PSU Finance 301 Exam 1 Questions with Correct Answers
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Course
FIN 301
Institution
FIN 301
Finance - Answer-Involves the management of money
Corporate Finance - Answer-the management of money/capital within a corporation. the major monetary decisions facing a corporation concern working capital management , capital budgeting and the capital structure decision
capital market - Answe...
PSU Finance 301 Exam 1 Questions with
Correct Answers
Finance - Answer-Involves the management of money
Corporate Finance - Answer-the management of money/capital within a corporation. the
major monetary decisions facing a corporation concern working capital management ,
capital budgeting and the capital structure decision
capital market - Answer-financial markets (such as NYSE, NASDAQ, OTC,CBOT)
where issues and investors buy and sell long term (<1 year) financial instruments
debt - Answer-a financial asset ( obligation) that typically has "fixed" cash inflows
(outflows)
stocks - Answer-financial asset that represents equity ownership in a company. it is
characterized by having junior status to the claims of creditors and preferred
stockholders in the event of liquidation
market efficiency - Answer-the stock market is brutally efficient, current prices reflect all
publicly available information and prices react completely, correctly and almost instantly
to incorporate the receipt of new information
asset allocation - Answer-the process of dividing a portfolio among major asset
categories such as bonds, stocks or cash. the purpose of asset allocation is to reduce
risk by diversifying the portfolio
diversification - Answer-a risk management technique that mixes a wide variety of
investments within a portfolio. it is designed to minimize the impact of any one security
on overall portfolio performance
risk - Answer-the chance that an investment's actual return will be different than
expected. this includes the possibility of losing some or all of the original investment. it
is usually measured by calculating the standard deviation of the historical returns or
average returns of a specific investment. the greater the amount of risk an investor is
willing to take, the greater the potential return they expect
markets - Answer-where shares are issued and traded either through exchanges or
over-the-counter markets. also known as the equity market, it is one of the most vital
areas of a market economy as it provides companies with access to capital and
investors with ownership in the economy and the exposure to potential gains based on
the company's future performance
, financial intermediaries - Answer-when a financial intermediary borrows fund from
savers or investors by issuing a claim, and uses those funds to make loans or to
purchase higher yielding securities. financial institutions act as middlemen, linking
lenders and borrowers through intermediation
investment decision - Answer-investing the funds of the company in working capital,
tangible and intangible assets to buy or build projects and investment that will be worth
more than they cost
financing decision - Answer-raising money for the company from institutional and
individual investors through the sale of debt and equity claims to finance the investment
projects or the firm
net present value - Answer-the present value of the expected future cash flows minus
the initial cost /investment
cost of capital - Answer-the required return for a capital budgeting project as measured
by the return offered by equivalent risk investments. it is the cost of raising debt and
equity for the company. weighted average cost of debt and equity financing
primary markets - Answer-capital markets in which governments, agencies and
municipal entities issue debt securities and corporations issue stock and bonds to
investors, and the issuer of the securities receives the proceeds from the sale of
securities
secondary markets - Answer-where stocks and bonds are traded after their initial
issuance. the issuing corporation receives no proceeds from the sale
liquidity - Answer-the ease with which an owner of a security can sell an investment to
another investor or trade it in the securities market
direct finance - Answer-the process in which issuers receive funds directly from he
purchasers of stocks and bonds in the markets
indirect finance - Answer-the process of funds moving from investors through financial
intermediaries to borrowers
return and risk - Answer-there is a positive relationship between risk and return. the
higher the risk, the higher the expected return
mean reversion - Answer-reversion to the mean is the tendency for measures of
performance such as percentage rates of return to revert to their historical averages
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