UGA FINA 3000 Exam 1

If shareholder equity is greater than market cap, the firm is _____________

failing

Market value of CS + Market value of PS + Market Value of Interest bearing debt - cash =

enterprise value

Finance focuses on when cash is _______________

received

Financial ratios: Can the firm pay its __________________ bills?

short-term

financial ratios: how ________ is management?

efficient

financial ratios: how ___________ is the firm?

profitable

financial ratios: how does the market ______________ the firm?

value

current assets/current liabilities

current ratio

(current assets-inventory)/current liabilities

quick ratio

-"acid" test

cash/current liabilities

cash ratio

liquidity ratios are used to determine how easily can we convert to ___________

cash

efficiency ratios are used to determine how well does the firm manage its _______________

current assets

sales/accounts receivable

accounts receivable turnover

cost of goods sold/inventory

inventory turnover

sales/total assets

total asset turnover

sales/net ppe

fixed asset turnover

accounts receivable/(sales/365)

collections

coverage ratios are used to measure the ability to make ___________ payments

interest

EBIT/Interest Expense

times interest earned (TIE)

The higher the TIE, the _______________ the default risk

lower

total asset turnover is relevant in the __________ industry

retail

leverage ratios show the % of ____________

debt

debt/total assets

total debt ratio

the higher the total debt ratio %, the ___________ the risk

higher

debt/shareholder equity

debt/equity ratio

gross profit/sales

gross profit margin

cogs encompasses which two components?

labor and material

operating profit/sales

operating profit margin

net income/sales

net profit margin

operating profit margin less interest and taxes will give you _____________

net profit margin

The higher the P/E ratio,

-stock will be more ___________

-____________ growth potential

-expensive

-higher

an example of low risk investment is a _______________

bank CD

an example of a medium risk investment is a ______________

large cap stock

an example of a high risk investment is a _____________________

start up

the two types of interest are:

-simple

-compound

with _____________ interest, you can only earn interest on the original principle

simple

with ______________ interest, your interest gets REINVESTED. The interest will earn interest going forward.

compound

when there is an increase in the number of compounding periods, there is an ____________ in interest and an _______________ in future value

Increase^ and increase^

corporate bonds typically have a __________________ compound frequency

semi-annual

common stock dividends typically have a ______________ compound frequency

quarterly

any loan/lease typically will have a ________________ compound frequency

monthly

an _____________________ is a cash flow stream in which an equal flow (payment) occurs at the end of every period for n periods

ordinary annuity

LOANS ARE __________________

annuities

an annuity due is ________ valuable than an ordinary annuity

more

when solving an annuity due, SET THE CALCULATOR TO _________

BGN

an __________________ is a loan repaid in equal payments over its life where the payments include interest and principal

amortized loan

________________: an annuity that has no end point. infinite number of the same payment

perpetuity

for the present value of an ordinary annuity, the present value is _______________ period before the first payment

one

The Guiding principles of finance:

1._____________ wealth

2.TVM

3. ___________ vs. _____________

4.Leverage

5. Diversification

1. Maximize

3. Risk, Return

What are the types of firms that don't attempt to maximize wealth?

Inefficient firms

Disruptors

non-profit

Time value of money: A dollar today is worth ___________ than a dollar tomorrow.

MORE

____________: what i give up when I invest my money

opportunity cost

-time

-risk

__________: chance an outcome differs from what is expected

risk

_____________ risk, higher reward/return

higher

roughly 80% of businesses are _____________

sole proprietorships

3 advantages of being a sole proprietor

-be your own boss

-single tax

-less regulated

3 disadvantages of sole proprietorship

-unlimited liability

-difficult to raise capital

-difficult to transfer ownership

advantages of a corporation

-limited liability

-easier to raise capital

-easy to transfer ownership

disadvantages of a corporation

-double taxation

-more regulation

five characteristics of debt

fixed maturity date

set payment dates

first claimant (1st in line)

no ownership/ voting rights

required payments

interest is tax deductible

what characteristics of debt are appealing to a business taking on debt?

no ownership/ voting rights

interest is tax-deductible

common stock is a ____________

variable income security

characteristics of equity

voting rights

ownership

dividends

residual claim

pre-emptive right

dividends can be _____________ or additional shares of _____________

cash, stock

___________________: if you own shares, this is the right to purchase additional shares

pre-emptive right

bonds can be described as a _________ income security

fixed

the four basic sources of bonds :

-us government

-corporate debt

-municipal

-international

True or False: US government bonds are VERY risky

FALSE

Corporations issue bonds to pay for ________

PPE

secured debt issues are usually called

mortgage bonds

Issues not secured by specific assets are called

debenture bonds

mortgage bonds = " "

collateral

debenture bonds = " "

reputation bonds

What are the four key bond characteristics described in the indenture?

-name of issuing firm

-maturity date

-coupon rate

-payment dates

-call options

___________: interest rate that sets dollars paid by the bond (fixed)

coupon rate

_______________:the right, that after a set date, for borrower to "call in" (pay off) bonds early

call options

You call in bonds when you can refinance at a ____________ coupon rate

lower

bonds have three main types of risk:

interest rate risk

default risk

liquidity risk

_______________ is the risk of economic or world events over time

interest rate risk

There are two ways an investor may lose money

re-organization

Liquidate

True or False: There is no way to estimate default risk before buying a bond issue

FALSE

___________ agencies estimate default risk of institutions that issue bonds

credit rating

rD

market driven

dynamic

sets price

coupon rate

historical

fixed

sets the dollars on the bond

A bond's _______ is the present value of the cash flow stream that the bond is expected to generate

price

____________ trading frequency, ______________ liquidity risk

increased, decreased

______________: the return or % I earn at the current market price

Bond Yields

Yield-to-maturity is just another name for

interest rate/ discount rate

__________ is the annual return if I buy now and hold bond until maturity

yield

Bond Price < Face Value

DISCOUNT

True of False: Current Yield refers to short-term investing

TRUE

YTM > coupon rate

discount bond

YTM < coupon rate

premium bond

True or False: There is very low risk associated with a company that is AAA investment grade

TRUE

True or False: There is a high YTM associated with a company that is AAA investment grade

FALSE

True or false: When a company's bond rating is upgraded, the bond is considered safer and there will be lower YTM

TRUE

True or False: When a company's bond rating is downgraded, the bond is considered riskier and there will be a higher YTM

TRUE

True or False: With Zero coupon bonds, at maturity you will get back face value plus interest

FALSE

True or False: Peleton's actual IPO was HIGHER than the target IPO

FALSE

True or False: Peleton is using the disruption strategy to gain market share

TRUE