Questions and Answers
In Capital Budgeting, what does the Terminal Cash Flow represent?
Proceeds from the sale of assets and release of working capital
What does Net Present Value (NPV) measure in Capital Budgeting?
The net present value of after-tax cash flows
How is Internal Rate of Return (IRR) defined in financial analysis?
The discount rate that results in zero net present value
If a company has a gain of 5,000 from selling equipment that has a book value of 10,000 and a tax rate of 30%. What are the After Tax Proceeds from the sale?
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If an investor expects a 12% rate of return and a stock will be worth 36 at the end of the year with a dividend of 2.25, how much should the investor pay for the stock?
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In stock investing, what are the two primary types of expected returns that investors consider?
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If a broker purchased a stock that pays a 1.15 annual dividend for 16 with a required rate of return of 15% and later sold it at 19, what was the actual return on the investment?
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If a stock is expected to pay a dividend of $5 for the current year and grow at a rate of 4% per year, with a required rate of return of 10%, what is the maximum amount that should be paid for the stock today?
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What is included in the Income Statement but NOT in the Statement of Cash Flows?
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In the Retained Earnings Statement, what happens to the retained earnings when dividends are paid out?
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What is the fundamental equation for the Balance Sheet?
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In a simple interest investment scenario, if $10,000 is invested at 8% simple interest for 3 years and 9 months, what will be the total return (principal + interest)?
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What does Net Income represent in financial statements?
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What is the expected return per year if a stock is bought for 45, pays a 2 annual dividend, and is expected to grow by 10% annually?
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What is the maximum amount that should be paid for a stock today if it is expected to pay a perpetual dividend of $5 per year and the required rate of return is 10%?
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What is the expected rate of return for a stock where there is a 60% chance of recession (return of 2%) and a 40% chance of expansion (return of 8%)?
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In a portfolio with 55% probability of expansion and 45% probability of recession, if Stock A during expansion returns 15% and during recession returns 2%, while Stock B during expansion returns 12% and during recession returns -3%, what is the portfolio expected return if 75k is invested in Stock A and 15k in Stock B?
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What does Capital Budgeting refer to in investment decisions?
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What is the Degree of Financial Leverage (DFL) when given EBIT of 40k and Interest Expense of 5k?
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If a company has a low degree of financial leverage, what does that indicate about the firm's risk profile?
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Based on Lil Corp's total assets of 1,020k and total liabilities of 750k, what is the Debt Ratio?
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What is the Degree of Operating Leverage (DOL) if Sales are 150k, Variable Costs are 90k, and EBIT is 30k?
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What does the Cash Flow from Investing Activities formula represent?
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In the context of financing activities, what does CFFFA stand for?
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What is the formula for calculating Free Cash Flow in the given scenario?
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What does the End PPE-Beg PPE formula represent?
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In the calculation of Cash Flow from Operations, what does the term 'Net capital expenditures' refer to?
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What is the impact on cash flow from operations if a company reports a net income of $100k, depreciation of $20k, and a decrease in Accounts Payable of $5k?
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In the cash flow statement, which of the following would be classified as a cash outflow in the Investing Activities section?
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If a company reports a $5k increase in Accounts Receivable for the year with half expected to be collected next year, what is the impact on cash flow from operations?
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If the Net PPE was recorded at 4,600 last year and 4,500 this year, with depreciation expenses of 500 and 800 respectively, what is the Cash Flow from Investing (CFI)?
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What is the impact on cash flow from operations if a company reports a net income of 100k, depreciation of 20k, and an increase in Accounts Receivable of 5k?
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Which of the following scenarios would result in a decrease in cash flow from operations?
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What effect does a $5,000 decrease in cash flow for the year have on cash flows from investing activities?
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How does an increase in Accounts Receivable affect the cash flow from operating activities?
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Which activity would cause a decrease in cash under operating activities?
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What is the impact on cash flow from operations when a company reports an increase of $5k in accounts receivable for the year with half expected to be collected next year?
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What is the main purpose of issuing bonds by the U.S. Treasury?
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How does a company like Google raise funds for investments such as low-orbiting satellites?
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What is the significance of owning a stock in a company?
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How do corporate bonds differ from U.S. Treasury Bonds in terms of risk?
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Why do companies like Google issue bonds instead of taking direct loans from banks?
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In finance, what does WACC stand for?
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What does the Times Interest Earned Ratio (TIE) measure?
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How is Financial Leverage Ratio (FLR) calculated?
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Why is interest expense an important component in financial analysis?
