Flashcards in The Business-Finance Environment Deck (38):
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
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.
What are the advantages of a limited corporation?
separation of ownership & management
transfer of ownership is easy
easy to raise capital
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
Where can firms get LT financing to invest?
Bring in owners (Issue equity/stocks)
Borrow (Issue debt/bonds)
What LT investment should be undertaken?
What is a financing decision?
Revolve around to how to pay for investment & expenses
and aim to maximise shareholder value
What is a capital budgeting decision?
Planning processes determining whether LT investment is worthwile
What is the agency relationship?
Principal hires an agent to represent their interest - stockholders (principals) hire managers (agents) to run company
What is the agency problem?
managers have different aims/motivations that shareholders and therefore may act in their own interest
What is the agency cost?
The value lost from the agency problem/the cost of mitigating the agency problem
What are the mechanisms that alleviate the agency problem?
Threat of takeovers
corporate governance - laws, regs, corporate practises that protect shareholders and investors
What are assets?
Assets=liabilities+shareholder - item/property owned by a person or company regarding as having value
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.
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).
What is the Income Statement?
The IS is a financial statement summarising a firms performance over a given period
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.
Define ratio analysis
Ratio analysis' help us to understand how healthy a company is & how well it's performing.
What are solvency ratios? (ST)
They provide info about a firms liquidity
Define current ratio
Current assets/Current liabilities
Define quick ratio
(current assets-inventory)/current liabilities
A relatively large inventory is usually a sign of ST issues
What are solvency ratios? (LT)
The LT ability of firms to meet their obligations
Define total debt ratio
(total assets-total equity)/total assets
What are the two variations of debt ratio?
Debt-equity ratio=total debt/total equity
equity multiplier=total assets/total equity
What are asset/management utilisation ratios?
Intend to describe how efficiently a firm uses its assets to generate sales
Define inventory turnover
Cost of goods sold/inventory - the higher the inventory turnover, the more efficiently the firm is managing turnover
Define days' sales in inventory
365 days/inventory turnover
Define receivable turnover
Define days' sales in receivables
365 days/receivables turnover
Define total asset turnover
What are probability measures?
Intends to measure how efficiently a firm uses its assets and manages operations
Define profit margins
Define return on assets (ROA)
Is a measure of profit per unit cash of assets -
net income/total assets
Define return on equity (ROE)
Is a measure of how shareholders fared over the year - net income/total equity
Define Earnings per share
Net income/shares outstanding
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.
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.