COB 300 FINANCE EXAM STUDY GUIDE
QUESTIONS AND ANSWERS
Stock's Intrinsic Value Depends on - Answer-"true" investor cash flows + "true" risk
- where "true" means the cash flows and risk that investors would expect if they had all
the information that existed about a company
Stock's Market Price Depends on - Answer-"Perceived" investor cash flows +
"perceived" risk
- where "perceived" means what investors expect given information they have
Intrinsic Value - Answer-estimate of a stock's "true" value based on accurate risk and
return data
- can be estimated but not measured precisely
Market Price - Answer-stock value based on perceived but possibly incorrect
information as seen my the marginal investor
Marginal Investor - Answer-investor whose views determine the actual stock price
Equilibrium - Answer-a situation in which the actual market price equals intrinsic value,
so investors are indifferent between buying and selling a stock
If a stock's actual price is greater than its intrinsic price then the stock is ___ - Answer-
overvalued
Corporate Governance - Answer-establishment of rules and practice by the Board of
Directors to ensure that managers act in shareholders' interests while balancing the
needs of other key constituencies
Dodd-Frank Act - Answer-a law enacted in the aftermath of the financial crisis of 2008-
2009 that strengthened government oversight of financial markets and placed limitations
on risky financial strategies such as heavy reliance on leverage
- SEC given authority to make rules regarding shareholder access to company proxy
materials
- implement an aggressive overhaul of the US financial regulatory system aimed at
preventing reckless actions that would cause another financial crisis
Corporate Raiders - Answer-individuals who target corporations for takeover because
they are undervalued
B Companies - Answer-committed to putting other stakeholders such as employees,
customers, and their communities on equal footing with shareholders
, Ethics - Answer-standards of conduct or moral behavior
Business Ethics - Answer-thought of as the company's attitude and conduct toward its
employees, customers, community, and stockholders
What level of management causes the most problems? - Answer-typically middle-level
managers who are trying to boost their unit's profits and thus their bonuses
Three Ways of Transferring Capital - Answer-- Direct transfers
- underwriting
- financial intermediary
Direct Transfer - Answer-when a business sells its stock or bonds directly to savers,
without going through any type of financial institution
- mainly used by small firms and little capital is raised
- business delivers its securities to savers who give the firm the money it needs
Underwrite - Answer-transfers that go through an investment bank
- company sells its stock or bonds to the investment bank, which sells these same
securities to savers
- AKA primary market transaction
Financial Intermediary - Answer-when transfers are made through institutions such as
banks, insurance companies, or mutual funds
- they obtain funds from savers in exchange for its securities and uses these funds to
buy and hold business' securities
- they create new forms of capital, like CoD
How do financial markets vary? - Answer-depending on the maturity of the securities
and the types of assets used to back securities
Dimensions to Clarify Financial Markets - Answer-- Physical Asset Markets v. Financial
Asset Markets
- Spot markets v. futures markets
- money markets v capital markets
- primary markets v secondary markets
- private markets v public markets
Physical Asset Markets - Answer-for products such as wheat, autos, real estate,
computers, and machinery (tangible or real asset markets)
Financial Asset markets - Answer-- Deal with stocks,bonds,notes, and mortgages.
- This market deal with derivative securities whose value are derived from changes in
the prices of other assets.
QUESTIONS AND ANSWERS
Stock's Intrinsic Value Depends on - Answer-"true" investor cash flows + "true" risk
- where "true" means the cash flows and risk that investors would expect if they had all
the information that existed about a company
Stock's Market Price Depends on - Answer-"Perceived" investor cash flows +
"perceived" risk
- where "perceived" means what investors expect given information they have
Intrinsic Value - Answer-estimate of a stock's "true" value based on accurate risk and
return data
- can be estimated but not measured precisely
Market Price - Answer-stock value based on perceived but possibly incorrect
information as seen my the marginal investor
Marginal Investor - Answer-investor whose views determine the actual stock price
Equilibrium - Answer-a situation in which the actual market price equals intrinsic value,
so investors are indifferent between buying and selling a stock
If a stock's actual price is greater than its intrinsic price then the stock is ___ - Answer-
overvalued
Corporate Governance - Answer-establishment of rules and practice by the Board of
Directors to ensure that managers act in shareholders' interests while balancing the
needs of other key constituencies
Dodd-Frank Act - Answer-a law enacted in the aftermath of the financial crisis of 2008-
2009 that strengthened government oversight of financial markets and placed limitations
on risky financial strategies such as heavy reliance on leverage
- SEC given authority to make rules regarding shareholder access to company proxy
materials
- implement an aggressive overhaul of the US financial regulatory system aimed at
preventing reckless actions that would cause another financial crisis
Corporate Raiders - Answer-individuals who target corporations for takeover because
they are undervalued
B Companies - Answer-committed to putting other stakeholders such as employees,
customers, and their communities on equal footing with shareholders
, Ethics - Answer-standards of conduct or moral behavior
Business Ethics - Answer-thought of as the company's attitude and conduct toward its
employees, customers, community, and stockholders
What level of management causes the most problems? - Answer-typically middle-level
managers who are trying to boost their unit's profits and thus their bonuses
Three Ways of Transferring Capital - Answer-- Direct transfers
- underwriting
- financial intermediary
Direct Transfer - Answer-when a business sells its stock or bonds directly to savers,
without going through any type of financial institution
- mainly used by small firms and little capital is raised
- business delivers its securities to savers who give the firm the money it needs
Underwrite - Answer-transfers that go through an investment bank
- company sells its stock or bonds to the investment bank, which sells these same
securities to savers
- AKA primary market transaction
Financial Intermediary - Answer-when transfers are made through institutions such as
banks, insurance companies, or mutual funds
- they obtain funds from savers in exchange for its securities and uses these funds to
buy and hold business' securities
- they create new forms of capital, like CoD
How do financial markets vary? - Answer-depending on the maturity of the securities
and the types of assets used to back securities
Dimensions to Clarify Financial Markets - Answer-- Physical Asset Markets v. Financial
Asset Markets
- Spot markets v. futures markets
- money markets v capital markets
- primary markets v secondary markets
- private markets v public markets
Physical Asset Markets - Answer-for products such as wheat, autos, real estate,
computers, and machinery (tangible or real asset markets)
Financial Asset markets - Answer-- Deal with stocks,bonds,notes, and mortgages.
- This market deal with derivative securities whose value are derived from changes in
the prices of other assets.
