Sophia's Finance Flashcards
(101 cards)
1
Q
What is Finance?
A
The study of funds management and asset allocation over time. Goal is to manage assets in a way that maximizes returns
OR
To provide or obtain funding for a transaction or undertaking; to back; to support.
“Since I know assets change value over time, how do I use that to cause my assets to change value in the direction I want? How do I manage assets so that they’re worth more in the future than they are today? ”
2
Q
What is Economics?
A
Studying the production, distribution, and consumption of goods and services
3
Q
Two fundamental types of financial decisions that the finance team needs to make in a business
A
Investment
Financing
4
Q
Two ways to raise money externally
A
taking on debt
selling equity
5
Q
valuation
A
estimating the market value of an asset, liability, or business entity,
6
Q
Underwriter
A
An entity that markets newly issued securities.
7
Q
Impact investing
A
assesses not only the financial return on an investment but also its social and environmental impacts.
8
Q
Incorporate
A
To form into a legal company
9
Q
Principal
A
One who directs another (the agent) to act on one’s behalf.
10
Q
Do bondholders get paid if the company doesn’t make a profit?
A
Yes, they should still be paid.
If there is no profit, the shareholder does not receive a dividend, but interest is paid to debenture holders regardless of whether or not a profit is made.
11
Q
Can bondholders vote?
A
No
12
Q
ex ante
A
Analysis based on forecasts or predictions before the event
The opposite is ex post, which is based on concrete results after the event
Translated from Latin, it means before the event.
13
Q
What is a secular bull/bear market?
A
A period where the market is generally in one direction with a year or two in the other direction
14
Q
Money market
A
Money markets deal with short-term debt instruments, which are usually less than a year.
These markets provide liquidity for institutions and governments.
15
Q
Derivatives
A
Financial contracts whose value depends on an underlying asset, like stocks, bonds, or commodities.
Mortgage-backed securities are an example of a derivative.
16
Q
Capital Market
A
Market where companies raise funds by issuing securities like stocks and bonds and where investors trade these securities.
Think of the NYSE and NASDAQ
17
Q
Currency Market
A
Market that involves trading different currencies from around the world; also known as a foreign exchange market (forex).
There is no clearinghouse– trading is done directly from entity to entity
18
Q
Debt-to-Equity Ratio
A
Total Liabilities ÷ Shareholders’ Equity
19
Q
Net Working Capital
A
Current Assets – Current Liabilities
20
Q
Gross Profit
A
Net sales - COGS
21
Q
Net Income
A
Gross profit minus operating expenses, admin expenses, depreciation, taxes, etc
AKA the bottom line
22
Q
What are the five types of ratios?
A
Profitability
Liquidity
Asset Management
Debt/Leverage
Market
23
Q
What are examples of profitability ratios
A
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return on Assets (ROA)
Basic Earning Power (BEP)
Return on Equity (ROE)
24
Q
What are some examples of liquidity ratios?
A
Current Ratio
Quick Ratio
25
What are some examples of asset management (efficiency) ratios?
Inventory Turnover Ratio
Day Sales Outstanding Ratio
Fixed Assets Turnover Ratio
Total Asset Turnover Ratio
26
What do asset management ratios (AKA efficiency ratios) measure?
The effectiveness of a firm’s use of resources or assets
27
What do debt (leverage) ratios measure?
The firm’s ability to repay long-term debt.
28
What are some examples of debt (leverage) ratios?
Debt Ratio
Times Interest Earned Ratio
29
What do market ratios measure?
The cost of issuing stock
Also the relationship between the return and the value of an investment in a company’s shares
Mainly for shareholders
30
Basic Earning Power ratio
Operating profit / Total Assets
31
Gross Profit Margin
Gross Profit / Sales
32
Net Profit Margin
(Net Profit / Sales) x 100
33
Operating Profit Margin
(Operating profit / Sales) x 100
34
Return On Assets
Net income / Total assets
35
Return On Equity
Net profit / Equity
36
The DuPont equation
It’s about return on equity (ROE)
It’s based on three components:
Net profit margin
Total asset turnover
Financial leverage
37
Trend Analysis categories
Trend analysis is broadly categorized into technical analysis and fundamental analysis.
