Finance Exam 1
Terms
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- capital budgeting
- the process of planning and managing a firm's long-term investments
- capital structure (financial structure)
- the mixture of long-term debt and equity maintained by a firm
- working capital
- a firm's short term assets and liabilitieis
- sole proprietorship
- business owned by a single individual, least regulated, owner keeps all profits, unlimited liability for debts
- partnership
- business formed by two or more individuals
- corporation
- business created as a distinct legal entity owned by one or more individuals or entities, double taxation
- LLC
- limited liability company, be taxed like partnership but retain limited liability for owners
- Sarbanes-Oxley Act
- to strengthen protection against corporate accounting fraud and financial malpractice, tell truth in financial statements
- agency problem
- the possibility of conflict of interest between the owners and management
- agency relationship
- relationship between stockholders and management
- stakeholder
- someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm
- primary market
- the original sale of securities by governments and corporations
- secondary market
- the securities are bought and sold after the original sale
- balance sheet
- snapshot of firm
- stockholders equity
- assets - liabilities
- balance sheet identity
- assets = liabilities + shareholders' equity
- net working capital (operating capital)
- current assets - current liabilities
- depreciation
- the fact that assets with finite lives lose value over time
- net operating profit after tax (NOPAT)
- a company's after-tax operating profit for all investors
- liquidity
- the speed and ease with which an asset can be converted to cash
- financial leverage
- the use of debt in a firm's capital structure; the more debt, the higher the leverage
- market value
- true value of any asset; the amount of cash we would get if we actually sold it
- book value
- values shown on the balance sheet for the firm's assets; generally not what the assets are actually worth
- GAAP
- the common set of standards and procedures by which audited financial statements are prepared
- income statement
- video recording of a firm
- income statement equation
- income = revenues - expenses
- recognition principle
- revenue is recognized at the time of sale (may not be the same time as collection)
- matching principle
- determine revenues and then match those revenues with the costs associated with producing them
- noncash items
- expenses charged against revenues that do not directly affect cash flow
- corporate tax rates
-
15%
25%
34%
35% - average tax rate
- the percentage of your income that goes to pay taxes; always less than marginal
- marginal tax rate
- the extra tax you would pay if you earned one more dollar
- munis
- state and local government bonds which are generally exempt from fed. taxes
- cash flow identity
- cash flow = cash flow to creditors + cash flow to stockholders
- cash flow from assets (free cash flow)
- the total of cash flow to creditors and cash flow to stockholders
- market value added (MVA)
- difference between the current market value of a firm and the capital contributed by investors
- economic value added (EVA)
- the value of an activity that is left over after subtracting from it the cost of executing that activity and the cost of having lost the opportunity of investing consumed resources in an alternate activity
- operating cash flow
- cash generated from a firm's normal business activities of producing and selling; revenues - costs
- capital spending
- purchases of fixed assets - fales of fixed assets
- cash flow to creditors
- a firm's interest payments to creditors - net new borrowing
- cash flow to stockholders
- dividends paid out by a firm - net new equity raised
- corporate governance
- the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled
- market cap(italization)
- a measurement of corporate size; one of the critical measurements of a public company's success or failure
- common-size statement
- a standardized financial statement presenting all items in percentage terms
- short-term solvency (liquidity) ratios
-
firm's ability to pay bills over the short run w/o undue stress
-current
-quick
-cash - long-term solvency (financial leverage) ratio
-
firm's long run ability to meet its obligations
-total debt ratio
-debt-equity ratio
-equity multiplier
-times interest earned ratio (TIE)
-cash coverage ratio - asset utilization (turnover) ratio
-
firms efficiency of using assets to generate sales
-inventory turnover
-receivables turnover
-total asset turnover
-capital intensity - profitability ratio
-
firms efficiency in using assets and managing operations
-profit margin
-ROA
-ROE
-Du Pont identity - market value ratio
-
-price earnings (PE) ratio
-market-to-book value ratio - Du Pont identity
-
profit margin (operating efficiency) x total asset turnover (asset use efficiency) x equity multiplier (financial leverage)
it's a convenient way of systematically approaching financial statement analysis; it will tell you where to start looking for the reasons ROE is unsatisfactory - retention ratio
- the portion of net income that is plowed back into the business
- internal financing
- what the firm earns and plows back into the business
- external financing
- funds raised by either borrowing money or selling stock
- internal growth rate
- how rapidly a firm can grow with just internal financing
- sustainable growth rate
- maximum growth rate that can be achieved
- compounding
- process of leaving money and accumulated interest in an investment for more than one period, reinvesting interest
- compound interest
- interest earned on both the initial principal and the interest reinvested from prior periods
- interest on interest
- interest earned on the reinvestment of previous ineterest payments
- simple interest
- the interest is NOT reinvested, interest is earned each period only on one principal
- annuity
- a level stream of cash flows for a fixed period of time
- annuity due
- an annuity for which the payments are occur at the BEGINNING of the period
- ordinary annuity
- an annuity for which the payments occur at the END of the period
- perpetuity (consol)
- an annuity in which the cash flows continue forever
- effective annual rate (EAR)
- the interest rate expressed as if it were compounded once per year; use if you want to compare two alternative investments with different compounding periods
- annual percentage rate (APR)
- the interest rate charged per period (period rate) multiplied by the number of periods per year
- period rate
- APR/# periods per year