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38 Cards in this Set
- Front
- Back
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Capital budgeting
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Process of planning and managing a firm's long term investment capital
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Capital structure
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Mixture of debt and equity maintained by a firm
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Working capital management
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A firm's short term assets and liabilities
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Three major business forms
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Sole proprietorship
Partnership Corporation |
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Three major business forms
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Sole proprietorship
Partnership Corporation |
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Goal of a corporations
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Maximize current value of company's stock (most important)
Survival Maximize profit Minimize cost Maximize market share |
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Agency problem
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Principal= stockholders
Agent= manager Conflict of interest between principal and agent |
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Agency cost
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Ex: Hiring outside accountants to audit the company's financial statements
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How to control managers' behaviors
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1) managerial compensation: incentives can be used to align management and stockholders interests. Incentives need to be structured carefully to make sure that they achieve their goal.
2) corporate control: a threat of take over May result in better management |
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Financial market
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Primary
Secondary |
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Primary market
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Market in which securities are sold by a company (IPO)
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Secondary market
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The market were securities that have been issued are traded between investors.
Auction vs dealer market |
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Auction market
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Has a middle man matching buyers and sellers
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Dealer
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Has a set price
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Balance sheet identity
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Assets = liabilities + stockholders' equity
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Liquidity
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Ability to convert to cash quickly without a significant loss in value
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Sources of cash
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1) cash Inflow (happens when we sell or borrow something)
2) decrease in assets account (accounts receivables, inventory, net fixed assets) 3) increase in liability or equity account ( accounts payable, other current liabilities, issuing more shares) |
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Uses of cash
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1) cash outflow (buying or selling)
2) increase in asset account 3) decrease in liability or equity account |
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Sources and uses of cash balance sheet
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1) assets increase - use of cash
Assets decrease - source of cash 2) liability increase - source of cash Liability decrease - use of cash |
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Ratio analysis
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Financial ratios represent an attempt to standardized financial info in order to facilitate a meaningful comparison overtime and between firms.
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Ratio analysis
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Financial ratios represent an attempt to standardized financial info in order to facilitate a meaningful comparison overtime and between firms.
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Types of interests
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Simple vs compounding interest
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Simple interest
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Interest earned only on the original principal amount invested.
Interest = principal x rate (I/y) x time period Future value = principal + total interest |
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Compound interest
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Interest earned on both the initial principal and the interest reinvested from prior period.
FV =PV (1+ r)^ t |
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Discounting
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The process of finding the present value of some future amount
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Rule 72
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72/ interest rate = number of years
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Annuity
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Finite series of equal payments that occur at regular intervals.
Ordinary annuity vs annuity due |
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Interest only loan
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Borrowers pay interest each period and repays the entire principal at some time in the future
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Amortized loan
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Borrowers repay parts of loans amount overtime
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Ordinary annuity
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If the first payment occurs at the end of the period
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Annuity due
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If the first payment occurs at the beginning of the period
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Perpetuity
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Infinite series of equal payments.
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Calculating perpetuities
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PV = C/r
C=payment R= payment rate |
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Calculating period rate
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Period rate = APR / number of periods per years
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Effect annual rate (EAR)
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1) Actual rate paid (or received) after accounting for compounding that occurs during the year.
2) if you want to compare two alternative investments with different compounding periods you need to compute the EAR and use that for comparison. |
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Annual Percentage Rate (APR)
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Period rate times the number of periods per year
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Loan types
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Pure discount loan
Interest only loan Amortized loan |
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Pure discount loan
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Borrowers receives today and repays a single lump sum at some time in the future
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