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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. Capital Markets
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)
Long term Debt and Equity Instruments only (more than 1 year maturity)
More efficient inventory management - increase in AR collections - etc.
Future to Present

2. Types of Finance
Holder can exchange bond for common stock according to the conversion ratio
By: Claims; Maturity; Seasoning of claims; Time of Delivery; Organizational Structure
Ease of transferring ownership - limited liability to debt - unlimited life of the business
Government; Personal; Corporate

3. Head and Shoulder refers to what type of stock analysis?
Technical
Buys/sells securities for their own benefit - directly with customers -
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)
Matches those who wish to buy with those who wish to sell

4. Convertible bond
Assets = Liabilities + Shareholders' Equity
Equity money provided by investors for start up firms with long term growth potential
Holder can exchange bond for common stock according to the conversion ratio
FV = PV(1 + r)^t r = interest rate t = # of periods

5. Capital Market Instruments
Weak Form Efficiency - Semi Strong Form - Strong Form
Common Stock; Preferred Stock; Long Term Government Bonds
Bond holder can 'Put Back' the bond with the issuer - In case interest rates rise or issuers credit quality decreases
Unexpected information; Information that effects the risk or return of an asset

6. Dealer
Short term government debt; Certificates of Deposits (CD's); Commercial Paper (CP)
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread
Common
Government; Personal; Corporate

7. What makes a Bond Price Change?
Movement of Interest Rate; Credit Risk; Features of the bonds. FYI - Long Term Bonds have more price risk
A financial statement summarizing performance over a period of time.
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.
Business formed by 2 or more individuals or entities.

8. What is the order of Seniority?
Senior secured; Senior unsecured - Senior Subordinated - Subordinated
The acquisition of long-term investments. the value of the cash flow generated by an asset exceeds the cost of that asset.
Form of financing where large capital expenditures are kept off a companies balance sheet; ex. Joint Ventures - R&D partnerships; Operating Leases
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)

9. 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 acquisition of long-term investments. the value of the cash flow generated by an asset exceeds the cost of that asset.
holds that: you cannot get superior returns from Technical Analysis; Fundamental analysis could beat the market
Loan to finance everyday operations i.e. pay accounts payable - wages - etc. and not to buy long term assets

10. Things financial manager should keep in mind when evaluating income statement
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
type of risk where interest rate rises and price of bond decreases
Security; Seniority; Features (putable bond)
GAAP - cash v. noncash items - time and costs

11. Noncash items
Expenses charged against revenues that do not directly affect cash flow - such as depreciation
Difference between a firm's current assets and its current liabilities``
Size of firm; Degree of development of financial markets
Short term government debt; Certificates of Deposits (CD's); Commercial Paper (CP)

12. Money Markets
Short term Debt Instruments only (Less than 1 year maturity)
Technical
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

13. How to invest in Inflation

14. Corporate Finance
Technical (charts - supply/demand of stocks); Fundamental (Analyze companies information: balance sheet - ect.); Insider Information
Matches those who wish to buy with those who wish to sell
The study of the relationship between business decisions and the value of the stock in the business
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid

15. LLC (Limited Liability Corporation)

16. EBIT
Earnings before interest and taxes
the Coupon rate is periodically adjusted to the current interest rate
Tax bill divided by taxable income
The large OTC market is NASDAQ

17. Liquidity
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.
the issuer does something which causes the credit quality to go down
Banks; Insurance Companies; Mutual Funds; Pension Funds
type of risk where interest rate rises and price of bond decreases

18. How to invest in Deflation
Long Term Bonds (w/ high - long term - & locked interest rate) ; Short Selling many types of stocks; Holding Cash; Gold
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
how company raise money; uses money; transfers of money from savers to spenders
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

19. Weak form efficiency
Long term Debt and Equity Instruments only (more than 1 year maturity)
Senior secured; Senior unsecured - Senior Subordinated - Subordinated
Partners receive equal profits and liability
holds that: you cannot get superior returns from Technical Analysis; Fundamental analysis could beat the market

20. How might a companies' change in NWC be negative in a given year?
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
More efficient inventory management - increase in AR collections - etc.
Where financing is secured by the projects assets - including revenues. Creditors do not have claims against the sponsors assets.
Risk that inflation increases since the bond was issued

21. Default Risk
Financing: how to get funds; Investing: what to do with funds
Cost of good sold
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control
Risk that the company will not be able to repay the interest or principle

22. Strong Form
The study of the relationship between business decisions and the value of the stock in the business
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)
Senior secured; Senior unsecured - Senior Subordinated - Subordinated

23. Debtor in Possession (DIP)
Net working capital
The large OTC market is NASDAQ
Pure discount loans; Interest only loans; Amortized loans
Senior security provided for companies in financial distress or under bankruptcy

24. What is an ETF?
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)
Revenues - expenses = income
Over the counter
Exchange Traded Fund - Mixture of stocks and mutual funds

25. Structured Finance
Security; Seniority; Features (putable bond)
Unique and Highly complex financial service transaction between a Bank and a Company
Technical (charts - supply/demand of stocks); Fundamental (Analyze companies information: balance sheet - ect.); Insider Information
Assets pledged as Collateral for non-payment of debt (collateral)

