Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
28 Cards in this Set
- Front
- Back
|
3 Fundamental Decisions financial management teams are concerned with? |
1. Capital budgeting decisions 2. Financing decisions 3. Working capital decisions |
|
|
How does Capital Budgeting affect the balance sheet? |
It addresses the question of which assets to buy; thus, it affects the asset side of the balance sheet |
|
|
How do Financing Decisions affect the balance sheet? |
They focus on raising the money the firm needs to buy productive assets. This is typically accomplished by selling long-term debt and equity |
|
|
How does Working Capital Decisions affect the balance sheet? |
They involve how firms manage their current assets and liabilities. The focus here is seeing that a firm has enough money to pay its bills and that any spare money is invested to earn a return |
|
|
Why is profit maximization not the best goal for a company? |
1. Profit can be defined a number of different ways, and variations in net income for similar firms can vary widely. 2. Accounting profits do not exactly equal cash flows. 3. Profit maximization does not account for timing and ignores risk associated with cash flows. |
|
|
What is an appropriate goal for a company? |
To maximize the value of the firm's current stock price |
|
|
What are the two basic sources of funds for all businesses? |
Debt and Equity |
|
|
What is a general decision rule for a firm considering undertaking a project? Give a real life example. |
A firm should undertake a capital project only if the value of its future cash flows exceeds the cost of the project. Ex. would be JWU decides to purchase land and build new academic buildings. |
|
|
What is the role of the financial system? |
To gather money from businesses and individuals and to channel funds to those who need them |
|
|
What are the two major components of the financial system? |
The financial system consists of financial markets and financial institutions |
|
|
What is the main difference between money markets and capital markets? |
Money markets are where short-term debt instruments w/ maturities < 1 year are bought and sold. Capital markets are where equity securities and debt instruments w/ maturities > 1 year are sold. |
|
|
How do large corporations adjust their liquidity in the money markets? |
1. By selling or buying short-term financial instruments such as commercial paper, CDs, or T-Bills. 2. Those w/ cash surplus can invest in short-term securities. 3. Those w/ cash shortfall can sell securities or borrow funds on a short-term basis. |
|
|
What is the real rate of interest, and how is it determined? |
It measures the return earned on savings, and it represents the cost of borrowing to finance capital goods.
Determined by the interaction between firms that invest in capital projects and the rate of return businesses can expect to earn on investments in capital goods, and individuals' time preference for consumption. |
|
|
How does the nominal rate of interest vary over time? |
It is the rate that we observe in the marketplace. It is determined by both the real rate as well as expected inflation. So, it will fluctuate according to the changes in the real rate as well as changes in expected inflation. |
|
|
Define book-value accounting and market-value accounting. |
BV implies that all assets and liabilities are recorded and reported at the historical cost when they were acquired. MV requires that all assets and liabilities are reported at their current market value. |
|
|
What is the statement of cash flows and what is its role? |
Record both the cash inflows and outflows for a period of time. It reports the changes in the cash position of a firm between successive accounting periods. |
|
|
Why is too much liquidity not a good thing? |
1. A firm is not putting its money to work as the shareholders would want to. 2. The manages are being too conservative and investing in low-yield assets. 3. Does not have enough investment opportunities and hanging onto its cash. 4. Can make it a takeover target for firms looking to utilize the debt capacity of the liquid firm |
|
|
What does a very high inventory turnover ratio signify? |
1. Firm is using up its inventory too fast and is unable to meet the demand for its products 2. Has priced its products too low relative to its competitors 3. Selling defective products that would eventually be returned |
|
|
How would one explain a low receivables turnover ratio? |
Implies a high Days Sales Outstanding The firms customers are not paying on time, either because of an inefficient collection system or because of a slowdown in their customers' business or even in the entire economy |
|
|
"A dollar today is worth more than a dollar tomorrow" |
If one was to receive a dollar today instead of in the future, the dollar could be invested and will be worth more than a dollar tomorrow because of the interest earned during that one day |
|
|
Explain the importance of a time-line |
Time lines are important tools used to analyze investments that involve cash flow streams over a period of time. They are horizontal lines that start at time zero (today) and show cash flows as they occur over time. |
|
|
Two factors to be considered in the time value of money |
The size and timing of the cash flows |
|
|
Differentiate future value from present value |
FV measures what one or more cash flows are worth at the end of a specified period. PV measures what one or more cash flows that are to be received in the future will be worth today |
|
|
What is the Rule of 72? |
A rule of thumb that allows you to closely approximate the time that it would take to double your money. Works well w/ interest rates 5-20%, but varies more w/ higher rates |
|
|
Difference between a perpetuity and an annuity |
A cash flow stream that consists of the same amount being received or paid on a periodic basis is called an annuity. If the same payments are made periodically forever, the contract is called a perpetuity. |
|
|
Why is the cost of capital referred to as the "hurdle" rate in capital budgeting |
It is the minimum required return on any new investment that allows a firm to break even. Since we are using the cost of capital as a benchmark ("hurdle") to compare the return earned by any project, it is referred as such |
|
|
What is "capital rationing", in the context of capital budgeting |
It implies that a firm does not have the resources necessary to fund all of the available projects. Projects that create the largest increase in the shareholder wealth will be accepted until all the available resources have been allocated |
|
|
Provide two conditions under which a set of projects might be characterized as mutually exclusive |
Acceptance of one project precludes the acceptance of others. Typically, ME projects perform the same function and so only one of them needs to be accepted. A funding resource constraint can also cause projects to be ME |
