Finance Terms

Question 1

What is the sustainable growth ratio?

Answer 1

The rate to which your company can grow with debt financing.

Question 2

What is the internal growth rate?

Answer 2

The rate at which your company can grow without taking on debt.

Question 3

What is the cash coverage ratio?

Answer 3

A metric that measures a company’s ability to pay off its debts using cash on hand.

Question 4

What is the return on assets formula?

Answer 4

Net income / Net Assets.

Question 5

What is the total asset turnover formula?

Answer 5

Net sales / average total assets

Question 6

What is the price to earning formula?

Answer 6

Share price / Earnings per share

Question 7

What is the times interest earned ratio?

Answer 7

EBIT / Interest expense.

Question 8

What is the current ratio?

Answer 8

Current assets / current liabilities

Question 9

What is ratio analysis?

Answer 9

A quantitative method of gaining insight into a company’s liquidity, operational efficiency, and profitability.

Question 10

What is the difference between the quick and current ratios?

Answer 10

Quick ratio does not include inventory.

Question 11

What is the total debt ratio?

Answer 11

Total assets - total equity / total assets.

Question 12

What is the times interest earned ratio?

Answer 12

EBIT / Interest

Question 13

What is the cash coverage ratio formula?

Answer 13

EBIT + (depreciation and amortization).

Question 14

What is enterprise value?

Answer 14

A measure of a company’s total value, thought to be more comprehensive that market capitalization.

EV - Market Cap + Total Debt - Cash

Question 15

EV / EBITA = What?

Answer 15

Enterprise value multiples, which is a comprehensive way to measure a company’s ROI.

Question 16

The DuPont method disaggregates ROE into what three ratios?

Answer 16

Profit Margin
Total Asset Turnover
Equity Multiplier

Question 17

What is total Asset Turnover?

Answer 17

Net sales / average total assets

Measures the company’s ability to generate revenue from its assets.

Question 18

What is equity multiplier?

Answer 18

A measure of the portion of a company’s assets that are financed by stock rather than debt.

Total assets / Total equity.

Question 19

IN the financial planning model, the external financing needs (EFN) as shown on a pro forma balance sheet is equal to the change in assets minus what?

Answer 19

The changes in both liabilities and equity.

Question 20

What is the retention ratio?

Answer 20

The proportion of net income retained in the business.

Question 21

What is the plow back ratio?

Answer 21

Same as the retention ratio - it measures how much cash a firm retains in the business

Question 22

What is the formula for present value of an investment?

Answer 22

FV1
_______
1 + r

Question 23

What is the difference between simple interest and compound interest?

Answer 23

In compound interest, the interest on the initial investment makes money as well.

Question 24

What is present value factor?

Answer 24

A factor used to calculate the present value of an amount to be received in a future period.

Question 25

What is discounting?

Answer 25

Calculating the present value of a future amount. The process is the opposite of compounding.

Question 26

What is capital intensity?

Answer 26

A measure of the amount of assets needed to generate income for a unit.

Question 27

What is the NPV Rule?

Answer 27

Accept a project with a positive NPV and reject a project with a negative NPV.

Question 28

What are the three attributes of NPV?

Answer 28

NPV uses cash flows NPV uses ALL the cash flows of the project NPV discounts the cash flows properly

Question 29

What is the payback period?

Answer 29

The length of time it takes for a project to return its initial investment.

Question 30

What is the discounted payback period?

Answer 30

The length of time it takes for a project’s discounted cash flow to equal it’s initial investment.

Question 31

What is cost of capital?

Answer 31

Cost of capital is the cost of funds used for financing a business. The return investors expect.

Question 32

What is the internal rate of return?

Answer 32

The discount rate at which the net present value of an investment is zero. It is a method of evaluating capital expenditure proposals.

Question 33

WHat is the profitability index?

Answer 33

A method used to evaluate projects. It is the ratio of the present value of the future expected cash flows after initial investment divided by the initial investment.

Question 34

What is the biggest difference between finance and accounting techniques?

Answer 34

Finance uses cash flows, accounting uses income and / or earnings.

Question 35

What is a sunk cost?

Answer 35

A cost that has already occurred and cannot be reversed.

Question 36

What is an opportunity cost?

Answer 36

The most valuable alternative that is given up.

Question 37

What is erosion?

Answer 37

Cash flow transferred to a new project from customers and sales of other products of the firm.

Question 38

What is synergy?

Answer 38

A positive incremental net gain associated with the combination of two firms through a merger or acquisition.

Question 39

What is real cash flow?

Answer 39

A cash flow expressed in terms of purchasing power, not actual dollars.

Question 40

What is a sensitivity analysis?

Answer 40

An analysis of the effect on the project when there is some change in a critical variable such as sales or costs.

Question 41

What is a BOP analysis?

Answer 41

Best, optimistic, pessimistic

Question 42

What is a coupon?

Answer 42

The stated interest payment on a debt instrument.

Question 43

What is a bond face value?

Answer 43

The principal value of a bond that is repaid at the end of the term. Also referred to as par value or principal.

Question 44

What is a coupon rate?

Answer 44

The annual coupon a bond pays divided by its face value.

Question 45

What is the yield to maturity?

Answer 45

The discount rate that equates the present value of the interest payments and par value of a bond with the current price of a bond.