Chapter 2 Flashcards
What is net working capital?
- Current Assets - Current Liabilities
- Positive when the cash that will be received over the next 12 month exceeds the cash that will be paid out
- Usually positive in a healthy firm
What is liquidity?
- Ability to convert cash quickly without significant loss in value
- Liquid firms are less likely to experience financial distress
- But, liquid assets earn a lower return
- Trade to find balance between liquid and illiquid assets
What is market value?
Market value is the price at which the assets, liabilities or equity can actually be bought and sold.
What is book value?
- Value at which an asset is carried on a balance sheet.
- Book value = Cost of an asset - Accumulated depreciation
What is the matching principal?
GAAP say to show revenue when it accrues and match the expenses required to generate the revenue.
What is the marginal tax rate?
- Amount of tax payable on next dollar earned.
What is the average tax rate?
- Total taxes paid divided by total taxable income.
What is cash flow from assets (CFFA)?
The total cash flow to creditors and cash flow to stockholders, consisting of the following; operating cash flow, capital spending, and change in net working capital.
What is operating cash flow?
Cash generated from a firm’s normal business activities.
What is free cash flow?
Another name for cash flow from assets.
What is cash flow to creditors?
A firm’s interest payments to creditors less net new borrowing.
What is cash flow to stockholders?
Dividends paid out by a firm less net new equity raised.
What is the balance sheet?
a snapshot of the firm’s assets and liabilities at a given point in time
