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FINC 341 Test 1 Theory
Terms in this set (93)
When the dollar gets stronger, imports are
When the dollar gets weaker, exports are
What does ROE not consider?
It does not consider the risk or the amount of invested capital
Does ROE look at return on shareholders' investment?
Yes it does but maximizing ROE is not desirable
If no debt is used as capital, will a firm's ROE equal its ROA?
Yes it will
When two projects of different sizes are being compared with ROE, will the one with the lower ROE add less value to the firm?
No, just because it has a lower ROE does not mean it will bring less value to the firm
How do you calculate Cost of Costly Capital?
=Total assets-accounts payable - accruals
Does total capital equal total assets?
Yes they can be used interchangeably.
Who is the candidate for president in the upcoming French Presidential Election that is pro FREXIT?
Marine Le Pen
Who is the president of the European Central Bank?
He says that quantitative easing has helped the European economy, but wants QE to continue for a while
Has quantative easing in Europe weakened the Euro to the US dollar?
Yes it has. The Euro currently equals about $1.14 in US dollars
Have stock prices increased significantly since Trump was elected?
Yes they have
When interest rates are high, should investors sell or buy bonds?
Investors should buy bonds and then sell them for capital gains once the rates go back down
As US rates increase, does that strengthen or weaken the US dollar?
The dollar should strengthen and help US companies that import goods
What does a stronger dollar mean?
It means people can buy more for the same amount in other countries thus increasing imports
Is the repeal of the Glass Steagall Act of 1933 under Clinton partially to be blamed for the 2008 financial crisis?
Yes it is very much to blame
What is the highest DOW closing ever recorded?
$26,828.29 on October 3, 2018
Before 2018, was was the highest DOW closing ever recorded?
$20,068 on January 25, 2017
What is the current US trade deficit?
What is the Vlocker rule and has it ever actually taken effect?
It was supposed to keep big banks from taking on investments that could put the bank in bankruptcy. It has never actually taken effect, even though it's in the Dodd Frank Bill.
What portions of the Philadelphia stock exchange and London stock exchange has the NASDAQ acquired?
100% of the Philadelphia
25% of the London
How many stocks and when did the Dow Jones Industrial average begin?
With just 10 stocks in 1896.
Was expanded to 20 stocks in 1916, and increased to 30 stocks in 1928. It is adjusted to stock spills
Did Apple replace AT&T on the Dow?
Yes they did
how is the Dow weighted?
It is price weighted
How are NASDAQ and S&P 500 weighted?
They are market weighted (bigger companies have a bigger impact)
What companies remain on the NASDAQ even though they have met the requirements of the NYSE?
Google, intel, Microsoft
Was the NYSE Euronext recently taken over by Inter Continental Exchange (ICE)?
Yes, ICE spun off Euronext in June of 2014
True or false:
Both the NYSE and NASDAQ have gone public to enable them to use stock to purchase other entities
In a dutch auction, how are stocks sold?
Stocks are sold at the highest bid price that would sell all of the shares at the offering
What is S&P 500's average loss during a shutdown?
What is the size of the skylight in the NYSE?
30' by 30'
What did the NYSE originate as?
The New York Stock and Exchange Board in 1792
What happened when Google went public with a dutch auction?
It resulted in their shares being sold at $85 per share
What does stochastics show?
Shows the momentum of a stock's price movement, and is used to indicate when to buy and sell that stock
When the FED increases the reserve requirement, will that push the rates up or down?
The rates will be pushed up
How many times did the FED cut interest rates from September 2007 to December 2008?
Does the FED mainly opperate in a short or long term sector?
A short term sector
by what percentage do rate hikes increase rates?
Who was the chair of the FED from 2014-2018
When was our first rake hike?
December 17, 2015 that took up from .25 to .5
When did we see our second rate hike?
December 15, 2016
In 2017, how many rate hikes did we see?
we saw 3 rate hikes taking us up to 2.5
Who is the current chair of the FED?
Jerome Pal, 2018-2022
How many rate hikes has there been in 2018?
Four, taking us to 2.5
How many rate hikes are projected for 2019?
