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Finance 355 > Exam 1 > Flashcards

Exam 1 Flashcards

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1
Q

financial management

A

how much/what types of assets to acquire, maximize value

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2
Q

capital markets

A

interest rates are determined

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3
Q

investments

A

stocks/bonds, security analysis, market analysis

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4
Q

organizational roles

A

board of directors, CEO, COO, CFO

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5
Q

proprietorship

A

owned by one person

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6
Q

benefits of proprietorship

A

easy/inexpensive
few government regulations
low income tax
keep all profit
complete owner control

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7
Q

limitations of proprietorship

A

unlimited personal liability
business life = person’s life
hard to make capital
difficult to transfer ownership
limited life

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8
Q

partnership

A

two/more people

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9
Q

benefits of partnership

A

income is allocated
single taxation
few government regulations

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10
Q

limitations of partnership

A

partners are responsible for other’s debts
difficult to transfer ownership
unlimited liability
limited life

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11
Q

corporation

A

separate/distinct from owners

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12
Q

benefits of corporation

A

owners lose only what they invested
easier access to capital
easier to transfer ownership
easier to expand

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13
Q

limitations of corporation

A

double taxation
shared control
harder/expensive
more government regulation

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14
Q

corporate governance

A

rules/practices to act in shareholder’s interest
-holding managers accountable

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15
Q

business

A

provides good/service for monetary value in exchange for money
-needs a want/need – demand
-purpose is to satisfy want/need

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16
Q

Sand Cloud Shark tank

A

corporation or LLC
difficult to transfer ownership of partnership, so in order to go on the show must be CORP or LLC

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17
Q

what mattered to the sharks?

A

cash flows
profits
cash in bank

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18
Q

valuation

A

asking amount/equity stake

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19
Q

finance

A

raising money to acquire assets
-circulation of money/making investments

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20
Q

three main methods to pay assets

A

debt
internal equity
external equity

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21
Q

intrinsic value

A

estimate of stock’s true value based on risk/return

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22
Q

current stock price

A

going rate in market place
-market price

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23
Q

stockholder wealth maximization

A

long-term goal
short-sighted actions cause inability to compete

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24
Q

stockholder actions

A

reasonable compensation packages
direct intervention by shareholders
threat of takeover

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25
Q

annual report

A

verbal section – letter from chairperson, describes operating results from past year and new developments for future
-provide picture of financial position

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26
Q

balance sheet

A

firm’s position at specific point in time

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27
Q

current assets

A

assets that should be converted into cash within one year
-cash
-cash equivalents
-inventory
-accounts receivable

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28
Q

long-term assets

A

assets expected to be used for more than one year
-plant and equipment
-“net fixed assets”
-intellectual property

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29
Q

left side of balance sheet

A

claims against assets

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30
Q

current liabilities

A

claims that must be paid off within one year
-accounts payable
-notes payable
-accrued wages
-accruals

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31
Q

long-term liabilities

A

bonds that mature in more than a year

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32
Q

stockholder’s equity

A

the amount that stockholders paid to the company when they bought shares
-earning the company retained over the years

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33
Q

retained earnings

A

total of all earnings company earned/retained over the years

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34
Q

what represents actual money?

A

only cash/cash equivalents

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35
Q

working capital

A

current assets that “turn over”
used and replaced throughout the year

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36
Q

NOWC

A

makes distinction between operational purpose cash and excess cash
-distinguish between “free” liabilities and interest-bearing notes payable

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37
Q

convertible bonds

A

debt securities to exchange bonds for shares of common stock

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38
Q

depreciation

A

annual charge against income that reflects estimated dollar cost of equipment and assets depleted in production process
-report lower earnings

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39
Q

balance sheet time dimension

A

point in time

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40
Q

income statements

A

operations over a period of time
-record of revenues/expenses

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41
Q

operating income

A

earnings from operations before interest/taxes

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42
Q

amortization

A

represents decline in value of intangible assets
-non-cash charge similar to depreciation

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43
Q

EBIT

A

earnings before interest

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44
Q

statement of cash flows

A

shows how much cash a firm generates
-operating, investing, financing

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45
Q

“Every _____ is a ______ but not every _______ is a ________.”

