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Harvard UniversityNursing

A study guide for FINC200 Exam 2, covering topics such as risk, stock risks, portfolio context, risk aversion, risk premium, standard deviation, operating leverage, break-even analysis, business risk, financial leverage, financial risk, capital structure, liquidity ratios, inventory ratios, DSO, asset turnover ratios, ROA, and ROE. definitions, equations, and examples for each topic, as well as their relevance to investors and analysts. It also includes True/False questions and conclusions on ROIC. useful for students studying finance and related fields.

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Download FINC200 Exam 2 - O'Connor 2023 and more Exams Nursing in PDF only on Docsity! FINC200 Exam 2 - O'Connor 2023 What is risk? - correct answers chance that some unfavorable event will occur What are all business assets expected to produce? - correct answers CASH FLOWS How do you evaluate the riskiness of an asset? - correct answers Based on the riskiness of its cash flow, riskier cash flows, the riskier the asset What are the two stock risks? - correct answers -stand-alone -portfolio context What is stand-alone stock risk? - correct answers single-stock basis, analyze the one What is portfolio context in stock risk? - correct answers where a number of stocks are combined and their consolidated cash flows are analyzed What's the difference between stand-alone and portfolio? - correct answers a stock that has a great deal of risk held by itself may be less risky when held as part of a larger portfolio What are the two components in a portfolio context? - correct answers -diversified risk -market risk What is diversified risk? - correct answers can be diversifed away & is thus a little concern to diversified investors What is market risk? - correct answers reflects the risk of a general stock market decline and cannot be eliminated by diversification Between market risk and diversified risk which one is relevant to rational investors? - correct answers market risk FINC200 Exam 2 - O'Connor 2023 -diversified risk can and will be eliminated True or False: Generally speaking are investors averse to risk? - correct answers True: they wont' buy risky assets unless they're compensated w/ higher expected returns What is investment risk? - correct answers to the probability of earning a low or negative actual return What is standard deviation? - correct answers statistical measure of the variability of a set of observations What are some key points about standard deviation? - correct answers -measures total, or stand-alone risk -larger s.d. the lower the probability that actual returns will be closer to expected returns -larger s.d. is associated w/ a wider probability distribution of returns Can T-Bills promise a completely risk-free return? - correct answers Risk free - UNLESS there's implication of inflation than no What is risk aversion? - correct answers assumes investors dislike risk and require higher rates of return to encourage them to hold risker securities What is risk premium? - correct answers the difference between the return on a risky and a riskless asset, which serves as compensation for investors to hold risker securities True or false: combining stocks in a portfolio generally lowers risk - correct answers True True or false: When creating a portfolio will each stock perform the same? - correct answers FALSE - they will perform differently FINC200 Exam 2 - O'Connor 2023 Expected: return that the investor thinks they can generate if the investment is made What happens if the security is valued correctly? - correct answers expected return = required return and the net present value of the investment will be zero What happens is the required rate of return is higher than the expected? - correct answers the investment security is considered to be overvalued What happens if the required rate of return is lower than the expected? - correct answers the investment security is undervalued What is ROIC? - correct answers return on invested capital What is the equation for ROIC? - correct answers EBIT (1-Tax Rate)/ (Investor-supplied capital) What does ROIC measure? - correct answers the after-tax return that the company provides for all of its investors What happens when there's more uncertainty about EBIt and thus ROIC? - correct answers the GREATER the company's business risk What determines business risk? - correct answers -competition -uncertainty about demand (sales) -uncertainty about output prices -uncertainty about costs -product obsolescence -foreign risk exposure -regulatory risk & legal exposure -operating leverage FINC200 Exam 2 - O'Connor 2023 What is operating leverage? - correct answers use of fixed costs rather than variable costs True or false: the higher a firm's fixed cost, the greater it's business risk? - correct answers TRUE What are higher fixed costs generally associated with? - correct answers more highly automated capital intensive firms True or false: When a high percentage of total costs are fixed, the firm is said to have a high degree of operating lev? - correct answers TRUE What does high operating leverage imply? - correct answers relatively small change in sales results in a large change in ROIC What is the break-even analysis? - correct answers EBIT (earnings before interest on tax) = PQ-VQ-F=0 What do each letter represent in the break-even analysis? - correct answers P = avg sales per unit of output Q = units of output V = variable