Explain the fallacy of this statement: “I’d rather put my money into a single high earning asset than in a portfolio of diversified investments; I’ll earn more money with the single asset.”
> Explain how internally generated funds are used to reduce the need for external financing to fund asset investments.
> How is the process of financial planning used to estimate asset investment requirements?
> How is the Du Pont system related to both the balance sheet and the income statement?
> Describe the Du Pont method or system of ratio analysis. What are the two major components of the system?
> List some reasons why financial statement analysis is conducted. Identify some of the participants that analyze firms’ financial statements.
> What is the purpose of the balance sheet? Briefly identify and describe the major types of assets and the claims of creditors and owners shown on the typical balance sheet.
> What is the purpose of the income statement? Also, briefly identify and describe the major types of expenses that are shown on the typical income statement.
> General accounting practice is based upon the accrual concept. Explain what this means and briefly describe how this compares with the financial manager’s focus on cash.
> What types of information are included in an annual report?
> Briefly describe the differences between a subchapter S corporation and a limited liability company.
> 1. Which of the following true of the OTC market? a. Stocks are traded in a physical location, over a counter in an office, on Wall Street. b. Primary market transactions are underwritten by investment banks. c. Only large institutional traders may par
> What are the differences in owner liability in proprietorships and partnerships versus corporations?
> Identify and briefly describe the three major forms of business ownership used in the United States.
> Briefly describe the financial responsibilities undertaken by a firm’s treasurer.
> What are the responsibilities of a firm’s controller?
> Describe four provisions of the Sarbanes-Oxley Act.
> What is restricted stock? How does it improve managerial incentives compared to the use of stock options?
> What are the two main solutions for reducing the adverse effects of agency problems?
> Discuss some ways agents can make self-serving decisions.
> What is meant by the principal-agent problem in the context of corporate governance?
> How do the financial markets accommodate the needs of both risky firms and very safe firms?
> 1. Traders wanting to buy a security make ______ prices; traders wanting to sell make ______ prices. a. Bid; ask b. Buy; sell c. Stop; limit d. Market; limit 2. Which type of order is executed immediately after a specified price target is hit? a.
> How are financial strategy and financial plans linked together?
> What does it mean when a firm’s MVA is negative?
> Briefly explain how shareholder wealth is measured.
> Describe the financial goal espoused by business firms.
> What steps did Ford take from 2008 to 2009, as seen by its balance sheet?
> What was GM’s financial position prior to its bailout in 2009? How did the bailout improve its financial position?
> How are industry-operating differences reflected in a firm’s financial statements?
> How can common-size financial statements be used?
> What is a statement of cash flows? What are the three standard sections contained in a statement of cash flows?
> Describe the three different accounts that comprise the owners’ equity section on a typical corporate balance sheet.
> 1. Participants on the floor of the New York Stock Exchange do not include which one of the following? a. House brokers b. Registered brokers c. Designated market makers d. Supplemental liquidity providers 2. The NYSE is an example of a(n) ___________
> It has often been said that a business should begin with a vision or mission statement. Explain what that means.
> Explain what is meant by “market efficiency.” What are the characteristics of an efficient market?
> Explain the historical relationships between return and risk for common stocks versus corporate bonds.
> Describe the meaning of a “state of nature” and explain how this concept is used to provide expected measures of return and risk.
> Suppose the U.S. dollar strengthens in the past year against other currencies. Explain its effect on U.S. dollar revenues and expenses for a global firm headquartered in the U.S.
> What are sources of risk facing a firm which are reflected on its income statement?
> Business risk has three possible sources. What are they?
> What is meant by the coefficient of variation? How is it used as a measure of risk?
> What is the market portfolio? Can we invest in such a portfolio?
> Define the concept of “beta” and describe what it measures.
> 1. A broker is paid by _________ by assisting the trading process; a dealer makes money on the __________ by trading from their own account. a. Salary; fees b. Fees; commissions c. Fees; spread d. Commissions; spread 2. In addition to assisting pri
> What is meant by the Capital Asset Pricing Model? Describe how it relates to expected return and risk.
> Describe how the variance and standard deviation are calculated and indicate how they are used as measures of risk.
> Classify each of the following as an example of systematic or unsystematic risk. a) The labor unions at Caterpillar, Inc. declared a strike yesterday. b) Contrary to what polls stated, the President was re-elected. c) Disagreement about inflation polic
> How does systematic risk differ from unsystematic risk?
> Describe what happens to portfolio risk as more and more assets are added to a portfolio. Are there advantages to international diversification?
> Explain the terms diversification and correlation in the context of forming portfolios.
> Define what is meant by a portfolio and describe how the expected return on a portfolio is computed.
