Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

129 Cards in this Set

  • Front
  • Back
sole prop
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.
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.
2 kinds of partnerships
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
a legal person composed of one or more actual individuals or legal entities, serparate and distinct from those individuals or entities
capital stock
money contributed towards starting a corp, is divided into shares
stockholders/shareholders-owners of a corp
limited liability
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
legal existence of a corporation not affected bywhether stocholders sell their shares, more permanent.
change of ownership easily accomplished when one prson sells to another
ability to raise capital
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.
officers are agents of corp and are authorized to act on behalf
board of directors
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
investors issued certificates in return for the use of their funds, represents claims against the assets and future earnings of the firm
debt securities
investors who lend money to the copr, expect periodic interest payments and eventual returns of their principal.
equity securities
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
preferred stock
priority over common stockholders w regard to firms earnings and assets, cash dividends and corp assets before common behind creditors
hybrid orgs
have features of 3 baisc forms of business
subchapter s
subchapter S
75>domestic stockholders avoid double taxatoin o earnings and paying taxes similar to partnerships limited liability
earnings low to members and taxed at individual level, limited liability, fewer restrictions on ownership and greater flexibility withh accounting requirements
LL Partnership
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
Maxamize Shareholder Wealth
rep by firm's common stock, primary goal in financial management
Present Value
value toda of some future payments evaluated at an appropriate discount rate.
discount rate
takes into the account the returns that are available from alternative investment opps during a specific time period
the greater the risk associated with receiving future benefit, lower value investors place on benefit
market value
price at which the stock trades in the marketplace
total shareholder wealth=no of shares times the market price
constituent groups, customers, employees, suppliers, communities in which bus operates firms focus on social responsibility variedly, no standard
economic value added
performance measure difference btwn sharholder wealth maximization goal and actual goals pursued by mana. some require significant owership to be a manager
agency relationships
one or more indviduals hire another indivdiual to perform a service on behalf of the principals, they delegate decision making authority to agents
creditors have fixed financial claim and insist on certain protective covenants, owners may want to be risky causes probs
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
agency costs
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.
corporate governance
-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.
managerial compensation
to reduce agency costs
exercise price
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
restricted stock
cant be sold unless mana remains w/ co for certain amount of time
performance shares
based on co meeting specific performance intiatives
Threat of Takeovers
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
profit max
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
book value
reflects historic costs of assets, not the earning capacity of those assets, doesnt consider risks
cash flow
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
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
to influence value --- analyze
threat of new entrants, threat of sub products, bargaining poewr of buyers, bargaining power of suppliers, rivalry among current competitors
net present value=present value of hte expected fufture cash flows - initial outlay of cash
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
Capital Structure Policy
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
Dividend Policy
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.
Capital Budgeting
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.
capital budgeting
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.
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
Saving Investment Cycle
actual savings for a given amount of time must equal investment s
Savings Investment Cycle
dpends on surplus spending units and deficit spending units, cycle is complete when the surpluse spending units transfer to deficit spending units
savings and investment cycle
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
financial assets
money, debt securities, equity securities, debt and equity are assets of investors and liabilities and stockholders equity on balance sheet
financial markets
vehicles through which financial assets are bought, sold, and traded.
