FINC 341 FINAL EXAM REVIEW QUESTIONS
Chapter 1 - An Overview of Financial Management
What is Finance? - Answers - The art of money management. Management of assets
and liabilities and planning for the future.
Primary Goal of a Company - Answers - Maximize shareholder wealth. Maximize the
stock price (maximizing the value of the firm).
Chapter 2 - Answers - Financial Markets and Institutions
Major Types of Markets - Answers - -Physical asset markets vs. Financial asset markets
-Spot markets vs. Futures markets
-Money markets vs. Capital markets
-Mortgage markets vs. Consumer credit markets
-Primary markets vs. Secondary markets
-Private markets vs. Public markets
Recent Trends - Answers - Technological advances in computers and
telecommunications, along with the globalization of banking and commerce, have led to
increased competition throughout the world.
-Computer algorithms to buy and sell securities
-Crowdfunding
-Robo-advisors
-Using technology for payment
Large amounts of capital move quickly around the world in response to changes in
interest and exchange rates, sometimes disrupting local economies.
Need for greater cooperation among regulators at the international level.
Increased use of derivatives (options) - can be used to reduce risks or for speculation
which increases risk.
-Used to hedge risk
How is Capital Transferred? - Answers - 1. Direct transfers
2. Indirect transfers through investment bankers
3. Indirect transfers through a financial intermediary
Financial Institutions - Answers - 1. Literally create new products
2. Help investors diversify while gaining the benefits of economy of scale
3. Innovative combinations of products (ex. life insurance and savings together)
New York Stock Exchange - Answers - Tangible physical entity.
,2006 - Went public to raise money
2007 - Merged with Euronext
2008 - Bought AMEX
2009 - Integrated AMEX
2013 - Intercontinental Exchange (ICE) bought NYSE Euronext
2014 - Spun off Euronext
American Stock Exchange (AMEX) - Answers - Merged with NYSE Euronext in 2008;
integrated into NYSE in 2009
Dealer Markets - Answers - Relatively few dealers hold inventories of securities and
"make a market."
Thousands of brokers bring dealers together with investors.
Brokers and dealers are members of NASD (National Association of Securities Dealers,
a self-regulatory body that licenses and oversees brokers).
A computer network links the dealers and brokers.
Dealer's profit is the bid-ask spread.
Fierce competition between NYSE and NASDAQ; higher dollar volume on the NYSE,
but higher share volume on the NASDAQ; many high-tech companies (eg. Apple,
Microsoft, Alphabet, Meta, Intel) have stayed on the NASDAQ.
The NASDAQ and AMEX merged in 1998 to form the NASDAQ-Amex Group (later split
in 2005)
Measuring the Market - Answers - Dow Jones Industrial Average (10 companies in
1896; 30 in 1928)
-Apple replaced AT&T in 2015
-Walgreens Boots Alliance replaced GE in 2018
-Equal weight
S&P 500 Index - 500 large strong American Firms
-Market Weighted
NASDAQ Composite Index - High-tech index
-Market weighted
Types of Trades - Answers - Initial Public Offering on the primary market by a privately
held firm
, Dutch Auction - A public auction where the stock price is set at the highest price bid that
would manage to sell ALL the shares to be sold in the offering; all bids at or above that
price are executed.
-Used by Google in 2004, and also by the federal government to sell treasury bills,
notes, and bonds.
Additional new shares sold by public companies on the primary market.
Trading outstanding shares of public companies on the secondary market.
Stock Market Efficiency - Answers - The Efficient Markets Hypothesis states that: stocks
are always in equilibrium and that it is impossible for an investor to consistently beat the
market
Efficient Market: Required Return (K) = Expected Return
Chapter 3 - Answers - Financial Statements, Cash Flow, and Taxes
Net Operating Working Capital - Answers - (Current Assets - Excess Cash) - (Current
Liabilities - Notes Payable)
Net Working Capital - Answers - Current Assets - Current Liabilities
Accounting Profit - Answers - Net Income
Net Cash Flow - Answers - Net Income + Depreciation
Operating Cash Flow - Answers - (EBIT)(1-T) + Depreciation
Free Cash Flow - Answers - The cash flow actually available for distribution to all
investors (stockholders and debt holders) after the company has made all the
investments in fixed assets, new products, and working capital necessary to sustain
ongoing operations.
FCF = EBIT(1-T)+D - (ΔNet FA+D) - ΔCA + Δ(A/P+Accruals)
Market Value Added (MVA) - Answers - Shareholder wealth is maximized by
maximizing the cumulative difference between the market value of the firm's equity and
the amount of equity capital that was supplied by investors.
MVA = Market Value of Equity - Equity Capital Supplied by Investors
MVA = (Shares Outstanding)(Stock Price) - total Common Equity
MVA can be negative.
