Download Finance - Department of Agricultural Economics

Agricultural Finance

Tax you would have to pay if you sold assets is called _________.
Contingent taxes

What four statements are contained in most annual reports?
Income Statements, balance sheets, statements of cash flows, and statement of
retained earnings.

The curve that shows the relationship between rates of returns and maturities of
securities is called the ________ curve.
Yield

As the discount rate increases without limit, what happens to the present value of the
future cash inflows?
They approach zero

The New York Stock Exchange is primarily a (n) __________.
Secondary

One of the basic relationships in interest rate theory is that for a given change in yield
to maturity, the _______ the time maturity, the ___________ change in price.
Longer, greater or shorter, less.

The nominal or face value of a bond is called ______ __________.
Par Value

The discount rate that makes the net present value of an investment equal to zero is
called ____________.
The internal rate of return

The ability of a firm to cover its current liabilities with its current assets is referred to
as __________.
Liquidity

When lender agrees at the beginning of the planning period to supply the operating
loan funds at the times and in the amounts indicated in the cash flow budget, this is
called a __________ line of credit.
Nonrevolving line of credit

The income statement is a summary of the __________ and __________ of the
business over a specified period of time.
Revenue and expenditures

The _______ is a systematic listing of all that the business owes and owns at a
specific point in time.
Balance Sheet

The variation in net earnings arising from the nature if the kinds of enterprises in
which the firm is engaged is known as what?
Business risk

What are the three basic reasons for the universal preference for a dollar now over the
prospect of receiving a dollar in the future?
Uncertainty, opportunity cost, and inflation

A claim or encumbrance on a property is a _____________.
A lien

What is the most common ration for determining liquidity?
Current Ratio= Current Assets
Current liabilities

What is the most common ratio for determining solvency?
Leverage Ratio= Total Liabilities
Total assets

What are four characteristics of a contract?
Contracting parties must be identifiable and competent, subject matter must be legal
and proper, there must be mutual consent, and consideration must be given.

What are the forms of a farm business organization?
Sole proprietorships, partnerships, cooperatives, and corporations.

Categorically name the three main uses of loans.
Real estate loans, Non-real estate loans, and personal loans.

What does the acronym FLBA stand for?
Federal Land Bank Association

In what stage of the business cycle should businesses carry their greatest amount of
working capital?
At the peak of the business cycle, when it is most needed.

What determines the value of any asset?
The sum of its discounted cash flows.

What is an accrual basis income statement?
One that records expenses when they are incurred and revenues when they are
earned.

What is the quick (acid-test) ratio?
(Current assets – Inventory) / Current Liabilities

What do liquidity ratios indicate?
A firm’s ability to meet short-term credit obligations.

What is a cash flow statement?
An estimate of a firm’s cash inflows and outflows.

What are noncurrent (long term) assets?
They are assets which are not expected to be converted into cash or used up during
the next accounting cycle.

What is the term used to describe a situation when a browser has exhausted all
sources of loanable funds but still finds that the marginal value product of resources
acquired with borrowed capital exceeds the marginal cost of borrowing?
External capital rationing

How does liquidity differ from solvency?
Liquidity involves a firm’s capacity to generate cash for meeting cash demands while
solvency refers to whether or not the present market value of a firm’s assets are
greater then the firm’s debt obligations.

What is the break-even point?
Point where total revenue is equal to total cost

The process of allocating the cost of an asset to periods in which services are
received from asset is referred to as _________.
Depreciation

List four types of depreciation methods.
1 – Straight line
2 – Accelerated Cost Recovery System (ACRS)
3 – Double Declining Balance
4 – Sum-of-the-years digits

What is book value?
Original cost minus accumulated depreciation

What is the difference between the nominal and the real rate of interest?
The real rate of interest is the nominal rate less the rate of inflation.

What is financial analyst referring to by monitoring a business’ cash flows?
Comparing the business’ actual cash flows to its projected cash flows in order to
focus on variances for management control purposes.

What is meant by inverted yield curve?
When long term rates of return are lower than shorter term rates on comparable risk
debt instruments.

