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. Balance sheet identity

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2. Fundamental principles of Finance
Time Value of Money; Risk/Return
Common Stock; Preferred Stock; Long Term Government Bonds
Loan to finance everyday operations i.e. pay accounts payable - wages - etc. and not to buy long term assets
Time Value of Money; Risk/Return: Greater risk - Greater returns


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

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4. Floating Rate
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)
the Coupon rate is periodically adjusted to the current interest rate
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


5. Money Markets
Difference between a firm's current assets and its current liabilities``
Short term Debt Instruments only (Less than 1 year maturity)
Banks; Insurance Companies; Mutual Funds; Pension Funds
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)


6. Principle Financial Intermediaries
Make no periodic interest payments - Yield comes from the difference between purchase price and par value
Earnings before interest and taxes
Banks; Insurance Companies; Mutual Funds; Pension Funds
the issuer does something which causes the credit quality to go down


7. The income statement equation
Banks; Insurance Companies; Mutual Funds; Pension Funds
Most desirable source of Financing; a way for companies to generate cash internally; Net Income + Depreciation and Amortization
later
Revenues - expenses = income


8. What is an ETF?
Exchange Traded Fund - Mixture of stocks and mutual funds
when a retailer gets financing from a bank for his inventory; i.e. financing for cars in a car dealership
Overreaction and correction; Delayed reaction; Efficient market reaction
The process of planning and managing a firm's long-term investments


9. Capital Budgeting

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10. Equity Issuance
Where a business sells its account receivables
Business formed by 2 or more individuals or entities.
Direct or Private Placement; Public Offering; Rights Issue
FV = PV(1 + r)^t r = interest rate t = # of periods


11. Security for a bond
Long Term Bonds (w/ high - long term - & locked interest rate) ; Short Selling many types of stocks; Holding Cash; Gold
The balance sheet
Assets pledged as Collateral for non-payment of debt (collateral)
Class (minorities); Geographical location; types of industry; Size; Exporting Firms


12. Financial leverage

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13. Goal of Financial Management
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk
More efficient inventory management - increase in AR collections - etc.
To maximize the current value per share fo the existing stock
Over the counter


14. Partnership
Buys/sells securities for their own benefit - directly with customers -
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread
states that: one Dollar today will be worth more in the future
Business formed by 2 or more individuals or entities.


15. Efficient Market Hypothesis
Risk that inflation increases since the bond was issued
holds that no investor can beat the market and that doing research is useless
The process of planning and managing a firm's long-term investments
how company raise money; uses money; transfers of money from savers to spenders


16. Two Basic Principles of Finance
Time Value of Money; Risk/Return
Time Value of Money; Risk/Return: Greater risk - Greater returns
Pure discount loans; Interest only loans; Amortized loans
states that: one Dollar today will be worth more in the future


17. What are the risks of investing in a Bond?
Assets = Liabilities + Shareholders' Equity
Risk that the bond will be called back by bond issuer if interest rates fall to much
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread


18. What are some of the shortcomings of the goal of profit maximization?
Profit is a vague term - this goal fails to consider whether short-run or long-run profit maximization is being considered
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'
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.
Common Stock; Preferred Stock; Long Term Government Bonds


19. Why might revenue and cost figures shown on an income statement not be representative of the actual cashflow?
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)
Risk that the bond will be called back by bond issuer if interest rates fall to much
Accounting principles call for revenues and costs to be "booked" when revenue process is complete - not when cash is collected or bills are paid
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.


20. How might a companies' change in NWC be negative in a given year?
More efficient inventory management - increase in AR collections - etc.
The large OTC market is NASDAQ
Earnings before interest and taxes
Most desirable source of Financing; a way for companies to generate cash internally; Net Income + Depreciation and Amortization


21. What are Stakeholders?
Bond may be redeemed earlier by the issuer
persons with interests in the existance of the company. (employees - Company Pensioners - Creditors - Lenders - Consumers)
states that: one Dollar today will be worth more in the future
Most desirable source of Financing; a way for companies to generate cash internally; Net Income + Depreciation and Amortization


22. Bond Risk
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond
Class (minorities); Geographical location; types of industry; Size; Exporting Firms
Matches those who wish to buy with those who wish to sell
A financial statement summarizing performance over a period of time.


23. Selling on consignment
retailer gets inventory which he does not have to pay for until he sells it
The balance sheet
Movement of Interest Rate; Credit Risk; Features of the bonds. FYI - Long Term Bonds have more price risk
Class (minorities); Geographical location; types of industry; Size; Exporting Firms


24. Head and Shoulder refers to what type of stock analysis?
Where financing is secured by the projects assets - including revenues. Creditors do not have claims against the sponsors assets.
Common Stock; Preferred Stock; Long Term Government Bonds
Technical
Unexpected information; Information that effects the risk or return of an asset


25. Important Determinants in choosing types of financing
Sole Proprietorship; Partnership (Limited Liability Company); Public Company/Corporation (through IPO)
Expenses charged against revenues that do not directly affect cash flow - such as depreciation
Size of firm; Degree of development of financial markets
Earnings before interest and taxes


26. Capital Structure (or Financial Structure)
Risk that inflation increases since the bond was issued
FV = PV(1 + r)^t r = interest rate t = # of periods
The common set of standards and procedures by which audited financial statements are prepared
The mixture of long-term debt and equity maintained by a firm to finance its operations


