Flashcards in Test 1 Deck (35):
What is the goal of financial management?
To maximize stockholder wealth in the long run.
To achieve the goal goal of financial management, you must maximize?
What is the valuation of any company or asset based on?
The present value of the future cash flow stream.
What is the greatest disadvantage of a sole proprietorship.
Unlimited personal liability
What is the biggest advantage of a corporation?
Limited personal liability
What is the biggest disadvantage of a corporation?
What is the biggest advantage of a partnership?
More knowledge and expertise
What form of business accounts for 80% of all businesses today?
What business type brings in 80% of the sales $ volume?
What is social responsibility?
Businesses have a responsibility to their stockholders & stakeholders.
What is EVA?
Economic value added: increased value due to adding tangible assets such as a new product.
What is MVA?
Market value added: increase in value of stock due to addition of soft assets.
What are two examples of value drivers?
Walmart: low prices, convenience
What are free cash flows?
Money leftover after all expenses are paid.
Who determines the value of a firm?
The investing community
What is liquidity?
How fast you can turn something into cash at the fair market value.
The ending balance of the cash flow statement should...
Equal the end balance of the cash account
When using ratio analysis, what is being looked for?
What are the three primary comparisons used in ratio analysis?
Industry averages, trends, and benchmarking
Which four groups of people use ratio analysis?
Lenders, investors, management, and the IRS
Which four categories can ratios be divided into?
Liquidity, profitability, asset utilization, and debt
What is the difference between the current ratio and the quick ratio?
The quick ratio subtracts inventory
What does a profit margin of .15 represent?
For every dollar of sales, $0.15 is the profit.
Why would a creditor be interested in the current and quick ratios?
To get an idea of how soon they'll get paid.
Net working capital equals?
Current assets - Current liabilities
Why is the average collection/days sales outstanding ratio important?
To know how soon I (the biz) will get paid.
What effect does the DSO ratio have on the cash flow statement?
High DSO = less cash! Low DSO = more cash
What is ROA?
Return on Asset: how well you turn assets into income.
What is ROE?
Return on Equity: how well you turn equity into income.
Frosty the Snowman was made from what?
Why would investors be interested in ROA and ROE?
To see how upper management is doing and to decide whether to invest.
What is the DuPont analysis?
ROE; deals with different categories making it more well rounded
Which ratio represents how much investors are willing to pay to buy a dollar of earnings?
When looking at debt ratios, which two questions are frequently asked?
How much debt do you already have? How much do you make?