audited financial statements are prepared

14. Discount rates go from _____ to ______ value
Future to Present
Unique and Highly complex financial service transaction between a Bank and a Company
Business formed by 2 or more individuals or entities.
Cash flow from assets

15. How might a companies' change in NWC be negative in a given year?
two companies combining resources in a partnership; i.e Sony-Ericsson
Cash flow from assets
More efficient inventory management - increase in AR collections - etc.
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control

16. Bond Risk
Short term government debt; Certificates of Deposits (CD's); Commercial Paper (CP)
holds that no investor can beat the market and that doing research is useless
Assets pledged as Collateral for non-payment of debt (collateral)
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond

17. Time Value of Money
Cash flow to creditors
Banks; Insurance Companies; Mutual Funds; Pension Funds
states that: one Dollar today will be worth more in the future
Make no periodic interest payments - Yield comes from the difference between purchase price and par value

18. Sole Proprietorship

19. COGS
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
Cash flow to creditors
Cost of good sold
Rate of the extra tax you would pay if you earned one more dollar

20. Three types of loans
Security; Seniority; Features (putable bond)
Pure discount loans; Interest only loans; Amortized loans
type of risk where interest rate rises and price of bond decreases
Risk that the company will not be able to repay the interest or principle

21. Factoring
the Coupon rate is periodically adjusted to the current interest rate
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer
Where a business sells its account receivables

22. CFS
Expenses charged against revenues that do not directly affect cash flow - such as depreciation
Time Value of Money; Risk/Return
Cash flow to stockholders
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond

23. Risks of Financial Theories
Length; Payment Method (Amortized or Single Bullet); Collateral Protection; Bank Obligation to lend ( Committed or Not Committed); Frequency of borrowing; Pricing (Euribor Rate)
Technical; Fundamental
Do not consider market emotions; assumes that the market is honest (true information); effects of third parties
Security; Seniority; Features (putable bond)

24. Money Market Instruments

25. The coupon rate of a bond is based off...
Business formed by 2 or more individuals or entities.
Security; Seniority; Features (putable bond)
Senior secured; Senior unsecured - Senior Subordinated - Subordinated
Technical

26. Important Determinants in choosing types of financing
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control
Unique and Highly complex financial service transaction between a Bank and a Company
Size of firm; Degree of development of financial markets
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.

27. Vendor Financing
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 from one company to another used to buy goods from the company providing the loan
Technical; Fundamental
The study of the relationship between business decisions and the value of the stock in the business

28. Fundamental principles of Finance
when a retailer gets financing from a bank for his inventory; i.e. financing for cars in a car dealership
Time Value of Money; Risk/Return
Use of debt in a firm's capital structure. more debt = greater degree of leverage
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread

29. Export Credit Agencies
State owned institutions which act as finance companies for private domestic entities conducting business abroad
An intermediary who does not own the object being sold; acts as a middle man; receives a fee for services
Common
Unexpected information; Information that effects the risk or return of an asset

30. Interest Rate Risk
Risk that the company will not be able to repay the interest or principle
Form of financing where large capital expenditures are kept off a companies balance sheet; ex. Joint Ventures - R&D partnerships; Operating Leases
type of risk where interest rate rises and price of bond decreases
Commodities (timber - oil - gold); Floating rate notes/bonds; TIP's (Treasury Inflation Protected Securities; Real Estate

31. Broker
More efficient inventory management - increase in AR collections - etc.
The process of planning and managing a firm's long-term investments
An intermediary who does not own the object being sold; acts as a middle man; receives a fee for services
Banks; Insurance Companies; Mutual Funds; Pension Funds

32. CFFA
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond
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'
states that: one Dollar today will be worth more in the future
Cash flow from assets

33. Liquidity
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond
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.
Bond may be redeemed earlier by the issuer
Short term government debt; Certificates of Deposits (CD's); Commercial Paper (CP)

34. Core Elements of Financial Management
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'
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control
Time Value of Money; Risk/Return

35. Callable Bonds
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)
Risk that inflation increases since the bond was issued
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)

36. General partnership
Loan from one company to another used to buy goods from the company providing the loan
Partners receive equal profits and liability
Claims to wealth and legal structure; Saving and Investment Process; Monetary System
Tax bill divided by taxable income

37. Zero coupon bonds
NYSE
Make no periodic interest payments - Yield comes from the difference between purchase price and par value
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)
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. Equity Market
Name of Issuer; Par Value; Maturity Date; Coupon Rate; Coupon Payments; Current Market Interest Rate; Current Market Price; Bond Indenture (legal note); Credit Rating.
Make no periodic interest payments - Yield comes from the difference between purchase price and par value
Markets where common or preferred stocks are sold in either the Primary or Secondary Markets
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.

39. Marginal tax rate
Form of financing where large capital expenditures are kept off a companies balance sheet; ex. Joint Ventures - R&D partnerships; Operating Leases
Rate of the extra tax you would pay if you earned one more dollar
Long term Debt and Equity Instruments only (more than 1 year maturity)
Market where Corporate Debt is sold. Short term/Long term

40. EBIT
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'
Tax bill divided by taxable income
Earnings before interest and taxes
the Coupon rate is periodically adjusted to the current interest rate

41. Franchising
Use of debt in a firm's capital structure. more debt = greater degree of leverage
Technical (charts - supply/demand of stocks); Fundamental (Analyze companies information: balance sheet - ect.); Insider Information
later
A way for seller of goods and services to have third parties sell his goods or services under license

42. What are some of the shortcomings of the goal of profit maximization?
Net working capital
Short term government debt; Certificates of Deposits (CD's); Commercial Paper (CP)
Profit is a vague term - this goal fails to consider whether short-run or long-run profit maximization is being considered
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)

43. Corporation
To maximize the current value per share fo the existing stock
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
Commodities (timber - oil - gold); Floating rate notes/bonds; TIP's (Treasury Inflation Protected Securities; Real Estate
Use of debt in a firm's capital structure. more debt = greater degree of leverage

44. Internally Generated Fund
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid
Most desirable source of Financing; a way for companies to generate cash internally; Net Income + Depreciation and Amortization
Difference between a firm's current assets and its current liabilities``
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)

45. Working Capital Management
two companies combining resources in a partnership; i.e Sony-Ericsson
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)
Way for companies to reduce working capital by: Decreasing Accounts Receivables; Increasing Accounts Payable; Decreasing levels of inventory
Risk that the company will not be able to repay the interest or principle

46. Dealer
Overreaction and correction; Delayed reaction; Efficient market reaction
Soft Loans; Guarantees; Grants; Taxes; Equity Financing
holds that no investor can beat the market and that doing research is useless
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread

47. LLC (Limited Liability Corporation)

48. Floor Plan Financing
Over the counter
when a retailer gets financing from a bank for his inventory; i.e. financing for cars in a car dealership
earlier
Partners receive equal profits and liability

49. What is an Annuity?
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
An intermediary who does not own the object being sold; acts as a middle man; receives a fee for services
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)
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.

50. Principle Financial Intermediaries
Difference between a firm's current assets and its current liabilities``
holds that: you cannot get superior returns from Technical Analysis; Fundamental analysis could beat the market
Banks; Insurance Companies; Mutual Funds; Pension Funds
Name of Issuer; Par Value; Maturity Date; Coupon Rate; Coupon Payments; Current Market Interest Rate; Current Market Price; Bond Indenture (legal note); Credit Rating.