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129 Cards in this Set
- Front
- Back
sole prop
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business owned by one person, easy and cheap to start, owner has unlimited liability for all debts and other obligations incurred by the firm, difficulty raising funds to finance growth. Common in retail trade, service, construction, ag industries.
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partnership
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org when 2 or more co owners form a business nomrally with the intention to make profits/losses, responsibilities, common in ag, mining oil and gas, finance insurace to raise more cap than sole prop but less than corps.
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2 kinds of partnerships
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general-ea partner has unlimited liability for all obligaiton of the business.
limited-one or more general partners and one or more limited partners liabilities are set out in partnership agreement |
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corporations
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a legal person composed of one or more actual individuals or legal entities, serparate and distinct from those individuals or entities
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capital stock
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money contributed towards starting a corp, is divided into shares
stockholders/shareholders-owners of a corp |
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limited liability
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once stockholders have paid for their shares, they are not liable for any obligations o r debts the corp may incur, only liable to the extent of their shares
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permanency
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legal existence of a corporation not affected bywhether stocholders sell their shares, more permanent.
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flexibility
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change of ownership easily accomplished when one prson sells to another
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ability to raise capital
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able to raise large amounts of capital bc limited liability of its owners and the easy marketability of its shares of ownership, makes large scale growth possible.
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agents
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officers are agents of corp and are authorized to act on behalf
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board of directors
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resp. for managing the corp, deals only w/ broad policy matters, leaving day to day ops to officers who are elected by the board, usually at least 3 members
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securities
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investors issued certificates in return for the use of their funds, represents claims against the assets and future earnings of the firm
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debt securities
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investors who lend money to the copr, expect periodic interest payments and eventual returns of their principal.
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equity securities
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owners of a corp
common stock-residual claims of common stocholders on the firsm earnings and assets are considered only after all other claims, true owners have rights and claims, divident rights, voting rights preemptive rights |
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preferred stock
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priority over common stockholders w regard to firms earnings and assets, cash dividends and corp assets before common behind creditors
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hybrid orgs
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have features of 3 baisc forms of business
subchapter s LLC LLpartnership |
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subchapter S
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75>domestic stockholders avoid double taxatoin o earnings and paying taxes similar to partnerships limited liability
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LLC
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earnings low to members and taxed at individual level, limited liability, fewer restrictions on ownership and greater flexibility withh accounting requirements
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LL Partnership
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LL, tax advantage of sole props and partnerships, optimal form of org of bus. ent. is influenced by cost, complexity, owner liability bus continuity, need for raising capm owners desire t maintain decision making authority, taxes
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Maxamize Shareholder Wealth
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rep by firm's common stock, primary goal in financial management
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Present Value
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value toda of some future payments evaluated at an appropriate discount rate.
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discount rate
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takes into the account the returns that are available from alternative investment opps during a specific time period
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risk
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the greater the risk associated with receiving future benefit, lower value investors place on benefit
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market value
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price at which the stock trades in the marketplace
total shareholder wealth=no of shares times the market price |
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stakeholders
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constituent groups, customers, employees, suppliers, communities in which bus operates firms focus on social responsibility variedly, no standard
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economic value added
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performance measure difference btwn sharholder wealth maximization goal and actual goals pursued by mana. some require significant owership to be a manager
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agency relationships
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one or more indviduals hire another indivdiual to perform a service on behalf of the principals, they delegate decision making authority to agents
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stockholders/creditors
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creditors have fixed financial claim and insist on certain protective covenants, owners may want to be risky causes probs
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stockholders/managers
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managers and on the job prereqqs like us oof co airplanes, limousines who dont ow in terest in the firm ea want to maximize own welfare
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agency costs
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incurred by shareholders to min agency probs, expenditures to structureorgs in a way to minimze incetives for management to take actions contrary to shareholders interests, monitor management actions , bonding expenditures to protect owners from dishonesty.
