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91 Cards in this Set
- Front
- Back
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What long-term investments should the firm undertake?
This is generally referred as... |
Capital Budgeting
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How should the firm raise money to fund these investments?
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Capital Structure
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How can the firm best manage its cash flows as they arise in day-to-day operations?
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Working Capital Management
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Institutions that facilitate financial transactions.
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Financial Markets
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Sole Proprietor
Answer the following: 1. Number of owners. 2. Are owners liable for the firm's debts? 3. Do owners manage the firms? 4. Does an ownership change dissolve the firm? 5. Access to capital. 6. Taxation. |
1. One
2. Yes 3. Yes 4. Yes 5. Very limited 6. Personal taxes. |
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Partnership
Answer the following: 1. Number of owners. 2. Are owners liable for the firm's debts? 3. Do owners manage the firms? 4. Does an ownership change dissolve the firm? 5. Access to capital. 6. Taxation. |
1. Unlimited
2. Yes; each partner has unlimited liability. 3. Yes 4. Yes 5. Very limited 6. Personal taxes |
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Limited Partnership (with General Partners (GPs) and Limited Partners (LPs)
Answer the following: 1. Number of owners. 2. Are owners liable for the firm's debts? 3. Do owners manage the firms? 4. Does an ownership change dissolve the firm? 5. Access to capital. 6. Taxation. |
1. At least one GP, but no limit on LPs
2. GPs - Unlimited Liability LPs - Limited Liabilities 3. GPs - Manage the firms LPs No role in management 4. GPs - Yes LPs - No can change 5. Limited 6. Personal Taxes |
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What is equity? What form of business has an important advantage of having this?
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Ownership
- Partnership |
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Units of ownership.
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Shares
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In a partnership, this person actually runs the business and faces unlimited liability for the firm's debts.
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General Partner
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In a partnership, this person is only liable up to the amount he or she invested.
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Limited Partner
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What form of business is created if very large sums of money are needed to build it?
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Corporation
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Owners of corporations.
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Shareholders or Stockholders
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What are three advantages to having separate legal status in a corporation?
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1. The owners liability is confined to the amount of their investment in the company.
2. The life of the business is not tied to the status of the investors. 3. The ease of raising capital. |
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One of the drawbacks of the corporate form is the double taxation of earnings that are paid out in what form?
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Dividends
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A cross between a partnership and a corporation.
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Limited Liability Company (LLC)
- No double taxation on earnings and the owners liability is limited to what they invested. |
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How does finance function fit in a firm's organizational chart?
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1st Tier: Board of Directors
2nd Tier: CEO 3rd Tier: VP (Marketing), CFO, VP (Productions and Operations) 4th Tier: Treasurer, Controller |
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How is maximizing shareholder wealth achieved in a company?
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Maximizing shareholder wealth
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The conflict of interest between the stockholders and the managers of a firm.
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Agency Problem
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Choosing to receive $1000 today instead of in a year and not receiving interest on the money could be identified as what?
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Opportunity Cost
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What determines an investment's value?
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Cash Flows
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You would work for only one company, and the company would reward your loyalty and hard work would pay you a pension based on the years of employment and the level of pay you earned.
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Defined Benefit Plan
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The employee and the employer make periodic cash contributions to your retirement fund (401 K) that you must take responsibility for investing
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Defined Contribution Plan
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Those who need money to finance their purchases.
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Borrowers
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Those who have money to invest.
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Savers (Investors)
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Brings borrowers and savers together.
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Financial Institutions (Intermediaries)
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A financial institution that accepts deposits and makes loans, such as Bank of America or Citibank.
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Commercial Bank
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Institutions that help bring together individuals and businesses. These institutions stand between those who have money to invest and those who need money.
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Financial Intermediaries
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Markets for short-term debt instruments, with "short-term" meaning maturities of one year or less.
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Money Markets
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Markets for long-term financial instruments, with "long-term" meaning maturities of more than one year.
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Capital Markets
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Selling guarantees to lenders that reimburse them should the loans they made go into default.
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Credit Default Swap
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Specialized financial intermediaries which help companies and governments raise money and provide advisory services to client firms when they enter into major transactions such as buying or merging with other firms.
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Investment Banks
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Financial institutions that pool the savings of individual savers and invest the money, purely for investment purposes, in the securities issued by other companies.
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Investment Companies
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A special type of intermediary through which individuals can invest in virtually all of the securities in the financial markets.
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Mutual Funds
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The price that you pay when you buy your shares and the price you receive when you sell your shares.
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Net Asset Value (NAV)
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A mutual fund that is sold through a broker, a financial advisor, or a financial planner who earns a commission in the form of the load fee when he or she sells shares of a mutual fund
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Load Fund
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A mutual fund that does not charge a commission.
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No-Load Fund
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Very much like a mutual fund except for the fact that the ownership shares in the ETF can be bought and sold on stock exchanges.
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Exchange-Traded Funds (ETF)
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Very much like a mutual fund, but are less regulated and tend to take more risk.
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Hedge Fund
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An individual with a net worth that exceeds $1 million who can also invest in a hedge fund.
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Accredited Investor
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A financial intermediary that invests in equities that are not traded on the public capital market.
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Private Equity Firm
- Venture Capital Firms (VC) - Leveraged Buyout Firms (LBO) |
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Raise money from investors (wealthy people and other financial institutions) which they then use to provide financing for private start-up companies and when they are first founded.
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Venture Capital Firms
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These funds acquire established firms that typically have not been performing very well with the objective of making them profitable again and then selling them.