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What is the primary way banks make money when dealing with depositors and borrowers?
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What does the management or allocation of capital emphasize in financial decision-making?
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Which financial securities are issued by the U.S. government and can be considered bonds?
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What does capital budgeting mainly involve in a firm's long-term planning process?
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From a corporation's perspective, what is the tradeoff when deciding between using debt (bonds) or equity (stocks) for financing investments?
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What is the impact on the Times Interest Earned (TIE) ratio when a company's Interest Expense increases?
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How does an increase in Financial Leverage Ratio (FLR) impact a company's risk profile?
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What happens to a company's Weighted Average Cost of Capital (WACC) when the cost of equity increases?
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If a company's interest-bearing debt to total capital (IBDTC) ratio decreases, what might this indicate about the firm?
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What is the significance of interest expense in financial analysis?
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What is the purpose of the Times Interest Earned Ratio (TIE)?
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How does Financial Leverage Ratio (FLR) differ from Debt to Equity Ratio (DER)?
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Why is Interest Expense a crucial factor in financial analysis?
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How does a decrease in Interest-Bearing Debt to Total Capital (IBDTC) impact a company's financial leverage?
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In terms of stock investing, how does a high WACC (Weighted Average Cost of Capital) affect investment decisions?
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Why is it important to analyze the relationship between interest-bearing debt and total capital in a company?
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How does the Times Interest Earned (TIE) ratio impact a company's financial health?
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What does the Financial Leverage Ratio (FLR) indicate about a company?
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Why is the consideration of Interest Expense important in financial analysis?
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What role does Weighted Average Cost of Capital (WACC) play in financial decision-making?
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What is the purpose of using color coding to link the balance sheet and the SCF as mentioned in the text?
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In the context of financing decisions, what does CFF refer to?
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What does the Times Interest Earned Ratio (TIE) measure in financial analysis?
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Why is a simple approach frequently best when trying to understand a firm through the complexities of accrual accounting?
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What does the Financial Leverage Ratio (FLR) indicate about a company?
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In financial analysis, why are interest expenses considered important?
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What can be inferred when two firms, A and B, both increase cash by $15 million in the last year?
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What impact does a decrease in the company's interest-bearing debt to total capital ratio have on its financial leverage?
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How does a high weighted average cost of capital (WACC) affect a company's investment decisions?
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When comparing two firms, what does a higher degree of financial leverage typically indicate?
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How does an increase in accounts receivable impact a company's current ratio?
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What is the effect on cash flow from operations when a company records a gain from selling equipment at a tax rate of 30%?
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What practical disadvantage of the Gordon model for equity valuation is mentioned in the text?
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What factor determines the 'market risk premium' on stocks according to the text?
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Why should an investor diversify their portfolio based on the text?
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Which factor does NOT affect the firm's Weighted Average Cost of Capital (WACC) as per the text?
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Which statement about a Price-to-Earnings (PE) ratio is false based on the text?
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What is the fundamental concept underlying the valuation of all financial assets?
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What does the beta measure in finance?
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How do market interest rate increases affect a given bond?
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What is the most effective use of financial statements in valuing a stock?
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If Company X has a higher degree of business risk than Company Y, what will happen if both companies experience a 1% increase in sales?
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How does the calculation of the Current Ratio differ from the Quick Ratio?
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What does it indicate about a firm if its Net PPE decreases from 4,600 to 4,500 with depreciation expenses of 500 and 800 in consecutive years?
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If a company decides to record an estimated warranty expense for a product sold, what will be the immediate effect on the Income Statement and Statement of Cash Flows?
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What does a leverage recapitalization strategy involve?
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Which type of bond allows an investor to exchange it for a set number of shares of common stock?
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What does a credit agency's recent downgrade of a company's debt lead to?
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What is the purpose of reserve balance for a firm?
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Which ratio is commonly used in the comparable multiple’s method for valuation?
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What is the implication of high financial and operating leverage in a firm?
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In an industry with high fixed costs and cyclical sales, what is the recommended financial leverage strategy?
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What does the Sustainable Growth Rate (SGR) measure?
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If a firm's goal is to maximize stockholder wealth, what type of investments would the firm avoid?
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When estimating sales impacts from international developments on a US product, what factor might affect sales according to the text?
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Why should a company carry cash?
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What is a commonly used method to reduce the time between payment and receipt of cash?
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Which three costs are associated with holding inventory?
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What is the primary purpose of Regulation S and Rule 144A by the Securities and Exchange Commission?
