# Finance Exam

 The flashcards below were created by user austkeat on FreezingBlue Flashcards. An annuity with payments at the end of the period Ordinary Annuity An annuity with payments at the beginning Annuity Due Increasing the compounding frequency will result in a ___________ PV and a ____________FV Smaller, larger To find the FV of a given amount today, use ______________ but to find the PV today of a given future amount use ____________________. Compounding, discounting If your house increased in value from \$200,000 to \$300,000 over the past 10 years, your average annual appreciation would be _______________ 4.14% You borrow \$90,000 that requires payments of \$456 for 30 years and the END of each month. You’re paying an annual interest rate of ___________% 4.5% You want to double your money and you’re earning 9% annually. It will take ___________ years. 8 If you make a one time deposit today of \$500 into an account that pays 4% interest compounded semi-annually in 10 years you’ll have ___________ in the account. \$742.97 If you put \$100 monthly into an account at the beginning of each and the account pays a 5% nominal rate compounded monthly, in five years you’ll have _____________ in the account. \$6828.94 If you buy a preferred stock that will pay you \$100 per year for the indefinite future then if the current required return on such a stock is 5%, you shouldn’t pay more than ___________ for the bond. \$2000 You invested \$10,000 today in an investment that will mature for \$50,000 in ten years. Your average annual return on the investment will be ___________% 17.46% A stock just paid a dividend of \$2 per share, which is expected to grow at a constant rate of 5% indefinitely. If the required return on the stock is 10%, then it should be selling for ____________ per share. \$42 A stock just paid a dividend of \$1 and is expected to pay \$0.95 at the end of this year. The dividend is expected to grow by the same rate indefinitely thereafter and is selling for \$7 per share. The market requires a rate of return on this stock of ___________% and it has a dividend yield of ____________%. 8.57%, 13.57% Rights of common stockholders include _____________________, _______________________, _______________________, and _____________________ Vote for electors, dividends declared and paid, preemptive, right to final claim on assets Dividends must be paid on ______________ stock before they can be paid on common stock. preferred A sinking fund is used to ________________ stock or bonds. retire A ______________provision allows a corporation to buy back preferred stock whereas a ____________ provision provides for the exchange of common stock for preferred stock. Call, conversion Planning and evaluating expenditures that result in LT streams of cash flows, usually involving fixed assets and large expenditures that have important consequences to the firm refers to the process called _____________________ ____________________. Capital, budgetting Replacement decisions and _____________ decisions define the two types of capital projects that are evaluated. expansion It is important that projects also be categorized as Independent, where all or none can be accepted, or _________________ exclusive where choosing one from among several eliminates the need or ability to do the others. mutually The steps in capital budgeting are to determine the initial cost, estimate the periodic _________ flows, assess _____________ to determine an appropriate required rate of return, then use evaluation tools such as the ___________, _____________, _____________. Cashflows, risk, NPV, IRR, PB The payback period is the length of time required for ________________ to recover the original investment in the project. Future CF The payback method suffers the weaknesses of ignoring time value of ________ and also ignores cash flows that occur subsequent to _____________. Money, Payback The NPV method relies on discounting future cash flows and reducing them by the _______________ to determine the NET amount by which the project will increase shareholder wealth. NINV If the value of the discounted future cash flows for an independent project is greater than the initial investment, then the NPV will be _________________ than zero and all such projects should be ______________ until the capital budget is fully committed. Greater, accepted In evaluating mutually exclusive projects, choose the one that has the ______________ NPV. biggest The IRR is the discount rate that will cause the _____________________ to be equal to the sum of the discounted future cash flows such that the NPV will equal (or be very, very close to) _______________. NINV, 0 The IRR is the same thing as the _____________to _____________ of a bond. Y, M If the IRR is greater than the required return for an independent project, the project should be __________________. Accepted In evaluating two mutually exclusive projects, different costs or capital that dictate different required rates of return may cause inconsistent results between the ____________ and the ________________ methods of evaluation, and the unique required rate of return where both methods will produce the same result is called the _______________ point on a graph of NPV profiles of two projects. IRR, NPV, Crossover Generally, it is best to base accept/reject decisions on the ____________ method because it assumes reinvestment of future cash flows at the more realistic ____________ of capital and also eliminates the conflict between the two methods for mutually exclusive projects that result from timing and size differences.. NPV, Cost NPV assumes cash flows are reinvested and earn the _______________ whereas the IRR assumes they are reinvested and earn the _____________ of the project. Required return ratios, IRR An additional evaluation tool called the _________________________________ can be used to eliminate the reinvestment rate conflict between the IRR and NPV methods. MIRR Working capital management relates to managing _______________ assets and the _______________ liabilities used to finance those assets. ST, ST Current assets and liabilities that increase at the same rate a firm’s business does are called _______________ assets and liabilities. Spontaneous Working capital does not include the portion of ___________________ that is due within one year because that short term liability does not relate to operations. LT The need for financing working capital with outside sources of funding can be due to _________________, ____________________, or _____________________. Seasonal, Business cycle, expansion/growth Generally, an account balance in the working