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Fall 23 > Fin 301 Mid Term MAIN > Flashcards

Fin 301 Mid Term MAIN Flashcards

(61 cards)

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1
Q

Explain Capital Budgeting

A

planning and managing a firm’s long-term investments (fixed assets) , identify investments where the value of cash flow generated by the asset exceeds the cost of the asset

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2
Q

Explain Net Working Capital Management

A

Involves managing the firm’s short-term assets and liabilities (everyday activities)

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3
Q

Explain Capital Structure

A

determining the mix of long-term debt and equity that is used to finance its operations

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4
Q

What is an example of Capital Budgeting?

A

Opening a Walmart in a new town (do we need it?) and updating an operating system

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5
Q

Explain a Sole Proprietorship

A

owned by one person, least regulated, unlimited personal liability, owner keeps all profits

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6
Q

Explain a General Partnership

A

partners share in gain/loss, both equal in unlimited liability

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7
Q

Explain a Limited Partnership

A

limited partner that does not participate in business and is only liable for their portion of particpation

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8
Q

Explain a Corporation

A

a business created as a formal legal entity, separate and distinct from its owner, public ownership, limited liability, strict regulation

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9
Q

How often are Corporations taxed?

A

Taxed twice, once when profits are reported and once if dividends are paid

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10
Q

Explain an LLC

A

hybrid of partnership and corporation, limited liability for owners but operated and taxed like a corporation

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11
Q

What is the primary goal of financial management?

A

maximize current value per share of existing stock

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12
Q

What are five secondary goals of financial management? (SAMMM)

A

Survive

Avoid Bankruptcy

Minimize Costs

Maximize Profits

Maintain Steady Growth

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13
Q

Explain the Sarbanes Oxley Act

A

Enacted by Congress, aimed to protect investors from corporate abuse

Management is responsible for accuracy of financial statements

No false statements

Annual report that contains an assessment of internal control structure and financial reports

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14
Q

Explain the Agency problem

A

Highlights potential conflicts of interest between stockholders and management

Owners: priority to seek new investment and raise share value

Management: pursue job security, corporate luxury, higher compensation at expense of shareholders

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15
Q

What is a primary market?

A

Markets in which the original sale of securities by governments and corporations occurs (IPO)

Public Offering, securities sold to public and debt/equity registered with SEC

Private Placement, negotiated sale with another company, avoids expense of IPO

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16
Q

What is a secondary market? (etrade)

A

Markets in which securities are bought and sold to the public after original sale

Owners or creditors sell to one another

Corporation is not directly involved

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17
Q

What is a dealer Market?

A

no physical location, transactions are made by a dealer electronically

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18
Q

What is an auction market?

A

sellers and buyers of securities are matched at a physical site

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19
Q

What is a balance sheet?

A

One day snapshot of the firms accounting value

What the firm owns and what they owe

Prepared at the end of the month

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20
Q

What is Net Working Capital?

A

Difference between Current Assets and Current Liabilities

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21
Q

Debt vs Equity

A

Financial Leverage: The amount of debt in a firm’s capital structure

More debt a firm has, the greater its leverage

Too much leverage puts the firm at risk of financial distress or failure

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22
Q

Market Value vs Book Value

A

Market Value: True worth of the firm TODAY

Book Value: Historical cost of the firm Used for GAAP

No relationship between the two

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23
Q

What is GAAP?

A

Generally Accepted Accounting Principles

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24
Q

What is the realization principle?

A

Recognize revenue when earnings process is virtually complete, and the transaction value is known

