FINC 3610 CORE EXAM MANUAL QUESTIONS AND
ANSWERS MARKED A+
✔✔Net working capital = - ✔✔Current Assets - Current Liabilities
✔✔liquid assets typically earn a - ✔✔lower return
✔✔liquidity - ✔✔Ability to convert to cash quickly without a significant loss in value
✔✔market value - ✔✔the price at which the assets, liabilities, or equity can actually be
bought or sold.
✔✔book value - ✔✔The balance sheet provides this of the assets, liabilities, and equity.
✔✔Income statement - ✔✔more like a video of the firm's operations for a specified
period of time.
✔✔matching principle - ✔✔GAAP says to show revenue when it accrues and match the
expenses required to generate the revenue
✔✔SEC - ✔✔Publicly traded companies must file regular reports with them
✔✔marginal tax rate - ✔✔the percentage paid on the next dollar earned
✔✔average tax rate - ✔✔the tax bill / taxable income
-vary widely across different companies and industries
✔✔Cash Flow From Assets (The cash flow identity) - ✔✔Cash Flow to Creditors + Cash
Flow to Stockholders
✔✔operating cash flow = - ✔✔EBIT -Taxes + Depreciation
✔✔Net capital spending= - ✔✔Ending FA - Beg. FA + Deprec.
✔✔change in NWC= - ✔✔Ending WC - Beg. WC
✔✔balance sheet CF components - ✔✔Changes in NWC
Net capital spending
CFC
CFS
✔✔Income statements CF components - ✔✔OCF
Net capital spending
CFC
, CFS
✔✔statement of CF - ✔✔Statement that summarizes the sources and uses of cash
✔✔operating activity - ✔✔includes net income and changes in most current accounts
✔✔investment activity - ✔✔includes changes in fixed assets
✔✔financing activity - ✔✔includes changes in notes payable, long-term debt, and equity
accounts, as well as dividends
✔✔standardized: common-sized BS - ✔✔Compute all accounts as a percent of total
assets
✔✔standardized: common-sized IS - ✔✔Compute all line items as a percent of sales
✔✔standardized statements - ✔✔-easier to compare financial information, particularly
as company grows
-useful for comparing companies of different sizes, particularly within same industry
✔✔equity multiplier - ✔✔TA / TE = 1 + D/E
✔✔EPS= - ✔✔Net Income/# of shares
✔✔PE Ratio - ✔✔Price per share / Earnings per share
✔✔profit margin - ✔✔a measure of the firm's operating efficiency
- how well it controls costs
✔✔total asset turnover - ✔✔measure of the firm's asset use efficiency
- how well does it manage its assets
✔✔equity multiplier is a measure of - ✔✔the firm's financial leverage
✔✔internal evaluation of financial statements - ✔✔-Performance evaluation -
compensation and comparison between divisions
-Planning for the future - guide in estimating future cash flows
✔✔interest rate - ✔✔"exchange rate" between earlier money and later money
✔✔components of the interest rate - ✔✔Discount rate
Cost of capital
Opportunity cost of capital
Required return
ANSWERS MARKED A+
✔✔Net working capital = - ✔✔Current Assets - Current Liabilities
✔✔liquid assets typically earn a - ✔✔lower return
✔✔liquidity - ✔✔Ability to convert to cash quickly without a significant loss in value
✔✔market value - ✔✔the price at which the assets, liabilities, or equity can actually be
bought or sold.
✔✔book value - ✔✔The balance sheet provides this of the assets, liabilities, and equity.
✔✔Income statement - ✔✔more like a video of the firm's operations for a specified
period of time.
✔✔matching principle - ✔✔GAAP says to show revenue when it accrues and match the
expenses required to generate the revenue
✔✔SEC - ✔✔Publicly traded companies must file regular reports with them
✔✔marginal tax rate - ✔✔the percentage paid on the next dollar earned
✔✔average tax rate - ✔✔the tax bill / taxable income
-vary widely across different companies and industries
✔✔Cash Flow From Assets (The cash flow identity) - ✔✔Cash Flow to Creditors + Cash
Flow to Stockholders
✔✔operating cash flow = - ✔✔EBIT -Taxes + Depreciation
✔✔Net capital spending= - ✔✔Ending FA - Beg. FA + Deprec.
✔✔change in NWC= - ✔✔Ending WC - Beg. WC
✔✔balance sheet CF components - ✔✔Changes in NWC
Net capital spending
CFC
CFS
✔✔Income statements CF components - ✔✔OCF
Net capital spending
CFC
, CFS
✔✔statement of CF - ✔✔Statement that summarizes the sources and uses of cash
✔✔operating activity - ✔✔includes net income and changes in most current accounts
✔✔investment activity - ✔✔includes changes in fixed assets
✔✔financing activity - ✔✔includes changes in notes payable, long-term debt, and equity
accounts, as well as dividends
✔✔standardized: common-sized BS - ✔✔Compute all accounts as a percent of total
assets
✔✔standardized: common-sized IS - ✔✔Compute all line items as a percent of sales
✔✔standardized statements - ✔✔-easier to compare financial information, particularly
as company grows
-useful for comparing companies of different sizes, particularly within same industry
✔✔equity multiplier - ✔✔TA / TE = 1 + D/E
✔✔EPS= - ✔✔Net Income/# of shares
✔✔PE Ratio - ✔✔Price per share / Earnings per share
✔✔profit margin - ✔✔a measure of the firm's operating efficiency
- how well it controls costs
✔✔total asset turnover - ✔✔measure of the firm's asset use efficiency
- how well does it manage its assets
✔✔equity multiplier is a measure of - ✔✔the firm's financial leverage
✔✔internal evaluation of financial statements - ✔✔-Performance evaluation -
compensation and comparison between divisions
-Planning for the future - guide in estimating future cash flows
✔✔interest rate - ✔✔"exchange rate" between earlier money and later money
✔✔components of the interest rate - ✔✔Discount rate
Cost of capital
Opportunity cost of capital
Required return