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What is the main objective of the Sarbanes-Oxley Act?
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In the context of working capital management, which two ratios are commonly used for evaluation?
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What does the comparable multiples method primarily utilize for evaluation?
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'What logic-defying behavioral implications arise from investors' decisions regarding stocks with gains or losses?'
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What led to the institution of the National Banking Act of 1863 in the U.S.?
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What was the purpose behind the McFadden Act of 1927 in the U.S.?
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Which act was introduced to monitor capital markets and institutions following the National Banking Act in the U.S.?
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Why was the Federal Reserve Act of 1913 enacted in the U.S.?
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What does the Sarbanes-Oxley Act primarily focus on in terms of company controls?
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What is the primary focus of FINRA compliance examinations?
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During a routine examination, what aspect of a firm's business does FINRA pay particular attention to?
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What is one of the core areas that FINRA examines during routine compliance exams?
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What is scrutinized by FINRA in terms of a firm's sales practices?
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In the context of routine examinations, which area does FINRA NOT focus on?
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What is the goal of FINRA's examination of a firm's books and records?
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What is the primary purpose of the SEC operationalizing its mission through public disclosure of firm data?
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What is the key requirement for an individual to be considered an 'accredited investor' according to the SEC?
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What does Rule 144A provide for firms in terms of raising capital?
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Which act is related to providing safe harbor for raising capital outside the United States?
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What is the primary document that a firm files to go public according to the information provided?
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Why is it crucial for insiders in an IPO to be fully transparent in the prospectus disclosure?
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What type of offering is almost always used when a firm is initially sold to the public in the United States?
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What was the main purpose of the Sarbanes-Oxley Act according to the text?
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In what way did Enron executives use accounting fraud to prop up the profits of the company?
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Why was Enron's fraud so elaborate and strategically planned according to the text?
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Which act was created in response to Enron's fraudulent activities?
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How does the Securities Act of 1933 help protect potential investors in a firm?
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'Build the book' through what is known as the roadshow refers to what process mentioned in the text?
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What does Rule 144A allow firms to do under certain conditions as mentioned in the text?
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What event led to Arthur Andersen going out of business in 2002?
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How did the number of public firms in the United States change after the implementation of SOX?
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What was one of the main reasons some public firms decided to delist or list internationally post-SOX implementation?
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Which area does FINRA primarily aim to regulate?
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Why are companies that trade in equities, corporate bonds, etc., required to be members of FINRA?
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What is one of the functions of FINRA that involves writing rules for industry behavior?
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What was the main purpose of the Glass-Steagall Banking Act of 1933?
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Which Act set up a wall between commercial/consumer banking and investment banking?
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What was the catalyst for the Depository Institutions Deregulation and Monetary Control Act of 1980?
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Which Act was responsible for allowing banks to offer adjustable rate mortgages and invest in government bonds?
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What was the major focus of the Dodd-Frank Act of 2010?
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Which Act was blamed for allowing financial institutions to become 'too big to fail'?
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Which Act established risk-based insurance premiums for banks through a CAMELS score system?
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What determines the value of a bond for an investor?
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In the context of bonds, what does the face value represent?
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What role does the indenture play in the context of bonds?
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How do bond coupons impact investors?
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Which factor directly affects the yield to maturity of a bond?
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What is the significance of the fixed income nature of bonds?
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Knowing the idiosyncratic risk allows an investor to determine:
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What does the Weighted Average Cost of Capital (WACC) represent in a company's financial structure?
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In determining the Weighted Average Cost of Capital (WACC), which component has a greater impact when its cost increases?
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How does a decrease in the Dividend Payout Ratio impact a company's Retained Earnings?
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What could a high Financial Leverage ratio indicate about a company's capital structure?
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If a company has a higher Sustainable Growth Rate (SGR) and wants to increase its growth further, what is a suitable strategy to achieve this?
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What is the formula to calculate Sustainable Growth Rate (SGR) for a company?
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What is the impact of increasing the Financial Leverage Ratio on a company's risk profile?
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What is the purpose of the Dividend Payout Ratio in evaluating a company's financial health?
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How does an increase in the company's Debt to Equity Ratio impact its Capital Structure?
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What does Retained Earnings represent in a company's financial statements?
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How does a decrease in the Dividend Payout Ratio affect a company's Retained Earnings?
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What will companies endeavor to do under the Efficient Market Hypothesis?
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What does the beta coefficient represent in finance?
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What is the expected rate of return for a stock with a beta of 2.1, a market premium of 0.14, and a market rate of 0.17?
