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Flashcards in The Business-Finance Environment Deck (38):
1

What are the 3 forms of businesses?

Sole Proprietorship - owned/managed by one person
Partnership - 2 or more owner
Limited corporation -
- Distinct legal entity composed by one or more individuals
- In large corporations shareholders and managers are often separate

2

What are the differences of single-tier board countries and two-tier board countries?

In single-tier board countries (UK/US) the shareholders elect a board of directors who then select managers.

In two-tier board countries (Germany) the executive board managers to day-to-day operations for the company and report back to supervisory board who monitor their performance.

3

What are the advantages of a limited corporation?

Limited liability
unlimited life
separation of ownership & management
transfer of ownership is easy
easy to raise capital

4

What are the disadvantages of a limited corporation?

separation of ownership & management
double taxation - income taxed at corporate rate and dividends taxed at personal rate

5

Where can firms get LT financing to invest?

Bring in owners (Issue equity/stocks)
Borrow (Issue debt/bonds)

6

What LT investment should be undertaken?

Buildings
Machinery
Equipment
R&D

7

What is a financing decision?

Revolve around to how to pay for investment & expenses
and aim to maximise shareholder value

8

What is a capital budgeting decision?

Planning processes determining whether LT investment is worthwile

9

What is the agency relationship?

Principal hires an agent to represent their interest - stockholders (principals) hire managers (agents) to run company

10

What is the agency problem?

managers have different aims/motivations that shareholders and therefore may act in their own interest

11

What is the agency cost?

The value lost from the agency problem/the cost of mitigating the agency problem

12

What are the mechanisms that alleviate the agency problem?

Managerial compensation
Threat of takeovers
corporate governance - laws, regs, corporate practises that protect shareholders and investors

13

What are assets?

Assets=liabilities+shareholder - item/property owned by a person or company regarding as having value

14

What is the difference between current & non-current assets?

Current assets are expected to be converted into cash within one year and usually include cash, accounts receivable & inventory
Non-current assets are LT assets that a company expects to hold over one year that cannot be readily converted into cash within one year.

15

What is the difference between market value & book value?

Book value is calculated from the balance sheet, its the difference between the companies total assets & total liabilities
Market value is the value of the company according to the stock market
(for current assets, market value & book value may be somewhat similar).

16

What is the Income Statement?

The IS is a financial statement summarising a firms performance over a given period

17

Define Cash flows

A cash flow is the difference between cash that came in and cash that came out from the balance sheet identity..
Cash flows from assets=cash flows to creditors+equity investors.

18

Define ratio analysis

Ratio analysis' help us to understand how healthy a company is & how well it's performing.

19

What are solvency ratios? (ST)

They provide info about a firms liquidity

20

Define current ratio

Current assets/Current liabilities

21

Define quick ratio

(current assets-inventory)/current liabilities
A relatively large inventory is usually a sign of ST issues

22

What are solvency ratios? (LT)

The LT ability of firms to meet their obligations

23

Define total debt ratio

(total assets-total equity)/total assets

24

What are the two variations of debt ratio?

Debt-equity ratio=total debt/total equity
equity multiplier=total assets/total equity

25

What are asset/management utilisation ratios?

Intend to describe how efficiently a firm uses its assets to generate sales

26

Define inventory turnover

Cost of goods sold/inventory - the higher the inventory turnover, the more efficiently the firm is managing turnover

27

Define days' sales in inventory

365 days/inventory turnover

28

Define receivable turnover

Sales/trade receivables

29

Define days' sales in receivables

365 days/receivables turnover

30

Define total asset turnover

Sales/total assets

31

What are probability measures?

Intends to measure how efficiently a firm uses its assets and manages operations

32

Define profit margins

Net income/sales

33

Define return on assets (ROA)

Is a measure of profit per unit cash of assets -
net income/total assets

34

Define return on equity (ROE)

Is a measure of how shareholders fared over the year - net income/total equity

35

Define Earnings per share

Net income/shares outstanding

36

Define price earnings ratio

Price per share/earnings per share - P.E ratio measures how much investors are willing to pay per unit of current earnings.

37

Define market to book ratio

Market value per share/book value per share - a value of less than one means the firm is unsuccessful in creating value for shareholders.

38

Define liabilities

Contractual obligation to deliver cash (or similar) to another entity.