BFIN Final Study Guide

Flashcards based on lecture notes to aid in exam preparation, focusing on key vocabulary and concepts.

Value Added

The excess of an asset's market value over its cost. In the initial example, a home worth $60,000 when the cost was $50,000 results in a $10,000 value add.

Net Present Value (NPV)

A method used to determine if an investment is worthwhile by discounting future cash flows to their present value and comparing it to the initial investment. A positive NPV indicates the investment is expected to be profitable.

Capital Budgeting Process

The systematic process of evaluating potential capital projects or investments.

Payback Rule

A straightforward investment decision method where an investment is acceptable if its payback period is less than a specified number of years.

Payback Period

The period required for an investment to generate enough cash flow to cover the initial cost.

Discounted Payback Rule

A modified version of the payback rule where cash flows are discounted to account for the time value of money.

Average Accounting Return (AAR)

A flawed method for making capital budgeting decisions that involves dividing average net income by the average book value of the investment.

Internal Rate of Return (IRR)

The discount rate that makes the net present value (NPV) of a project equal to zero, summarizing the project’s merits in a single rate of return.

Profitability Index (PI)

A measure calculated by dividing the present value of future cash flows by the initial cost of the investment, indicating the value generated per unit of investment.

Relevant Cash Flows

Changes in a business's overall future cash flows that directly result from the decision to undertake a project.

Sunk Cost

A cost that has already been incurred and cannot be recovered, therefore irrelevant to future investment decisions.

Opportunity Cost

The value of the next best alternative that is foregone when undertaking a particular investment.

Side Effects

Unintended positive or negative consequences that a new project may have on existing projects within a business.

Erosion/Cannibalization

The cash flows of a new project that come at the expense of a business's existing projects.

Pro Forma Financial Statement

A project's projected or forecasted financial statement estimating future operations, including sales, costs, and investments.

Cash Flow Components

Operating activities, investment activities, and financing activities.

Forecasting Risk

The possibility of making a poor investment decision due to errors in projected cash flows.

Scenario Analysis

Examining the change in net present value when specific questions or basic assumptions are altered.

Sensitivity Analysis

A method where only one variable is changed to determine the impact on net present value, pinpointing sensitive areas of forecasting risk.

Operating Leverage

The degree to which a business or project relies on fixed costs, not related to the business reliance on debt.

Soft Rationing

A situation where a business unit is allocated a specific amount of financing for capital budgeting, even if more could be raised.

Hard Rationing

A stringent condition where a business cannot secure financing for a project under any circumstances.

Required Return

The return that is required on investment depending on the investment risk.

Capital Appreciation

Change in an investment's value.

Income Component

Interest on bond and dividend yield on equity.

Efficient Market

Market condition in which a security trades are priced efficiently.

Risk Premium

Return of investment less the risk free weight of turn.

Return Volatility

Actual term deviating from an investment's average return in a year.

Risk Free Rate

A return comprised from treasury bills

Unsystematic Risk

Eliminating the individual assets performance by diversification

Systematic Risk

Macro factors associated with assets systematic risk.

Capital Structure

Mixture of debt and equity that business chooses to avoid

Cost of Equity

Return that equity investors require in investment in a business

Cost of Debt

Return that lender require on new borrowers

WACC

The weighted average cost of capital.

Which one of the following is the financial statement which shows the accounting value of a firm’s equity as of a particular date

Balance sheet

Net working capital is defined as

Current assets minus current liabilities

Which one of these set forth the common set of standards and procedures by which audited financial statements are prepared

Generally Accepted Accounting Principles

Which one of the following accounts is the most liquid

Accounts Receivable

The process of planning and managing a firm’s long-term investments is called

Capital Budgeting

Which of the following is subject to double taxation

Corporation

Technically, control of a firm ultimately rests with

Shareholders

Which of the following should a financial manager consider when considering an opportunity

All of the above

Which one is a financial leverage ratio

Liabilities to equity

Noncash items refer to

Expenses which do not directly affect net cash flows

Which one of the following statements concerning net working capital is correct

Net working capital may be a negative value

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called

Limited partner

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner

Maximum loss limited to the capital invested

The sources and uses of cash over a period are reflected on the

Statement of cash flow

Which one of the following is a source of cash for a firm

Decrease in accounts receivable

Which is a measure of a company's liquidity

Quick ratio

Interest earned on both the initial principal and the interest reinvested from the prior periods is called