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Leveraged Buyout Firms
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A negotiable instrument that represents a financial claim. It can take the form of ownership (stocks) or a debt agreement.
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Security
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A market in which new, as opposed to previously issued, securities are bought and sold for the first time.
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Primary Market
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Where all subsequent trading or previously issued securities take place. In this market, the issuing firm does not receive any new financing, as the securities it has sold are simply being transferred from one investor to another.
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Secondary Market
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What are the four steps to raising money in the securities market?
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1. The firm sells securities to the investors.
2. The firm invests the funds it raises in its business. 3. The firm distributes the cash earned from its investments. 4. Securities trading in the secondary market. |
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Type of security used when firms borrow money in the debt market.
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Debt Security
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The length of time until the debt is due.
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Maturity
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When the debt has a maturity between one and ten years.
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Note
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When the debt has a maturity of longer than 10 years and it is sold in the capital market.
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Bond
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Represents ownership of the corporation.
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Equity Securities
- Common Stock - Preferred Stock |
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A security that represents equity ownership in a corporation, provides voting rights, and entitles the holder to a share of the company's success in the form of dividends and any capital appreciation in the value of the security.
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Common Stock
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A security where shareholders receive their dividends before any dividends are distributed to the common stockholder, who receive their dividends from whatever is left over.
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Preferred Stock
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What three ways are preferred stock similar to common stock?
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1. It has no fixed maturity date.
2. The nonpayments of dividends do not bring on bankruptcy for the firm. 3. Dividends paid on these securities are not deductible for tax purposes. |
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A public market in which the stock of companies is traded.
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Stock Market
- Organized Securities Exchanges - Over-the-Counter Markets |
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Tangible entities; that is, they physically occupy space (building) and financial instruments are traded on their premise.
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Organized Security Exchanges
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Include all securities markets except the organized exchanges.
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Over-the-Counter Markets
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Includes the revenue the firm has earned over a specific period of time, usually a quarter of a year or a full year; the expenses it has incurred during the year to earn its revenues; and the profit the firm has earned.
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Income Statement
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Contains information as of the date of its preparations about the firm's assets, liabilities, and shareholders equity.
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Balance Sheet
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Reports cash received and cash spent by the firm over a specified period of time, usually one quarter of the year or a full year.
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Cash Flow Statement
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Provides a detailed account of the firm's activities in the common and preferred stock accounts, the retained earnings account, and changes to owners' equity that do not appear in the income statement.
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Statement of Shareholders' Equity
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To assess the financial conditions of the firm being analyzed.
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Financial Statement Analysis
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Also called a profit and loss statement. Measures the amount of profits generated by a firm over a given period of time.
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Income Statement
Revenues(expenses)-Sales=Profit |
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What is the order of items in an income statement? (9)
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1. Sales
2. Cost of Goods Sold 3. Gross Profit 4. Operating Expenses 5. Net Operating Income 6. Interest Expense 7. Earnings Before Taxes 8. Income Taxes 9. Net Income |
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A non-cash expense used to allocate the cost of the firm's long-lived assets (like its plants and equipment ) over the useful lives of the assets.
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Depreciation Expense
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Shows us the firm's ability to earn profits from its ongoing operations - before it makes interest payments and pays taxes.
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Net Operating Income
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How do you calculate earnings per share?
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Companies net incomes/outstanding common shares
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How do you calculate the dividends per share?
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Total dividends/Shares Outstanding
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How do you calculate gross profit margin?
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Gross Profit/Cost of Goods Sold=%
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How do you calculate the operating profit margin?
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Net Operating Income/Sales=%
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How do you calculate the net profit margin?
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Net Profit/Sales=%
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Often referred to in its earnings before taxes.
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Taxable Income
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The tax rate that the company will pay on its next dollar of taxable income.
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Marginal Tax Rate
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A snapshot of the firm's financial position on a specific date.
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Balance Sheet
Total Assets=Total Liabilities+Total Shareholders' Equity |
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Difference in the firm's total assets and the firm's total liabilities recorded it the firm's balance sheet.
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Total Shareholders' Equity
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What is the sum of the total shareholders' equity and total liabilities equal to?
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Total Assets
Resources owned by the firm. |
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The price that an asset would sell for in a competitive market.
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Market Price
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On a balance sheet, what is equal to the historical cost incurred when the assets were purchased less the depreciation accumulated on them?
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Net Plant Equipment
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Consist of the firm's cash plus other assets the firm expects to convert in 12 months or less.
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Current Assets
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Assets that the firm does not expect to sell within 12 months.
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Fixed Assets
- Plant and equipment, land, and other investments. |
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What the firm owes to creditors that must be repaid within a period of 12 months or less.
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Current Liabilities
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What the firm owes its suppliers for items purchased for it inventories.
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Account Payable
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Used to address a very basic question on the firm's financial health: how liquid is the firm?
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Liquidity Ratios
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What is the most commonly used measure of a firm's liquidity and how do you calculate it?
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Current Ratio = Current Assets/Current Liabilites
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How do you calculate the acid-test ratio?
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Acid (Quick Test) = Current Assets - Inventory/Current Liabilities
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Shorter inventory cycles lead to greater liquidity. This can be measured by using what?
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Inventory Turnover = Cost of Goods Sold / Inventory
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The number of days the inventory sits unsold on the firm's shelves.
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Days' Sales in Inventory
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A measure of the proportion of the firm's assets that were financed by borrowing or debt financing.
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Debt Ratio
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The firm's operating earnings divided by interest expense.
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Times Interest Earned Ratio
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The amount of sales generated per dollar invested in the firm's assets.
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Total Asset Turnover (TATO)
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