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22 Cards in this Set
- Front
- Back
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If you buy shares of Coca-Cola on the primary market, you buy the shares from another investor who decided to sell the shares. True/False?
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False
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You are a shareholder in a corporation. This corporation earns $4 per share be- fore taxes. After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 35% and your tax rate on dividend income is 15%. The effective tax rate on your share of the corporations earnings is closest to 45%. True/false?
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True
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An agency problem can be alleviated by compensating managers in such a way that acting in the best interest of shareholders is also in the best interest of managers. True/false?
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True
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The major duties of a financial manager are: 1. to make investment decisions, 2. to make financing decisions and 3. to manage cash flow and working capital. True/false?
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True
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In a corporation, the ultimate decisions regarding business matters are made by the shareholders. True/false?
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True
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Corporations face more regulations when compared to partnerships. True/false?
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True
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An investment is said to be liquid if the investment has a large bid-ask spread. True/false?
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False
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What is the task of an auditor?
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Neutral third party that checks a firm’s financial statements
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Name 4 types of financial statements.
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1. Balance Sheet
2. Income Statement 3. Statement of Cash Flows 4. Statement of Stockholders’ Equity |
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What is a balance sheet and what does it contain?
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A snapshot in time of the firm’s financial position: --Assets
• What the company owns Liabilities • What the company owes Stockholder’s Equity • The difference between the value of the firm’s assets and liabilities The Balance Sheet Identity: Assets=Liabilities+Stockholder’s Equity |
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Describes two types of assets.
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Long-Term Assets
• Net Property, Plant, & Equipment – Book Value = Acquisition cost – Depreciation (and Accumulated Depreciation) • Goodwill and intangible assets – Amortization • Other Long-Term Assets, Example: Investments in Long-term Securities Current Assets • Cash or expected to be turned into cash in the next year – Marketable Securities – Accounts Receivable – Inventories – Other Current Assets, Example: Pre-paid expenses |
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What is net working capital?
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Net Working Capital = Current Assets - Current Liabilities
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Describe two types of liabilities.
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Current Liabilities: Due to be paid within the next year
• Accounts Payable • Short-Term Debt/Notes Payable • Current Maturities of Long-Term Debt • Other Current Liabilities – Taxes Payable Long-Term Liabilities • Long-Term Debt • Capital Leases • Deferred Taxes |
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Describe two types of equities.
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Book Value of Equity = Book Value of Assets - Book Value of Liabilities
• Could possibly be negative Market Value of Equity (Market Capitalization) = Market Price per Share ⇥ Number of Shares Outstanding • Cannot be negative |
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Briefly describe balance sheet analysis.
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Liquidation Value
• Value of the firm if all assets were sold and liabilities paid Market-to-Book Ratio = Market Value of Equity / Book Value of Equity • Value stocks: Low M/B ratios • Growth stocks: High M/B ratios Debt-Equity Ratio = Total Debt / Total Equity • Measures a firm’s leverage • Using Book Value versus Market Value Enterprise Value = Market Value of Equity + Debt - Cash |
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What is EPS?
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Earnings per Share, EPS = Net Income / Shares Outstanding
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Name three profitability ratios.
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• Gross Margin = Gross Profit / Sales
• Operating Margin = Operating Income/Sales • Net Profit Margin = Net Income / Total Sales |
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What is EBITDA?
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• Reflects the cash a firm has earned from its operations
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Name three leverage ratios/interest coverage ratios.
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• EBIT / Interest Expense
• Operating Income / Interest Expense • EBITDA / Interest Expense |
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What is ROA and ROE?
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Investment Returns
• Return on Assets, ROA = Net Income / Total Assets • Return on Equity, ROE = Net Income / Book Value of Equity |
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Describes three valuation ratios.
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- P/E Ratio = (market capitalization/net income) = (share price/earnings per share)
- Enterprise value to operating income = (market value of equity + debt - cash)/EBIT - Enterprise value to sales = (market value of equity+debt+cash)/sales |
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Explain a statement of cash flows.
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1. Net income:
Net Income typically does NOT equal the amount of Cash the firm has earned. • Non-Cash Expenses – Depreciation and Amortization • Uses of Cash not on the Income Statement – Investment in Property, Plant, and Equipment 2. Operating Activities • Adjusts net income by all non-cash items related to operating activities and changes in net working capital – Accounts Receivable – deduct the increases – Accounts Payable – add the increases – Inventories – deduct the increases 3. Investing Activities • Capital Expenditures – Buying or Selling Marketable Securities 4. Financing Activities • Payment of Dividends – Retained Earnings = Net Income – Dividends – Changes in Borrowings |