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If a stock has a beta of 0.75 and the market rate is 0.14, what would be its expected return if Treasury bonds are returning 0.025?
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A stock with a beta of 1.42 is in a market returning 0.11 while treasury bills are yielding 0.014. What is the expected return for this stock?
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If a stock has a beta of 1.92 with a market rate of 0.09 and a risk-free rate of 0.015, what is the expected rate of return?
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What is the primary focus of the Dodd-Frank Act of 2010?
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Which Act allowed banks to conduct business across state lines?
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What was a significant feature introduced by the Garn-St. Germain Act of 1982?
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Which trend followed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989?
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What impact did the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 have on bank regulations?
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Which Act reversed the trend of deregulation following the Savings and Loan crisis?
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What was one of the main criticisms of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999?
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What was a significant outcome of the repeal of the Glass-Steagall Act?
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Which regulatory act aimed to regain control of the financial institutions industry by expanding governmental authority over liquidation and regulation?
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What was a key feature introduced by Dodd-Frank Act to limit bank investments and trading activities?
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What was the primary purpose of creating the Financial Stability Oversight Council under Dodd-Frank Act?
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What was the primary aim of the Glass-Steagall Act of 1933?
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Which restriction was imposed on banks by the Garn-St. Germain Act of 1982?
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Which act allowed many large financial holding companies to hold subsidiaries in commercial banking, investment banking, and insurance?
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What was a significant outcome of the Bank Holding Company Act of 1956?
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The Depository Institutions Deregulation and Monetary Control Act of 1980 was primarily a response to which economic conditions?
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How did the Glass-Steagall Act of 1933 impact the banking industry?
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What was the main objective of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)?
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The stock price of a company increases and the market is deemed efficient. What assumptions can be made?
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Which statement is true about how the global market affects the U.S.
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What are secondary markets:
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A special interest group in the U.S. has been lobbying intensely for protectionism through increased tariffs and trade restrictions, with the argument that it will save jobs in the industry they represent. What is the most likely result if they are successful?
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What do the content and structure of a balance sheet report?
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What is the basis used to compute a company's income tax expense?
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What is the firm's cash flow from financing, using the following data: Net Income 1000, Depreciation Expense 300, Change in operating assets 600, Change in net PPE 5000, Change in long-term liabilities 1000, Dividends paid 200.
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A company reported an increase in accounts payable of 2000 for the current year. Half of this amount is expected to be paid next period. How will this change in accounts payable be reported on the statement of cash flows?
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An analyst is comparing the ratios of two firms and needs to address accounting differences. What would be considered an accounting difference between the two firms?
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Firms A and B are in the same industry. For the year 2013, Firm A has a gross margin of .45 and Firm B has a gross margin of .36. Which conclusion would be an analyst draw when comparing Firm A and Firm B?
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What is an example of an estimate used in recording transactions?
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An investor anticipates receiving 72,000 in 6 years. Assuming an annual discount rate of 9%, what is the present value of this company?
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A doctor will receive 9,000 per year (at the end of the year) for 10 years. The annual interest on the investment is 6%. What is the present value of the doctor's investment?
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A banker wants to retire in 20 years from today and would like to have an annual income of 300,000 withdrawn at the end of each year for 10 years starting in exactly 20 years. The discount rate is 6%. What is the present value, today?
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The market rate of return is 6%. The face value of the bond is 1,000, the coupon rate is 10% with annual compounding, and the bond matures in 10 years. What is the value of the bond?
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How can a private firm appropriately maximize shareholder value?
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Why are American regulators focused on international investing in a global marketplace?
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What is one of the two basic types of financial instruments?
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What is the likeliest outcome if a company outsources the manufacturing of its products to a foreign country?
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What do the content and structure of a balance sheet report?
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A company reported an increase in accounts receivable of $5,000 during the recent period. Half of this amount is expected to be collected next period. How will this change in accounts receivable affect the cash flows from the operating activities section?
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Which statement accurately explains the recognition of revenues and expenses under accounting income and income for tax purposes?
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Selected Data for 20x2 for ABD Inc: Net Income 1,000, Depreciation Expense 300, Change in Operating Assets 600, Change in Net PP&E 5,000, Changes in Long-Term Liabilities 1,000, Dividends Paid 200. What is this firm’s cash flow from investments, using the data above and assuming no asset disposals?
