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Business |\Finance |- |\Peregrine |\Section |\Review |\
Questions |\and |\answers
A |\company's |\balance |\sheet |\shows |\the |\value |\of |\assets, |\liabilities, |\and |
stockholders' |\equity |_____. A. |\for |\any |\given |\period |\of |\time B. |\at |\a |\specific |\point |\in |\time C. |\at |\the |\end |\of |\the |\fiscal |\year |- |\CORRECT |\ANSWERS |\✔✔B. |\at |\a |
specific |\point |\in |\time Match |\the |\ratios |\to |\their |\ratio |\type. A. |\Debt |\Ratios B. |\Activity |\Ratios C. |\Market |\Ratios D. |\Liquidity |\Ratios E. |\Profitability |\Ratios Current |\Ratio |& |\Quick |(Acid |\Test) |\Ratio Turnover |\ratios |& |\Collection/Payment |\Period
Debt-to-Equity |\Ratio |& |\Times |\Interest |\Earned |(TIE) Profit |\Margin |& |\Return |\on |\Assets Price/Earnings |(P/E) |\Ratio |& |\Market-to-Book |\Ratio |- |\CORRECT |
ANSWERS |\✔✔A. |\Debt |\Ratios: |\Debt-to-Equity |\Ratio |& |\Times |\Interest |
Earned |(TIE) B. |\Activity |\Ratios: |\Turnover |\ratios |& |\Collection/Payment |\Period C. |\Market |\Ratios: |\Price/Earnings |(P/E) |\Ratio |& |\Market-to-Book |\Ratio D. |\Liquidity |\Ratios: |\Current |\Ratio |& |\Quick |(Acid |\Test) |\Ratio E. |\Profitability |\Ratios: |\Profit |\Margin |& |\Return |\on |\Assets Balance |\Sheet |\Assets |- |\CORRECT |\ANSWERS |\✔✔Cash |\and |\cash |
equivalents |\are |\assets |\such |\as |\checking |\account |\balances |\at |
commercial |\banks |\that |\can |\be |\used |\directly |\as |\means |\of |\payment.
A. |\Investment |\Flows B. |\Operating |\Flows C. |\Financing |\Flows Cash |\inflows |\and |\outflows |\directly |\related |\to |\production |\and |\sale |\of |
products |\or |\services Cash |\flows |\associated |\with |\the |\purchase |\or |\sale |\of |\fixed |\assets |\and |
business |\equity The |\result |\from |\debt |\and |\equity |\financing |\transactions |- |\CORRECT |
ANSWERS |\✔✔A. |\Investment |\Flows: |\Cash |\flows |\associated |\with |\the |
purchase |\or |\sale |\of |\fixed |\assets |\and |\business |\equity B. |\Operating |\Flows: |\Cash |\inflows |\and |\outflows |\directly |\related |\to |
production |\and |\sale |\of |\products |\or |\services C. |\Financing |\Flows: |\The |\result |\from |\debt |\and |\equity |\financing |
transactions The |\Income |\Statement |- |\CORRECT |\ANSWERS |\✔✔EBIT: |\Other |\income, |
earned |\on |\transactions |\directly |\related |\to |\producing |\and/or |\selling |
the |\firm's |\products, |\is |\added |\to |\operating |\income |\to |\yield |\earnings |\
before |\interest |\and |\taxes |(EBIT). |\When |\a |\firm |\has |\no |"other |\income," |
its |\operating |\profit |\and |\EBIT |\are |\equal. Net |\Income: |\The |\firm |\subtracts |\interest |\expense |- |\representing |\the |
cost |\of |\debt |\financing |- |\from |\EBIT |\to |\find |\its |\pretax |\income. |\The |\final |
step |\is |\to |\subtract |\taxes |\from |\pretax |\income |\to |\arrive |\at |\net |\income, |
or |\net |\profits |\after |\taxes. |\Net |\income |\is |\the |\proverbial |"bottom |\line" |
and |\the |\single |\most |\important |\accounting |\number |\for |\both |\corporate |\managers |\and |\external |\financial |\analysts. Earnings |\Available |\for |\Common |\Stockholders |\and |\EPS: |\If |\a |\firm |\has |
preferred |\stock, |\it |\deducts |\preferred |\stock |\dividends |\from |\net |
income. |\Net |\income |\less |\preferred |\stock |\dividends |\is |\earnings |
available |\for |\common |\stockholders. |\Dividing |\earnings |\available |\for |
common |\stockholders |\by |\the |\number |\of |\shares |\of |\common |\stock |
outstanding |\results |\in |\earnings |\per |\share |(EPS). The |\Sustainable |\Growth |\Model: |- |\CORRECT |\ANSWERS |\✔✔gives |
managers |\a |\shorthand |\projection |\that |\ties |\together |\growth |\objectives |\and |\financing |\needs. provides |\hints |\about |\the |\levers |\that |\managers |\must |\pull |\in |\order |\to |
achieve |\growth |\beyond |\the |\sustainable |\rate. identifies |\some |\financial |\benefits |\of |\growing |\more |\slowly |\than |\the |
sustainable |\rate.
