Chapters 1-3
Chapters 4-6
Chapters 7-10
Chapters 11-15
Misc.
100
These are the three areas of finance that we talked about in Chapter 1 and throughout the course.
What are: corporate finance, investments, and institutional finance?
100
This is the term used which refers to the fact that fixed assets cannot always increase incrementally with sales and instead increase in larger batches.
What is "lumpy"? See Chapter 4 and slides for more details.
100
This method uses the following equation to calculate the required return on a common stock: k(cs) = risk free rate + beta * (market return - risk free rate)
What is the CAPM? (Capital Asset Pricing Model)
100
This is the "i" in the equation that will make the NPV equal to zero for a project.
What is internal rate of return?
100
This is the stated interest rate on a bond used to determine the annual (or semiannual) payments received.
What is the coupon rate? Not to be confused with the bond's YTM which is the required discount rate on the bond.
200
As we discussed in class, due to this accounting principle, this is one of the reasons the net income balance may not equal the cash flows of the firm.
What is accrual accounting? (Or the Matching principle)
200
This is what happens to the price of bonds if interest rates go down.
What is the price of the bond will go up?
200
This is why firm-specific risks are not included in calculating a firm's required return.
What is because firm specific risks are assumed to be diversified away?
200
These are some drawbacks to using the IRR.
What is any of the following: 1) It puts a greater weight on earlier cash flows 2) It only works well with conventional cash flows (if there is more than one sign change it will return more than one answer) 3) It sometimes conflicts with NPV - so we always error on the side of using NPV
200
This is one of the reasons debt financing is sometimes preferred over equity financing.
What is debt is often cheaper (due to the tax shield)? See slides for other reasons that a firm may want to use debt OR equity.
300
This ratio can help us understand how a firm is doing in terms of its production costs.
What is the gross margin? Sales - COGS = Gross Profit Gross Margin = Gross Profit/Sales Since COGS represent production costs of the actual product or service being offered, the GM can help us understand how the firm is performing in terms of its production costs before considering other operating expenses.
300
When doing a percent of sales forecast, this is the amount of funding needed to make the forecasted Asset side equal the forecasted Liabilities + Stockholder equity side.
What are discretionary financing needs? (See class slides and homework for examples of how to calculate).
300
This type of risk increases as the firm increases its use of fixed operating costs.
What is business risk?
300
These are some of the cash flows we need to consider for capital budgeting in the initial year (year 0), the project years, and the last year of the project.
What are: 1. Initial outlay: including a variety of components such as machine cost (and everything needed to get it up and running), initial increase in NWC, sale of any old asset, and taxes on gain/loss of sale 2. Incremental cash flows: considering cash flow caused specifically by the project during the intermediate years including inflows, outflows, depreciation implication, etc. 3. Terminal cash flows: including sale of new asset if applicable, taxes on gain/loss, and recouping of all new working capital increases
300
This is why many firms prefer to use MACRs instead of straight-line depreciation when reporting their financial statements to the IRS.
What is MACRs allows accelerated depreciation which enables firms to recognize less tax in earlier years?
400
This is the equation for free cash flow to equity.
What is NI + Depreciation - Capex - NWC Changes + Increase in Net Debt?
400
This is how much you must save each month to have $2,000,000 at retirement assuming that - You have 35 years until retirement - You expect to earn 8% interest on your return ***Assume monthly payments and end of month
What is $871.88?
400
This is the weighted average cost of capital for the Pear Co. given the following information and a marginal tax rate of 35%: Company is financed with 60% debt, 25% common equity, and 15% preferred equity. Debt consists of a loan to the company at an interest rate of 8%. Preferred stock is priced at $45 after flotation costs and pays a $4.50 dividend. Common stock is currently being sold for $25, the last dividend was $1.75 and dividends are expected to grow at a rate of 3% forever. There is a 5% flotation cost on common stock.
What is 7.27%? Answer: Debt required return = 8% After tax = 8%*(1-.35) = 5.2% Preferred stock required return 4.5/45 = 10% Common Stock required return D1 = 1.75*(1.03) = $1.8025 Price (money to company) =25*(1-.05) = $23.75 1.8025/23.75+3% = 10.5895% 5.2%*60%+15%*10%+25%*10.5895% =7.27%
400
This is the project Company XYZ would choose assuming the projects are mutually exclusive and given the following information: Project A: IO -$50,000, CF Yrs 1-5: $20,000 Project B:IO: -$25,000 CF Yrs 1-5: $15,000
What is Project B? Answer: Project A 28.6%? Project B: 52.8%
400
This is why you should love finance by now!
What is because it will help you GREATLY in life no matter what your profession or path you take? :)
500
This is the new balance in retained earnings given the following information: Sales $10,000 EBIT: $8,000 Net Income (NI): $4,000 Two year's ago NI: $4,000 Two year's ago RE: $3,000 Last year's RE: $5,000
What is $7,000?
500
Tahitian Pony Corp. issued 30 year bonds 5 years ago with a $1,000 face value, and an 8% coupon payment paid annually. If the current required market return is 5.5% this is the price of the bond today.
What is $1,335?
500
Levered Company has sales of 100,000, unit sales price is $14 per unit, variable cost is $8 per unit. The fixed costs is 250,000, interest is 125,000 common shares outstanding is 100,000. If its tax rate is 34%, answer following questions. If sales increases by 10%, what happens to EBIT?
Increase by 17.14%? Feedback: DOL is 1.714, so if the sales increase by 10%, then EBIT will increase by 10 X DOL = 17.14% With Data Given Sales 1,400,000 (=100,000*$14) -Variable Costs 800,000 (=100,000*$8) -Fixed Costs 250,000 =EBIT 350,000 -Interest 125,000 =EBT 225,000 -Tax 76,500 (=225000*0.34) =Net Income 148,500 EPS = 148500/100000 = $1.485 Thus DOL = (1400000 – 800000)/350000 = 1.714 DFL = 350000/(350000-125000) = 1.556 DCL = DOL X DFL = 1.714*1.556 = 2.667
500
This is one of the major differences between ROTH Ira and Traditional IRA.
What is that a ROTH is contributed to post-tax and is later distributed without paying taxes, while a traditional IRA is contributed to pre-tax and then taxes are not paid until it is distributed in later years. (There are several - see notes and Ch. 15 slides for more details).
500
XYZ company is considering selling one of its machines. The machine was purchased 3 years ago and has an expected life of 10 years. The machine was purchased for $90,000 and has a salvage value of $15,000. The machine can be sold today for $65,000 dollars. With a tax rate of 40% what is the tax result of the sale?
What is a tax shield of $1000?
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