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34 Cards in this Set
- Front
- Back
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Goal of a Corporation (Best) |
Maximizing Value |
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Investment Decision (or capital budgeting decision) |
Involves decision to invest in tangible or intangible assets |
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Financing Decision |
Involves sources and amounts of financing and how to pay for assets |
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Real Asset |
used to produce goods and services |
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Financial Asset |
financial claims to the income generated by the firm's real assets |
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Capital Structure |
a mix of long-term debt and equity financing |
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Opportunity Cost of Capital |
the minimum acceptable rate of return on capital investment set by the investment opportunities available to shareholders in financial markets |
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Agency Problem |
Managers are agents for stockholders and are tempted to act in their own interests instead of maximizing value |
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Agency Mitigation |
Corporate governance (laws, regulations, institutions, etc. that protect shareholders) |
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Examples of Corporate Governance |
Legal Requirements Board of Directors Takeovers Info for shareholders |
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Limited Liability |
Meaning a corporation (an LLC) cannot personally be sued |
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Double Taxation |
when corporations are taxed twice due to the owner and business itself being taxed separately |
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Primary Market |
Market for sale of new securities by corporations |
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Secondary Market |
Market in which previously issued securities are traded among investors |
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Money Market |
market for short-term financing *less than 1 year |
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Capital Market |
market for long-term financing (more than 1 year) |
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Financial Intermediary |
Organization that raises money from investors and provides financing for individuals, companies, and other organizations |
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Functions of a Financial Market (5) |
1. Transporting cash across time - extra money can be placed in bonds etc. to be used in the future (i.e. after retirement) 2. Risk transfer and diversification - wide range of risk in financial markets using diversification (investing in many companies lowers overall risk) 3. Liquidity - ability to buy and sell stock on demand 4. Payment Mechanism - method for us to pay for things (cc, check, etc.) 5. Provide Information - prices, interest rates, company values |
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What is a Hedge Fund? |
a private investment pool, open to wealthy or institutional investors. Lightly regulated and therefore can pursue more speculative policies than mutual funds |
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The role of an Investment Banker |
Acts as an intermediary between company and investors |
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The 2008 Financial Crisis |
"Easy Money" from federal reserve Subprime Mortgages (mortgages sold to people with bad debt) Mortgage backed securities Bailouts of large companies |
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Balance Sheet Setup |
CA Fixed Assets CL Long Term Debt Shareholder's Equity |
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Income Statement Setup |
Sales COGS SG&A Expense (selling, general, and admin.) Depreciation EBIT (Earnings before interest and income taxes) Interest Expense Taxable Income Taxes Net Income [allocation of net income - dividends and retained earnings] |
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Statement of Cash Flows Cash Flows from Operations |
Net income Depreciation Increases/Decreases in CA and CL |
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Statement of Cash Flows Cash Flows from Investing Activities |
sale/purchases of property, plant, and equipment |
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Statement of Cash Flows Cash Flows from Financing Activities |
changes in long-term debt dividends stock |
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Profits Vs Cash Flow |
Profits(among other more obvious things) subtract depreciation and do not considerchanges in working capital (CA-CL) |
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Book Value |
Value of assets/liabilities according to balance sheet (looking back) |
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Market Value |
Value of assets/liabilities were they to be resold in the market (looking forward) |
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How to calculate Taxes Owed |
EBIT - interest = Pretax income - Taxes =Net Income |
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Marginal Tax Rate |
Tax an individual pays on each extra dollar of income |
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Average Tax Rate |
total tax bill divided by total income |
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What does Progressive Tax rate mean? |
Tax rate increases as income increases |
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Liquidity |
How quickly an asset can be turned into cash |
