Exam 1 Study Guide Flashcards
(20 cards)
What is financial management
the art and science of managing of personal or corporate
financial needs
the movement of funds from lenders who have a surplus of funds to
borrowers who have a shortage of finances
Cycle of Money
Types of business organizations
Sole Proprietorship
Pros: Easy to form, minimal paperwork, keeps all profits.
Cons: Hard to get financing, full personal liability, no ownership transfer.
Taxes: Personal taxes on profits.
Partnership
Pros: More expertise/capital, shared liability, possible ownership transfer.
Cons: Must share profits.
Taxes: Personal taxes on profits.
Corporation
Pros: Limited liability, easy financing.
Cons: Hard to form, lots of paperwork, double taxation (corporate + capital gains).
Other: Separation of ownership/control
summarizes assets and who has claims on them (stock holders or
creditors
Balance Sheet
summarizes revenues and expenses
Income statement
think of it as how much cash is actually on a company’s bank account
today, you need to make this adjustment because depreciation and similar non-monetary
expense
Cash flows
summarizes funds that were retained from net income
over the years (accumulated)
Statement of Retained Earnings
how much in debt the company is? TIE and debt ratios
Leverage
various profit margins (gross, net) relative to sales
Profitability
The total asset turnover, how well does the company deploy its assets to generate
sales
Efficiency
what is the value of the company relative to its competitors if the
company is publicly traded. We compare market to the book value
Market Value
do we have sufficient current assets to cover our short-term liabilities? How
quickly we can convert our short-term assets into cash?
Liquidity
the value of the future cash flows today (dollar today is not a dollar
tomorrow, thus, you need to account for this via the process of discounting)
Present Value
the value of the money today in the future if it accumulates interest or
appreciates (housing, retirement) – grows through compounding
Future Value
how many years you need to wait to retire with the desired amount?
Number of periods
what should be the rate of return to make retirement at the
desired age with the desired nest egg
Solving for the interest rate
Three types of loans
discount (interest and principal paid at maturity)
interest-only
(interest over lifetime of the loan, interest and principal in the last year)
amortized (part
of interest and principal every payment)
what is the value of the project today, if it
generates series of cash flows in the future?
Present value of multiple cash flows
If you deposit money to your brokerage account
very month, how much will you have accumulated after several years?
Future value of multiple cash flows
is it better to take money today or over years? Depends on the interest
rate you can earn over the payment time horizon. Generally, money today is preferred
Lottery problem
