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Financial Strategy > Exam 1 > Flashcards

Exam 1 Flashcards

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1
Q

Retained earnings

A

The portion of company profits that are kept by the company rather than distributed to the stockholders as cash dividends

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2
Q

Financial Institutions and Markets

A

The organizations that facilitate the flow of capital between investors and companies

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3
Q

Risk

A

A potential future negative impact to value and/or cash flows. It is often discussed in terms of the probability of loss and the expected magnitude of the loss

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4
Q

Financial Asset

A

A general term for securities like stocks, bonds, and other assets that represent ownership in a cash flow

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5
Q

Real Assets

A

Physical property like gold, machinery, equipment, or real estate

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6
Q

Time Value of Money (TVM)

A

The theory and application of valuing cash flows at various points in time

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7
Q

Defined Benefit Plan

A

A retirement plan in which the employer funds a pension generally based on each employee’s years of service and salary

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8
Q

Defined Contribution Plan

A

A retirement plan in which the employee contributes money and directs its investment. The amount of retirement benefits are directly related to the amount of money contributed and the success of its investment

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9
Q

401k Plan

A

A defined contribution plan that is sponsored by corporate employers

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10
Q

Individual Retirement Account (IRA)

A

A self-sponsored retirement program

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11
Q

Sole Proprietorship

A

A business entity that is not legally separate from its owner

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12
Q

Unlimited Liability

A

A situation in which a person’s personal assets are at risk from a business liability

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13
Q

Equity

A

An ownership interest in a business enterprise

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14
Q

Angel Investors

A

Individuals who provide small amounts of capital and expert business advice to small firms in exchange for an ownership stake in the firm

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15
Q

Venture Capitalists

A

Similar to angel investors except that they are organized as groups of investors and can provide larger amounts of capital

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16
Q

General Partnership

A

A form of business organization where the partners own the business together and are personally liable for legal actions and debts of the firm

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17
Q

Public Corporation

A

A company owned by a large number of stockholders from the general public

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18
Q

Double Taxation

A

A situation in which two taxes must be paid on the same income

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19
Q

Limited Liability

A

Limitation of a person’s financial liability to a fixed sum or investment

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20
Q

Hybrid Organization

A

Business forms that have some attributes of corporations and some of proprietorships/partnerships

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21
Q

Maximization of Shareholder Wealth

A

A view that management should first and foremost consider the interests of shareholders in its business decisions

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22
Q

Option

A

The opportunity to buy stock at a fixed price over a specific period of time

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23
Q

Corporate Governance

A

The set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control

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24
Q

Credit Analyst

A

A person who analyzes a company’s ability to repay its debts and reports the findings as a grade

