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74 Cards in this Set
- Front
- Back
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Capital Budgeting |
This tells you what kind of return you will get if you buy and asset |
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Capital Structure |
How much DEBT and EQUITY you use. How should we pay for our assets? |
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Working Capital Management |
How we manage the day-to-day finances of the firm |
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Working Capital |
Current Assets less Current Liabilities |
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What is the goal of financial management for a corporation? |
To maximize the long term value of the company |
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Why isn't the goal for financial management to be maximizing profit? |
Maximizing profit is or can be short term. We want long term goals |
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Why isn't the goal for financial management to minimize cost? |
If you minimize cost long term, it can have a negative effect on your company. You can lose the quality of your product and so on |
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Why isn't the goal for financial management to maximize market share? |
You could lower the price of your product, but this might hurt you long term. |
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What is the Agency Problem? |
Usually refers to a conflict of interest between a company's management and the company's stockholders. |
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What are Agency Costs? |
Lost opportunities die to management decisions |
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What are Indirect Agency Costs? |
two forms: 1) Corp expenditures that benefit management, but cost the stakeholders. ex: private jets 2) Expenses that arise from the need to monitor management actions ex: auditors? |
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Who votes for the Board of Directors of a public company? |
Shareholders |
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What is the role of the Board of Directors? |
They direct the mangers and appoint CEOs as well |
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What is a primary market? |
When the stock has not been issued before |
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What is a secondary market? |
When you are buying stock from a previous owner of the stock. |
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What is Market Capitalization? |
(# of Shares) x (price per share) |
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What is finance? |
Evolved from econ and accounting Financial management --> corp finance Capital Markets Investments |
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"How much debt is used to finance the firm" and "the total amount of assets the firm owns" can be found by reviewing what? |
The balance sheet |
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A balance sheet reflects the firm's__________ |
Accounting value on a specific date |
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What are the 4 categories that assets can be described as? |
1) tangible 2) intangible 3) current 4) fixed |
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Net working capital equals ____________ |
current assets less current liabilities |
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Operating cash flow |
Cash generated from a firm's normal business activities |
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What are components of cash flow from assets? |
Change in net working capital Operating cash flow Capital spending |
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What is capital spending? (capital expenditure) |
Funds that are often used to undertake new projects or investments by the firm. Usually to acquire or upgrade physical assets such as property, industrial buildings or equipment |
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Net earnings refer to what? |
Income earned after interest and taxes |
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Financial leverage refers to a firm's what? |
Use of debt in it's capital structure |
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What is an example of a non cash item on an income statement? |
Depreciation |
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Why are marginal tax rates the most important type of tax rate? |
Incremental cash flows are taxed at marginal tax rates and financial decisions are usually based on new cash flows |
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Liquidity refers to the ease of changing what? |
Assets into cash |
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Assets are generally carried on the firm's balance sheet as what cost/price? |
Book value Historical cost |
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On a balance sheet Total Assets must equal Total Liabilities + __________? |
Shareholder's equity |
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Operating cash flow for a mature firm is usually positive or negative? |
Positive, and is a sign of trouble if negative for a long time |
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When is revenue recognized on an income statement? |
When the exchange of goods and services are complete as well as the earnings process |
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Product costs are usually shown on the income statement under what heading? |
Cost of Goods Sold |
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Non cash items do not affect __________ |
Cash Flow |
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What does stockholder's equity represent? |
A residual claim against the firm's assets |
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In finance, the value of a firm depends on it's ability to generate ___________ |
Cash Flows |
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What are two ways that financial accountants usually classify costs? |
Period and Product costs |
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The short run period will have what type of costs? |
Fixed and Variable costs |
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Net working capital equals |
current assets less current liabilities |
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A positive operating cash flow means that the firm is generating enough money to what? |
Pay operating costs |
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Common stock holders are entitled to the difference between _________ and _________. |
Total assets; total liabilities |
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Cash flow to creditors equals_________ |
Interest paid less net new borrowing |
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A perpetuity is a constant stream of cash flows for a(n) _____________ period of time |
infinite |
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What are the two processes that can be used to calculate future value of multiple cash flows? |
1) Compound the accumulated balance forward one year at a time 2) Calculate the future value for each cash flow first and then add them up |
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If interest is compounded monthly, the __________ annual rate will express this rate as though it were compounded annually |
effective |
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If m is the number of times interest is compounded in a year, what is the general formula for the EAR? |
(1=quoted rate/ m) ^m -1 |
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The interest rate charged per period multiplied by the number of periods per year |
The annual percentage rate |
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Stated interest rate |
An interest rate expressed in terms of the interest payment made each period |
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Quoted interest rate |
An interest rate expressed in terms of the interest payment made each period |
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Effective annual rate (EAR) |
The interest rate expressed as if it were compounded once per year |
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An ordinary annuity consists of a(n) ___________ stream of cash flows for a fixed period of time. |
level |
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current ratio |
current assets/ current liabilities |
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quick ratio |
current assets - inventory / current liabilities |
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total debt ratio |
total assets - total equity/ total assets |
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debt to equity ratio |
total debt/ total equity |
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equity multiplier |
total assets/ total equity |
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times interest earned |
EBIT/ interest |
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Inventory turnover |
COGS/ inventory |
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Days sales in Inventory |
365/ Inventory turnover |
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Receivables turnover |
Sales/ accounts receivable |
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Day's sales in receivables |
365/ receivables turnover |
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Total asset turnover |
sales/ total assets |
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Profit margin |
Net Income / Sales |
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Gross margin |
gross profit/ sales gross profit= sales - cogs |
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return on assets |
net income/ total assets |
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return on equity |
net income/ total equity |
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price to earnings |
price per share/ earnings per share |
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market to book |
market value per share/ book value per share |
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Liquidity ratios |
1) current ratio 2) quick ratio |
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Solvency ratios |
1) total debt ratio 2) debt to equity ratio 3) equity multiplier 4) times interest earned |
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Asset Management ratios |
1) Inventory Turnover 2) Day's sales in inventory 3) Receivables Turnover 4) Day's sales in receivables 5) Total asset turnover |
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Profitability ratios |
1) profit margin 2) gross margin 3) return on assets 4) return on equity |
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Market value ratios |
1) price to earnings 2) market to book |