Compound interest

Hunter Biden invested $2,000 six years ago at 7.5%. He spends his earnings as soon as he earns any interest so he only receives interest on his initial investment. Which type of interest is Mr. Biden earning this year

Simple interest

Which best describes an auction market

London Stock Exchange

Which is the best example of an interest only (I/O) security

US Treasury bill

X, formerly known as Twitter, had a 2022 profit before tax of $10,000,000, a tax rate of 20%, and debt due in 2028 of $19,000,000. Its depreciation and amortization for 2022 aggregates $3,000,000. What is X’s approximate cash flow in 2022

$11,000,000

Which security has a “residual claim” on a company’s cash flows

Equity

You recently signed a two-year contract with Goldman Sachs for $1,000,000 per year. Your tax rate is 40% per annum and you receive your money at the end of each year. You live with your his best friend rent-free. You do not have any expenses. You deposit your net wages at the end of every year at a rate of 5.0%. What is the value of your deposit after year two

$1,230,000

A bank quotes an interest rate of 14% per annum on your auto loan, which compounds monthly. What is the 14% interest rate called

APR

The process of determining the present value of future cash flows is referred to as

Discounted cash flow valuation

Which is the best definition of corporate finance

Fianancial decisions and how thye impact the value of a company

Which is the best definition of an annuity

A cash flow stream where a fixed amount is received every year

What does the time value of money (TVM) concept primarily emphasize

The importance of considering the timing of cash flows when making financial decisions

What does the current ratio measure

Short-term liquidity

What is a security

A financial instrument representing ownership or debt

Which of the following is NOT a type of security

Real estate

What is the primary purpose of a bond

To offer a fixed income through interest payments

Which regulatory body oversees securities markets in the United States

Securities and Exchange Commission (SEC)

What is an IPO

Initial Public Offering

Which of the following is a characteristic of preferred securities

Fixed dividend payments

Equities typically represent

Ownership in a company

Bonds are primarily used for

Offering fixed interest payments

Which of the following is true about preferred securities compared to common equities

Preferred securities have higher claim on assets in liquidation

Which type of security typically has a maturity date

Bonds

Which of the following is a key characteristic of bonds

Long-term debt instrument

Treasury bills are typically

Short-term securities with maturities of one year or less

Debentures are

Unsecured long-term debt instruments

Which of the following best describes the difference between bonds and debentures

Bonds are secured by collateral, while debentures are unsecured

Which type of security is typically used for short-term financing needs

Treasury bills

Which of the following factors can affect the current price of a security

All of the above

What is a common factor that influences the price of fixed-income securities

Changes in interest rates

What is the primary function of the SEC

Enforcing federal securities laws

Which of the following is NOT a division of the SEC

Division of Monetary Policy

Which act led to the creation of the SEC

The Securities Exchange Act of 1934

What is the primary role of investment banks in financial markets

Facilitating capital raising and financial transactions

Which of the following services is typically provided by investment banks

Underwriting securities

Investment banks often assist companies with mergers and acquisitions by

Conducting valuation analyses and negotiating deals

Which market participant is primarily involved in trading and sales of financial instruments like stocks and bonds

Investment banks

What does the term "underwriting" mean in the context of investment banking

Assisting companies in issuing securities and selling them to investors

Which of the following best describes the primary function of money markets

Providing short-term financing and liquidity

Capital markets are primarily used for

Raising long-term capital through stocks and bonds

What is the primary function of the foreign exchange market

Facilitating international trade and investment by allowing currency conversion

Which of the following is a derivative instrument

Currency swap

What is a forward contract in the context of derivatives markets

A contract to buy or sell an asset at a specified price on a future date

Which market participant is most likely to use foreign exchange markets for hedging purposes

Multinational corporations

What is the main purpose of using options in derivatives markets

To hedge against price fluctuations and manage risk

Which of the following is a characteristic of government bonds

Backed by the government

Corporate bonds are typically

Issued by companies to raise capital

Municipal bonds are issued by

State and local governments

Which type of bond is often used to finance specific projects and is backed by the revenue generated from those projects

Municipal bonds