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25
Restricted Stock
A special type of stock that is not transferable from the current holder to others until specific conditions are satisfied
26
Fiduciary
A legal duty between two parties where one party must act in the interest of the other party
27
Liquidity
Ease with which an asset can be converted into cash
28
Current Assets
Assets that will normally convert to cash within one year
29
Marketable Securities
Short-term, low-rate investment securities held by the firm for liquidity purposes.
30
Fixed Assets
Assets with a useful life exceeding one year
31
Liabilities
Funds provided by lenders to the firm.
32
Current Liabilities
Obligations of the firm that are due within one year.
33
Stockholders' Equity
Funds provided by the firm’s preferred and common stock owners.
34
Stockholders' Equity
Funds provided by the firm’s preferred and common stock owners.
35
Preferred Stock
A hybrid security that has characteristics of both long-term debt and common stock.
36
Common stock and paid-in surplus
The fundamental ownership claim in a public or private company.
37
Average Tax Rate
The percentage of each dollar of taxable income that the firm pays in taxes.
38
Marginal Tax Rate
The amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.
39
Statement of cash flow
Financial statement that shows the firm’s cash flows over a period of time.
40
Cash flow from operations
Cash flows that are the direct result of the production and sale of the firm’s products.
41
Cash flow from investing activities
Cash flows associated with the purchase or sale of fixed or other long-term assets.
42
Cash flow from financing activities
Cash flows that result from debt and equity financing transactions.
43
Net change in cash and marketable securities
The sum of the cash flows from operations, investing activities, and financing activities.
44
Free cash flow
The cash that is actually available for distribution to the investors in the firm after the investments that are necessary to sustain the firm’s ongoing operations are made.
45
FCF formula =
[EBIT(1 - tax rate) + Depreciation] - [change in gross fixed assets + change in net operating working capital] OR [NOPAT + Depreciation] - IOC
46
net operating profit after taxes (NOPAT)
Net profit a firm earns after taxes but before any financing costs.
47
OCF Formula =
EBIT(1 - tax rate) + Depreciation OR NOPAT + Depreciation
48
IOC Formula =
Change in gross fixed assets + change in net working capital
49
Net operating working capital formula =
Current Assets - Current Liabilities
50
Statement of retained earnings
Financial statement that reconciles net income earned during a given period and any cash dividends paid with the change in retained earnings over the period.
51
Sarbanes-Oxley Act of 2002
Requires that a firm’s senior management must sign off on the financial statements of the firm, certifying the statements as accurate and representative of the firm’s financial condition during the period covered.
52
Ratio Analysis
The process of calculating and analyzing financial ratios to assess a firm’s performance and to identify actions needed to improve firm performance.
53
Asset Management Ratios
Measure how efficiently a firm uses its assets (inventory, accounts receivable, and fixed assets), as well as its accounts payable.
54
Accounts Receivable Turnover formula =
Credit Sales / Accounts Receivable
55
Accounts Payable Turnover formula =
COGS / Accounts Payable
56
Fixed Asset Turnover formula =
Sales / Working Capital
57
EBT Formula =
Net Income / (1 - tax rate)
58
Return on Equity Formula =
Net Income / Total Equity
59
Total asset turnover formula =
Sales / Total Assets
60
Capital Intensity Formula =
Total Assets / Sales
61
Return on Assets (ROA) formula =
Net Income / Total Assets
62
Internal Growth Rate (IGR) formula =
ROA * RR / 1 - (ROA * RR)
63
Debt Management Ratios
Measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets as well as how well the firm can pay off its debt.
64
Capital Structure
The amount of debt versus equity financing held on the balance sheet.
65
Profitability Ratios
Ratios that show the combined effect of liquidity, asset management, and debt management on the firm’s overall operating results.
66
Gross Profit Margin formula =
(Sales - COGS) / Sales
67
Profit Margin formula =
Net Income / Sales
68
Operating profit margin formula =
EBIT / Sales
69
Basic earnings power (BEP) formula =
EBIT / Total Assets
70
Dividend payout formula =
Common Stock Dividends Paid / Net Income
71
DuPont system of analysis
An analytical method that uses the balance sheet and income statement to break the ROA and ROE ratios into component pieces.
72
Common size financial statements
Dividing all balance sheet amounts by total assets and all income statement amounts by net sales.
73
Internal Growth Rate
growth rate a firm can sustain if it uses only internal financing—that is, retained earnings—to finance future growth
74
Sustainable Growth Rate
The growth rate a firm can sustain if it finances growth using both debt and internal financing such that the debt ratio remains constant.
75
Time Series Analysis
Analyzing firm performance by monitoring ratio trends.
76
Cross-sectional Analysis
Analyzing the performance of a firm against one or more companies in the same industry
77
Present Value formula =
CF[1/(1 + i)^t = CF / (1 + I)^t
78
Future Value formula =
CF (1 + i)^t
79
Future Value Annuity formula =
PMT [(1 + i)^t - 1 / i]
80
Present Value Annuity formula =
PMT [1 - (1/(1 + i)^t) / i]
81
Payment formula =
PMT = PV annuity [i / 1 - 1/(1 + i)^t]
82
Rate formula =
[(FV / PV) ^ 1/t] - 1
83
EAR formula =
[1 + (Quote Rate / N) ^ N] -1
84
Rule of 72
An approximation for the number of years needed for an investment to double in value.
85
Annuity
A stream of level and frequent cash flows paid at the end of each time period—often referred to as an ordinary annuity.
86
Perpetuity
An annuity with cash flows that continue forever.
87
Consols
Investment assets structured as perpetuities.
88
PV of a perpetuity formula =
Payment / Interest Rate
89
Annuity due
An annuity in which cash flows are paid at the beginning of each time period.
90
Annual Percentage Rate (APR)
The interest rate per period times the number of periods in a year.
91
Effective Annual Rate (EAR)
An interest rate that reflects annualizing with compounding figured in.
92
Amortized Loan
A loan in which the borrower pays interest and principal over time.
93
Add-on Interest
A calculation of the amount of interest determined at the beginning of the loan and then added to the principal.
94
Gross Profit formula =
EBIT + Depreciation + Other Operating Expense
95
Net Sales formula =
Gross Profit / (1 - COGS %)
96
Dividends paid to preferred & common stockholders + Addition to RE =
Net Income
97
NOPAT is the same as:
EBIT(1 - tax rate)
98
Investment in Operating Capital (IOC) formula =
Change in gross fixed assets + change in working capital
99
Decreasing debt and increasing equity will ___ EPS?
Decrease
100
Taxable Income formula =
EBIT - Allowable Interest Deduction
101
Tax Liability formula =
.21 * taxable income
102
Average Tax Rate formula =
Tax Liability / Taxable Income
103
Income available for asset funders =
Operating Income (EBIT) - Taxes
104
Return on asset funders' investment =
Income available for asset funders / total assets
105
Current Ratio
Current assets / Current liabilities
106
Average collection period
AR x 365 / Credit Sales
107
Debt Ratio
Total Debt / Total Assets
108
In general, firms want a ___ asset turnover ratio and a ___ capital intensity ratio
High; Low. If ratios are too high and too low, it can indicate poor asset management caused by inventory stockouts or strict AR policies
109
DuPont ROA =
Profit margin * Total asset turnover
110
DuPont ROE =
ROA * Equity Multiplier
111
Equity Multiplier
Total Assets / Common Stockholders' Equity
112
What does the DuPont ROA equation tell us about a firm?
It breaks down ROA into operating efficiency and asset use efficiency so we can analyze changes to ROA in more detail. Ex: did profit margin or asset turnover cause the change?
113
What does the DuPont ROE equation tell us about a firm?
It allows us to look at the ROE as a function of the net profit margin, asset use efficiency, and financial leverage from the BS.
114
Retention Ratio (RR) Formula =
Addition to RE / Net Income OR 1 - Dividend Payout Ratio
115
Sustainable Growth Rate formula =
ROE * RR / 1 - (ROE * RR)
116
What factors influence SGR?
Profit Margin, Total Asset Turnover, Financial Leverage, Profit Retention

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