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25
What is the matching principle?
Revenues must be matched with costs incurred to generate them
26
Average Tax Rate
Total Tax Bill / Taxable Income
27
Marginal Tax Rate
The tax rate charged for one additional dollar of income
28
What is Cash Flow Identity?
Difference between the number of dollars that came in and the number that went out NOT the same as statement of cash flows, not equal
29
What is a statement of cash flows?
A firm's financial statement that summarizes its sources and uses of cash over a specified period
30
Common size statements for balance sheet
Show items as percentages of asset, found by dividing by total assets
31
Common size statements for income statement
Show items as percentages of sales Percentages are found by dividing by Total Net Sales
32
Current Ratio
One of the most widely used measures of short-term liquidity To a creditor, the higher the current ratio, the better; (2:1) or better is desired
33
Debt to Equity Ratio
shows how much of a company is owned by creditors (Important Variation of Total Debt Ratio) = Total Debt / Total Equity
34
Long Term Debt to Equity
shows how much of a business' assets are financed by long-term financial obligations, such as loans Long Term Debt to Equity = Long Term Debt / Total Equity Comfortable figure is 1/3
35
Total Asset Turnover Ratio
Sales / Total Assets Reciprocal of Capital Intensity Ratio Also known as 1 / Capital Intensity Ratio
36
Market Value Ratio
Based on the market price per share of a stock, not on financial statements (must be publicly traded)
37
Price Earning Ratio
how much an investor is willing to pay for a dollar of current earnings
38
DuPont Identity
Breaks return on equity (ROE, net income / equity) into three parts Operating Efficiency (Measured by Profit Margin) Asset Use Efficiency (Measured by Total Asset Turnover) Financial Leverage (Measured by Equity Multiplier)
39
What are the six ingredients to a successful financial plan? (FESAPP)
Financial Requirements Economic Assumptions Sales Forecast Asset Requirements Pro Forma Statements Plug it in
40
Financial Planning
Formulates the way in which financial goals are to be achieved Avoids “stumbling into the future backwards” Anticipating possible problems before they arrive
41
Short Run
(1 Year): the budget
42
Long Run
Planning Horizon, (2-5 years), what financial planning focuses on
43
External Financing Needed
Assets does not equal liabilities + owners' equity (HAS TO)
44
Capital Intensity Ratio
Represents the amount of assets needed to generate $1 of sales Reciprocal of Total Assets Turnover For Rosengarten, it was 3:1, took $3 to generate $1 of sales
45
EFN and Growth Rate
External Financing Needing (EFN) and growth are related Growth is a convenient means of examining the interactions between investment and financing decisions All other things being equal, the higher the rate of growth in sales or assets, the greater the need external financing
46
Internal Growth Rate (%IGR)
The maximum growth rate a firm can achieve without external financing of any kind (taking on additional long-term debt or raising new equity) ROA = return on assets B = retention ratio
47
Sustainable Growth Rate (%SGR)
The maximum growth rate a firm can achieve without equity financing while maintaining the same debt/equity ratio (taking on debt is ok). Use year 1
48
Rule of 72
(time it takes for money to double): t = 72/%r or %r = 72/
49
Future Value
amount an investment is worth after one or more periods
50
Compounding
accumulating interest on an investment over time to earn more interest
51
Investing for a Single Period
If you invest $100 in a savings account yearly that has a 10% annual interest rate... Your investment will grow 1+r per dollar invested R = .10, so 1.10 dollars per dollar invested Have $110 dollars at the end of the year
52
Investing for More than One Period
Interest on Interest Interest earned on the reinvestment of previous interest earned
53
Compound Interest
Interest earned on both the initial principal and the interest invested from the prior periods
54
Simple Interest
Interest earned only on the original principal amount invested
55
Present Value vs Future Value
The Present Value Factor is the reciprocal or the inverse of the Future Value Factor
56
Present Value of Annuities
A series of constant or level cash flows that occur at the end of a period or some fixed number of periods College loans, home loans, car loans,
57
Annuity Due
An annuity for which the cash flows occur at the beginning of a period Lease and rental payment
58
Perpetuities
An annuity in which the cash flows continue forever, the cash flow is the same each year Preferred stock
59
Stated Interest Rate
The interest rate expressed in terms of the interest payment made each period. %APR on a loan or a quoted loan
60
Effective Annual Rate (%EAR)
The interest rate expressed as if it were compounded once per year. It is the compounded interest during the year as if it only happened once a year Use EAR when you see compounded
61
Annual Percentage Rate (APR)
Interest rate charged per period multiplied by the number of periods per year All lenders must disclose a %APR on consumer loans %APR is a quoted rate or stated rate

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