> How do mutual fund return data present evidence for or against efficient markets? Explain.
> Explain if you agree or disagree with this statement: “After the merger announcement the stock price greatly increased. Then it fell for the next 1-2 days before becoming relatively stable. This is proof against the efficient market hypothesis.”
> 1. What is the difference between the funds received by the company from the underwriters and the value of the firm’s shares in the aftermarket known as? a. Spread b. Underpricing c. Flotation costs d. Sum of the spread and underpricing 2. Direct co
> 1. Which of the following is the largest component of the M1 money supply definition? a. Currency b. Traveler’s checks c. Demand deposits d. Other checkable deposits 2. The M2 definition of the money supply does not include which of the following?
> What type of market efficiency—none, weak, semi-strong, or strong—exists under each of the following statements? a) I know which stocks are going to rise in value by looking at their price changes over the past two weeks. b) Returns earned by company off
> What are the differences among the weak, semi-strong, and strong forms of the efficient market hypothesis?
> Explain how a percentage return is calculated and describe the calculation of an arithmetic average return.
> Describe the inroads into investment banking being made by commercial banks.
> Briefly describe how investment banking is regulated.
> Identify the costs associated with going public.
> Briefly describe the process of competitive bidding and discuss the relative advantages and disadvantages.
> What were some of the reasons for the decline in Facebook’s stock price after its IPO?
> Explain what is meant by market stabilization.
> Discuss how investment bankers assume risk in the process of marketing securities of corporations. How do investment bankers try to minimize these risks?
> 1. The Facebook IPO was not as successful as initially hoped because: a. not enough shares were offered. b. the investment banks set the offering price too low. c. disappointing news occurred shortly before the IPO. d. of uncertainty about when the IPO w
> Between 2007 and 2014, the costs of unethical behavior in investment banks (fines, lawyer costs, trading losses) were estimated at over $100 billion, about 6.6% of industry revenue during that time. Will this be a deterrent?
> What is Regulation FD and how does it affect security trading?
> Why is it illegal to trade on insider information?
> What are American Depository Receipts (ADRs)?
> Give some examples of market indexes. Why are there so many different indexes?
> What are some factors that influence the commission on a stock trade with a broker?
> Why may a stock trade that takes one second to execute be preferable to a trade that takes nine seconds to execute?
> A security’s liquidity is affected by what influences?
> Identify the primary market functions of investment bankers.
> What factors differentiate a “good market” from a “poor market”?
> 1. Why was the Facebook IPO not as successful as was initially hoped? a. Not enough shares were offered b. The investment banks set the offering price too low c. Disappointing news occurred shortly before the IPO d. Uncertainty about when the IPO wou
> How do the third and fourth markets differ from other secondary markets?
> Describe several differences between the organized exchanges and the over-the-counter (OTC) market.
> What is meant by program trading?
> Describe the meaning of buying on margin.
> What is meant by a short sale?
> Describe the differences among the following three types of orders: market, limit, and stop-loss.
> Why is there a difference between bid and ask prices at some point in time for a specific security?
> Describe the types of members of the New York Stock Exchange.
> What are some of the characteristics of an organized securities exchange?
> Why do corporations employ investment bankers?
> 1. Which are examples of professional designations with ethics requirements? a. ADR and GDR b. CFA and CFP c. SEC and FINRA d. Merrill Lynch and Charles Schwab 2. Which of the following is a law passed to correct ethical lapses in the financial mar
> Why might a firm want to maintain a high bond rating? What has been happening to bond ratings in recent years?
> Why are investment-grade bonds given that name? Why are “junk bonds” also known as “high-yield bonds”?
> What is meant by the following terms: convertible bonds, callable bonds, putable bonds, and Eurodollar bonds?
> What are bond ratings?
> Describe what is meant by bond covenants.
> Let’s assume energy prices are forecast to go higher. How would this affect your decision to purchase the stocks and bonds of a) ExxonMobil? b) American Airlines? c) Ford? d) Archer Daniels Midland, a food processor?
> Give examples of firms you believe have been successful over time because they are industry leaders in quality; they are the low-cost producer; they are innovative; they offer superior customer service.
> Can only large institutional investors purchase bonds? Explain.
> Is industry competition good or bad if you are looking for attractive stock investments?
> What can looking at data on inventories tell us about the condition of the economy? Data on business expansion or investment plans?
> 1. Market indexes are used for which of the following reasons? a. To keep track of trends in an overall market b. To compare performance of different investment strategies c. To compare performance of your portfolio with the market d. All of the abov
> Discuss how changes in exchange rates can affect the outlook for both global and domestic firms.