Typical |\Financial |\Assets |\Issued |\or |\Held |\by |\Corporations
- |\Treasury |\Bills
- |\Repurchase |\Agreements
- |\Federal |\Funds
- |\Bankers |\Acceptances
- |\Commercial |\Papers
- |\Eurodollars
- |\Negotiable |\Certificate |\of |\Deposit
- |\Money |\Market |\Funds
- |\Treasury |\Notes |\and |\Bonds
- |\Municipal |\Bonds
- |\Term |\Loans
- |\Corporate |\Bonds
- |\Preferred |\Stock
- |\Common |\Stock |- |\CORRECT |\ANSWERS |\✔✔- |\Treasury |\Bills: |\Short-term |
debt |\obligation |\backed |\by |\the |\U.S. |\government |\with |\a |\maturity |\of |
less |\than |\one |\year - |\Repurchase |\Agreements: |\Contract |\for |\a |\future |\transaction |\between |
two |\parties |\to |\be |\concluded |\on |\a |\known |\deal |\date
- |\Federal |\Funds: |\Overnight |\borrowings |\between |\banks |\and |\other |
entities |\to |\maintain |\their |\bank |\reserves |\at |\the |\Federal |\Reserve - |\Bankers |\Acceptances: |\Promised |\future |\payment |\which |\is |\accepted |
and |\guaranteed |\by |\a |\bank |\and |\drawn |\on |\a |\deposit |\at |\the |\bank - |\Commercial |\Papers: |\Unsecured |\promissory |\note |\with |\a |\fixed |
maturity |\of |\not |\more |\than |\ 270 |\days - |\Eurodollars: |\Time |\deposits |\denominated |\in |\U.S. |\dollars |\at |\banks |
outside |\of |\the |\United |\States - |\Negotiable |\Certificate |\of |\Deposit: |\CD |\with |\a |\face |\value |\of |$100,000 |
or |\more, |\guaranteed |\by |\a |\bank, |\that |\cannot |\be |\cashed |\in |\before |
maturity - |\Money |\Market |\Funds: |\Open-ended |\mutual |\fund |\that |\invests |\in |
short-term |\debt |\securities |\such |\as |\U.S. |\Treasury |\bills |\and |\commercial |
paper - |\Treasury |\Notes |\and |\Bonds: |\U.S. |\Treasury |\securities |\with |\maturities |
of |\at |\least |\one |\year
legal |\document |\that |\identifies |\restrictions |\of |\the |\bond |\and |\the |\rights |
of |\those |\involved assigned |\to |\represent |\the |\bondholders |\and |\to |\ensure |\the |\terms |\of |
the |\indenture |\are |\upheld part |\of |\the |\indenture |\that |\covers |\multiple |\conditions |\and |\restrictions gives |\the |\issuing |\corporation |\the |\right |\to |\call |\the |\bonds |\for |
redemption |\prior |\to |\maturity provision |\that |\facilitates |\the |\orderly |\retirement |\of |\a |\bond |\issue permits |\the |\bondholder |\to |\convert |\the |\bond |\into |\shares |\of |\common |
stock |\at |\a |\fixed |\price |- |\CORRECT |\ANSWERS |\✔✔A. |\trustee: |\assigned |\to |
represent |\the |\bondholders |\and |\to |\ensure |\the |\terms |\of |\the |\indenture |
are |\upheld B. |\conversion |\feature: |\permits |\the |\bondholder |\to |\convert |\the |\bond |
into |\shares |\of |\common |\stock |\at |\a |\fixed |\price C. |\restrictive |\covenants: |\part |\of |\the |\indenture |\that |\covers |\multiple |
conditions |\and |\restrictions
D. |\indenture: |\legal |\document |\that |\identifies |\restrictions |\of |\the |\bond |
and |\the |\rights |\of |\those |\involved E. |\sinking |\fund: |\provision |\that |\facilitates |\the |\orderly |\retirement |\of |\a |
bond |\issue F. |\call |\provision: |\gives |\the |\issuing |\corporation |\the |\right |\to |\call |\the |
bonds |\for |\redemption |\prior |\to |\maturity Bond |\Ratings |- |\CORRECT |\ANSWERS |\✔✔The |\triple-A |\and |\double-A |