Define liquidity
The ability of the business to generate sufficient cash to meet financial commitments
as they come due without disrupting ongoing operations.

What is meant by treasury stock?
A company’s stock which has been issued and then repurchased by the company.

What are the three types of activities into which a statement of cash flows is divided?
Operating, investing, financing

What are the five areas of financial position and performance that are generally
focused on in analyzing financial statements for credit purposes?
Liquidity, solvency, profitability, repayment capacity, financial efficiency

What is a balance sheet?
A summary of a specific entity’s assets and liabilities in momentary terms, together a
statement of owner’s equity at a specific point in time.

What is a fiscal year end?
The end of the business year. It may or may not coincide with the calendar year end.

On the balance sheet, what is the difference between current and non-current
liabilities?
Current liabilities are due within one year of the date of the statement. Non-current
liabilities are due beyond one year.

What is the difference between a revolving and non-revolving line of credit?
A non-revolving line of credit refers to the sum of credit which can be extended
during a given period of time. A revolving line of credit refers to the peak amount
that can be borrowed during a given period of time.

What is the financial principle of increasing risk?
The tendency for risk to increase at an increasing rate as the relative amount of nonequity capital used on a business (leverage) increase.

What is the difference between accrual and cash basis income accounting?
The accrual basis recognizes revenues when earned and expenses when incurred.
The cash basis recognizes revenues when cash is received and expenses when cash is
paid.

What are two drawbacks to the payback method of investment analysis?
It ignores cash flows that occur after the payback period and it does not consider the
timing of cash flows within the payback period.

What is the internal rate of return on an investment?
The interest rate which equates the net present value of the projected cash flows
associated with an investment to zero.

What are the steps in reconciling a business’s change in net worth (owner equity)
between two balance sheet dates, if new worth is determined on a market value basis?
Beginning net worth + net income + capital contributions – capital disbursements +
and – asset revaluation = ending net worth

Is it possible for a business’s return on equity to be less than its return on assets and
still be profitable?
Yes, but the business would be losing money on its borrowed funds, i.e. , equity
capital would be subsidizing debt capital.

What is shared appreciation mortgage?
A mortgage through which the lender acquires a percent equity interest in any asset
value appreciation that occurs over a stated period of time, usually in exchange for
more favorable financing terms, for example, a lower rate and/or a fixed interest rate.

What are six types of entries that would appear on a business’s statement of cash
flows but not on its income statement?
Principal payments on loans, cash capital contributions, cash capital withdrawals,
new principal borrowing, the cash portion of capital sales above capital gains or
depreciation recapture the cash portion of capital investments above allowable
expending limits.

What are “pre forma” financial statements?
Pro forma means projected

When using the net present value method to evaluate different capital investments,
what are two methods that can be used to compare investments with different
economic lives?
Compare the net present value for each investment using the least common
denominator of time or convert the net present values to annuity equivalents.

How does a secondary financial market differ from a primary financial market?
Excludes non-financial intermediaries

How does a financial intermediary differ from other firms?
Its assets consist principally of claims on others.

What is the principal advantage of a depositary lender, compared with a nondepositary lender?
Deposits that are influenced by the volume of loans made and that serve as basis for
added loans.

The concept of limiting the rate of interest charged on loans is called __________.
Usury

The rate Federal Reserve Banks charge member banks is called the
_______________.
Discount rate

What was originally known as the Chicago Butter and Egg Board?
The Chicago Mercantile Exchange

What is the oldest grain futures exchange?
The Chicago Board of Trade

What government agency lends with resource to farmers and ranchers?
The Farmer’s Home Administration

What government agency lends without resource to farmers and ranchers?
The Commodity Credit Corporation

What legislation restricts the interstate branching of commercial banks?
The McFadden Act of 1927

What legislation separates commercial banking from investment banking (i.e. trading
in securities)?
The Gloss-Stegall Act of 1933

What is meant by “yield to maturity”?
The rate of interest that equates the present value of a financial asset with the price of
the asset.

