Capital Markets Overview

Capital Markets

• A primary function is facilitating the allocation of long-term funds for investment.
• Primary markets involve new securities, while secondary markets deal with existing securities.
• An investor with a bond that has a 5% annual coupon rate and a face value of $1,000 receives an annual interest payment of $50.
• If a company with a WACC of 8% considers a project expected to yield a 10% return, it should proceed because the return exceeds the WACC.
• A financial manager should consider the company's current earnings reports, the impact of taxes on realized gains, and market liquidity conditions before advising to sell a stock that has been steadily rising but is predicted for market correction.
• A diversified investment portfolio for a low-risk tolerance client who wants stable income should have a 20% equities, 70% bonds, and 10% cash allocation.
• Investment banks primarily underwrite and distribute new securities in capital markets.
• Market efficiency is vital in capital markets because it allows accurate reflection of all available information in asset prices.

Investment Analysis

• If an investor purchases 100 shares of a company at $50 per share and sells them for $55 per share, the total gain is $500.
• For Company X, with a beta of 1.5, the market's expected return is 8% with a risk-free rate of 3%, the expected return of the stock using CAPM (Capital Asset Pricing Model) is 10.5%.
• When deciding between a high-yield bond and a government bond, the investor should consider the credit rating of the high-yield bond issuer, their risk tolerance and time horizon, and the potential impact of interest rate changes.
• To reduce market risk in an equity portfolio during periods of high volatility, increase diversification by adding uncorrelated assets.
• "Blue-chip stocks" refer to stocks of established companies with a history of reliable performance in capital markets.
• Inflation decreases the purchasing power of fixed-income investments.
• If market interest rates rise to 7%, both bond prices will decrease when considering two bonds—one with a coupon rate of 6% and another with a coupon rate of 4%.
• A value investor considers buying the stock because it appears undervalued when a company's stock is currently trading at $50 per share, but analysts estimate its fair value based on discounted cash flows (DCF) to be $60 per share.

Behavioral Finance

• An investor who identifies a stock with a high dividend yield but low price-to-earnings (P/E) ratio indicates the stock may be undervalued but carries some risk.
• Purchasing puts on the stock index is the most effective action to design a hedging strategy for a portfolio heavily weighted in equities during a market downturn.
• Common stock represents ownership in a corporation.
• The primary purpose of a stock index like the S&P 500 is to measure the performance of a segment of the stock market.
• Behavioral Finance analyzes how psychological influences and biases affect investors' financial decisions.
• The primary objective of Behavioral Finance is to understand how emotions and biases influence financial decisions.
• An example of overconfidence bias in investing is when a person frequently underestimates the risks in their investment portfolio.
• An investor tends to sell stocks that have increased in value while holding onto those that have decreased, hoping they will recover. This behavior exemplifies loss aversion.
• After experiencing a string of poor investments, an investor may begin to avoid high-risk opportunities entirely, even though their financial goals require a diversified portfolio. They exhibit recency bias.
• A financial analyst predicts the market will crash after hearing about a recent major drop in stock prices because the decision is mostly influenced by availability bias.
• A behavioral finance-based solution for an investor frequently influenced by herding behavior is creating a monthly report detailing personal investment goals and strategies.
• Allocating funds into risky and safe assets based on emotional preferences is not typically associated with mental accounting.
• An investor who maintains separate mental accounts for different types of investments exhibits mental accounting bias.
• To help a client who consistently overestimates their investment returns based on previous successes, a financial advisor should implement structured decision-making processes, such as setting realistic return expectations.
• Anchoring bias occurs when individuals rely too heavily on the first piece of information encountered when making decisions.
• An investor refuses to sell a stock at a loss, and believes its value will eventually recover despite no evidence which supports said expectation: Regret aversion explains this behavior.
• Herd behavior is when a new investor decides to invest in a stock because they have heard about multiple people profiting from it recently, without performing any analysis.
• As a financial planner, designing a strategy to mitigate the impact of confirmation bias on a client's investment decisions involves introducing a system where all investment ideas must be supported by contradictory evidence.