A

stockholder ; stakeholder ; stakeholder ; stockholder

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46
Q

triple bottom line

A

people, planet, profit
-society, environment, sustainable profit

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47
Q

stockholder-manager conflicts

A

managers may only be invested in short-term
-not acting in best interest of stockholders/company

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48
Q

free cash flows

A

how much cash a business generates after capital expenditures/operational needs
-amount can be withdrawn without hurting future operations
-cash belonging to shareholders

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49
Q

always want more ____ than _____

A

current assets ; current liabilities

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50
Q

Cash flow rules

A

-asset increase = use of cash (-)
-liability increase = source of cash (+)
-asset decrease = source of cash (+)
-liability decrease = use of cash (-)

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51
Q

operating cash flows

A

IDEAL
-want to see funding operations with operating activities

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52
Q

do retained earnings = cash dividend?

A

NO
-not held as cash, but investment in firm’s assets

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53
Q

are investors more interest in free cash flows or NI?

A

FCF because shows exact amount available to all investors

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54
Q

why would a company have negative FCF?

A

rapidly crowing company
-due to fixed assets and working capital needed to support rapid growth
-all exceed cash flows from existing operations
-new investments will eventually be profitable

55
Q

financial statement analysis

A

review/analyze the company’s statements to make decisions

56
Q

if debt _____, then equity _____

A

increases ; decreases

57
Q

affect of debt on ratios

A

profit margin and ROA
-interest expenses lower NI
-decrease in long-term

ROE
-interest expenses lower NI
-increasing debt = less equity
-may increase ROE – misleading

58
Q

Du Pont Analysis

A

method of dissecting ROA profitability measures into profit margin/turnover

59
Q

high ROE

A

preferred EXCEPT when assets are much higher than equity – signals high debt

60
Q

is it worth it to sacrifice sales?

A

yes:
-lose sales but gain cash
-helps eliminate chance of bad debt
-company can reinvest cash or pay stockholders
-reduces need to borrow

61
Q

what happens when you reduce assets?

A

same amount of sales with less assets
-improves efficiency

62
Q

commercial banks

A

traditional “department stores of finance” that serve a variety of savers/borrowers

63
Q

example of commercial banks

A

wells fargo, citibank

64
Q

investment banks

A

help corporations design attractive securities, buy the securities, and resell them to savers.
-underwrite/distribute new investment securities
-helps obtain financing

65
Q

example of investment banks

A

Morgan Stanley

66
Q

financial service corporation

A

offers a wide range of financial services within a single corporation
-investment banking
-brokerage
-insurance

67
Q

example of financial service corporation

A

citigroup owns citibank, an investment bank, a securities brokerage organization, and an insurance company.

68
Q

mutual funds

A

pool investor funds to purchase financial instruments (stocks, long-term bonds, short-term debt) and reduce risks.

69
Q

exchange-traded funds

A

buy a portfolio of stocks and sell their own shares to the public

70
Q

hedge funds

A

accept money from savers and use funds to buy various securities
-largely unregulated, marketed to institutions/individuals with high net worth

71
Q

private-equity companies

A

private equity players buy and manage entire firms, not just stock

72
Q

pension funds

A

retirement plans funded by corporations or government agencies for their workers that invest in stocks/bonds/real estate

73
Q

economy

A

flows from those who supply capital to those who demand it

74
Q

suppliers of capital

A

individuals/institutions with excess funds
-saving money, looking for rate of return

75
Q

demanders of capital

A

need to raise funds for investment opportunities
-willing to pay rate of return

76
Q

capital allocation process

A
  1. direct transfers
  2. indirect transfers through investment banks
  3. indirect transfers through financial intermediary
77
Q

direct transfers

A

business gives securities, savers give money

78
Q

indirect transfers through investment bankers

A

investment banks are the middle-man to help the money move back and forth

79
Q

indirect transfers through financial intermediary

A

financial intermediaries are the middle-man that help money move back and forth
-buy securities using money received from selling own securities

80
Q

financial market

A

where money is exchanged
-where we are

81
Q

money market

A

short-term investments, under one year
-day-trade

82
Q

capital market

A

anything with a maturity of longer than one year

83
Q

primary market

A

initial/first trade of stock/bond
-Initial public offerings (IPOs)

84
Q

secondary market

A

every other trade besides the IPO

85
Q

public market

A

traded on open exchange, anyone can buy

86
Q

private market

A

any company not traded on open exchange
-owned by few investors (“closely-held”)