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A company’s year-end balance sheet for 2013 shows the following: Accounts Receivable: 900, Inventory: 1,200, Fixed Assets: 1,000, Accounts Payable: 1,300, Sales: 4,000, Salaries Expense: 275. What is its fixed asset turnover ratio?
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A firm has a ROE (return on equity) of 0.27, and the industry average ROE is 0.24. Which conclusion should an analyst draw when comparing this firm to the industry?
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What must have taken place for a firm to recognize revenue, in order for the firm to comply with the accrual accounting rules?
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A teacher won 100,000 and invests this money for five years at an interest rate of 4% (compounded annually). How much will this teacher have in principal and interest at the end of the five years?
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An accountant is 40 years old and has an anticipated retirement age of 70 years old. The accountant plans to save 6,000 per year at the end of the next 30 years to fund retirement. How much will this accountant have upon retirement, if the accountant is able to earn 4% annually on this investment?
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An investor deposits 2,000 per year (beginning today) for 10 years in a 4% interest-bearing account. The last cash flow is received one year prior to the end of the tenth year. What is this investor’s future balance after 10 years?
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What is the par value (face value) of a bond?
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A broker is considering purchasing common stock in a company that has average but consistent operating performance. Which factor should lead this broker to purchase shares in this company?
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The market rate of return is 9%. The face value of a bond is 1,000, the coupon rate is 9% with annual compounding, and the bond matures in 10 years. What is the value of this bond?
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Which statement is true about fluctuations in bond prices?
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A company issues bonds at a market price of 925. The face value is 1,000. The bonds mature in 10 years, and the coupon rate is 6% compounded semiannually. What is the yield to maturity (YTM) on this company’s bonds?
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Which securities are issued by local governments and are usually tax exempt at the federal level?
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A bond pays 27.50 semiannually, matures in nine years, and is currently priced at 1,090. What is the yield to maturity for this bond?
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A bond that matures in 30 months is sold at a premium. What is the yield to maturity (YTM)?
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Why does a long-term bond resemble an interest-only loan?
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Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate (APR)?
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What are primary benefits of the capital asset pricing model (CAPM)?
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A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt of 6%, a cost of preferred equity of 8%, and a marginal tax rate of 34%. The current market value of the company is 150 million, with 75 million common equity, 50 million debt, and 25 million preferred equity. What is this company's weighted average cost of capital?
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Which techniques are effective ways to manage the growth of a firm, if additional financing is not available?
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Partial financial data for a company is as follows: Assets: 10,000,000, Liabilities: 4,000,000, Equity: 6,000,000, Sales: 25,000,000, Net Income: 5,000,000, Profit Margin: 20%, Dividends: 500,000, Dividend Payout Ratio: 10%, ROA: 50%, ROE: 83%. What is the sustainable growth rate for this company?
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A machine will reach the end of its useful life in year 5. The realizable salvage value is expected to be 50,000 with a book value of zero. The company’s marginal tax rate is 34%. What is the tax implication on the sale of this new machine at year 5?
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What is the acceptance criteria when using internal rate of return to evaluate a project?
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Year 2010 ending retained earnings were 2 million. Year 2011 forecasted sales are 100,000 with a 25% net margin and 20% dividend payout ratio. What are the forecasted retained earnings for year 2011?
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How is the amount of discretionary financing that is needed by a firm determined?
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A company is preparing a pro forma balance sheet. The company forecast 10 million in projected sales. The projected cash needed 6% of sales, accounts receivable are 19% of sales, and PP&E are 50% of sales. Accounts payable have been 12% of sales, historically. Shareholders' equity is 1.5 million. Pro forma income is 3.6 million. The company has no long-term debt. What is the discretionary financing needed?
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Study Notes
- Current assets on the balance sheet include cash, marketable securities, accounts receivable, and inventories, listed in order of liquidity.
- Depreciation expense and accumulated depreciation are important concepts for equipment lasting over one year.
- The U.S. government issues Treasury bonds as loans, with varying lengths such as 60-day loans or 30-year repayment periods.
- Corporations like Google issue bonds to borrow money for investments, which are paid back over time and provide bondholders access to company assets in case of bankruptcy.
- Stocks represent ownership in a company and are essential for understanding financial markets and valuing investments.
- Ratio analysis involves calculating key ratios related to leverage, efficiency, productivity, and liquidity to assess a company's performance.
- Cash Flow from Investing (CFI) involves cash flow due to investment in or disposal of fixed assets, which is crucial for understanding firm health.
- Understanding security returns involves calculating dollar returns and percentage returns, with different calculations for bonds and stocks.
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