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corporate governance
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-board of directors hoould have a majorit of independent directors
-nominating committee should be independent -chairman and CEO should be split, independent auditors and compensation commmittess explain if code of ethics is established and if not why. |
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managerial compensation
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to reduce agency costs
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exercise price
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stock options granted tomanagers entitiel them to buy shares o the co stock at an exercise price greater than the price o stock at the time options are gratned and can be exercised only after a certain period of time has elapsed
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restricted stock
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cant be sold unless mana remains w/ co for certain amount of time
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performance shares
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based on co meeting specific performance intiatives
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Threat of Takeovers
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if managers act in their self interest than shared values will be depressed, providing incentive for someone to take over the company at a depressed level, acquirer can then benefit from instituting policies that are consistent with wealth maximization, reduces agency costs
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profit max
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doesnt work for financial mana b/c lacks time dimension, there are 100s of definitions for profit, provides no direct way to consider risk associated with alternatives
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book value
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reflects historic costs of assets, not the earning capacity of those assets, doesnt consider risks
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cash flow
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relates to actual cash generated or paid by the firm, only cash can be used to acquire assets, make valuable distr. to investors will reflect dimensions of return in their valuation of the enterprise
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risk
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market value influenced by perceived risk of cash flows if expected to generate, greater risk, greater rate of return required by investors will reflect dimensions of return in their valuation of the enterprise
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to influence value --- analyze
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threat of new entrants, threat of sub products, bargaining poewr of buyers, bargaining power of suppliers, rivalry among current competitors
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net present value=present value of hte expected fufture cash flows - initial outlay of cash
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reps the contribution of that investment to the value of the firm and wealth of shareholders
-future outlays are discounted back to the present at a required rate of return that reflects the perceived risk of the investment |
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Capital Structure Policy
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interest payments associated with debt financing are deductible from earnings when computing a co's income tax liability, whereas common stock dividends and peferred stock dividends are not deductible
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Dividend Policy
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influenced by personal income taxes when dividends are paid to common stockholders, these dividends are taxed as income to the shareholder, if firm retains dividends and reinvests price of stock will most likely increase and personal taxes owned on common stock appreciateion are deferred until stock is sold, those investors with high marginal tax brackets prefer to retain and reinvest which impacts corporate dividend policy.
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Capital Budgeting
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cap expenditures influenced by croporate taxes, depreciation is a tax deductible expense associated with cap exp. it is a non cash expense that reduced taxable income and amount of taxes paid. financial management must pay close attention to tax law changes.
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capital budgeting
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changes in the tax code that speed up the depreciation rate increae the present value of the cash flows from the investment project and make the project a more desirable investment.
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leasing
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decision to lease or buy an asset is motivated by tax effects, if the asset user is losing money or not sub to taxation leasing is advantageous bc the asset owner canreflect the tax benefits of ownership in the lease arate charged to the asset owner
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Saving Investment Cycle
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actual savings for a given amount of time must equal investment s
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Savings Investment Cycle
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dpends on surplus spending units and deficit spending units, cycle is complete when the surpluse spending units transfer to deficit spending units
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savings and investment cycle
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flow through inancial middlement they carry investment bankers who assist corps in selling their securities called primary claims because they are sold directly by the borrower and bought b the saver
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financial assets
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money, debt securities, equity securities, debt and equity are assets of investors and liabilities and stockholders equity on balance sheet
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financial markets
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vehicles through which financial assets are bought, sold, and traded.
