Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
14 Cards in this Set
- Front
- Back
|
What are the 3 interrelated areas of Finance
|
1. Money of Capital markets - environment of business.
2. Investments - choice of securities 3. Corporate Finance (Financial management) |
|
|
What are the 3 forms of business?
|
1. Sole proporietorships (80% of all business)
2. Partnerships 3. Corporations (10% of business but account for 80% of dollars in sales |
|
|
What are the 3 advantages and 3 disadvantages of sole proprietorships?
|
Sole Proprietorships
Advantages: 1) Inexpensive to organize 2) No corporate income tax 3) Subject to fewer government regulations Disadvantages: 1. Unlimited liability for the owners 2. Has a limited life. It dies with the owner 3. Limited capital |
|
|
What are the 2 advantages and 4 disadvantages of partnerships?
|
Partnerships
Advantages: 1. Low cost and easy to form 2. Accounts to more capital than sole proprietorship Disadvantage: 1. Unlimited liability for each partner 2. Limited life 3. Difficult to transfer ownership 4. Limited capital than for corporation |
|
|
What are the 4 advantages and 3 disadvantages of corporations?
|
Corporations
Advantages: 1. Limited liability for owners 2. Can raise more capital ($) 3. Unlimited life 4. Easy to transfer ownership Disadvantages: 1. Double taxation of dividend income a. Pays income tax on its earnings, and the when it pays dividends, stockholders need to pay income tax 2. Separation of ownership from management a. Can result in the “agency problem” i. Agent – Manager ii. Principal – Stockholder iii. Agent may seek to pursue self interest. This is the agency problem. iv. It exists when the agent pursues self-interest which doesn’t benefit the owners 3. Subject to more government regulations |
|
|
What are the 4 factors that affect stock price?
|
1. Expected earnings or free cash flow. The funds are available to all stock holders. It’s also known as expected profits. It a firm is more profitable, there are more expected earnings
2. Timing of earnings (cashflow) due to time value of money 3. Riskiness of earnings (EPS) affects cash flow. 4. Additional factors (not in book): a. Dividend policy b. Capital structure (mix of debt and equity) c. External factors (outside the control of the business firm) |
|
|
Define intrinsic value
|
The value of a stock which can be sustained over time.
|
|
|
What are the 8 factors affecting interest rates?
|
1. Production opportunities available to producers affect demand for loanable funds
2. Time preference for consumption (spending) affects supply of loanable funds 3. Risk. a. Higher risk = higher interest rate b. Lower risk = lower interest rate 4. Inflation a. Higher inflation = higher interest rates b. SEE FIG 1-2 p. 18 i. Interest rates and inflation move together ii. When interest rates rise – bond prices fall 5. Federal Reserve Policy 6. Federal budget deficit a. More borrowing by gov. = higher interest rates 7. Foreign trade deficit 8. State of the economy or business cycle a. A Recession = lower demand for borrowing, lower interest rates b. During upturn in economy = Higher demand for borrowing, interest rates rise |
|
|
What are the 2 types of securities?
|
1. Money market
a. Mature within a one-year period 2. Capital market a. Long-term maturities and equities (stocks & bonds) |
|
|
SINGLE PAYMENT PROBLEMS:
PROBLEM: How long does it take to double sales at a 10% growth rate? |
PV = -100
FV = 200 I/y = 10% PMT = 0 N = ? (7.27) |
|
|
If you borrow $500 and payback $650 after 3 years to pay off the loan. What interest rate did you pay?
|
PV = -500
FV=650 N=3 years PMT = 0 I/y = ? (9.14%) |
|
|
What is an annuity, and what are the 2 types of annuities?
|
Definition: An annuity is a series of equal PMTS made at the same fixed interval for a specified time period.
1. Ordinary (Deferred) annuity – If each payment occurs and the end of a period 2. Annuity due - Each payment occurs at the beginning of each period |
|
|
You are 20 yrs. old and you want to be a millionaire by 60 yrs. old. If you can earn 12% annually how much would you need to save?
|
PV=0
FV= $1,000,000 I/y=12% N=40 years PMT=? ($1,303.63) |
|
|
PA must make lottery payments of $100million on a lottery win to be paid in 20 equal annual payments over 20 years. If the state can earn 15% on its investments, how much must be set aside today to make the 20 payments?
|
PMT = 100m/20 = $5mm/year
N=20 FV=0 (remember future value must be ZERO) I/y=15% PV=? $31,296,657.37 |
