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66 Cards in this Set

  • Front
  • Back
capital budgeting
the process of planning and managing a firm's long-term investments
capital structure (financial structure)
the mixture of long-term debt and equity maintained by a firm
working capital
a firm's short term assets and liabilitieis
sole proprietorship
business owned by a single individual, least regulated, owner keeps all profits, unlimited liability for debts
business formed by two or more individuals
business created as a distinct legal entity owned by one or more individuals or entities, double taxation
limited liability company, be taxed like partnership but retain limited liability for owners
Sarbanes-Oxley Act
to strengthen protection against corporate accounting fraud and financial malpractice, tell truth in financial statements
agency problem
the possibility of conflict of interest between the owners and management
agency relationship
relationship between stockholders and management
someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm
primary market
the original sale of securities by governments and corporations
secondary market
the securities are bought and sold after the original sale
balance sheet
snapshot of firm
stockholders equity
assets - liabilities
balance sheet identity
assets = liabilities + shareholders' equity
net working capital (operating capital)
current assets - current liabilities
the fact that assets with finite lives lose value over time
net operating profit after tax (NOPAT)
a company's after-tax operating profit for all investors
the speed and ease with which an asset can be converted to cash
financial leverage
the use of debt in a firm's capital structure; the more debt, the higher the leverage
market value
true value of any asset; the amount of cash we would get if we actually sold it
book value
values shown on the balance sheet for the firm's assets; generally not what the assets are actually worth
the common set of standards and procedures by which audited financial statements are prepared
income statement
video recording of a firm
income statement equation
income = revenues - expenses
recognition principle
revenue is recognized at the time of sale (may not be the same time as collection)
matching principle
determine revenues and then match those revenues with the costs associated with producing them
noncash items
expenses charged against revenues that do not directly affect cash flow
corporate tax rates
average tax rate
the percentage of your income that goes to pay taxes; always less than marginal
marginal tax rate
the extra tax you would pay if you earned one more dollar
state and local government bonds which are generally exempt from fed. taxes
cash flow identity
cash flow = cash flow to creditors + cash flow to stockholders
cash flow from assets (free cash flow)
the total of cash flow to creditors and cash flow to stockholders
market value added (MVA)
difference between the current market value of a firm and the capital contributed by investors
economic value added (EVA)
the value of an activity that is left over after subtracting from it the cost of executing that activity and the cost of having lost the opportunity of investing consumed resources in an alternate activity
operating cash flow
cash generated from a firm's normal business activities of producing and selling; revenues - costs
capital spending
purchases of fixed assets - fales of fixed assets
cash flow to creditors
a firm's interest payments to creditors - net new borrowing
cash flow to stockholders
dividends paid out by a firm - net new equity raised
corporate governance
the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled
market cap(italization)
a measurement of corporate size; one of the critical measurements of a public company's success or failure
common-size statement
a standardized financial statement presenting all items in percentage terms
short-term solvency (liquidity) ratios
firm's ability to pay bills over the short run w/o undue stress

long-term solvency (financial leverage) ratio
firm's long run ability to meet its obligations

-total debt ratio
-debt-equity ratio
-equity multiplier
-times interest earned ratio (TIE)
-cash coverage ratio
asset utilization (turnover) ratio
firms efficiency of using assets to generate sales

-inventory turnover
-receivables turnover
-total asset turnover
-capital intensity
profitability ratio
firms efficiency in using assets and managing operations

-profit margin
-Du Pont identity
market value ratio
-price earnings (PE) ratio
-market-to-book value ratio
Du Pont identity
profit margin (operating efficiency) x total asset turnover (asset use efficiency) x equity multiplier (financial leverage)
it's a convenient way of systematically approaching financial statement analysis; it will tell you where to start looking for the reasons ROE is unsatisfactory
retention ratio
the portion of net income that is plowed back into the business
internal financing
what the firm earns and plows back into the business
external financing
funds raised by either borrowing money or selling stock
internal growth rate
how rapidly a firm can grow with just internal financing
sustainable growth rate
maximum growth rate that can be achieved
process of leaving money and accumulated interest in an investment for more than one period, reinvesting interest
compound interest
interest earned on both the initial principal and the interest reinvested from prior periods
interest on interest
interest earned on the reinvestment of previous ineterest payments
simple interest
the interest is NOT reinvested, interest is earned each period only on one principal
a level stream of cash flows for a fixed period of time
annuity due
an annuity for which the payments are occur at the BEGINNING of the period
ordinary annuity
an annuity for which the payments occur at the END of the period
perpetuity (consol)
an annuity in which the cash flows continue forever
effective annual rate (EAR)
the interest rate expressed as if it were compounded once per year; use if you want to compare two alternative investments with different compounding periods
annual percentage rate (APR)
the interest rate charged per period (period rate) multiplied by the number of periods per year
period rate
APR/# periods per year