Cheat Sheet Finance

Sole proprietorships and partnerships are subject to fewer regulations, easy and less expensive, no corporate inc tax. Corporations easy to raise capital, transfer of ownership, limited liability, unlimited life.bThe conflicts between bondholders and stockholders can be reduced with the use of restrictive bond covenants. Stockholders are more likely to prefer riskier projects because they receive more of the upside if the project succeeds. By contrast, bondholders receiving fixed payments are more interested in limiting risk. Bondholders are particularly concerned about the use of additional debt. Bondholders attempt to protect themselves by including covenants in bond agreements that limit the use of additional debt and constrain the manager.  New shares of stock are being issued, this is a primary market transaction. No new shares are created, this is a secondary market transaction. An initial public offering (IPO) is where a company issues stock in the public market for the first time. Its primary market. Highly Inefficient: Small companies not followed by many analysts.

Not much contact with investors. Highly Efficient: large companies followed by many analysts. Good communications with investors. Hedge funds have traditionally been unregulated. Derivatives can be used either to reduce risks or to speculate. A larger bid-ask spread means the dealer will realize a higher profit. Compensating managers with stock options can help reduce conflicts of interest between stockholders and managers, but if the options are all exercisable on a specific date in the near future, this can motivate managers to deceive stockholders. A stock is considered overvalued if its intrinsic value is smaller than its market value. The income statement shows us the firm’s financial situation over a period of time. Last year, Blanda Brothers had positive cash flow from operation; however, cash on its balance sheet decreased. Answer: The company purchased a lot of new fixed assets. Company A and Company B have the same total assets, Return on Assets (ROA), and profit margin. However, Company A has a higher debt ratio and interest expense than Company B. Which of the following statements is most correct?

Company A has a higher ROE than Company B. Double taxation refers to the fact that corporate income is subject to an income tax, and then stockholders are subject to a further personal tax on dividends received. Ace Industries has $2. 0 million in current assets and $0. 75 million in current liabilities. Ace decides to raise funds as additional notes payable and use them to increase inventory. How much can Ace’s note payable increase without pushing its current ratio below 1. 8? $0. 8125 million. A new firm is developing its business plan. It will require $600,000 of assets, and it projects $435,000 of sales and $350,000 of operating costs for the first year. The firm is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7. 5%, but the bank requires it to have a TIE of at least 5. 0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio the firm can use? 37. 8% Last year, Candle Corp had $200,000 of assets, $300,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 40%.

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The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $30,800. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE 9. 00%. You want to buy a condo 5 years from now, and you can save $3,000 per year, beginning immediately. You will make 5 deposits in an account that pays 6% interest. Under these assumptions, how much will you have 5 years from today? $17,925. 9 You want to borrow $40,000 to buy a new car. You can afford to make monthly payments of $850, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan? 10% You want to buy a new sports car from City Toyota for $62,000. The contract is in the form of a 48-month annuity due at a 9% APR. What will your monthly payment be? $1531. 39.

Can the Effective Rate ever be equal to the nominal rate?

• a)  Yes, but only if annual compounding is used, i. e. , if M = 1. Why is it important to consider effective rates of return?
• b)  Investments with different compounding intervals provide different effective returns.

A bank is offering you a credit card with an APR of 16%, compounded monthly. What is the Effective Annual Rate (EAR)? 17. 23% One year ago, you took out a 10-year, $15,000, interest-only loan. The APR on the loan is 7% and payments are to be made annually. What is the amount of the loan payment that is due today? $1050 A local charity receives an annual income of $30,000 from a trust fund established by a generous donor several years ago. The trust fund earns a fixed annual return of 6%. How much did the donor contribute to establishing this fund? $500,000

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