1ST MIDTERM Flashcards
● is one of the crucial prerequisites to start any business.
Finance
● Involves strategically planning, organizing, directing, and controlling an organization’s
Financial Management
governed by the principle that it must protect the financial interest of the investors and shareholders and ensure business growth.
Financial Management Scope
Financial Managers need to evaluate factors such as the cost of current and fixed assets, cost of marketing, need for butter capital, long-term operations, and human resources cost, etc.
Assessing Capital Needs
Is the framework that determines decisions such as debt-equity ratio in the short as well long-term.
Determination of Capital Structure
There is a need to frame efficient financial policies that govern cash control, the lending and borrowing processes, and so on.
Creation of Effective Financial Policies
Great Financial managers are able to navigate through different scenarios by making optimum use of the available financial resources.
Resource Optimization
For any business to grow confidently and have a good market reputation, an adequate amount of cash and liquidity is critical.
Fundraising
Smart fund allocation is as critical to a business’ financial health as fund-raising itself.
Fund Allocation
It determines its financial health and future growth.
Profit Planning
Good financial managers have to be well-versed with the capital market dynamics, and the risks associated.
Understanding Capital Markets
Determines a company’s mix of debt and equity financing.
Capital Structure
Involves evaluating long-term investments.
Capital Budgeting
Mitigating financial health risks by balancing current assets with liabilities.
Working Capital Management
Involves creating disbursement policies and strategies.
Dividend Management
● Guides companies through strategic processes, ensuring stability and growth.
Financial Managent Cycle
Includes analyzing past data to set financial goals.
Planning and Budgeting
Assigns value to capital resources, aligning funds with company goals.
Resource Allocation
Tracking transactions, and reducing fraud risks.
Operations and Monitoring
Focuses on analyzing financial performance by comparing it to previous periods.
Evaluation and Reporting
are in charge of financial reporting and the oversight of the accounting activities necessary to develop those reports.
Controllers
may be responsible for structuring loan and debt obligation and determining when and from whom to borrow funds.
Treasurer
is an executive level position and oversees the activities of the controller and treasurer.
Vice President of Finance (VP-F)
is in a “big picture” position.
Chief Financial Officers (CFO)
● Allows a firm to understand the past, present and future funding needs and distributions required to satisfy all interested parties.
- Need to be experts in analyzing financial statements
Financial Planning
● It uses past, current, and pro forma (forward-looking) income statements.
Good Financial Planning
estimated the timing and magnitude of actual cash flows available to meet financial obligations.
Cash Flow Statements
- a document
- are critical for demonstrating the sources and uses of funds for a firm.
Balance Sheets
- in the form of expected sales, cost of funds, and microeconomic and macroeconomic conditions are essential elements of financial planning.
- becomes the process for adapting to those changes.
Forecasting
including ratio analysis, common size financial statements, and trend statements are important aspects of financial planning.
Financial Analysis
- can help identify the differences or variance from expectations
- road map
Budgeting
One of the financial roles pertaining to raising funds for the business operations.