Credit & Finance

• Managing overdue accounts is a key function of a credit department within a company.
• The purpose of a credit score is best described as predicting the likelihood of an individual repaying their debt.
• As a first step for a company experiencing an increase in overdue accounts, review and tighten credit policies.
• A customer with a history of missed payments or defaults most likely represents a credit risk for a company.
• Offering a flexible payment plan or deferred payment terms would be the most effective collection strategies when dealing with a customer who has a known history of paying late due to cash flow issues.
• A new credit policy for a company seeking to minimize bad debt while ensuring customer satisfaction should involve setting credit limits based on a customer's credit score and history.
• Offering discounts for early payments is NOT part of a company's credit collection process.
• The correct statement about the aging of accounts receivable is the older the debt, the less likely it is to be collected.
• If a customer's payment is 60 days overdue, a company should send a second reminder and offer payment options.
• The change is likely due to customers facing seasonal or cash flow issues if a company observes late payments from customers who typically pay on time.
• Bad debt is the term for a debt that a company has determined is unlikely to be collected.
• A collection agency acts as an intermediary to recover unpaid debts on behalf of a company.
• Paying $4,900 is how much a customer will pay when offered a 2% discount for invoices paid within 10 days (on a $5,000 invoice paid on the 9th day).
• A recession impacting customer income levels could cause a sudden spike in overdue accounts for a company.

Taxation

• The primary purpose of income taxation is to fund government projects and services.
• Taxable income is best described as the amount of income left after accounting for allowable deductions and exemptions.
• Individuals typically use Form 1040 to file their annual income tax return in the United States.
• When a business incurs $50,000 in revenue, $20,000 in deductible expenses, and $5,000 in depreciation expenses, the taxable income is $25,000.
• A corporation with $200,000 in revenue and operating expenses of $120,000 will have a net taxable income of $60,000 if eligible for a $15,000 tax credit.
• A business owner cannot consider personal expenses a business expense for tax purposes.
• A business owner with a gross income of $150,000 and deductible business expenses of $50,000 will have a taxable income of $88,000 after applying a standard deduction of $12,000.
• Shifting operations to a lower-tax jurisdiction would be most beneficial to minimize the tax burden for a company operating in a high corporate tax rate area.
• An individual who earned $75,000 in wages and $15,000 in interest income claims a $12,000 standard deduction. Their taxable income is $78,000.
• To correctly calculate taxable income for a business that pays $10,000 in deductible interest on a loan but receives $2,000 in dividends, include the dividend income, and apply an exemption or special rate.
• Assessing the impact of increased tax deductions involves comparing the taxable income with and without the deductions.
• Carefully assessing which expenses are eligible for tax deductions and planning to optimize them aims to maximize the benefits of tax deductions and minimize taxable income.
• A tax deduction reduces the amount of income subject to taxation.
• Tax credit is a reduction in the amount of tax owed.
• What amount of tax business will pay is $25,000 if a business has taxable income of $100,000 and a corporate tax rate of 25%.
• $45,000 is the amount of tax liability. An individual has $50,000 in taxable income and qualifies for a $5,000 tax credit.
• The difference between "gross income" and "net income" is gross income is income before any deductions, and net income is after deductions.
• What is its gross profit: Sales = $500,000, cost of goods = $300,000 and expences $100,000 = $200,000
• The impact on their tax liability would decrease by $1,500. A taxpayer receives $50,000 in taxable income, and their tax rate is 15%. Taxpayer is able to detect $10,000 in expenses.
• Best tax structure: It will involve consulting with a tax professional. Business owner plans to incorporate its business and is considering the tax advantages.
• Increasing business income = Income increases. Type of progressive tax system.
• Social Security benefits is considered tax-exempt.
• $6,000 = taxation. If a business incurs $30,000 in operating expenses but has $40,000 in revenue. The tax rate is 20%, What is the business's tax liability?
• Effect is to reduce by $10,000 amount. Business receives a $10,000 tax credit. Impact does this credit have on the business's final tax liability?
• The income statement would be a key financial statement. - Key financial statement assesses financial performance, Assets equal to liabilities
• 12/1.5. If Assets is ROA. Total Asset turnover. Net profit margin?
• The correct answer is ROE. - Evaluate amount of profit. In relation to shareholders. Analyze

Financial analysis

• The gross margin profit - Can be informed well if operated is controlled enough for revenue.
• A reason would be its debt increasing the - increase debt-equity ratio. Changed significantly
• A financial analysis is is the evaluation to provide is evaluating for a company. Should be current
• Earnings. If two were to happen together. Net income increased. Cash flow is the main of them
• A better answer is the current ration - liquidity Value of higher inventory - FIFO. This will lower. Then net income. Also higher.
• A helpful assessment: meet of long is the debt service (ratio).

Bank and Capital

• Depreciation. Will appear in the income
• cashflow (ability). The use of this will increase profit, etc.
• Net will be higher than its revenue in relation. Revenue, new sales of stock. Stock/Price (ratio) The relationship the market Decrease of cash. Levels - increase in capacity.

Market Value

• The most useful tool would be an income statement. When evaluating
• income statement the potential tool to know - will see relevance, from data this analysis