costs per unit F = fixed operation costs What is business risk? - correct answers the riskiness inherent in the firm's operation if no debt is used True or false: business risk is the single most important determinant of capital structure? - correct answers TRUE What is financial leverage? - correct answers the extent to which fixed-income securities (debt & preferred stock) are used in a firm's capital structure FINC200 Exam 2 - O'Connor 2023 What is financial risk? - correct answers the increase in stockholders risk, over & above the firm's basic business risk, resulting from the use of financial lev. Difference between business risk and financial risk... - correct answers Business: depends on business factors such as competition, product, obsolescence & operating lev Financial: depends only on the types of securities issued (debt) What is not calculated if the firm is unleveraged? - correct answers no debt, no interest expense What is calculated if the firm is leveraged? - correct answers interest expense and debt net income will be lower than unleverage due to the interest expense True or false: Return on Invested Capital (ROIC) is unaffected by financial leverage - correct answers TRUE Powerpoint 5 slide 19 - correct answers Conclusions on ROIC - understand and theorize Powerpoint 5 slide 22 - correct answers Understand image - how it's set up and what's your debt and what's your equity? What is optimal capital structure? - correct answers the capital structure (mix of debt, preff. stock and common equity) at which firms stock price is max How does someone measure capital? - correct answers investor - supplied funds such as long & short term loans from individuals and institutions, preferred stock, common stock and retained earnings How does someone measure capital structure? - correct answers mix of debt, preferred stock, and common equity that is used to finance the firm's assets FINC200 Exam 2 - O'Connor 2023 -trend analysis -industry analysis -benchmark (peer) analysis What is current ratio? - correct answers a liquidity ratio that measures a company's ability to pay short- trem and long-term obligations What is quick ratio? - correct answers a measure of how well a company can meet its short-term financial liabilities What do low inventory ratios indicate? - correct answers too much inventory which suggest poor inventory management or low sales What do high inventory ratios indicate? - correct answers replenishing cash quickly and has a lower risk of becoming stuck w/ obsolete inventory Is very high inventory a good thing? - correct answers No may indicate a company is running out of items frequently or making ineffective purchases and therefore losing sales to competitors What does excess inventory do to a company? - correct answers ties up a company's cash and makes the company vulnerable to drop in market prices Why is DSO (days sales outstanding) important? - correct answers the speed at which a company collects cash is important to its efficiency and overall profitability the faster a company collects, cash the faster it can reinvest that cash to make more sales FINC200 Exam 2 - O'Connor 2023 What can you get from comparing DSO among companies? - correct answers give analysts a good idea of which companies manage credit well and use receivables efficiently to grow their businesses What does a low DSO indicate? - correct answers a company collects its receivables quickly What does a high DSO indicate? - correct answers a company collects its receivables slowly True or false: a company with an increasing DSO over time could be becoming less efficient? - correct answers TRUE True of false: a company with a decreasing DSO over time could be becoming more efficient? - correct answers TRUE What do higher asset turnover ratios indicate? - correct answers the better the company is performing since higher ratios imply that the company is generating more revenue per dollar What is ROA? - correct answers Return on Assets What is ROE? - correct answers Return on Equity What are the effects of debt on ROA? - correct answers declines, due to the reduction in net income What are the effects of debt on ROE? - correct answers may increase or decrease since both net income and equity decline What are some problems with ROE? - correct answers -doesn't consider risk -doesn't consider the amount of capital invested What does the Dupont Equation tell us? - correct answers helps identify the part of the business that is underperforming is ROE is unsatisfactory FINC200 Exam 2 - O'Connor 2023 From the DuPont Equation what are the 3 things that affect ROE? - correct answers ROE affected by 3 things 1. operating efficiency, measured by profit margin 2. asset use efficiency, measured by total asset turnover 3. financial leverage, measured by the equity multiplier What are some potential uses of reed up cash? - correct answers -repurchase stock -expand business -reduce debt What are some potential problems & limitations of financial ratio analysis? - correct answers - comparison w/ industry averages is difficult for a conglomerate firm that operates on different divisions -different practices can distort comparisons -what's a 'good' or 'bad' ratio -difficult to tell whether a company is on balance, in a strong or weak position True of false: seasonal factors can distort ratios? - correct answers TRUE True or false: 'window dressing' techniques can make statements and ratios look better - correct answers TRUE

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