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money markets
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short term securities having maturities of one year or less, most large corps that have extra cash on hand
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cap markets
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long term securities having maturities greater than one year
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primary markets
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an investor who purchases new securities, tombstones in which WSJ announce issuance of new debt and equity securities
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secondary markets
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an investor who resells existing securities, new york stock exchange, ase,,
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commercial banks
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demand depositsk, time deposits, loaned to individuals businesses, and got emp and more permanet short term financing
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term loans
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initial maturities btwen 1 and 10 yrs and are usually repaid in installments over life of a loan
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thrift institutions
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savings and loan associations, mutual savings banks, credit unions accept demand and time deposits
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investment co
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mutual funds, securities of corps, and real estate investment trusts
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pension funds
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pool contributions of employees and invest in various financial assets such as corporate securities, real estate, managed by bank trust depts, and life insurance co
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insurance co
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receive periodic or lump sum premium payments 4rm individuals or orgs in exchange for agreeing to make certain future contractual payments, reserve received are invested in various types of assets
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finance co
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obtain funds by issuing own debt securities and through oans from commercial banks, loan to indivduals and business, some finance sale of parent co products,
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secondary markets are classified as
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listed security exchanges
otc markets stock market indices |
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Listed security exchange
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operates at designated places of business and have requirements governing the types of securities they can list and trade, american stock exchange or NYSE
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OTC security markets
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over the counter do not have centralized places of business but rather exist as networks of security dealers connected by a communication system of telephones and comp terminals that allow the dealers to post hte prices at which are willing to buy and sell variou s securities from smaller firms
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stock market indices
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give broad indication fo how the stock market or seg perform daily
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regulation of security markets
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blue sky laws, security and exchange commission, ensuring full disclosure of security info, regulates insider trading
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merchandise trade balance
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difference btwn merchandise exp and imp
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multinational corp
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has direct investments in manufacturing/distri facilities in more than one country
easy for firms to transfer the key factors of production, land labor and cap to the location govt regs tax laws, political environments, exchange rate conflicts with trade over foreign borders |
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eurocurrency
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currency that is deposited in a bank located outside the country of origin, international and marketplace
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eurodollars
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when dollars are deposited in a bank outside the US
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LIBOR
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interest rate at which banks in the eurocurrency market lend to each other
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direct quotes
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home currency price of one unit of foreign currency
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indirect quotes
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foreign currency price of one unit of hte home currency
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spot rates
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represent the rate of exchang for currencies being bought and sold immediate delivery
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forward rates
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currencies bough and sold today for deliver at some future time
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forward contract
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contract btwn two indivduals who are known to each other, such as an importer and a commerical bank
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futures contract
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exchange traded agreement that calls for the delivery of a standardized amount of an item at a standardized maturity date, traded on organized exchanges.
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options
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contract that give the option buyer the right, but not the obligation, to either buy or sell a fixed amount of foreign currency at a fixed price at a time up or at the expiration date of the option.
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call option
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option to buy something such as a foreign country
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put option
american option Euro option |
option to sell
gives holder the right to buy or sell the underlying currency at any time prior to expiratoin gives holder right to buy or sell the underlying currency only at expiration |
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efficient cap market
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stock prices provide an unbiased estimate of the true, or intrinsic value of an enterprise, reflect a present value estimate of the firms epected cash lows evaluated at an appropriate required rate of returns.
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cap markets
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are efficient if security prices instantaneously reflect in an unbiased manner of all economically relevant ino about a security's prospective returns and the risk of those returns
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weak form efficiency
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no investor can expect to earn excess returns based on an investment strategy using such info as historical price or return info, us cap markets, are efficient in weak form, already incorporated in price of security
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semistrong efficiency
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no investor can expect to earn excess returns based on an investment strategy using any publickly available info, info already incorporated in price of security
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strong form efficiency
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security prices fully reflect all info both public and private
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holding period returns
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return from holding an investments,holding a security,includig price changes and distributions, such as dividends or interest
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distributions
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interest on debt or the dividends on stock
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financial analysis
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assits in identifying the major strengths and weaknesses of a business enterprise, enough cash to pay obligations, reasonable a/r collection period, efficient inventory management policy, sufficient plant, property adn equipment, and adequate capital structure
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financial ratio
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relationship that indicates something about a co's activities, such as the ration btwn current assets and currentl liabilities or btwn its accounts recivables and its annual sales, makes comparisons over time btwn firms
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6 types of ratios
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liquidity
asset management financial leverage profitibility market based dividend policy |
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liquidity ratio
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indicate firm's ability to meet short term financial obligations
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asset management
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indicat how efficiently a firm is using its assets to generate sales
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profitibility ratio
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measure how effectively a firms' management
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Market Based ratios
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measure the financial market's evaluation of a co's performance
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dividend policy
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ratios indicate the dividend practices of a firm
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balance sheet
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contains info on a co's assets, liabilities, and stockholders equity at any point in time "snapshot" of financial health.