capital accounts is equal to the average daily activity in an income statement account related to that account multiplied by the ______________________. Number of days activity 'rests' in the account The Cash Conversion Cycle is the length of time between when raw material purchases are paid for until when _________________________resulting from inventory sales are collected. A/R Which is better, a longer CCC or a shorter CCC, generally speaking ______________. Shorter The two basic questions involved in WC are: The appropriate ___________ for each CA and total CA; and how should those Current Assets be __________________. level, financed/funded If a company keeps large balances of cash and marketable securities, inventories are maintained at high levels, and credit policies are liberal and encourage large A/R balances, the company is following a__________________ current asset investment policy. relaxed If cash, marketable securities, inventories and A/R are minimized by policy structure, the company is following a _______________ policy. Restricted Working capital assets consist of two components: a Permanent Layer that doesn’t change much even when business is slow, and a _____________ layer that fluctuates seasonally or cyclically due to the nature of the business. Temporary If all of the FA and all of the permanent layer and some of the temporary layer is financed with LT capital, the firm is following a _________________ CA financing policy. Conservative If some of the permanent layer and all of the temporary layer is financed with ST, non-spontaneous, capital, the firm is following an _______________ Aggressive Firms prefer to use ST financing because it’s ________________ and __________________. Cheaper, easier The risks of using ST financing are ________ rates may unexpectedly change and business conditions may deteriorate resulting in inability to _______________ ST debt. Interest, repay European firms have CCC that are _____________ than US firms, on average. Bigger Firms maintain cash in the bank to pay creditors, employees, and otherwise do business and such balances are called _____________ balances Transaction Often banks require firms to keep a certain amount on deposit with the bank as a condition for making a loan. Such bank accounts are called _______________ balances. Compensating Cash kept in reserve for unforeseen needs that can be reduced by having a LOC loan facility are called _______________ balances. Precautionary A schedule that shows expected receipts, expected disbursements, and target cash balances for a firm is called a ______________. Cash budget Firms often attempt to arrange their credit policy so that collections on AR match amounts require to pay current AP balances, and this technique is called ________________ cash flows. Synchronized Float is the difference between ___________________ and ____________________. Checkbook balance, balance ber bank ‘Good’ float is the value of checks that have been _______________ but have not yet cleared the bank and is called __________________ float. Written, disbursment ‘Bad’ float is the value of checks that have been ___________________ but have not yet cleared for credit and is called __________________ float. Deposited, Collection Net Float is the difference between ______________ and ____________________. Disbursment, collection Lockbox arrangements, concentration accounts in banks, and pre-authorized debits of customers’ accounts for sales are methods of ____________________ receipts so that ______________ is minimized. Accelerating, Collection Float Concentrating payment of AP in one location, maintaining bank accounts that have a zero balance normally and into which funds are only deposited as checks are presented for payment, and locating disbursing banks in remote places from where checks are distributed are all methods of increasing __________________float, which is the ‘good float’. Disbursment Surplus cash is ‘temporarily parked’ in marketable securities, which are ST investments that have ____________ risk, _____________ liquidity, and thus has _______________ returns. Low, High, Low Credit policy involves decisions as to who gets credit and how much, how long customers can take to pay and what discount they may take for paying early, when action should be taken on delinquent AR, and how __________________ will be achieved on past due accounts. Collection A basic tool of credit monitoring is a schedule that reflects how long balances for each customer have been ________________ and divides balances into categories such as _______ days, __________days, ____________ days, and ___________ days. Oustanding, 30, 60, 90, 120 A company’s DSO is 35 days. It wants to reduce the DSO to increase cash on hand, and offers customers the following terms: 1%/10, net 30. If 20% of the company’s customers take advantage of the discount and pay on the 10th day, 70% pay on the 30th day, and the remaining 10% of the customers take 60 days to pay, the company will reduce its DSO by __________ days. 6 Sources of ST financing for firms are ________________ and _____________________ Accruals, A/P Trade credit is ‘free’ during the _____________ period. Discount ST bank loans are generally evidenced by a document called a _______ ___________. Promissory Note If a firm borrows \$100,000 for eight months on a loan that quotes a nominal annual rate of 8%, what is the EAR the firm is paying? 8.11% If the bank deducts the interest from the loan proceeds, i.e. makes a Discount loan, then the firm is paying an APR of ____________ and an EAR of _____________. 8.45%, 8.56% ST bank loans are normally secured, collateralized, using ______________ assets. ST When accounts receivables are ‘sold’ to a bank, or other financial institution, the transaction is called ________________ receivables and only a fraction of the face value is received. Factoring Recourse for uncollectable accounts remains with the _________________ when a loan is made, but if receivables are _______________ then the receiving purchaser assumes responsibility for uncollectable amounts. Borrower, factored Inventory financing can be achieved by ‘pledging’ inventories to the lender. This can be accomplished by ___________liens, ____________ receipts, ____________ receipts, physical separation of the _____________. Blanket, Warehouse, Trust, Inventory/goods A flexible inventory financing arrangement is often used by __________ dealerships to finance floor stock with the loan being paid when the ___________ is ____________. Car, Car, Sold Authoraustkeat ID55553 Card SetFinance Exam DescriptionFinance exam flash cards Updated2010-12-13T09:45:41Z Show Answers