FIN 201 Final Exam - Questions and Answers

FIN 201 Final Exam - Questions and Answers What are the tips for the non-risky part of one's portfolio? - Pay off one's debt as the non-risky part of the portfolio - Begin by paying the most expensive debt first (highest interest) - Paying off your debt is about as riskless an investment as you can find - Once all of the debt is paid off, invest in either bonds, CDs, another house with a low-cost mortgage as an investment or for retirement, or other non-risky assets What are the tips for the risk portion of one's portfolio? - If you are highly risk averse, then stick with CDs, money market funs, and maybe income-paying bonds from government sources - If you aren't a long-term investor (20 years), then you may not want to invest in stocks - Dollar cost averaging = The investor invests a set amount into some type of investment on a set schedule; when the market is down, your money buys more shares; when the market is up, your shares are increasing in value - Choose stock index funds over actively-managed funds - Choose the broadest index to invest in possible - Always make sure you get the match that may accompany your contributions to your 401(k) - As you get closer to retirement, transfer your risky portfolio into non-risky assets - Subtract your age from 100 and then target this percentage of your overall investment portfolio in risky assets (65 years old = 35% of your portfolio in risky assets) What is cash-value insurance? - Comes in various types such as whole life and universal life - Each month when you pay the premium, a portion goes toward your life insurance benefit and a portion is invested for you - You receive some tax benefits - Salespeople get a much larger commission for selling cash-value rather than term What is term life insurance? - No investment component - You pay a low monthly premium and then your loved ones collect when you die - Much cheaper than cash-value insurance - You can buy term and invest the difference in no-load mutual funds or even less-risky assets - Cuts out the middle man When should you consider cash-value insurance? - If you have maxed out your 401K plan and your IRAs - If you fit the other criteria above and need additional tax breaks What are the tips for negotiating an offer? - It never hurts to try - At a minimum, always ask the question, "Is that the very best offer your company can make?" - Tact and respect must be used, so avoid being belligerent or prideful Why are ratios useful in comparing company performance? - They standardize financial data, thus making it comparable across firms (or across different time periods within a single firm) - They are flexible as they are not determined by any set of rules, so it is easily adapted to any situation or need - They lead us to look in the right places so we can correctly understand the current performance and position of the company (ratios tell us what questions to ask, they don't provide answers to questions about the company) - Ratio analysis evaluates whether the firm is achieving its stated goal to maximize shareholder wealth What are the four types of questions that ratios answer about a firm? - Liquidity - Asset use efficiency - Financing - Profitability What are the ratios that you need to know for the exam?