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50 Cards in this Set
- Front
- Back
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- Capital budgeting - Capital structure - Working capital management |
what are the three major financial management decisions? |
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- sole proprietorship -partnership -corporation -LLC/ S corportation |
Name the forms of business organizations |
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sole proprietorship |
-Business owned by one person-Advantages: easiest to start, least regulated, owner keeps all profits, taxed once as personal income-Disadvantages: limited life, limited capital, unlimited liability, hard to transfer ownership |
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partnership |
-Two or more persons as co-owner -General vs. Limited -Disadvantages: limited life; limited capital; unlimited liability; hard to transfer ownership |
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corporation |
-Legal “person” separate and distinct from its owners -Advantages: limited liability; unlimited life; easy to transfer ownership; access to capital -Disadvantages: double taxation; greater regulation; agency problem |
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LLC / S corporation |
-Limited liability -taxed as partnership |
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create wealth for shareholders by maximizing price of common stock |
what is the goal of financial management? |
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primary market |
-Market for new issuance -Initial public offering (IPO) vs. Seasoned equity offering (SEO) |
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secondary market |
-Market for the trading of existing securities -Dealer vs. Auction markets --Dealer markets: Over the counter markets (e.g., NASDAQ) --Auction markets: Organized exchanges (e.g., NYSE) |
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agency relationship |
-Principal hires an agent to represent his/her interests -Stockholders (principals) hire managers (agents) to run the company |
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agency problem |
conflicts between principal and agent leads to agency costs |
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capital budgeting |
long term investments |
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capital structure |
the long term financing to pay for the investment |
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working capital management |
how we manage everyday financial activities |
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- compensation for managers - corporate control |
what are the solutions to the agency problem? |
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Sarbanes-Oxley Act (SOX) |
-Hold senior corporate advisors responsible for misconduct -Attempt to protect investors -criticized for imposing additional compliance costs on the firms. Some firmshave chosen to “go dark” |
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balance sheet |
assets = liabilities + equity |
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liquidity |
ability to convert to cash quickly without a significant loss in value |
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less lower |
liquid firms are ________ likely to experience financial stress liquid assets typically have _________ return |
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current assets - current liabilities |
net working capital = |
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book value |
value provided by balance sheet |
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market value |
observed value for the asset in the market place |
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income statment |
net operating income = revenues - expenses |
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balance sheet = compute all accounts as a % of total assets income statement = compute all line items as a % of sales |
common sized balance sheet & income statement |
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marginal tax rate |
the percentage paid on the dollar earned |
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average tax rate |
taxes owed / taxable income |
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DuPont Identity |
allows us to decompose ROE into component parts |
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potential problems with ratio analysis |
-no underlying theory -differences inaccounting regulations -Some industries have specialized ratios that have no comparisons to any other industry -Varying accounting procedures -Different fiscal years |
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compounding |
the process of accumulating interest on an investment over time to earn more interest |
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discounting |
the process of finding present value of some future amount |
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ordinary annuity |
payments may occur at the end of each time period |
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annuity due |
payments that occur at the beginning of each time period |
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perpetuity |
a constant stream of cash flows that lasts forever |
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growing annuity |
a growing stream of cash flows with a fixed maturity |
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growing perpetuity |
growing stream of cash flows that lasts forever |
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amortized loans |
loans paid off in equal amounts over time |
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bond |
interest only loan |
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par value |
the face value of the bond returned to the bondholder at maturity |
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maturity |
The length of time until the bond issuer returns the par value to the bondholder andterminates the bond |
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coupon rate |
The percentage of the par value of the bond that will be paid periodically in theform of interest |
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indenture |
Legal agreement between the firm issuing the bond and its creditors |
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call provision |
gives the issuer the option to redeem the bonds before the maturity date |
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sinking fund |
provision facilitates the orderly retirement of the bond issue |
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protective covenants |
limit certain actions of the company during the term of the loan |
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yield to maturity |
the market rate of return that makes the discounted cash flows from abond equal to the bond’s market price |
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If YTM = coupon rate, then bond price = par value |
sell at par value |
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If YTM > coupon rate, then bond price < par value |
discount bond |
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If YTM < coupon rate, then bond price > par value |
premium bond |
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All else equal, the longer the time to maturity, the greater the interest rate risk All else equal, the lower the coupon rate, the greater the interest rate risk. |
interest rate risk |
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the fisher effect |
defines the relationship between real rates, nominal rates, and inflation |
