C214 Final Exam Questions with solutions 2023

C214 Final Exam Questions with solutions 2023Coupon Rate The interest rate that a company promises to pay on bonds Market Rate The interest rate on other comparable bonds Par Value The amount payable on maturity of the bond Market rate Same as YTM - Yield to Maturity Gordon Growth Model Assumes stable growth rates and does not incorporate risk CAPM Model Allows to determine expected return on stocks and incorporates risk How do public companies maximize shareholder value? By maximizing Earnings Per Share How do private companies maximize shareholder value? By keeping control within the company Positive credit rating has what effect on capital? Lowers cost of capital What is cash flow from operating activities? It is cash flow generated for sale of products and services What is the formula for retained earnings? Ending retained earnings=Beginning retained earnings + Net Income = Dividends Is depreciation and salvage value on an asset precise or is it an estimate? It is an estimate What is an example of accounting difference Companies using different accounting methods What is an example of a timing difference? Companies using different fiscal years Do stock holders or bond holders have voting rights? Stock holders have voting rights What factors are considered for the initial outlay of a new investment? Purchase price of new equipment, shipping costs, and investment in working capital What is the risk associated with debt financing? Too much debt can lead to bankruptcy What are inventory related costs? Product costs, storage costs, and opportunity costs What statements are required to be filed with the SEC Annual audited financial statements What are the issues with understanding foreign financial statements? Foreign financial statements use international financial reporting standards and they are different from US accounting standards What does cash flow from investing activities measure? It measure investments in long term assets such as building, equipment, and machinery What does the efficient frontier measure? It maximizes expected return for a given level of risk What is the objective of portfolio diversification? The objective is to reduce risk What is the definition of a current asset and current liability? A current asset is cash or any other asset that can be converted to cash within 12 months and a current liability is any liability that has to be paid within 12 months What is a differential cash flow? It is the amount of net cash flow generated a new asset on a yearly basis What does the current ratio measure? It is a measure of short term liquidity to pay short term obligations How does credit rating impact cost of capital? A rating downgrade will increase the cost of capital What is one of the roles of the SEC? It regulates public disclosures of entities that sell debt and equity to the public What leads to an increase in APY? An increase in the frequency of compounding - like going from annual to monthly compounding What bonds are taxed at the federal level? Treasury bonds What bonds are not taxed at the federal level? Municipal bonds What are the two benefits of unblundling and offshoring? It reduces costs and results in higher sales and employment. It allows for sale of intermediate and final goods at lower prices and increases employment What are the two basic types of financial instruments? Stocks and bonds What are primary and secondary markets? Primary markets are where companies directly sell securities to investors and secondary markets are where bought and sold from third parties like the New York Stock Exchange Dodd Frank regulates which segment of the US Economy? Banking industry What does the Sarbanes Oxley Act require companies to do? Have internal control audits What would be considered a cash outflow in the investing section of the statement of cash flows? Purchase of equipment What is Net Present Value? The present value of after tax net cash flows and is the most commonly used method in Capital Budgeting Internal Rate of Return Defined as the discount rate that results in a Zero Net Present Value What does inflation do to the value of cash flows? It lowers the value of cash flows What does Free Cash Flow equal? Cash flow from Operations - Change in Net working capital - Investment in PPE What does the degree of financial leverage indicate? The reliance on debt What is degree of operating risk also known as? Business Risk What should a company do to manage its working capital? Collect quickly and pay slowly How can a firm speed up collections? Offer discounts to pay early and electronic check processing What ratio is used to measure short term liquidity? Current ratio measures short term liquidity for a firm When will ROE be greater than ROA? The company has debt and uses the interest expense to reduce its taxes Market Rate = Coupon Rate Bonds will sell at par value Market Rate Coupon Rate Bonds will sell at discount Market Rate Coupon Rate Bonds will sell at premium