How does the expected rate of inflation affect the nominal interest rate?
Directly: The nominal interest rate moves in the same direction as does expected
inflation.

What is meant by the exchange value of the U.S. Dollar?
Its value, stated in terms of currency(s) other than the U.S. dollar.

Of the three current leading components of the Cooperative Farm Credit System
which was the first to be established?
The Federal Land Banks

How is the Farmer’s Home Administration linked with rural banks and lenders in the
Cooperative Farm Credit System?
By insuring them against loss on loans made to qualifying farm borrowers.

What most differentiates life insurance companies from Federal Land Banks as farm
mortgage lenders?
Selectivity of life insurance companies with respect to areas of lending activity.

Why do political leaders tend to favor crop insurance and farmers favor emergency
crop loans as alternative public programs that respond to natural hazards that
influence crop yields?
For given amounts of emergency relief crop insurance is less in public cost,
emergency crop loans have proven cheaper for farmers.

Why would a wheat producer prefer a weak dollar over a strong dollar?
Much of annual US wheat production is earmarked for foreign markets. A strong
dollar means lower exports, greater carryover stocks, and lower domestic farm prices
for wheat.

What are the three major policy instruments the Federal Reserve System can use to
modify the rate of growth in the nation’s money supply?
Reserve requirements, discount rate and Federal Open Market Committee purchases
and sales of government securities.

A sustained rise in the general price level is known as ____________.
Inflation

Why is it important to focus on real net farm income rather than nominal net farm
income when studying the performance of the farm economy?
Real Net Farm Income, having been adjusted for inflation, reflects the purchasing
power of current net farm income.

To increase the money supply, the Federal Reserve should (buy, sell) securities in the
open market.
Buy securities increases reserves and hence the money supply.

Excess reserves of a commercial bank are equal to?
The amount by which the reserves (vault cash and deposits at the Fed) of a financial
institution exceed its required reserves.

A benchmark bank loan rate (supposedly the rate on loans made to its best
customers) that is widely publicized and used as a standard by which other loan rates
are set is known as the __________ ____________.
Prime Rate

What is a recessionary gap?
The amount by which equilibrium GNP falls short of the full-employment GNP; the
amount of additional output required to generate full employment of capital and
labor.

What is crowding out?
The adverse effect of increased deficits on investment expenditures resulting from
higher interest rates.

What is FOMC?
The Federal Open Market Committee consists of seven members of the board of
Governors and five of the 12 Federal Reserve Bank presidents; responsible for
implementing monetary policy by conducting open market operations.

What is supply-side economics?
School of economics that emphasizes the importance of promoting policies that shift
the aggregate supply curve to the right; promote policies that boost incentives to
work, produce, save and invest.

What are the functions provided by money in the economy?
Store of Value, medium of exchange and unit of account.

What is the Consumer Price Index?
A price index based upon the goods and services produced by consumers; weighted
average of prices paid for these goods and services.

What is Gross National Product?
The value of the output of all final goods and services produced in the economy
during a specific period of time; consumer expenditures, government expenditures,
and net exports to foreign countries.

The interest rate on loans made among financial institutions in the federal funds
markets is known as the ____________________.
Federal Funds Rate

What is the marginal propensity to consume?
Ratio of the change in consumption to the change in consumer disposable income,
slope of the aggregate consumption function.

Are John Keynes and Milton Friedman close personal friends?
Keynes, who died in 1945, was a strong proponent of aggressive action by federal
governments to direct the growth of aggregate output and employment. Friedman
and other monetarists take issue with Keynesian economists over the active
implementation of monetary and fiscal policy to fine tune economy. Milton would
prefer an announced steady rate of growth in the money supply.

What is full employment GNP?
GNP where the economy is operating at lowest unemployment rate for labor and
highest capacity utilization rate for capital without setting of a boost in inflation.

What is monetary policy?
The use of policy instruments by the Federal Reserve System to alter the supply of
money, the availability of credit and level of interest rates in order to influence
aggregate economic activity.