Chapter 1 - An Overview of Financial Management
What is Finance? - Answers - The art of money management. Management of assets
and liabilities and planning for the future.
Primary Goal of a Company - Answers - Maximize shareholder wealth. Maximize the
stock price (maximizing the value of the firm).
Chapter 2 - Answers - Financial Markets and Institutions
Major Types of Markets - Answers - -Physical asset markets vs. Financial asset markets
-Spot markets vs. Futures markets
-Money markets vs. Capital markets
-Mortgage markets vs. Consumer credit markets
-Primary markets vs. Secondary markets
-Private markets vs. Public markets
Recent Trends - Answers - Technological advances in computers and
telecommunications, along with the globalization of banking and commerce, have led to
increased competition throughout the world.
-Computer algorithms to buy and sell securities
-Crowdfunding
-Robo-advisors
-Using technology for payment
Large amounts of capital move quickly around the world in response to changes in
interest and exchange rates, sometimes disrupting local economies.
Need for greater cooperation among regulators at the international level.
Increased use of derivatives (options) - can be used to reduce risks or for speculation
which increases risk.
-Used to hedge risk
How is Capital Transferred? - Answers - 1. Direct transfers
2. Indirect transfers through investment bankers
3. Indirect transfers through a financial intermediary
Financial Institutions - Answers - 1. Literally create new products
2. Help investors diversify while gaining the benefits of economy of scale
3. Innovative combinations of products (ex. life insurance and savings together)
New York Stock Exchange - Answers - Tangible physical entity.
,2006 - Went public to raise money
2007 - Merged with Euronext
2008 - Bought AMEX
2009 - Integrated AMEX
2013 - Intercontinental Exchange (ICE) bought NYSE Euronext
2014 - Spun off Euronext
American Stock Exchange (AMEX) - Answers - Merged with NYSE Euronext in 2008;
integrated into NYSE in 2009
Dealer Markets - Answers - Relatively few dealers hold inventories of securities and
"make a market."
Thousands of brokers bring dealers together with investors.
Brokers and dealers are members of NASD (National Association of Securities Dealers,
a self-regulatory body that licenses and oversees brokers).
A computer network links the dealers and brokers.
Dealer's profit is the bid-ask spread.
Fierce competition between NYSE and NASDAQ; higher dollar volume on the NYSE,
but higher share volume on the NASDAQ; many high-tech companies (eg. Apple,
Microsoft, Alphabet, Meta, Intel) have stayed on the NASDAQ.
The NASDAQ and AMEX merged in 1998 to form the NASDAQ-Amex Group (later split
in 2005)
Measuring the Market - Answers - Dow Jones Industrial Average (10 companies in
1896; 30 in 1928)
-Apple replaced AT&T in 2015
-Walgreens Boots Alliance replaced GE in 2018
-Equal weight
S&P 500 Index - 500 large strong American Firms
-Market Weighted
NASDAQ Composite Index - High-tech index
-Market weighted
Types of Trades - Answers - Initial Public Offering on the primary market by a privately
held firm
, Dutch Auction - A public auction where the stock price is set at the highest price bid that
would manage to sell ALL the shares to be sold in the offering; all bids at or above that
price are executed.
-Used by Google in 2004, and also by the federal government to sell treasury bills,
notes, and bonds.
Additional new shares sold by public companies on the primary market.
Trading outstanding shares of public companies on the secondary market.
Stock Market Efficiency - Answers - The Efficient Markets Hypothesis states that: stocks
are always in equilibrium and that it is impossible for an investor to consistently beat the
market
Efficient Market: Required Return (K) = Expected Return
Chapter 3 - Answers - Financial Statements, Cash Flow, and Taxes
Net Operating Working Capital - Answers - (Current Assets - Excess Cash) - (Current
Liabilities - Notes Payable)
Net Working Capital - Answers - Current Assets - Current Liabilities
Accounting Profit - Answers - Net Income
Net Cash Flow - Answers - Net Income + Depreciation
Operating Cash Flow - Answers - (EBIT)(1-T) + Depreciation
Free Cash Flow - Answers - The cash flow actually available for distribution to all
investors (stockholders and debt holders) after the company has made all the
investments in fixed assets, new products, and working capital necessary to sustain
ongoing operations.
FCF = EBIT(1-T)+D - (ΔNet FA+D) - ΔCA + Δ(A/P+Accruals)
Market Value Added (MVA) - Answers - Shareholder wealth is maximized by
maximizing the cumulative difference between the market value of the firm's equity and
the amount of equity capital that was supplied by investors.
MVA = Market Value of Equity - Equity Capital Supplied by Investors
MVA = (Shares Outstanding)(Stock Price) - total Common Equity
MVA can be negative.