26. Call Risk
Holder can exchange bond for common stock according to the conversion ratio
An intermediary who does not own the object being sold; acts as a middle man; receives a fee for services
Name of Issuer; Par Value; Maturity Date; Coupon Rate; Coupon Payments; Current Market Interest Rate; Current Market Price; Bond Indenture (legal note); Credit Rating.
Risk that the bond will be called back by bond issuer if interest rates fall to much

27. Different Types of Investing Analysis
The mixture of long-term debt and equity maintained by a firm to finance its operations
Technical (charts - supply/demand of stocks); Fundamental (Analyze companies information: balance sheet - ect.); Insider Information
Cost of good sold
Common Stock; Preferred Stock; Long Term Government Bonds

28. What are Stakeholders?
Time Value of Money; Risk/Return: Greater risk - Greater returns
how company raise money; uses money; transfers of money from savers to spenders
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)
Over the counter

29. Interest rates go from _____ to _____ value
Present to Future
Volatility of price movement; Liquidity of the market; Interest costs
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer
Soft Loans; Guarantees; Grants; Taxes; Equity Financing

30. Security for a bond
Cross Border Lease used to arbitrage tax law
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'
Future to Present
Assets pledged as Collateral for non-payment of debt (collateral)

31. Time Value of Money
states that: one Dollar today will be worth more in the future
earlier
Short term; Cancelable; Lessor is responsible; stays off balance sheet; for Financial lease the opposite is true.
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer

32. Types of Financing: Sale and Leaseback
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
Where a company sells an asset and then leases it back.
Exchange Traded Fund - Mixture of stocks and mutual funds
Unexpected information; Information that effects the risk or return of an asset

33. Which type of stocks carry voting rights?
Common
Preferred; Common
Use of debt in a firm's capital structure. more debt = greater degree of leverage
Form of Finance that ensure the seller obtains prompt payment upon delivery of his goods to the buyer

34. Credit Quality Risk
Common
Financing: how to get funds; Investing: what to do with funds
the issuer does something which causes the credit quality to go down
Preferred; Common

35. Why is the corporate form of business organization superior when it comes to raising cash?
Government; Personal; Corporate
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'
Ease of transferring ownership - limited liability to debt - unlimited life of the business
Bond may be redeemed earlier by the issuer

36. Putable Bonds

37. Working Capital

38. Fundamental principles of Finance
retailer gets inventory which he does not have to pay for until he sells it
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)
FV = PV(1 + r)^t r = interest rate t = # of periods
Time Value of Money; Risk/Return

39. Core Elements of Financial Management
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control
Common Stock; Preferred Stock; Long Term Government Bonds
Long Term Bonds (w/ high - long term - & locked interest rate) ; Short Selling many types of stocks; Holding Cash; Gold
The process of planning and managing a firm's long-term investments

40. Balance sheet identity

41. Risks of Financial Theories
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.
Do not consider market emotions; assumes that the market is honest (true information); effects of third parties
A firm's short-term assets (ie cash - inventory) and liabilities (ie accounts payable to suppliers)
retailer gets inventory which he does not have to pay for until he sells it

42. Why might revenue and cost figures shown on an income statement not be representative of the actual cashflow?
Short term government debt; Certificates of Deposits (CD's); Commercial Paper (CP)
Where a company sells an asset and then leases it back.
Common Stock; Preferred Stock; Long Term Government Bonds
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid

43. Discount rates go from _____ to ______ value
Time Value of Money; Risk/Return
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)
Future to Present

44. Venture Capital
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)
the issuer does something which causes the credit quality to go down
Equity money provided by investors for start up firms with long term growth potential

45. Internally Generated Fund
More efficient inventory management - increase in AR collections - etc.
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
Pure discount loans; Interest only loans; Amortized loans
Most desirable source of Financing; a way for companies to generate cash internally; Net Income + Depreciation and Amortization

46. COGS
Cost of good sold
To maximize the current value per share fo the existing stock
Where financing is secured by the projects assets - including revenues. Creditors do not have claims against the sponsors assets.
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

47. Working Capital Management
To maximize the current value per share fo the existing stock
Buys/sells securities for their own benefit - directly with customers -
Way for companies to reduce working capital by: Decreasing Accounts Receivables; Increasing Accounts Payable; Decreasing levels of inventory
Preferred; Common

48. A good financial system must have...
The study of the relationship between business decisions and the value of the stock in the business
Present to Future
Substitute for buying an asset
Claims to wealth and legal structure; Saving and Investment Process; Monetary System

49. Levels of Market Efficiency
Unique and Highly complex financial service transaction between a Bank and a Company
Security; Seniority; Features (putable bond)
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)
Weak Form Efficiency - Semi Strong Form - Strong Form

50. Auction market
Matches those who wish to buy with those who wish to sell
A financial statement summarizing performance over a period of time.
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
Ease of transferring ownership - limited liability to debt - unlimited life of the business