What are government spending or taxation actions that take place without any
deliberate government control that tend to soften the business cycle?
Automatic Stabilizers

During a recession the government deficit tends to become _________.
Larger

What are the two policy lags?
Effectiveness and recognition

If discretionary tax cuts only have supply0side effects on the economy, in the short
run a tax cut will do what with GNP and the price levels?
Increase real GNP and decrease the price level

What is the objective of discretionary fiscal policy?
Eliminates inflationary and deflationary gaps more quickly than the self correcting
mechanism.

If tax cuts cause people to both spend more and work more, what happens with
respect to the aggregate demand curve and the short run aggregate supply curve?
Aggregate demand shifts right and short run aggregate supply shifts right

When does a balanced budget exist?
When government spending equals tax revenues

What two automatic stabilizers are built into most modern economies?
Income tax system and unemployment-compensation and welfare payments

How does expansionary fiscal policy lead to “crowding out”?
It pushes up interest rates.

According to rational expectations theory, under what conditions does
countercyclical monetary and fiscal policy work?
1) only if it is unanticipated
2) for effect to be long lasting, public must be continuously fooled

What are the Fed’s three major tools to control the money supply?
Required reserves, open market operations, and discount rate

What is the monetary base?
Currency in circulation + federal reserves

If the Fed sells $10,000 of government securities, what happens to the monetary
base?
Decreases $10,000

As the market interest rates rise, how does the Fed change the discount rate?
Raises it

“The money supply should grow at a fixed percentage each year” is what rule?
Constant-money-growth rule

What kind of policy would a monetarist use to cure a deflationary gap?
None let the self correcting mechanism work

What is the “announcement effect”?
The discount rate lets people know what is happening with the future Fed policy.

What is the relationship between bond prices and interest rates?
Inverse

A counter cyclical monetary policy ______ aggregate demand when output is falling
too much (or when the rate of output is declining) and _______ aggregate demand
when output is rising too rapidly.
Increases, decreases

What is the recognition lag? How long is it?
Time it takes for the Fed to decide to change the money supply. It lasts about four
months.

Historically what kind of policy has the Fed used?
Procyclical

This regulation created a ceiling on interest rates that institutions could offer.
Regulation Q

When investors withdraw from banks to invest in higher yielding opportunities this is
called? – This is also caused by Regulation Q.
Disintermediation

What does the acronym FDIC stand for?
Federal Deposit Insurance Corporation

What does the acronym DIDMCA stand for?
Deposit Institution Deregulation Monetary Control Act

What act eliminated Regulation Q?
Deposit Institution Deregulation Monetary Control Act (DIDMCA)

What act permitted banks and S & L’s to be more comparable?

Garn Act ‘82
What act limited interstate banking?
McFadden Act ‘27

Name the 4 traditional financial institutions.
Banks, S & L’s, Savings banks, Credit Union

A mutual association in which the depositors are the ones that actually own the bank
is known as a _______.
Savings bank

The only institution able to have non-interest bearing account is _________.
Banks

Who was the first claim against a firm’s income?
Creditors or debt holders

Investors who prefer outcomes with a high degree of certainty to those that are less
certain are _____ ______.
Risk adverse

Diversification of a portfolio can result in lower _____ for the same level of return.
Risk

That part of a stock’s risk that can be reduced by diversification is known as ______
__________.
Company specific

That part of a stock’s risk that cannot be eliminated is called ______ __________.
Market risk

What measures of a stock’s risk that cannot be eliminated with a stock market index?
Beta coefficient

What is the best measure of risk for an asset held in a well-diversified portfolio?
Beta coefficient

The process of finding the present value is called?
Discounting

For a given number of time periods, the PVIF K, N will decline as the ______
_______ increases.
Interest rate

A series of payments of a constant amount for a specified number of periods is an?
Annuity

A stream of equal payments expected to continue forever is called?
Perpetuity

What process compares a project’s actual results with its projected results?
Post-audit

What is the internal rate of return (IRR)?
It is the discount rate that equates the present value of the cash inflows with the
present value of the cash outflows or initial cost.

