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C214- PA Version
| Question | Answer |
|---|---|
| What is a potential negative consequence if the firm focuses solely on profit maximization? | Unethical behavior and potential scandals |
| How might a privately held company define shareholder value differently from a publicly held company? | Privately held companies may value keeping the business within the family. |
| What effect does a currency devaluation have on a countryâs international trade? | It makes a countryâs exports cheaper internationally. |
| Devaluation reduces the price of a countryâs goods and services abroad, making exports more | competitive while potentially increasing the volume of exports |
| How does global financing integration benefit corporations? | It provides access to a wider range of funding sources and investment opportunities |
| Global financing integration enables companies to tap into international markets for debt and equity, offering them | more favorable conditions and diversification benefits than might be available domestically |
| What is an auction market in secondary financial markets? | A market that operates where prices are determined by the highest bidder |
| Why are efficient, well-developed financial markets important for stock pricing? | They produce more reliable stock prices. |
| Efficient and well-developed financial markets enable frequent trading of stocks, leading to more | reliable and up-to-date pricing that better reflects available information about the stock. |
| Change in retained earnings is calculated as net income less dividends. This relationship indicates that | net income is either distributed as dividends or contributes to a change in the retained earnings of the company. |
| When reviewing the financials, she notices that although the company produced $200,000 in net income during the last year, the retained earnings increased by only $50,000. | The remaining earnings were paid out as dividends to shareholders. |
| What does Retained Earnings represent in the equity section of the balance sheet? | The cumulative total of earnings not paid out as dividends to stockholders |
| In the statement of cash flows, why is depreciation expense added back to net income when calculating cash flows from operations (CFO)? | Because it is a non-cash expense |
| An investor is considering putting money into a start-up company. They ask for the companyâs projected statement of cash flows for the next period. | It will show the cash flows the firm expects from operating, investing, and financing activities. |
| In the statement of cash flows, when using the indirect method of calculating cash flow from operations (CFO), how is an increase in operating asset accounts (other than cash) treated? | It is subtracted from net income. |
| An increase in operating asset accounts implies | an outflow of cash, as the firm must use cash to acquire these assets. |
| Why is scrubbing the data crucial when comparing a company with its peers through ratio analysis? | To adjust for differences in fiscal year-ends and accounting practices among companies |
| Which difficulty may arise when performing ratio analysis for seasonal businesses? | Seasonal variations make it challenging to compare ratios across firms if the reporting dates of the companyâs financial statements are different. |
| What information does the return on equity (ROE) ratio provide? | It indicates the earnings generated for each dollar of equity invested. |
| Which factor is an example of an external risk that should be considered in an integrated financial analysis of a firm? | Changes in competitive forces due to economic turndown |
| What is the primary characteristic of the cash flow pattern for a typical corporate bond? | A stream of annual or semiannual interest payments and a final principal repaymen |
| How is the number of periods (n) calculated for a bond paying semiannual coupons? | It is multiplied by 2. |
| In the case of bankruptcy, what represents a primary difference in the claim hierarchy between common and preferred stockholders? | Preferred stockholders have a higher claim on company assets in case of liquidation. |
| What is a key advantage of holding common stock over preferred stock? | Potential for capital appreciation |
| What is the book value per share if a companyâs total equity is $200 million and it has 20 million shares outstanding? | The book value per share is total equity divided by the number of shares, so $200 million/20 million shares = $10 per share. |
| A company with a market capitalization of $500 million has net income of $25 million. What is the companyâs earnings per share (EPS) if it has 10 million shares outstanding? | EPS is calculated as net income ($25 million) divided by number of shares outstanding (10 million), resulting in $2.50. |
| A company is expected to pay a dividend of $1.80 next year, which is expected to grow at a rate of 7% per year indefinitely. The required rate of return on the companyâs stock is 11%. What is the value of the stock using the Gordon growth model? | The value is D1/(k â g) = $1.80/(0.11 â 0.07) = $45.00. |
| company plans to pay $4.12 for its next dividend. The dividends are expected to grow at 3% annually, and the required rate of return is 11%. What is the value of the stock using the Gordon growth model? | The value is D0(1 + g)/(k â g) = $4 Ã 1.03/(0.11 â 0.03) = $51.50. |
| What is the impact of portfolio diversification on expected returns? | It reduces the variability of expected returns. |
| What is the primary purpose of diversification in a portfolio? | To reduce the idiosyncratic risk |
| In the capital asset pricing model (CAPM), what is the significance of the market risk premium? | It is the extra return over the risk-free rate expected from the market. |
| What does the capital asset pricing model (CAPM) imply about stocks with a beta greater than 1? | They are more volatile than the market. |
| Which factor is used in the capital asset pricing model (CAPM) but not the Gordon growth model to estimate the cost of common equity? | The companyâs beta |
| What is a primary advantage of using the Gordon growth model to estimate the cost of common equity? | incorporates a companyâs dividend growth rate. |
| The Gordon growth model incorporates a companyâs expected | dividend growth rate, which is a key advantage |
| Which key factors are used to approximate the return required by shareholders in the Gordon growth model? | Dividend growth rate and current share price |
| Which method estimates the cost of common equity by considering the expected market returns and the risk-free rate? | Capital asset pricing model |
| What is a primary reason for a firm to consider slowing its sales growth? | To reduce its dependency on external financing |
| A company has net income of $50,000 and total equity of $350,000. The company also pays out 12% of its net income in dividends. What is the sustainable growth rate? | 12.57% |
| Which capital budget budgeting method is used by firms that wish to recover their invested capital as quickly as possible? | Payback |
Created by:
mnapole