bonds |\are |\extremely |\safe. |\Single-A |\and |\triple-B |\bonds |\are |\strong |
enough |\to |\be |\called |\investment-grade |\bonds; |\they |\are |\the |\lowest- rated |\bonds |\that |\many |\banks |\and |\other |\institutional |\investors |\are |
permitted |\by |\law |\to |\hold. |\Double-B |\and |\lower-rated |\bonds |\are |
speculative, |\or |\junk |\bonds; |\they |\have |\a |\significant |\probability |\of |
going |\into |\default, |\and |\many |\financial |\institutions |\are |\prohibited |
from |\buying |\them. Derivatives
- |\Options
- |\Convertibles
- |\Futures |& |\Swaps
- |\Hedge |\Fund |- |\CORRECT |\ANSWERS |\✔✔Options: |\The |\most |\basic |\types |\of |\options |\include |\a |\call |\and |\a |\put. |\A |\call |\option |\gives |\the |\holder |\the |
right |\to |\purchase, |\or |\call |\in, |\shares |\of |\a |\stock |\for |\purchase |\at |\a |\
Hedge |\Fund: |\A |\hedge |\fund |\is |\a |\relatively |\new, |\innovative, |\and |
complex |\investment |\that |\takes |\many |\different |\forms. |\In |\simple |
terms, |\a |\hedge |\fund |\is |\a |\private |\pool |\of |\funds |\that |\is |\constructed |\for |
the |\purpose |\of |\generating |\a |\specific |\range |\of |\returns, |\no |\matter |
what |\happens |\in |\the |\general |\stock |\market. |\To |\do |\so, |\hedge |\fund |
managers |\follow |\complex |\combinations |\of |\investment |\strategies |\that |
include |\borrowing Four |\fundamental |\factors |\affect |\the |\cost |\of |\money: |\the |\firm's |
production |\opportunities, |\investors' |\time |\preferences |\for |
consumption, |\risk, |\and |\inflation. |- |\CORRECT |\ANSWERS |\✔✔ The |________________ |\provides |\a |\snapshot |\of |\the |\relationship |\between |
short-term |\and |\long-term |\rates, |\usually |\for |\Treasury |\securities, |\on |\a |
particular |\date |- |\CORRECT |\ANSWERS |\✔✔yield |\curve Match |\the |\slope |\of |\the |\yield |\curve |\with |\the |\expected |\outcome. A. |\upward |\sloping B. |\downward |\sloping inflation |\is |\expected |\to |\increase inflation |\is |\high |\and |\expected |\to |\decline |\and |\the |\economy |\may |
weaken |\in |\the |\future |- |\CORRECT |\ANSWERS |\✔✔A. |\upward |
sloping:inflation |\is |\expected |\to |\increase
B. |\downward |\sloping: |\inflation |\is |\high |\and |\expected |\to |\decline |\and |
the |\economy |\may |\weaken |\in |\the |\future All |\else |\equal, |\investors |\generally |\prefer |\to |\hold |______________ |
securities |\because |\such |\securities |\are |\less |\sensitive |\to |\changes |\in |
interest |\rates |\and |\provide |\greater |\investment |\flexibility |\than |\their |
counterpart. |- |\CORRECT |\ANSWERS |\✔✔short-term, |\short |\term In |\general, |\when |\the |\rates |\in |\the |\financial |\markets |\increase, |\the |
prices |(values) |\of |\financial |\assets |\decrease. |- |\CORRECT |\ANSWERS |\✔✔ Capital |\Budgeting |\Process |- |\CORRECT |\ANSWERS |\✔✔Determine |\the |
relevant |\components |\of |\the |\initial |\investment |\outlay |\for |\the |\asset |\or |
project. Estimate |\the |\future |\cash |\flows |\expected |\to |\be |\generated |\by |\the |\asset |\or |\project. Evaluate |\the |\riskiness |\of |\the |\projected |\cash |\flows |\to |\determine |\the |
appropriate |\rate |\of |\return |\to |\use |\for |\computing |\the |\present |\value |\of |
the |\estimated |\cash |\flows.
