Chapter 9 Flashcards
Financial capital
the funds a firm uses to acquire its assets and finance its operations.
Finance
The functional area of business that is concerned with finding the best sources and uses of financial capital.
Risk
The degree of uncertainty regarding the outcome of a decision
Risk-return tradeoff
The observation that financial opportunities that offer high rates of return are generally riskier than opportunities that offer lower rates of return.
Financial ratio analysis
Computing ratios that compare values of key accounts listed on a firm’s financial statements.
Liquid asset
An asset that can quickly be converted into cash with little risk of loss.
Liquidity ratios
Financial ratios that measure the ability of a firm to obtain the cash it needs to pay is short-term debt obligations as they come due.
Asset management ratios
Financial ratios that measure how effectively a firm is using its assets to generate revenues or cash.
Financial leverage
The use of debt in a firm’s capital structure.
Leverage ratios
Ratios that measure the extend to which a firm relies on debt financing to its capital structure.
Profitability ratios
Ratios that measure the rate of return a firm is earning on various measures of investment.
Budgeted income statement
A projection showing how a firm’s budgeted sales and costs will affect expected net income (also called a pro forma income statement).
Cash budget
A detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash.
Retained earnings
The part of a firm’s net income it reinvests.
Equity financing
Funds provided by the owners of a company
Debt financing
Funds provided by lenders (creditors).
Capital structure
The mix of equity and debt financing a firm uses to meet its permanent financing needs.
Capital budgeting
The process a firm uses to evaluate long-term investment proposals.
Time value of money
The principle that a dollar received today is worth more than a dollar received in the future.
Present value
The amount of money that, if invested today at a given rate of interest (called the discount rate), would grow to become some future amount in a specified number of time periods.
Net present value (NPV)
The sum of the present values of expected future cash flows from an investment, minus the cost of that investment.
Budgeted balance sheet
A projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets. (also called a pro forma balance sheet).