What method of comparing investments assumes that reinvestment occurs at the cost
of capital, therefore, making it a better indicator of a project’s profitability than IRR?
Modified Internal Ratio of Return (MIRR)

What does a firm’s capital budget outline?
It outlines its planned expenditures on fixed assets.

What is a payback period?
The number of years necessary to return the original investment in a project.

Current assets minus current liabilities is known as?
Net working capital

What type of debt should firms that are uncertain about their current borrowing needs
use?
Short term

The average amount of time it rakes for a firm to convert its raw materials into
finished goods is known as the ___________ ________ period.
Inventory conversion

How does gross working capital differ from net working capital?
Gross working capital is current assets while working capital is current assets minus
current liabilities.

The average length of time it takes a firm’s customers to pay off their credit
purchases which is calculated by dividing the accounts receivable balance by the
average daily credit sales is known as?
Days sales outstanding (DSO)

What are the five C’s of credit?
Character, capacity, capital, collateral, conditions

The manner in which a firm tries to obtain payment from past-due accounts is called
________ policy.
Collection

What effect will tightening credit policy have on sales?
Decrease them

Increase the credit period or offer discounts will have what effect on sales?
Increase sales

The process finding a future value is called ________.
Compounding

The size of the capital stock relative to the profit maximizing capital stock determines
what?
The rate of capital investment

What is the Economic Ordering Quantity (EOC)?
The optimum quantity of units a firm should order at each reorder point.

What are lumpy assets?
Assets that cannot be acquired in small increments but must be obtained in large,
discrete amounts

What is the retention rate?
The % of earnings retained by the firm, which is equal to one minus the dividend
pay-out ratio

Where do spontaneously generated funds come from?
Accounts payable and accruals, which rise spontaneously with sales.

A long-term promissory note issued by a business firm or governmental unit.
Bond

What are the two components of the income stream expected from a common stock?
Dividend yield and capital gains yield

Typically assets are listed in what order?
In order of their liquidity

Which financial statement is referred to as a “snapshot” of a firm’s finances?
Balance sheet

How does a strong U.S. dollar against foreign currencies affect imports?
Increase them

What does expansionary fiscal policy do to interest rates?
Increase them

The internal rate of return makes the net present value of an investment equal what?
Zero

The buying and selling of bonds is considered what type of monetary policy?
Open market operations

Expansionary monetary policy will do what to the reserve requirement?
Decrease

What did the National Bank Act (1863) do?
Set up a national currency

What did the Glass-Steagall Act do?
It separated commercial from investment banking

What year was the first income tax initiated?
1913

What are 3 types of investment analysis?
Net present value, time value of money, internal rate of return

Name the 2 types of taxation.
Automatic, discretionary

What is the real interest rate?
Nominal interest rate - expected inflation rate

The main goal of a publicly owned firm interested in serving its stockholders should
be to _______________.
Maximize the stock price per share

What is treasury stock?
Previously issued stock that has been repurchased by the company

What is beta?
A measure of a company’s risk relative to that of the market in general

Will IRR always tell you to accept the same projects as NPV?
No

The face value of a stock or bond is its __________ _________.
Par value

If you converted you assets to cash you would have to pay ___________ _________.
Contingent tax

