FINC 341 TAMU EXAM 1 QUESTIONS & ANSWERS
Finance - Answers - A field that is concerned with the allocation (investment) of assets
and liabilities over space and time, often under conditions of risk and uncertainty
- Investments and Money Mgmt
Sole Proprietorship & Partnership - Answers - _________ _________ & ___________
have unlimited personal liability
Unlimited Personal Liability - Answers - Personal assets can be taken from you
Corporation - Answers - Are subject to double taxation
- Do not short a stock!
- Value of firm will most likely be maximized
Double Taxation - Answers - Taxed as company/whole, and then dividend goes out to
shareholder who is also taxed
S Corporation - Answers - Small company, only taxed once (individual tax rate)
- Limit liability to what you invest in the company, personal assets are not up for grabs!
Max Stock Price - Answers - = # of shares x Pº = value (capitalization)
Interest Rates - Answers - _________ _________ are currently very low because of
COVID
NO - too much risk and debt - Answers - Will maximizing profits maximize shareholder
wealth?
Intrinsic Value - Answers - An estimate of a stock's true value based on accurate risk
and return date (cannot be measured precisely)
- Given all public information > what do you derive the value of the stock to be at this
time?
- calculated by an analyst *outside* the company
Market Price - Answers - The stock value based on perceived but possibly incorrect
information
- Go to computer and check price for company's stock
- Market tends to overbuy/oversell
- Market price fluctuates
Agency Relationship - Answers - Somebody owns something and needs help in
managing it, so they hire somebody who doesn't own it to help make contracts on their
behalf
, Stockholders vs Managers - Answers - An agency relationship where the stockholder is
the principle (owns assets) and manager is the hired agent
- Managerial Compensation
- Direct Intervention by shareholders
- Threat of Takeover > keep stock prices HIGH
Who was Carl Icahn? - Answers - A corporate raider who was famous for owning a lot
stock (Apple)
- Thought Apple's stock should be higher and has the duty distribute cash to
shareholders
- buys out all of Apple stock, wipes out higher mgmt, brings stock to higher price, the
sells it
Corporate Raiders - Answers - Individuals who target corporations for takeover because
they are undervalued
Stockholders/Managers vs Creditors - Answers - An agency relationship where
managers have a duty to protect existing creditors from detrimental changes in (given
many stock options)
-the riskiness of the firm's existing assets
-expectations concerning the riskiness of future asset additions
-expectations concerning future capital structure (20% debt, 80% equity) decisions
- With risk, insist on return
Total Assets (Total Capital) - Answers - Gross Fixed Assets - Depreciation
Operating Income - Answers - Earnings before interest and taxes (EBIT)
EBITDA - Answers - Earnings before interest, taxes, depreciation, and amortization
Source of Cash - Answers - Decrease in an asset account (sell an asset)
Increase in a liability (loan) or equity (sell stock to firm) account
Use of Cash - Answers - Increase in an asset account (buy an asset)
Decrease in a liability (pay off loan) or equity (repurchase co's stock) account
Net Income Structure - Answers - R
-C
-D
EBIT
-I
EBT
* (1-T)
NI
Net Cash Flow (NCF) - Answers - Net Income + Depreciation = ?
Finance - Answers - A field that is concerned with the allocation (investment) of assets
and liabilities over space and time, often under conditions of risk and uncertainty
- Investments and Money Mgmt
Sole Proprietorship & Partnership - Answers - _________ _________ & ___________
have unlimited personal liability
Unlimited Personal Liability - Answers - Personal assets can be taken from you
Corporation - Answers - Are subject to double taxation
- Do not short a stock!
- Value of firm will most likely be maximized
Double Taxation - Answers - Taxed as company/whole, and then dividend goes out to
shareholder who is also taxed
S Corporation - Answers - Small company, only taxed once (individual tax rate)
- Limit liability to what you invest in the company, personal assets are not up for grabs!
Max Stock Price - Answers - = # of shares x Pº = value (capitalization)
Interest Rates - Answers - _________ _________ are currently very low because of
COVID
NO - too much risk and debt - Answers - Will maximizing profits maximize shareholder
wealth?
Intrinsic Value - Answers - An estimate of a stock's true value based on accurate risk
and return date (cannot be measured precisely)
- Given all public information > what do you derive the value of the stock to be at this
time?
- calculated by an analyst *outside* the company
Market Price - Answers - The stock value based on perceived but possibly incorrect
information
- Go to computer and check price for company's stock
- Market tends to overbuy/oversell
- Market price fluctuates
Agency Relationship - Answers - Somebody owns something and needs help in
managing it, so they hire somebody who doesn't own it to help make contracts on their
behalf
, Stockholders vs Managers - Answers - An agency relationship where the stockholder is
the principle (owns assets) and manager is the hired agent
- Managerial Compensation
- Direct Intervention by shareholders
- Threat of Takeover > keep stock prices HIGH
Who was Carl Icahn? - Answers - A corporate raider who was famous for owning a lot
stock (Apple)
- Thought Apple's stock should be higher and has the duty distribute cash to
shareholders
- buys out all of Apple stock, wipes out higher mgmt, brings stock to higher price, the
sells it
Corporate Raiders - Answers - Individuals who target corporations for takeover because
they are undervalued
Stockholders/Managers vs Creditors - Answers - An agency relationship where
managers have a duty to protect existing creditors from detrimental changes in (given
many stock options)
-the riskiness of the firm's existing assets
-expectations concerning the riskiness of future asset additions
-expectations concerning future capital structure (20% debt, 80% equity) decisions
- With risk, insist on return
Total Assets (Total Capital) - Answers - Gross Fixed Assets - Depreciation
Operating Income - Answers - Earnings before interest and taxes (EBIT)
EBITDA - Answers - Earnings before interest, taxes, depreciation, and amortization
Source of Cash - Answers - Decrease in an asset account (sell an asset)
Increase in a liability (loan) or equity (sell stock to firm) account
Use of Cash - Answers - Increase in an asset account (buy an asset)
Decrease in a liability (pay off loan) or equity (repurchase co's stock) account
Net Income Structure - Answers - R
-C
-D
EBIT
-I
EBT
* (1-T)
NI
Net Cash Flow (NCF) - Answers - Net Income + Depreciation = ?