87
Q

Initial Public Offering (IPO)

A

stock is issued in open public market for the first time
-“going public”

88
Q

purpose of IPO

A

-raises capital
-regulations
-gains awareness

89
Q

advantages of public market

A

-access to more funds
-can issue more shares

90
Q

disadvantages of public market

A

-more people have a say/less owner control
-dilution by issuing more stock
-have to report financials

91
Q

institutional investors

A

large investors that have power to move markets
-large companies
-do majority of trading in financial markets

92
Q

example of institutional investors

A

Berkshire Hathaway, 401Ks, Warren Buffet

93
Q

Security Exchange Commission
(SEC)

A

enforce security laws, maintain functioning economy
-supports formation of capital
-requires security disclosure to all investors
-prevents insider trading

94
Q

when was Security Exchange Commission founded

A

1934
-prompted by Great Depression

95
Q

why would SEC stop a company from going public?

A

-false reports
-if company doesn’t look feasible/won’t be around a while

96
Q

stock market exchanges

A

where trading takes place
-NYSE
-NASDAQ

97
Q

Market Cap

A

market capitalization
market price/share x total shares outstanding

98
Q

stock quotes

A

website that shows EPS/ratios regarding stocks

99
Q

market measures

A

-Dow Jones
-S&P 500
-NASDAQ

100
Q

index

A

give an idea of how whole market is doing

101
Q

Dow Jones

A

measure of 30 stocks
-more exclusive
-bluechip stocks
-represent 1/5 of total market value

102
Q

bluechip stocks

A

stocks that have been around for a while
-mature within the industry
-solid history of growth performance

103
Q

S&P 500

A

measure of 500 largest market cap stocks
-“the market”

104
Q

Who uses the financial statements of a firm and why?

A

-investors – determine earnings potential
-market analysts – analyze growth potential
-creditors – predict if cash can cover debt

105
Q

Which one of the following will decrease the net working capital of a firm?

A

Making a payment on a long-term debt

106
Q

Which of the following is an example of a capital market instrument?

A

preferred stock

107
Q

the more ______ a firm requires, the more likely it’s a ______

A

capital; corporation

108
Q

the prices of stock reflect what?

A

all publicly available information

109
Q

Retained earnings represent:

A

profits that have been re-invested in the company.

110
Q

example of window dressing

A

Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio

111
Q

what is the ITO and DSO used for?

A

assess how effectively a firm is managing its current assets.

112
Q

examples of stockholders

A

shareholders, anybody who owns outstanding shares.

113
Q

examples of stakeholders

A

investors, employees, customers, and suppliers

114
Q

examples of money market securities

A

-commercial papers
-money market mutual funds
-us treasury bills

115
Q

examples of capital market securities

A

-debt and equity securities
-long-term corporate bonds
-common stock
-preferred stock

116
Q

stock market

A

allows companies to raise equity capital by selling shares to investors

117
Q

bond market

A

raise debt capital by issuing bonds

118
Q

stock/bond markets

A

facilitate the transfer of funds from investors to businesses

119
Q

debt to equity ratio

A

measures proportion of company’s financing that comes from debt compared to equity
-higher = more risk

120
Q

financial intermediaries

A

facilitate flow of cash between savers and borrowers
-loans
-mutual funds

121
Q

advantages of investing in bonds

A

-regular interest payments
-relative stability

122
Q

advantages of investing in stocks

A

-higher potential returns
-less interest rate risk

123
Q

current ratio & quick ratio

A

assess a company’s liquidity

124
Q

dividend

A

pay back to investors

125
Q

when was NASDAQ formed?

A

1971

126
Q

when was NYSE formed?

A

1792

127
Q

index fund

A

little money invested in all companies

128
Q

stock market

A

not the real value of the stock, what OTHER PEOPLE think the real value is
-new stories can make a stock rise/fall

129
Q

warren buffet says:

A

“buy low cost index funds”

130
Q

derivative

A

price depending on one asset
-used to either reduce risks or speculate

131
Q

money market funds

A

“checking accounts” that invest in low-risk securities

132
Q

changes to financial markets

A

-technological advances
-globalization of banking/commerce
-increase of derivatives

all lead to increased competition and new opportunities but also new risks

133
Q

a larger bid ask means recognizing a ______ profit

A

higher

Finance 355 (1 decks)

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