*
Assets that will not be used up in the current accounting period are referred to as
_________ __________.
Noncurrent assets
Do T-Bills promise a completely risk-free return?
No, T-Bills are still at risk of inflation.
*
What does the coefficient of variation represent:
The risk per unit of return
*
What does CAPM mean?
Captial Asset Pricing Model
*
Why does the use of debt lower the ROA?
It causes net income to be lower due to additional interest expense
*
What is the bid-ask spread?
The difference between bid and ask prices, represents the dealer's mark-up or profit
*
What is the contracted, or quoted, or stated interest rate?
Nominal Interest Rate
*
_________ pertains to the uncertainty regarding the rate of return.
Investment Risk
*
The slope coefficent corresponds with the ______ coefficient.
beta
*
What is the range for beta?
.5 to 1.5
*
___________ risk cannot be eliminated by portfolio diversification.
Market
*
What is the equation for the Security Market Line?
K = Krf + (Km – Krf) b
*
An increase in risk aversion causes the SML curve to ___________.
Become more steep
*
What type of risk pertains to the uncertainty regarding the rate of return?
Investment risk
*
The beta of a stock measures what?
Its market risk or how volatile it is relative to the market.
*
The rate of return that you could earn on an alternative investment of similar risk
known as __________.
Opportunity cost rate
*
List the 4 financial statements of publicly traded companies.
Balance Sheet, Income Statement, Statement of Retained Earning, Statement of Cash
Flows
*
Name 2 methods of valuing depreciation.
Double-declining balance, Sum of years digits, Straight line, Output based
is
*
This type of performance measure determines the economic value (before and after) the
implementation of a value creating strategy or event
Event Study Method
*
What states that money is the most commodity of commodities?
Diversification
*
What is the safest investment and why?
Treasury bill because government won’t default.
*
What effect does combining stocks generally have on risk?
It lowers it
*
What does economic profit figure that accounting profit does not?
Opportunity cost
*
Describe what the Debt/Asset ratio does:
It shows the proportion of assets which are financed through debt.
*
What should the Debt/Asset ratio be?
Less than .500
*
What is the main goal of a corporate finance professional?
To maximize shareholder wealth.
*
How can risk be factored into the analysis of a businesses' potential viability?
Risk increases the cost of capital. If the business is especially risky, it will cost more to
actually get financed. A banker or investor will expect to receive a higher interest rate
for taking on the risk of loaning money to a risky business. This cuts into their long term
profitability because they will be spending more of their profit on making payments and
will have less available to reinvest. This will have an impact on their liabilities and
therefore all of their key ratios.
*
What does the balance sheet portray?
Financial Position
*
What is included in a real estate mortgage?
All liabilities where a mortgage has been given on real estate in exchange for a long-term
loan.
*
Define repayment capacity.
A measurement of the ability to repay debt from both farm and non-farm income.
*
What are the three categories/labels that determine one ’s risk-taking level?
Risk Averse, Risk Neutral, Risk Lover
*
What is often considered the least risky form of investment and why?
A T-bill. Since the government issues it, its stability is certain.
*
Diversifying your portfolio, say between stocks and bonds, can be effective why?
Because the two markets are negatively correlated and they balance out each other’s
performance level.
*
This method of depreciation is used for income tax reporting.
Accelerated Cost Recovery System (ACRS)
*
The number of years over which the projected cash flows of an investment will be
evaluated.
Planning Horizon
*
____________ is a loan where specific assets have been pledged by the borrower to
guarantee the loan.
Secured Loan
*
What two things determine the accounts receivable balance?
Volume of credit sales, aging schedule
*
What is financial leverage?
the extent to which fixed-income securities(debt and preferred stock) are used in a firm's
capital structure.
*
What are the three types of cash flows in a typical project?
Initial investment outlay, operating cash flows, terminal cash flows
*
The type of risk that cannot be completely eliminated through diversification of the
portfolio
Market risk
*
The Dow Utilities, the Wilshire 5000, and Philadelphia Semiconductor averages are
examples of what?
Indexes (Market or stock indexes)
*
A stock that generally moves counter-cyclical to and one third as volatile as the market
as a whole would have a beta of
(-.333)
*
What does beta measure?
an individual stock's market risk, it's volatility relative to the market
*
How do you eliminate total risk?
you can't, only firm-specific risk can be eliminated, market risk cannot
*
How can you minimize firm-specific risk?
by combining stock's in a diversified portfolio
*
If an investment alternative is couter-cyclical, what does that mean?
that it's expected returns move opposite to those of the the market
*
The Coefficient of Variance is?
the standardized measure of dispersion about the expected value.
*
Idiosyncratic or nonsystematic risk is?
Firm Specific Risk.
*
The higher______, the higher the expected rate of return.
Beta
*
Who are considered to be "sellers"?
savers or investors
*
What risk is associated with T-bills?
The risk of inflation
*
_________ cannot be eliminated by diversification while ___________ can be eliminated
by diversification.
market risk firm-specific