important |\to |\include |\in |\the |\project |\cost |\because |\they |\require |\cash |
payments included |\for |\the |\asset's |\calculated |\value |\and |\expected |\rate |\of |\return |
to |\be |\correct |- |\CORRECT |\ANSWERS |\✔✔A. |\Sunk |\costs: |\outlays |\that |
have |\been |\committed |\which |\will |\not |\change |\if |\project |\is |\purchased. B. |\Externalities: |\effects |\that |\a |\project |\will |\have |\on |\other |\parts |\of |\the |
firm C. |\Shipping |\and |\installation |\costs: |\important |\to |\include |\in |\the |\project |
cost |\because |\they |\require |\cash |\payments D. |\Inflation: |\included |\for |\the |\asset's |\calculated |\value |\and |\expected |
rate |\of |\return |\to |\be |\correct E. |\Opportunity |\costs: |\cash |\flows |\that |\can |\be |\generated |\from |\assets |
the |\firm |\already |\owns |\if |\not |\used |\for |\project The |\three |\most |\popular |\methods |\used |\by |\businesses |\to |\evaluate |
capital |\budgeting |\projects |\are |(1) |\net |\present |\value |(NPV), |(2) |\internal |\rate |\of |\return |(IRR), |\and |(3) |\payback |\period |(PB). |- |\CORRECT |
ANSWERS |\✔✔NPV:If |\the |\estimated |\NPV |\for |\a |\project |\is |\positive, |\then |\
it |\is |\an |\acceptable |\investment |\because |\the |\value |\of |\the |\company |\will |
be |\increased. |\If |\the |\NPV |\is |\negative, |\then |\the |\project |\should |\be |
rejected |\because |\it |\will |\decrease |\the |\value |\of |\the |\company |\if |\it |\is |
undertaken. |\An |\NPV |\of |\zero |\would |\indicate |\that |\the |\project |\will |\have |
no |\effect |\on |\the |\value |\of |\the |\company. IRR:The |\internal |\rate |\of |\return |(IRR) |\is |\the |\rate |\of |\return |\the |\firm |
expects |\to |\earn |\if |\a |\project |\is |\purchased |\and |\held |\for |\its |\economic |
(useful) |\life. |\The |\IRR |\is |\defined |\as |\the |\discount |\rate |\that |\equates |\the |
present |\value |\of |\a |\project's |\expected |\cash |\flows |\to |\the |\initial |\amount |
invested. PB: |\Payback |\period |\is |\defined |\as |\the |\number |\of |\years |\required |\to |
recover |\the |\original |\cash |\investment. |\In |\other |\words, |\it |\is |\the |\period |
of |\time |\at |\the |\end |\of |\which |\a |\machine, |\facility, |\or |\other |\investment |
has |\produced |\sufficient |\net |\revenue |\to |\recover |\its |\investment |\costs. Match |\the |\project |\risk |\level |\with |\the |\required |\rate |\of |\return |\for |\the |
project. A. |\Above-average-risk B. |\below-average-risk C. |\Average |\risk "average" |\rate |\of |\return |(the |\firm's |\WACC)
