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Introduction to Finance Flashcards | StudBud
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Introduction to Finance
Introduction to Finance
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Highlights of all finance topics
Flashcards
48 cards
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Practice quiz
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Questions
48
Answers
1
Junior debt is less risky and carries lower interest rates than senior debt
False
True
2
Investments should generally be rejected if the NPV is negative
True
False
3
In equity financing, interest payments are higher than in debt financing
False
True
4
Discounting is estimating the present value of a future payment
True
False
5
The longer the time to maturity, the greater the interest rate risk
True
False
6
Corporate bond yield = 7%, Municipal bond yield = 6%, Tax Rate = 20%. Which bond yield is more profitable?
Corporate Bond Yield
Municipal Bond Yield
7
How do you calculate projected cash flows?
Project CF = Operating CF - Change in NWC + Capital Spending
Project CF = Operating CF - Change in NWC - Capital Spending
Project CF = EBIT + Depreciation - Taxes
Project CF = EBIT - Depreciation + Taxes
8
In the typical case, when do we accept a project according to the IRR rule?
Accept a project if the IRR is lower than the opportunity cost of capital
Accept a project if the IRR exceeds the opportunity cost of capital
Accept a project if the IRR is lower than the NPV
Acceot a project if the IRR is higher than the NPV
9
Calculate the firm’s net working capital
$20,000
$80,000
$35,00
$40,000
10
Test your knowledge
2300000
1670000
11
In what case can the Internal Rate of Return (IRR) rule be misleading?
When there is one cash flow only
When there is an initial cash inflow and then cash outflows
When there are multiple cash inflows and outflows
When there is an initial cash outflow and then cash inflows
12
Bank account: $500,000. Annual rate of return = 12%, how much will your account be approximately worth in 15 years.
$2,700,000
$2,400,000
$3,400,000
$1,500,000
13
What is NOT considered a benefit of the NPV rule?
Depends on the forecasted cash flows and the cost of capital
Value additivity characteristic
Prefers early paybacks
Acknowledges the time value of money
14
Calculate Retained earnings, assuming a 20% growth in sales (assume dividends also increase)
$153,576
$115,443
$113,281
$117,576
15
Which of the following factors would explain an increase in retained earnings?
Dividends
Net loss
PPE purchase
Investments by stockholders
16
The Benchmark P/E ratio for an industry is 30. Your company has an earnings per share of $4. What is a fair stock price?
$7.50
$120
$26
$34
17
Fixed Exchange Rates stay constant throughout the loan, while floating exchange rates may fluctuate
True
False
18
Accounting break-even uses which of the following measures for the break-even calculation?
Net Income
Operating Cash Flow
Earnings before Interest and Taxes (EBIT)
NPV
19
Which of the following is NOT a determinant of a bond yield?
Default Risk Rate
Inflation
Equity Risk
Interest Rate Risk
20
What would be the buying power of $20,000 in 3 years, assuming inflation of 8% annually.
$15,886
$15,200
$20,000
$22,112
21
2023 Sales = $1500, 2022 Sales = $1400. If 2022 Assets = $700, what will Assets equal in 2023?
$750
$653
$700
$800
22
Which of the following is NOT an objective of financial planning
Reducing Costs
Exploring Options
Avoiding Surprises
Examining Interactions
23
What is most likely the effect on cash when current liabilities increase?
Cash increases by the same amount.
Cash does not change
Cash decreases by twice as much.
Cash decreases by the same amount.
24
Calculate the value of a bond yield: Face Value = $1000, Coupon = $100, Required Rate of Return = 15%, Maturity=10 years
$683
$1,231
$749
$981
25
$50,000 account, retire with $1,000,000. What must the annual rate of return be in order to retire in 25 years?
12.7%
10.1%
13.4%
8.6%
26
The present value of money becomes smaller, the more years that have passed
False
True
27
What is the present value of a stock with a $70 ending value (in 1 year) and $10 dividend at 25%?
85$
$80
$70
$64
28
The current yield of a bond is...
a bond’s annual coupon divided by its price
a bond’s annual coupon divided by its face value
the interest rate required for a similar bank loan
the interest rate required in the market on a bond
29
The process of accumulating interest on an investment over time to earn more interest is called:
Installment
Perpetuity
Compounding
Annuity
30
Base on the Rule of 72, how many years will it take to double an investment if the rate of return is 6%
8
6
12
15
31
Which shareholder voting system is more friendly to minority investors?
There is no difference
Cumulative voting
Straight voting
32
Which of the following is NOT an example of soft capital rationing?
Pursuit of predictive growth
Management Worry about too much debt
Management does not know the opportunities in the future.
Investors dont provide capital
33
You will get $100 in 5 years. The appropriate discount rate is 15%. What is the present value?
~$100
~$50
~$115
~$25
34
What advantage does discounted payback rule have over the normal payback rule?
Provides guidance on the appropriate cutoff date.
Prefers early paybacks
Considers the time value of money
Simpler and more intuitive
35
Calculate the Capital Intensity Ratio given that Sales = $100,000
0.56
1.00
1.63
1.77
36
What is NOT part of a bond indenture?
Basic terms of the bond
Description of property used as security
Call provisions
The total amount paid back already
37
Capital Budgeting: What is the most used capital budgeting rule?
NPV
Degree of Operating Leverage
Discounted Payback
Payback
38
Invest in: Asset A = $300, appreciates 10% for 4 years
OR
Asset B = $400, appreciates 3% for 4 years
Asset A
Asset B
39
The plowback (retention ratio) = (net income - retained earnings) / net income
False
True
40
What is most likely the effect on cash when current noncash operating assets increase?
Cash decreases by the same amount.
Cash decreases by twice as much.
Cash does not change.
Cash increases by the same amount.
41
What is the Plug variable?
Source of external financing to deal with financing shortfall / surplus
Explains the distribution of retained earnings among assets/ liabilities
Measures the capital efficiency of a company: dividing assets by sales
Designated variable that determines the forecasted sales growth of a firm
42
Which of the following interest rates is adjusted for inflation?
Nominal Rate
Real Rate
43
What is no Preferred Stock (PS) feature?
The cash dividend of PS is described in terms of % per share
PS have a dividend priority, but a company may choose to not pay dividends
Holders of PS must receive a dividend before holders of common shares
PS have a stated liquidation value per share
44
The largest stock exchange in the world is the NYSE, followed by the NASDAQ
False
True
45
In a scenario analysis, which of the following cases is typically NOT included?
Best Case
Base Case
Null Case
Worse Case
46
Which is no feature of the NPV?
The NPV rule is not directly affected by managerial discretion
The NPV does not consider the opportunity cost of capital
The NPV acknowledges the time value of money
The NPV depends only on the forecasted cash flows from the project
47
Jacobs corp. loans out $1,000 over 30 years, with an interest rate of 12%. Calculate the Coupon.
$3600
$120
$140
$3400
48
Growth should be the main goal of a financial manager
False
True