27. Auction market
Matches those who wish to buy with those who wish to sell
Overreaction and correction; Delayed reaction; Efficient market reaction
Markets where common or preferred stocks are sold in either the Primary or Secondary Markets
A firm's short-term assets (ie cash - inventory) and liabilities (ie accounts payable to suppliers)


28. Core Elements of Financial Management
FV = PV(1 + r)^t r = interest rate t = # of periods
Capital markets and Finance; Cash and Liquidity Mgmt; Corporate Financial Mgmt; Risk Mgmt; Treasury Operations & Control
A way for seller of goods and services to have third parties sell his goods or services under license
Matches those who wish to buy with those who wish to sell


29. Forms of Government Sponsored Financing
how company raise money; uses money; transfers of money from savers to spenders
Coupon payment will be reinvested when received at a lower rate than initial interest rate of the bond
Soft Loans; Guarantees; Grants; Taxes; Equity Financing
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


30. Money Market Instruments

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31. Corporation
Class (minorities); Geographical location; types of industry; Size; Exporting Firms
A firm's short-term assets (ie cash - inventory) and liabilities (ie accounts payable to suppliers)
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
the issuer does something which causes the credit quality to go down


32. Levels of Market Efficiency
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.
Over the counter
Weak Form Efficiency - Semi Strong Form - Strong Form


33. What is a dealer market?
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'
Movement of Interest Rate; Credit Risk; Features of the bonds. FYI - Long Term Bonds have more price risk
A firm's short-term assets (ie cash - inventory) and liabilities (ie accounts payable to suppliers)
Buys/sells securities for their own benefit - directly with customers -


34. Project Finance
Where financing is secured by the projects assets - including revenues. Creditors do not have claims against the sponsors assets.
Length; Payment Method (Amortized or Single Bullet); Collateral Protection; Bank Obligation to lend ( Committed or Not Committed); Frequency of borrowing; Pricing (Euribor Rate)
Volatility of price movement; Liquidity of the market; Interest costs
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


35. What is the order of Seniority?
Senior secured; Senior unsecured - Senior Subordinated - Subordinated
Moving Average; Cash positions of funds; Amount of short selling
The study of the relationship between business decisions and the value of the stock in the business
Profit is a vague term - this goal fails to consider whether short-run or long-run profit maximization is being considered


36. Average tax rate
Risk that the bond will be called back by bond issuer if interest rates fall to much
holds that: you cannot get superior returns from Technical Analysis; Fundamental analysis could beat the market
Tax bill divided by taxable income
Preferred; Common


37. Aagency costs
NYSE
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.
earlier
Loan to finance everyday operations i.e. pay accounts payable - wages - etc. and not to buy long term assets


38. CFS
Do not consider market emotions; assumes that the market is honest (true information); effects of third parties
how company raise money; uses money; transfers of money from savers to spenders
Cash flow to stockholders
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.


39. Franchising
Over the counter
Exchange Traded Fund - Mixture of stocks and mutual funds
A way for seller of goods and services to have third parties sell his goods or services under license
holds that: there is no information available that can help beat the market (Technical - Fundamental - Insider Information)


40. Leases
Substitute for buying an asset
Partners receive equal profits and liability
Cost of good sold
Holder can exchange bond for common stock according to the conversion ratio


41. Weak form efficiency
holds that: you cannot get superior returns from Technical Analysis; Fundamental analysis could beat the market
Senior security provided for companies in financial distress or under bankruptcy
Long term Debt and Equity Instruments only (more than 1 year maturity)
Where a corporate entity moves assets to a bankruptcy remote vehicle (SPV) to obtain lower interest rates from lenders.


42. Export Credit Agencies
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.
Security; Seniority; Features (putable bond)
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


43. Debtor in Possession (DIP)
Senior security provided for companies in financial distress or under bankruptcy
Assets = Liabilities + Shareholders' Equity
Make no periodic interest payments - Yield comes from the difference between purchase price and par value
holds that no investor can beat the market and that doing research is useless


44. Different Types of Investing Analysis
An intermediary who buys and sells the object being sold. He Buys (Bids) and later re-sells (asks). Profits from the spread
Common
Technical (charts - supply/demand of stocks); Fundamental (Analyze companies information: balance sheet - ect.); Insider Information
An intermediary who does not own the object being sold; acts as a middle man; receives a fee for services


45. Liquidity
The mixture of long-term debt and equity maintained by a firm to finance its operations
Where a business sells its account receivables
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.
Interest Rate Risk; Reinvestment Risk; Call Risk; Default Risk; Credit Risk; Inflation Risk


46. OTC
Markets where common or preferred stocks are sold in either the Primary or Secondary Markets
Matches those who wish to buy with those who wish to sell
Over the counter
the issuer does something which causes the credit quality to go down


47. GAAP (Generally Accepted Accounting Principles)
The common set of standards and procedures by which audited financial statements are prepared
NYSE
Partners receive equal profits and liability
Where financing is secured by the projects assets - including revenues. Creditors do not have claims against the sponsors assets.


48. Structured Finance
equal payments used by financial intermediaries to make regular payments to recipients (pensioners)
Unique and Highly complex financial service transaction between a Bank and a Company
Soft Loans; Guarantees; Grants; Taxes; Equity Financing
Pure discount loans; Interest only loans; Amortized loans


49. Commercial Paper
later
Cash flow to creditors
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 business sells its account receivables


50. Stock Prices adjust to new information in these ways...
Make no periodic interest payments - Yield comes from the difference between purchase price and par value
Overreaction and correction; Delayed reaction; Efficient market reaction
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.
two companies combining resources in a partnership; i.e Sony-Ericsson