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stockholder's equity
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net worth/owner's equity is difference btwn total assets minus total liabilities including c/s and retained earnings
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income statement
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indicates how a firm performed during a period of time, costs of sales, other operating expenses, interest expensses and taxes are deducted from revenues generated or net sales, to arrive at the firm's net income, or earnings after taxes
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common size balance sheet
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show firm's assets and liabilities and stockholders equity as a percentage of total assets, rather than in dollar amounts, allow for trend analysis
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common size income statement
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lists firms income and expense items as a percentage of sales rather than in dollar amounts, allows for trend analysis
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statement of cash flows
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indicates how firm generated cash flows from its operations, how it used casdh in investing activities, and how it obtained cash from financing acts
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liquidity ratios
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quick measures of a firm's ability to provide sufficient cash to conduct business over the next few months, cash budgets provide the best assessment of a firm's liquidity position
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current ratio
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current assets/current liabilities
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quick ratio
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current assets-inventories/current liabilities
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asset management ratio
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indicate how much a firm has ivnested in a particular type of asset relative to the revenue the asset is producing
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avg collection period
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avg # of days an acounts receivable remains outstanding
a/r/(annual credit sales / 365) |
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inventory turnover
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=cost of sales / avg inventory
if its too low than you have too much on hand too high than too much inventory |
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fixed asset turnover ratio
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=sales / net fixed assets
indicates the extent to which a firm uses resources to generate sales, costs of assets at acquisition, length since depreciation policies, and leasing affect ratio better to compare from year to year within a company. |
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total asset turnover ratio
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=sales/total assets how efficiently a firm uses resources to generate sales is a summary measure influenced by ea of the asset management ratios
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fiancial leverage mana ratio
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measure degree to which co is employing financial leverage n are of interst to creditors and owners alike, indicates co's risk exposure in meeting debt service charges
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debt ratio
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total debts/ total assets
low debt ratio provides more protection |
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debt to equity
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total d/ total equity
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times interest earned ratio
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earnings before interest and taxes / interest changes
bad when it falls below one percent |
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fixed charge coverage
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meausures the no. of times a firm is able to cover total fixed charges in addition to interest preferred dividends and long term lease contracts
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profitability ratios
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measure how effectively a firm's management is making decisions regarding pricing and control of production costs
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net profit margin
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earnings after taxes/sales how profitable a co's sasles are after all expenses, including taxes and interest, have been deducted
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return on invesetmetn
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earnings after taxes / total assets
firms net income in relation to the total asset investment |
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ROI = EAT / TA
=(EAT/SALES)x (sales/total assets) |
can be used to determine if one or both are deficient in contributing to the profitability of the firm
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return on stockholders equity
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earnings after taxes / stockholders equity
rate of return that a firm earns on stockholders equity |
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market based ratios
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measure a markets assessment of risk and performance of a firm shold parallel accting ratios
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Price to Earnings
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market price per share / current earnings per share, lower risk should be higher pe better growth propsects of earnigns should be the greater the PE multiple, supplement is stock price to free cash flow ratio
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market price to book value
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market price per share / book value per share, boook value per share = total common stockholders equity / no. of shares outstanding, higher the earnings of a firm from rate of return relative to return required to investors, the higher the p/bv ratio
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dividend policy ratios
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payout ratio=dividend per share/ earnings per share, % of a firms earnings that are paid out as dividends
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dividend yield
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expected dividend per share/ stock price, low dividend yield indcate high expected future growth, high yield indicate low future growth prospects
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trend analysis
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indicates a firm's performance over time and reveals whether its position is improving or deteriorating relative to other companies in the industry, # of different ratios calculated over several years and plotted to yield a graphic rep of co's performance
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equity multiplier
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ta/stockholders equity = used to show how a firms use of of debt finance assets affects the return on equity
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Dun & Bradstreet
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14 key business ratios
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