Evaluation of past market data to forecast future price movements and inform investment decisions.
38
Technical Analysis
Trends are the focus
Technical Analysis attempts to predict future stock price movements based on recently observed trend data.
39
Fundamental Analysis
evaluating the intrinsic value of an asset by examining related economic, financial, and other qualitative and quantitative factors.
40
Efficient-Market Hypothesis (EMH)
financial markets are informationally efficient; therefore, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.
41
Benchmarking
Comparing financial ratios to your own historical data or among other companies.
42
Pro Forma Income Statement
A financial statement of the company’s estimate of how it plans to convert its revenue into net income.
43
Capacity planning
Ensures that a firm will be realistic when predicting sales and is using its financial resources in the most efficient way possible.
44
Capacity utilization
The extent to which a company is using its capacity to create production efficiency
45
According to Sophia, what is the primary role of corporate financiers and accountants?
Forecasting cash inflows and outflows in advance
46
When forecasting cash for budgets, what are receipts?
Usually A/R
Receipts also refer to the returns of short-term investments as well as the sale of various assets.
Sometimes other things
47
Cash disbursement cycle
The total time between when an obligation occurs and when the payment clears the bank.
Firms generally want to delay this as long as possible using different kinds of float
48
Financial forecasting typically involves three key steps
Sales Forecast
Financial Modeling
Estimation of Additional Funds Needed (AFN) to support additional sales
49
What is the is the primary input for forecasting budgets?
Forecasting what available liquidity will be required over a given period is the primary input for forecasting budgets.
50
What are the four types of cash forecasting?
Direct method
Adjusted net income method
Pro forma balance sheet method
Accrual reversal method
51
Discounting
Today’s price for money that you will receive in the future.
52
Considering 'time value of money', what does PV mean?
Present value (PV) is what the money is worth right now.
53
Considering 'time value of money', what does FV mean?
Future value (FV) is what the money today is worth after the time period.
54
Considering 'time value of money', what does 't' mean?
the time period
55
Considering 'time value of money', what does 'r' mean?
the interest rate. Can also be 'i'
56
Compound interest equation
FV = PV x (1 + interest rate) to the power of time
57
What is the variable used for the number of periods?
The number of periods can be represented as either t or n.
The amount of time between the present and future is called the number of periods. A period is a general block of time. Usually, a period is 1 year.
58
The amount of time between the present and future is called the number of periods. A period is a general block of time. Usually, a period is 1 year.
What is the variable used for the number of periods?
The number of periods can be represented as either t or n.
59
Calculations for time value of money, what are the variables used for the interest rate?
i or r
60
Simple interest
With simple interest, you earn interest only on the amount you originally invested, or the principal.
Your total balance will go up each period, because you earn interest each period, but the interest is paid only on the amount you originally borrowed/deposited.
61
What is the formula for simple interest?
FV = PV x (1 + rate * time)
62
The difference between simple and compound interest
Ask yourself if you are earning interest on just the principal (simple interest) or the balance of the account including previously accrued interest (compound interest)
63
A discount rate is kind of like a(n) ________ rate in reverse
interest
64
Ordinary Annuity
An investment with fixed payments that occur at regular intervals, paid at the end of each period.
64
Annuity Due
An investment with fixed payments that occur at regular intervals, paid at the BEGINNING of each period.
65
What is the difference between APR and APY?
APY includes accrued compounding interest when calculating yield, whereas APR does not.
66
inverted yield curve
the interest rates for long-term investments are lower than those for short-term investments
67
flat yield curve
interest rates were projected to be the same for the short term and long term
68
normal yield curve
interest rates rising through longer terms
69
federal funds rate
the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed.
70
Expansionary monetary policy
Traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding.
An expansionary policy increases the total supply of money in the economy more rapidly than usual.
71
Contractionary monetary policy
intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values.
Contractionary policy increases interest rate levels by slowing the rate that the money supply expands or even shrinking it.