money markets
short term securities having maturities of one year or less, most large corps that have extra cash on hand
cap markets
long term securities having maturities greater than one year
primary markets
an investor who purchases new securities, tombstones in which WSJ announce issuance of new debt and equity securities
secondary markets
an investor who resells existing securities, new york stock exchange, ase,,
commercial banks
demand depositsk, time deposits, loaned to individuals businesses, and got emp and more permanet short term financing
term loans
initial maturities btwen 1 and 10 yrs and are usually repaid in installments over life of a loan
thrift institutions
savings and loan associations, mutual savings banks, credit unions accept demand and time deposits
investment co
mutual funds, securities of corps, and real estate investment trusts
pension funds
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
insurance co
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
finance co
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,
secondary markets are classified as
listed security exchanges
otc markets
stock market indices
Listed security exchange
operates at designated places of business and have requirements governing the types of securities they can list and trade, american stock exchange or NYSE
OTC security markets
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
stock market indices
give broad indication fo how the stock market or seg perform daily
regulation of security markets
blue sky laws, security and exchange commission, ensuring full disclosure of security info, regulates insider trading
merchandise trade balance
difference btwn merchandise exp and imp
multinational corp
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
currency that is deposited in a bank located outside the country of origin, international and marketplace
when dollars are deposited in a bank outside the US
interest rate at which banks in the eurocurrency market lend to each other
direct quotes
home currency price of one unit of foreign currency
indirect quotes
foreign currency price of one unit of hte home currency
spot rates
represent the rate of exchang for currencies being bought and sold immediate delivery
forward rates
currencies bough and sold today for deliver at some future time
forward contract
contract btwn two indivduals who are known to each other, such as an importer and a commerical bank
futures contract
exchange traded agreement that calls for the delivery of a standardized amount of an item at a standardized maturity date, traded on organized exchanges.
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.
call option
option to buy something such as a foreign country
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
efficient cap market
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.
cap markets
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
weak form efficiency
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
semistrong efficiency
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
strong form efficiency
security prices fully reflect all info both public and private
holding period returns
return from holding an investments,holding a security,includig price changes and distributions, such as dividends or interest
interest on debt or the dividends on stock
financial analysis
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
financial ratio
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
6 types of ratios
asset management
financial leverage
market based
dividend policy
liquidity ratio
indicate firm's ability to meet short term financial obligations
asset management
indicat how efficiently a firm is using its assets to generate sales
profitibility ratio
measure how effectively a firms' management
Market Based ratios
measure the financial market's evaluation of a co's performance
dividend policy
ratios indicate the dividend practices of a firm
balance sheet
contains info on a co's assets, liabilities, and stockholders equity at any point in time "snapshot" of financial health.
stockholder's equity
net worth/owner's equity is difference btwn total assets minus total liabilities including c/s and retained earnings
income statement
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
common size balance sheet
show firm's assets and liabilities and stockholders equity as a percentage of total assets, rather than in dollar amounts, allow for trend analysis
common size income statement
lists firms income and expense items as a percentage of sales rather than in dollar amounts, allows for trend analysis
statement of cash flows
indicates how firm generated cash flows from its operations, how it used casdh in investing activities, and how it obtained cash from financing acts
liquidity ratios
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
current ratio
current assets/current liabilities
quick ratio
current assets-inventories/current liabilities
asset management ratio
indicate how much a firm has ivnested in a particular type of asset relative to the revenue the asset is producing
avg collection period
avg # of days an acounts receivable remains outstanding
a/r/(annual credit sales / 365)
inventory turnover
=cost of sales / avg inventory
if its too low than you have too much on hand
too high than too much inventory
fixed asset turnover ratio
=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.
total asset turnover ratio
=sales/total assets how efficiently a firm uses resources to generate sales is a summary measure influenced by ea of the asset management ratios
fiancial leverage mana ratio
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
debt ratio
total debts/ total assets
low debt ratio provides more protection
debt to equity
total d/ total equity
times interest earned ratio
earnings before interest and taxes / interest changes
bad when it falls below one percent
fixed charge coverage
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
profitability ratios
measure how effectively a firm's management is making decisions regarding pricing and control of production costs
net profit margin
earnings after taxes/sales how profitable a co's sasles are after all expenses, including taxes and interest, have been deducted
return on invesetmetn
earnings after taxes / total assets
firms net income in relation to the total asset investment
=(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
return on stockholders equity
earnings after taxes / stockholders equity
rate of return that a firm earns on stockholders equity
market based ratios
measure a markets assessment of risk and performance of a firm shold parallel accting ratios
Price to Earnings
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
market price to book value
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
dividend policy ratios
payout ratio=dividend per share/ earnings per share, % of a firms earnings that are paid out as dividends
dividend yield
expected dividend per share/ stock price, low dividend yield indcate high expected future growth, high yield indicate low future growth prospects
trend analysis
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
equity multiplier
ta/stockholders equity = used to show how a firms use of of debt finance assets affects the return on equity
Dun & Bradstreet
14 key business ratios