Chapter 9

Question 1

Financial capital

Answer 1

the funds a firm uses to acquire its assets and finance its operations.

Question 2

Finance

Answer 2

The functional area of business that is concerned with finding the best sources and uses of financial capital.

Question 3

Risk

Answer 3

The degree of uncertainty regarding the outcome of a decision

Question 4

Risk-return tradeoff

Answer 4

The observation that financial opportunities that offer high rates of return are generally riskier than opportunities that offer lower rates of return.

Question 5

Financial ratio analysis

Answer 5

Computing ratios that compare values of key accounts listed on a firm’s financial statements.

Question 6

Liquid asset

Answer 6

An asset that can quickly be converted into cash with little risk of loss.

Question 7

Liquidity ratios

Answer 7

Financial ratios that measure the ability of a firm to obtain the cash it needs to pay is short-term debt obligations as they come due.

Question 8

Asset management ratios

Answer 8

Financial ratios that measure how effectively a firm is using its assets to generate revenues or cash.

Question 9

Financial leverage

Answer 9

The use of debt in a firm’s capital structure.

Question 10

Leverage ratios

Answer 10

Ratios that measure the extend to which a firm relies on debt financing to its capital structure.

Question 11

Profitability ratios

Answer 11

Ratios that measure the rate of return a firm is earning on various measures of investment.

Question 12

Budgeted income statement

Answer 12

A projection showing how a firm’s budgeted sales and costs will affect expected net income (also called a pro forma income statement).

Question 13

Cash budget

Answer 13

A detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash.

Question 14

Retained earnings

Answer 14

The part of a firm’s net income it reinvests.

Question 15

Equity financing

Answer 15

Funds provided by the owners of a company

Question 16

Debt financing

Answer 16

Funds provided by lenders (creditors).

Question 17

Capital structure

Answer 17

The mix of equity and debt financing a firm uses to meet its permanent financing needs.

Question 18

Capital budgeting

Answer 18

The process a firm uses to evaluate long-term investment proposals.

Question 19

Time value of money

Answer 19

The principle that a dollar received today is worth more than a dollar received in the future.

Question 20

Present value

Answer 20

The amount of money that, if invested today at a given rate of interest (called the discount rate), would grow to become some future amount in a specified number of time periods.

Question 21

Net present value (NPV)

Answer 21

The sum of the present values of expected future cash flows from an investment, minus the cost of that investment.

Question 22

Budgeted balance sheet

Answer 22

A projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets. (also called a pro forma balance sheet).