At what percentage does the FED want inflation to stay at?
How many rounds of quantitative easing have we had?
Three, the last on ended at the end of 2014.
When did QE start?
In operating twist, what did the FED do?
They purchased very long term maturities and sold off shorter term ones
If the FED lowers rates, does that cause foreigners to buy or sell bonds?
Causes them to sell their US bonds. They would be paid in dollars, which they would sell, lowering the value of the dollar and helping US export goods.
Is the FED currently in quantitative tightening?
Yes, they will let $50 billion of bonds mature a month without replacement, this takes money out of the financial system
What does it mean when EVA is positive?
The after tax operating income exceeds the cost of capital needed to produce that income, and management's actions are adding value for stockholders
How is EVA different from Net Income?
EVA reflects the cost of equity as well as the cost of debt
What does a negative EVA mean?
Means that the shareholders could have earned more on the money in other equal risk investments
Does a trend of positive EVA's ensure a positive MVA?
Yes it does
What does MVA ignore?
The time value of money
True of False
IF an individual has $4000 of capital gains and $17000 of capital losses this year, that person will pay no tax on the cap gains and will be able to keep $3000 of his salary from being taxed that year and then carry $10000 of cap loss forward to the next year
If a firm's expected basing earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding assets and financing them with debt would do what to the ROE?
It would raise the firm's expected ROE
Since 2008, the US government has does what to the number of dollars in existence?
Would the US dollar exchange rates have been greatly affected by the increase in currency if the other major countries had not been doing the same thing?
Yes it would have affected us greatly
Between 1913 and 2017, inflation was average at
Between 1990 and 2017 the average inflation rate was
Did the US have large trade surpluses for about 25 years following WW2?
Yes they did
Since when has the US had large trade deficits from?
Since the mid 1970's
What must a person who purchases more than 5% of a public company file?
A schedule 13D
When did the dollar lost its value to the euro?
from WW1 to 2000, the US economy grew at an average of about what percent per year?
What is the current unemployment rate?
What is the lowest employment rate in history?
3.7% in September 2018
Do short or long term securities have more reinvestment rate risk?
Short term securities
The value of a business, other than small ones, will probably be maximized it it is a corporation?
How is the income from an S Corp reported by its stockholders?
It is recorded as personal income and is taxed by their rates.
An S corp may have no more than ... stockholders and only natural person and non aliens may be stockholders
Does the structure of the corporate tax system favor debt or equity financing?
It favors debt financing because interest is deducted while dividends are not
What do the new corporate tax rates do?
They cut the tax to a flat 21% and it will expire in the tax year 2025 (fiscal year 2026)
The highest marginal tax rate from an individual was lowered from
39.6% to 37%
Pass-through business, business structures as sole proprietorship, partnerships, and s corps will be taxed at
an individual's tax rates, but will be able to deduct 20% of income
Beneficiaries will still get a step up cost basis, meaning
There would be no capital gains tax due on inherited assets if sold at the time of transfer
Intrinsic value of stock is calculated by
Someone outside of the company
The primary goal of a financial manager is to
maximize the value of the firm
An advantage of a sole proprietorship is
that it is easily and inexpensively formed
An advantage of a corp and s corp is that
there is limited liability
Can corps attract capital more easily than unincorporated businesses?
Does a corporation have infinite life?
Does a sole proprietorship have easy transfer of ownership?
When interest rates are low, company's stock prices tend to do what with time?
They tend to go up
From WW1 to 2000, the economy grew at an average growth rate of 3.5% per year. From 2000 until today it has grown at about 1.5% per year
when a company buys back its own stock, its P/E ratio is decreased, this making its stock price decrease
From 1971 to 2006, the purchasing power of the US dollar bill dropped 60%
The NADSAQ acquired the Chicago stock exchange, several ECN's and 15 % of the London Stock Exchange
a dealer's bid-ask spread gets narrower when the stock becomes more volatile and is trading actively
If inflation were expected to decrease in the future the yield curve would be downward sloping
The NASDAQ has a higher dollar volume, while the NYSE has a higher share volume.
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