Test 1 Notes

Question 1

study of the funding of a firm’s operating assets.

Answer 1

Finance

Question 2

Cash flows from operations are positive

Answer 2

Cash Flow Positive

Question 3

responsible for the right side of the balance sheet and for financial reporting and decision making in a corporation. Make sure the firm has adequate funding for its operations, make sure the firm meets all financial reporting requirements and prepare a firm’s financial plan.

Answer 3

Chief Financial Officer (CFO)

Question 4

responsible for the left side of a firm’s balance sheet.

Answer 4

Chief Operating Officer (COO)

Question 5

where suppliers and demanders of capital interact to promote capital formation. Where corporate finance and investments come together.

Answer 5

Capital Markets

Question 6

the speed, volume, and accuracy of information flows into the capital markets and the influence of information on prices of financial instruments traded in the capital markets. A financial market is said to be more efficient if market prices reflect all currently available information and if market prices react to new information very fast.

Answer 6

Market Efficiency

Question 7

providing enough information about a company to provide decision makers doing their due diligence with information to make a decision.

Answer 7

Disclosure

Question 8

ability of the reader to clearly figure out how the company is doing.

Answer 8

Transparent

Question 9

inefficiencies in financial market prices result in one group of people having knowledge that others do not have.

Answer 9

Asymmetric Information

Question 10

market value of the firm’s equity. Price per share of stock times the number of common shares outstanding.

Answer 10

Market Capitalization

Question 11

refers to a firm being a good citizen within the community where the citizen does the things that will not put the firm at risk of going out of business.

Answer 11

Corporate Sustainability

Question 12

the interest of both parties is best served by designing a loan structure that matches the expected cash inflows of a firm to the maturity date of the loan.

Answer 12

Maturity Matching Principle

Question 13

term used to indicate that real property is committed by a borrower to back a loan.

Answer 13

Collateral

Question 14

the higher the risk the higher the expected return. The lower the risk, the lower the expected return.

Answer 14

Principal of Risk and Return

Question 15

Assets - Debts

Answer 15

Net Worth

Question 16

the value today of the future expected cash flows. The most you will be willing to pay today for a future cash flow or series of cash flows given a certain rate of required return.

Answer 16

Discounted Value or Present Value

Question 17

a compound rate of return that is taken out of the series of cash flows you construct each compounding period you select.

Answer 17

Discount Rate

Question 18

the amount you expect to accumulate or an amount you might be required to repay in the future.

Answer 18

Future Values

Question 19

series of equal cash flows that are expected to be received at regular time intervals.

Answer 19

Annuity

Question 20

one single cash flow

Answer 20

Lump Sum

Question 21

to structure a loan such that one makes an equal stream of payments at the same time each period where the amount owed falls to zero immediately after the last payment.

Answer 21

Amortize

Question 22

the values of stocks and bonds you see on the stock exchanges.

Answer 22

Market Valuations

Question 23

interest rates rising after purchase of bonds.

Answer 23

Interest Rate Risk

Question 24

the possibility that a firm’s credit rating will decline because of deterioration in a firm’s financial health.

Answer 24

Credit Risk

Question 25

a cash flow that lasts forever

Answer 25

Perpetuity

Question 26

selling stock for a higher price than the purchase price.

Answer 26

Capital Gain

Question 27

the relative percentages of debt and equity a firm uses to find its operations.

Answer 27

Capital Structure

Question 28

the use of debt in a firm's funding structure

Answer 28

Financial Leverage

Question 29

the use of fixed assets in a firm’s operating structure.

Answer 29

Operating Leverage

Question 30

a number assigned to you that reflects your credit standing.

Answer 30

Credit Rating

Question 31

the percentage of total funding supplied by creditors and the lower this ratio the better for a firm’s financial health.

Answer 31

Debt to Asset Ratio

Question 32

where your credit rating is reported

Answer 32

Credit Report

Question 33

the ability of a firm to meet its interest and principal payments on debt.

Answer 33

Debt Service

Question 34

measured by fluctuations in a firm’s earnings per share (EPS) in relation to changes in operating profits (EBIT).

Answer 34

Financial Risk

Question 35

Results when a firm will not be able to meet its debt service requirements.

Answer 35

Financial Distress

Question 36

refers to the ability of a company to meet its principal and interest payments on a timely basis.

Answer 36

Debt Service

Question 37

relates to a firm’s operating activity and environment. Factors such as a firm’s competitive or leadership position, fixed-variable production cost mix, use of technology, marketing strategy and tactics, and regulatory environment influence this.

Answer 37

Business Risk

Question 38

shows up in the Shareholder’s Equity Section of a Balance Sheet. When a firm incorporates at the Secretary of State’s office the founding directors must indicate a number of shares of common stock to authorize.

Answer 38

Shares Authorized

Question 39

number of shares issued in the IPO represents _____ in the Shareholder’s Equity Section of a Balance Sheet.

Answer 39

Shares Issued

Question 40

the number of shares of common stock that are in the hands of shareholders (and not the company). Leaves room to issue additional shares if the firm needs additional equity funding (which newly organized firms might need).

Answer 40

Shares Outstanding

Question 41

represents funds a company earns from operating that have not been paid out to the common or preferred stockholders.

Answer 41

Retained Earnings

Question 42

cash flow that some firms pay to equity investors

Answer 42

Dividends

Question 43

debt issued by a financial institution or debt acquired in the financial markets

Answer 43

Funded Debt

Question 44

a fixed interest rate a firm pays on its long-term debt

Answer 44

Coupon Rate

Question 45

when a business cannot pay its short-term creditors

Answer 45

Financial Distress

Question 46

when a firm with a long-term credit commitment with a financial institution stops paying that financial institution

Answer 46

Default

Question 47

shows the relationship between interest rates on debt instruments and the Time to Maturity of the debt.

Answer 47

Yield Curve

Question 47

the difference in paying a lower interest rate on deposits than the rate on loans

Answer 47

Spread

Question 48

Low Unemployment and Low Inflation

Answer 48

Fed Dual Mandate

Question 49

a signal that an economic downturn will occur in the future. Hint: type of yield curve.

Answer 49

Inverted Yield Curve

Question 50

help to bring suppliers and demanders of capital together. Are involved with underwriting, distributing, and advising on security placements.

Answer 50

Investment Bankers

Question 51

regulates new issues of securities and requires registration of all securities unless an exemption is made.

Answer 51

Securities Act of 1933

Question 52

established the SEC and regulates secondary issues of securities and the securities markets. Provides for regulation of insider trading. Provides for regulation of securities manipulation.

Answer 52

Securities Act of 1934

Question 53

Number of Shares of Stock Outstanding X Market Price Per Share = Represents the value the market places on the firm's Total Shareholder's Equity.

Answer 53

Market Capitalization

Question 54

AKA Book Value. Total Assets - Total Debt = _________

Answer 54

Total Shareholder's Equity

Question 55

holding different types of securities. Depends on things like your age, risk aversion, and life expectancy.

Answer 55

Asset Allocation

Question 56

holding different securities within a class of securities.

Answer 56

Diversification

Question 57

Net Income + Depreciation - Incremental Working Capital - Incremental Capital Investment

Answer 57

Free Cash Flow

Question 58

Net Income Available for Shareholders / Number of Common Shares Outstanding

Answer 58

Earnings Per Share (EPS)