Corporate Finance Roles
Handle financial restructuring of companies
Investment Banking Roles
It is an advanced field that requires sound knowledge of mathematics
Portfolio Management
Has crucial part of financial sectors operations
Risk Management
Banks are the key enabler
Commercial Banking Sector
Companies also employ managers and financial administrators to handle various procedures and regulations
Compliance and Internal Financial Management
both contain valuable information relating to various fiscal topics
Financial Statements and Financial Reports
these reports cover the pull scope
Quarterly or Annual Reports
these reports compromise information
External Reports
these reports allow the public to oversee government institution’s financial health
Government Reports
a note that listing several financial statements
Financial notes
these statements formal record of specific types of information relating to a business’s finances
Finance Statements
these statements that measures the long-term profitability
Income Statements
these statements how cash flowing in and out
Cash Flow Statements
these statements provide information about any change
Statement of Changes in Equity
3 sections in a balance sheet
Assets, Liability, and Equity
Formula of Balance Sheet
Owner’s Equity = Assets - Liability
are assets your business plan to keep for a short period of time
Current Assets
are assets your business plan to keep for a long period of time
Fixed assets (non-current assets)
are assets you can’t touch
Intangible Assets
information or process that set your business apart from others
Intellectual Property
formally registered concepts that bring value to your business
Trademarks and Patents
are usually things you will pay for during the next 12 months
Current Liabilities
are thing that you will not pay for
Non-Current Liabilities
also called shareholder’s equity companies
Owner’s Equity
money has time value
Concept and Significance of Time Value of Money
Outflows of cash are in our control as payments but there is no certainty for future cash flows
Risk and Uncertainty
the money you receive today has more purchasing power than the money to be received in the future
Inflation
taking the money today is probably the best bet
Investment Opportunities
Formula of Time Value of Money (Future Value)
FV = PV / P (1 + i )t
Individuals prefer current consumption to the future consumption
Consumption
Formula of Time Value of money (Present Value)
PV = FV / (1 + i )t
what you have or you need in today
Present Value of Money
amount money you’ll have in the future
Future Value of Money
present value of future sum of money is LOWER
Higher Discount Rate
present value of future sum of money is HIGHER
Lower Discount Rate
earning interest grows in each compounding period
compounding interest
a timeline illustrates cash flows in an investments period
Cash Flow Timeline
forecasting future investment returns helps individuals make informed decisions
Strategic Investment Planning
any stream of cash flows indexed at the same point equals the sum of the present values of the cash flows
Cash Flow Additivity Principle
present value is a crucial tool for evaluating risk and making risk-adjusted
Risk Mitigation
involve using PV to assess different assets and balance portfolios for growth
Diversification and Portfolio Optimization
making time a valuable asset in wealth-building
Time Management
by discounting expected future cash flows
Discounted Cash Flow Analysis
calculate how much a single deposit will grow over time with compound interest
Future Value (FV)
is a series of fixed, periodic payments or received in the future, either immediately or after a delay
Annuities
calculations are used to understand how much future amounts are worth today and adjust financial decisions accordingly
Present Value (PV)
allow investments in options like mutuals funds with returns based on performance
Variable Annuity
guarantees a minimum interest rate and fixed payments
Fixed Annuity
tied to a stock market index combining securities and insurance features
Indexed Annuity
covers insurance risk and commissions
Mortality and Expense Risk Charge
payments at the beginning
Annuity Due
payments at the end
Ordinary Annuity
charges for second keeping
Administrative Fees
fees for mutual funds within the annuity
Underlying Fund Expenses
verify your broker or adviser if she/he is registered and review mutual fund documents before investing
Avoiding Fraud
provides a way to value infinite cash flow, either constant or growing
Perpetuity
early withdrawal before age 59 1/2 may have 10% IRS penalty plus regular income taxes
Penalties
Flat Perpetuity Formula
PV = c / r
is the simplest and it is straightforward as it doesn’t include terminal value
Flat Perpetuity
this type accounts for cash flows that increase at a constant rate g indefinitely
Growing Perpetuity
Growing Perpetuity Formula
PV = c / (r - g)
required individual discounting to find the total present value
Uneven Cash Flows
it can help borrowers identify lenders offering lower rates
Comparing Interest rates
breaks down loans into manageable payments but total cost can vary based on the term and rate
Amortization
higher prices usually mean higher monthly payments
Purchase Price
the higher the rate, the more you will pay in interest
Interest Rate
a longer-term result in lower monthly payments but more total interest paid
Loan Term
is the decrease in an assets value over time
Depreciation
reward you receive
return
may pay a sum of money to the investor from time to time
income
may increase in value
capital gain
how much money you have gained or lost form an investment over a certain period
calculation of return
Simple Return Formula
Return = End Value - Beginning Value x 100
this is the basic way to calculate
simple return or total return
it adjusts the return to show it would have been over one year
Annualized Return
Annualized Return Formula
Annualized Return = (End Value / Beginning Value) (number of years) - 1
uncertainty in how much money you’ll actually make compared to what you expected to make
Concept of Risk
firm anticipates earning from assets over some future period
Expected Return
past return that was earned by the firm
Realized Return
