Finance Skills For Managers Flashcards
(123 cards)
1
Q
Capital
A
A financial asset that can be used by a firm or individual - cash or machinery for ex
2
Q
What are the 3 subspecialties of finance?
A
- Business finance
- Investments
- Financial institutions
3
Q
Personal Finance Goals
A
Utility - total satisfaction received from consuming goods and services
4
Q
What are the 3 main tasks that a financial manager does?
A
- investment decisions
- financing decisions
- Manage working capital
5
Q
What are the 3 types of securities?
A
- Treasuries
- Corporate bonds
- Stocks
6
Q
Treasuries
A
Bonds that are issued by the government
7
Q
Money market
A
financial market used to borrow and lend money short term
8
Q
Capital market
A
used for long-term assets that are held for greater than one year
9
Q
What are the 2 types of financial markets?
A
- Money market
2. Capital market
10
Q
Why do financial markets exist?
A
to manage liquidity and risk
11
Q
Primary financial market
A
the financial market where securities (stocks and/or bonds) are first sold
12
Q
Syndicate
A
a group that is temporarily formed to handle a bond or stock issue
13
Q
How can firms place bonds with syndicates?
A
through a competitive or negotiated sale
14
Q
Initial public offering (IPO)
A
when a privately held company first offers shares of stock to outside investors to raise capital, therefore becoming a publicly owned company
15
Q
Secondary financial market
A
The stock market - markets where assets are priced
16
Q
What are two types of secondary markets?
A
- Auction market
2. Dealer market
17
Q
Auction market
A
secondary market with a physical location and where prices are determined by investors’ willingness to pay
18
Q
Dealer market
A
secondary market where securities are bought and sold through a network of dealers who trade for themselves
19
Q
Bid-ask spread
A
Compensation the specialist receives for risk associated with providing liquidity
20
Q
What are the 3 roles of prices?
A
- convey information to consumers
- affect incentives
- affect the distribution of income
21
Q
What is an efficient market?
A
when prices fully reflect the available information about securities
22
Q
What are the 3 types of financial institutions?
A
- Depository
- Non-depository
- Securities and investment firms
23
Q
Depository financial institution
A
financial institution that accepts monetary deposits and provides loans - includes savings banks, commercial banks, savings and loan associations, and credit unions
24
Q
Non-depository financial institutions
A
financial institution that is not allowed to accept monetary deposits but can lend money - includes brokerage firms, investment firms, mutual funds, and hedge funds
25
Securities firms
financial institution that facilitates the investment of securities - includes underwriting
26
Investment firms
company that invests the capital of investors in financial securities - includes mutual funds and investment trusts
27
Mutual fund function
investment company that offers investments and buys securities on behalf of investors
28
Private equity function
financial institution that invests in an entity that is not publicly listed or traded using money received from institutional investors
29
What are the 3 types of economic indicators?
1. Leading
2. Lagging
3. Coincident
30
Leading economic indicators
1. Yield curve
| 2. Stock market return
31
Yield curve
basis for an interest rate on a loan
Normal: results when longer maturity bonds have higher interest rates than shorter ones
Inverted: when longer-term bonds have a lower interest rate than shorter-term bonds
Flat: when both short-term and long-term bonds have the same interest rate, indicating that the economy is in a transitional state
32
Stock market return
rising market = improving
| declining market = worsening
33
Lagging indicators
1. unemployment rate
| 2. consumer price index (CPI)
34
Consumer Price Index (CPI)
measures changes in the inflation rate
35
Coincident Indicators
1. gross domestic product
| 2. personal income
36
Gross Domestic Product (GDP)
monetary value of all finished goods and services
37
securitization
process of combining several types of debt and reselling them as a package to investors
38
Bond holder
interested in projects that give them a higher chance of getting their investment back
39
What are the 2 types of interest rates?
1. Simple interest
| 2. Compound interest
40
Simple interest
Principal × Interest Rate
41
Compounding interest
interest on interest
42
What is an interest rate composed of?
1. Opportunity cost
2. Risk
3. Inflation
43
Risk
the possibility that the actual return will differ from the expected return
44
What are interest rates made of?
1. Risk free rate
| 2. Risk premium
45
Risk free rate
rate of return on an investment with no risk
46
What are the 3 components of interest rates?
1. Opportunity cost
2. Risk
3. Inflation
47
What is the interest rate calculation?
Risk free rate + risk premium
48
Risk premium
compensation for the amount of risk taken on by investors
49
Nominal rate
rate at which money grows over time including inflation - does not measure actual purchasing power
50
Real rate
nominal minus expected inflation rate
51
time value of money (TVM)
present money is worth more than future money
52
What are the 3 variables of TVM?
1. amount of cash flows
2. timing of cash flows
3. rate at which the value of cash flows changes over time
53
Compounding
finding a future value given a present value
54
Discounting
finding a present value given a future value
55
Annuities
a stream of cash flows of an equal amount paid every consecutive period
56
What are the 3 different types of annuities?
1. Ordinary annuity
2. Annuity due
3. Perpetuities
57
Ordinary annuity
series of equal payments made at the end of consecutive periods over a fixed length of time
58
Annuity due
paid at the beginning of consecutive periods
59
Perpetuity
constant stream of identical cash flows that continues forever
60
What are the measures of return?