72
Crowding out
Crowding out- when expansionary fiscal policy unintentionally causes interest rates to rise, thereby reducing investment spending. That means an increase in government spending crowds out investment spending.
73
Term structure
how a given quantity or variable changes with time.
EX: Term structure of interest rates is often referred to as a yield curve
74
The true value of a bond can be calculated from ______
... the net present value of all the expected cash flows.
75
A bond is said to be selling at par when...
...the coupon rate equals the yield to maturity.
76
When the coupon rate is greater than the yield to maturity, a bond is said to be selling at a ______.
premium
Coupon Rate > Yield
It’s selling at a premium because its interest rate is higher than the other internet rates being offered.
77
Expected Return
Multiply the probability of a given event by the estimated return of that event.
Then add the results for all events.
78
What is variance?
In probability theory and statistics, the variance is a measure of how far a set of numbers is spread out.
79
What is variance?
In probability theory and statistics, the variance is a measure of how far a set of numbers is spread out.
80
Standard Deviation
even though we can expect an average of 9.25% return on our stock over the course of 50 years, if we take any given year out and look at its performance, it is likely to be somewhere within 13.81% above or below that figure.
81
Which kind of yield curve suggests the beginning of a recession?
Inverted
82
reinvestment risk and interest rate risk are _______ related.
inversely
An investor can moderate one or the other, but they cannot eliminate both
83
Expected value, or
expected return formula
the probability that something will happen
x
the resulting outcome if it happens
84
variance
(in probability theory and statistics)
a measure of how far a set of numbers is spread out.
It is one of several descriptors of a probability distribution, describing how far the numbers lie from the mean (expected value).
85
Standard deviation
looks at how far individual points in a dataset are dispersed from the mean of that set.
If your average return was 9.25% and the standard deviation were 13.81%, then if we take any given year out and look at its performance, it is likely to be somewhere within 13.81% above or below that figure.
86
General steps for calculating standard deviation
1) Subtract the expected return from each actual stock return to find all the deviations
2) Square each deviation
3) Multiply each squared deviation by the probability
4) Add the results. This will be the total variance
5) Find the square root of the variance. This will be the standard deviation
87
Systemic risk
the risk that the markets will experience in a downturn, and all investments within that market will be negatively affected.
It is difficult to reduce with diversification.
88
Specific risk
The risk associated with one individual security.
It can be diversified away.
89
Asset allocation theory
The theory that any portfolio should have a set of target weights for different asset classes based on time frame and risk tolerance
90
What is Beta?
Beta is a measure of comparison to the market.
91
Capital Asset Pricing Model (CAPM)
An equation that assesses the required rate of return on a given investment.
It’s based upon its risk relative to a theoretical risk-free asset.
92
Private Placement
A funding round of securities that are sold through a private offering, mostly to a small number of chosen investors.
93
At its simplest, the Weighted Average Cost of Capital is...
...the combination of interest rates being incurred from both debt and equity.
It ultimately determines the profitability required to break even.
94
required rate of return
the threshold that must be met for a specific level of risk
95
What’s the difference between an operating lease and a capital lease?
An operating lease has a much shorter term compared to a capital lease.
Also, once a capital lease ends, companies may have the option to buy the equipment they’re leasing.
96
Bid-ask spread
All those who want to sell the stock state the price at which they are willing to sell a certain number of shares, also known as the ask price.
All those who want to buy state the maximum price they’re willing to pay for a certain number of shares, or the bid.
The difference between the highest bid and the lowest ask price is called the bid–ask spread.
97
Does outperforming earnings projections necessarily mean an increase in that stock's price?
No.
The market's reaction will depend on:
the reasons behind the higher profits (e.g., one-time events vs. sustainable growth)
and whether analysts believe these profits indicate a positive trend.
98
What’s another name for EBIT?
Operating profit
99
Required rate of return
AKA hurdle rate
the minimum acceptable compensation for the investment's level of risk
Its a key concept in corporate finance and equity valuation.
100
What is CAGR?
Compound Annual Growth Rate
The average rate of growth of an investment over an annual time period, assuming that all returns on the investment are reinvested.
