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FI 311 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Financial management

A

How to run a firm to max value. How to raise funds.

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2
Q

Financial institutions

A

Where savers meet borrowers. Supply capital to firms

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3
Q

Forms of business organization

A

Propietorship, parternship, corporations

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4
Q

Proprietorship

A

Unincorporated, owned by individual

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5
Q

Partnership

A

Unincorporated, owned by two or more

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6
Q

Corporation

A

A legal entity, separate ownership and management

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7
Q

Proprietorship and partnership advantages

A

Ease of formation, subject to few regulations, no corporate income taxes

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8
Q

Proprietorship and partnership disadvantages

A

Difficult to raise capital, unlimited liablitiy, limited life

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9
Q

LLC/LLP

A

Hybrid: low income taxes and limited liability

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10
Q

Corporation advantages

A

Unlimited life, easy transfer of ownership, limited liability, ease of raising capital

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11
Q

Corporation disadvantages

A

Double taxation and cost of setup and report filling

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12
Q

S corporation

A

Private less than 100 owners. Avoid tax

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13
Q

C corporation

A

Public

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14
Q

The primary financial goal of management is

A

Shareholder wealth max and max stock price

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15
Q

Managers reocognize

A

That being socuially responsible is consistent with maxing shareholder value

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16
Q

Intrinsic value

A

True value

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17
Q

Market value

A

The extent that investor perceptions are incorrect

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18
Q

Important business trends

A

Increased business ethics, increased globalization, improving tech, stockholders have more control of corporate governance

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19
Q

Conficts between stockholders and bondholders

A

Stockholders prefer riskier projects, bondholders concerned about use of addional debt, bondholders limit use of addional debt

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20
Q

Stockholders

A

Have owners stake and get more when company has higher profit

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21
Q

Bondholders

A

Recieve fixed payment of interst regardless of how well the company does

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22
Q

Suppliers of capital

A

Excess funds and looking for a rate of return on their investments

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23
Q

Demanders of capital

A

Need to raise funds and are willing to pay a rate of return on captial

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24
Q

Direct transfers

A

From savers to business: private placement. Underwriters

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25
Q

Investment banks

A

Indirect transfer. Investment to JPM to FB. Money from FB to JPM to investor

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26
Q

Financial intermediaries

A

Indirect. Money from You to bank of america to syco. Investment from sysco to bofa to you

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27
Q

Market

A

Venue where goods and services are exchanges

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28
Q

Financial market

A

Place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds

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29
Q

Physical asset market

A

Tangiable or real assets

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30
Q

Finacial assets

A

Stocks bonds notes mortages

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31
Q

Spot markets

A

Assets are bought and sold for an on the spot delivery

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32
Q

Future market

A

Buyer seller agree today to buy sell something in the future

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33
Q

Money market

A

Funds borrowed or loaned for short periods

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34
Q

Capital markets

A

For stocks and longer term debt

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35
Q

Primary market

A

Firms raise capital by issuing new securities. Moving to a c corp

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36
Q

Secondary marker

A

Exisitinf securites are traded

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37
Q

Public market

A

Standard exchange on the stockmarket

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38
Q

Private market

A

Directly involve buyers and sellers

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39
Q

Derivatives

A

Securities value derived from the price of another security

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40
Q

Derivatives for hedging

A

An importer whos profit falls when the dollar loses value could purchase currency futures that do well when the dollar weakens

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41
Q

Speculators using derivatives

A

To bet on direction of future stock prices. Increase risk

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42
Q

Investment banks

A

Sell securities on behalf of the company

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43
Q

Financial service corporations

A

Large mix include many different financial markets

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44
Q

Pension funds

A

Returement fund funded by employer

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45
Q

Mutal funds

A

Collect money from investors and invest

46
Q

Exchange traded funds

A

Invest in specific

47
Q

Private equity comapanies

A

Buy companies manage for a few years then resell

48
Q

Bull market

A

Stockmarket increasing

49
Q

Bear market

A

Stockmarket decreasing

50
Q

Frame dependence

A

How being asked will change outcome. Overconfidence and regret avoidance

51
Q

Heuristics decisions

A

Too much weight on negative and recent

52
Q

Proponents of market effieciency

A

Increase number of analysis and lower transaction cost would make markets to become increasingly efficient

53
Q

Opponents to markets efficient

A

The existence of recent housing buble and previous IT bubble provides contrary evidence

54
Q

Performance measures for evaluating managers

A

MVA and EVA

55
Q

MVA

A

Difference between market value and bookvalue

56
Q

EVA

A

Estimate of a business true economic profit for a given year

57
Q

EVA equation

A

EBIT(1-T)-(invesor supplied capital x cost of capital)

58
Q

Net operation working capital

A

Current assets-current liabilites-notes payable

59
Q

EVA positive

A

AT operating income> cost of cap needed to produce that income. Managers added back