1. Holding period return
| 2. Annualize based on simple interest
61
Holding period return
return that an investor gets over the entire period during which they own a financial security
62
What are the types of risk?
Market risk and firm specific risk
63
Interest rate risk
probability that changes in interest rates will impact the value of a bond - market risk
64
Default risk
probability of borrower’s failure to repay a contractual obligation - firm specific
65
Price risk
potential for the decline in the price of a security relative to the market - diversifiable
66
Diversification
process of “spreading” your money over many different assets
67
Risk separation
dispersing assets geographically instead of concentrating them in one location
68
Time diversification
concept that riskier financial securities have lower risk in the long term
69
What are the 4 uses of financial ratios?
1. Standardization
2. Flexibility
3. Focus
4. Evaluation
70
Standardization ratio analysis
making financial data comparable across firms
71
What are three main comparison methods used in ratio analysis?
1. Trend analysis
2. Cross-sectional analysis
3. Progress measurement
72
Trend analysis
looks at a firm’s financial ratios over time and compares the performance this year with performance in the past
73
Cross-sectional analysis
compares a firm’s financial ratios with those of a peer group
74
What are the 5 types of ratios?
1. Liquidity
2. Leverage
3. Activity
4. Market
5. Profitability
75
Liquidity ratios
measure a firm’s ability to meet short-term obligations without raising external capital
76
Activity ratios
measure how well the company uses its assets to generate sales or cash
77
Leverage ratios
considers how the firm is financed
78
Profitability Ratios
used to judge how profitable the company is
79
Market ratios
used to evaluate the current share price of a public firm’s stock
80
DuPont Framework
expanded formula of the return of equity
81
Cash budgets
forecast of future events less than a year
82
What are the steps to creating a cash budget?
1. Determine cash receipts
2. Estimate cash disbursements
3. Create the cash budget
83
Profit forecasting
projection of future earnings after all costs are subtracted from sales
84
Balance sheet forecasting
Using sales growth and profit forecast to understand future implications
85
discretionary financing needed (DFN)
additional financing needed given a firm’s expectations for future growth
86
Financial Forecasting vs. Budgeting
budget: quantified expectation of what a business wants to achieve
financial forecasting: estimate of what will actually be achieved
87
Spontaneous accounts
Accounts that vary naturally with sales
88
discretionary accounts
Accounts that do not vary automatically with sales but are left to the discretion of management
89
How to calculate DFN
Projected total assets - projected total liabilities - projected owners equity
90
sustainable growth rate (SGR)
growth rate that allows a firm to maintain its present financial ratios without issuing new equity
91
Ways to Reduce DFN
Slow sales growth
examine capacity constraints
lower dividend payments
92
Dividend
distribution of profits to shareholders
93
capital budgeting criteria
calculations used to determine if a project will add value to the firm
94
Net present value (NPV)
the sum of the present values of all of the expected cash inflows and outflows - calculated by adding the cash inflows and then subtracting the cash outflows
95
Internal rate of return (IRR)
the rate of return that a firm earns on its capital projects
96
Profitability index (PI)
The ratio of payoff to investment
97
Bonds
the primary means of borrowing money in the corporate world
98
Fixed income securities
security where the borrower pays a fixed interest payment to investors annually
99
Par value
The sum of money that a corporation promises to pay at the expiration of a bond; also called face value
100
Yield to maturity
The rate of return received on a bond purchased today at market price and held until maturity
101
Premium bond
bond whose price is above its par value
102
Common stock
stock that represents equity in a firm and allows the right to vote at shareholder meetings
103
Preferred stock
A hybrid security that has no fixed maturity, has fixed payments, and does not confer voting rights on bondholders
104
dividends in arrears
A feature of preferred stock specifying if a company ignores preferred stock dividends, it cannot pay anything to its common stockholders
105
Capital investment
the sum of money invested to purchase long-term assets
106
Intrinsic value
the value of an investment without referring to its market value
107
How to value preferred stock
Annual fixed dividend divided by the discount rate
108
How to value common stock
Dividend to be paid next year divided by the discount rate minus the constant growth rate
109
Beta
how the price of a security varies with the market
110
Defensive assets
beta less than 1
111
Capital budget
process of evaluating and planning for purchases of long-term assets
112
What are the Criteria to Consider for Capital Investment?
1. includes all cash flows that occur during the life of the project
2. considers TVM
3. incorporates the cost of capital
113
Incremental cash flows
Cash flows that result from accepting a project
114
Incidental cash flows
cash flows that are created by the project, but are not revenues or costs
115
Standard deviation
Smaller the SD the better
116
Ar turnover
Company’s ability to collect debts
117
Leverage multiplier
How much capital comes in the form of debt - assets/equity
118
Net margin
How much profit is generated as a percentage of revenue
119
Current ratio
measures whether a firm has enough resources to meet its short-term obligations
120
Market to book ratio
assets minus liabilities
121
Leverage ratios
assesses the ability of a company to meet its financial obligations
122
Hurdle rate
the minimum rate of return on a project required by an in investor
123
Bond vs stock payments
Stocks: partial ownership in a company - stocks must appreciate in value and be sold later on the stock market
Bonds: loan from you to a company - bonds pay fixed interest over time