60
Q

Decrease depreciation years

A

Fixed assets, net income, and tax payments would all decline. Cash position would increase

61
Q

Corp taxes

A

Rates begin at 15% and rise to 35% for corps with income over 10m. Between 15-18.33m pay 38%. State tax of 5%

62
Q

Individual taxes

A

Rates at 10% raise to 35% over $372950. May have state tax

63
Q

Interest paid

A

Tax deductable for corps not individual expect interst on home loans

64
Q

Interest earned

A

Fully taxable except muni taxes

65
Q

Dividends paid

A

Paid out of after tax income

66
Q

Captial gains

A

Profits from the sale of assets not normally transacted. Individual taxed as ordinary income

67
Q

Why are ratios useful

A

Standardize numbers and facilitate comparisons, highlight weaknesses and strengths

68
Q

Different ratio analysis

A

Trend, industry, benchmark (compare with simalar sized companies)

69
Q

Liquidity

A

Can we make required payments

70
Q

Asset management

A

Right amount of assets vs sales

71
Q

Debt management

A

Right mix of debt and equity

72
Q

Profitability

A

Do sales prices exceed unit cost and are sales high enough as reflected in PM ROE and ROA

73
Q

Market value

A

Do investors like what they see as reflected in P/E and M/B ratios

74
Q

Liquidity ratios

A

Current ratio and quick ratio

75
Q

Current ratio

A

How fast company can pay off liability. Higher is better

76
Q

If liqudity ratios are lower than industry

A

Cant make payments as easily as others in the industry

77
Q

Asset management ratios

A

Inventory turnover, days sales outstanding, fixed assets turnover, total asset turnover

78
Q

Inventory turnover ratio

A

How many times restocked and sold

79
Q

Inventory turnover below industry

A

Have old inventory or control might be poor: carrying too much inventory

80
Q

Days sales outstanding ratio

A

Has to do with the firms credit policy

81
Q

Cash in advance

A

Buyer pays first because they have no or bad credit or demand is higher than supply

82
Q

Open account

A

Seller sends supply first

83
Q

TA turnover below industry

A

Caused by excessice current assets

84
Q

Debt management ratios

A

Debt ratio, time interest earned

85
Q

Debt ratio and TIE

A

Lower is better

86
Q

Debt ratio and TIE better than industry

A

Firm is using a manageable amount of debt and a low interest payment is a result

87
Q

Better leveraged or unleveraged

A

Tradeoff between higher expected return and increased risk

88
Q

Profitability ratios

A

Operating margin, profit margin, basic earning power, return on assets, return on equity

89
Q

Basic earning power

A

Removes the effects of taxes and financial leverage and is useful for comparison

90
Q

Return on equity is important

A

Because it shows how much stockholders earn as a return on their money

91
Q

Holding assets constant, if debt increases

A

Equity declines, interest expense increases(reduce NI), ROA declines, ROE either

92
Q

ROE problems

A

Doesnt consider risk, doesnt consider amount of capital invested

93
Q

Market value ratios

A

Price earnings and market book

94
Q

Price earnings ratio

A

How much investors are willing to pay for $1 of earnings. High for firms with strong growth and low risk. Low for slow growth and high risk

95
Q

Market book ratio

A

How much investors are willing to pay for $1 of book value equity

96
Q

DuPont equation

A

ROE= profit marginTATOEquity multiplier

97
Q

DuPont equatio reasoning

A

Focuses on expense control, asset utilization, and debt utilization

98
Q

Limitations if ratios

A

Comparisons hard with multiple divisions, different accounting can distort, hard to tell if good or bad strong or weak, average not good, seasonal factors, window dressing, inflation

99
Q

Nominal rate

A

Stated rate that is the annual rate

100
Q

Periodic rate

A

Amount of interest charged each period

101
Q

Effective rate

A

Annual rate of interest actually being earned. (1+I/M)^N*M-1

102
Q

Nominal used

A

For contracts, quotes, and brokers

103
Q

Perpetual used

A

Calculations and shown on time lines

104
Q

Effective rats

A

Compare returns on investments

105
Q

Can effective ever equal nominal

A

Yes if compounded annually

106
Q

Amoritized loan

A

Deals with a loan that is repaid in equal payments over time (includes the principal and the interest)

107
Q

Step one amortized loan

A

Find the required annual payment

108
Q

Step two amorization

A

Find the interest paid in year one

Begining balance*interest rate

109
Q

Step three amortization

A

Find the principal repaid in year one

PMT-INT

110
Q

Step four amoritzation

A

Find the ending balance after year one

Beginning balance-principal

111
Q

You sold 100 shares of stock and got the money then and gave the certificate up then what is this transaction?

A

Direct transfer of captial

FI 311 (3 decks)

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