exam 1 Flashcards
interest
an amount paid to the lender as a fee
principal
the initial amount borrowed
unsecured debt
debt without collateral
collateral
the property the lender can take if the borrower fails to pay
default
failure by borrower to pay interest and capital back
mortgage
a loan secured by real estate
secured debt
debt with collateral
short-term debt capital
a loan that must be repaid within a year
loan, money market
long-term debt capital
loan with term greater than 1 year
loan, bond
par value
face value
dividend
distribution payment of the corporations net income
2 types of equity capital
Preferred and common
only common is required
stockholder focus on common
board of directors
protects the interests of the shareholders
consists of execs, large shareholders, officers
finance vs accounting
finance focuses on the future, accounting focuses on the past
synonym for forecast/projection
Pro Forma
Free Cashflow
cash generated by business over what is needed for operations
uses of free cashflow
Distribute dividends
Buy back stock
expenditure
a cash outflow, but not an expense
non-cash expense
reduces current period net income but doesnt use cash in the current period
Dep Exp, Amort Exp
CAPEX
Capital Expenditures
money used to acquire and maintain fixed assets
Goal of financial management
maximize wealth of stockholders
max value of stock/company
Alternate term for EBIT
Operating profit/earning before income tax
3 limitations of a social science
imprecise prediction
relationships between social variables (the economy) can change
social phenomena can be difficult to observe
types of businesses
corp - stakeholders - 1-3
partnership - partners - 2
sole proprietorship - proprietor - 1
LLC - members - 1 - newest
2 types of stock
common - required to be public
preferred - optional
who can become an owner of a private company
make an investment or be invited
who can be an onwer of a public company
anyone who buys a share of stock
corp vs incorp
corp is formed to serve a function of a business
incorp is the process to be legally set up as a business
LLC features
combines tax level of a partnership with the limited liability of a corp
CEO
highest rank in a corp makes managerial decisions
CFO
executive with responsibility for financial direction of a corp
treasurer
appointed to manage finances of entire corp or body
controller
responsible for all accounting activities/day to day managerial decisions of accounting
wealth vs income
what you have / what you earn
net worth
the difference between an entity’s assets and liabilities
benchmark
ratios used for industry standards
treasury stock
issued stock bought back by the company
sales mix
portion of sales a particular product makes up
why can a gross margin change
the cost of goods and merchandise
change in selling price
varies by product due to variable cost per product
current ratio
current assets/current liabilities
operating/working capital
current assets-current liabilities
gross margin
gross profit/net sales
operating margin
EBIT/net sales
net profit margin
net income/net sales
leverage
potential increase on investment returns
decreases amount owners must invest
businesses may default
interest expense could reduce or eliminate profit
Ending Retained Earnings
Beg. Ret. Earn. + Net Income - Dividends
High Low div payout ratio per business
big corp/established brand = high
small businesses/young companies = small
reinvested profits
can increase value and productivity
3 plans of a business
strategic, operating, financial
strategic plan
plan including mission statement, statement of corporate scope and target objectives
operating plan
detailed plan that indicates dept. responsibilities, timelines for tasks and profit targets
financial plan
projection of company’s finances, assuming operation plan works
statement of corporate scope
defines a firms line of business and geographic areas of operation
mission statement
condensed version of a firms strategic plan
1st pro forma statement prepared
income statement
business capacity
maximum business potential output
EBITDA
earnings before income tax, depreciation, and amortization, not shown on income statement
3 definitions of risk
uncertainty of an outcome
possibility of loss
undesired outcome
2 components of return
income from investing (stocks/interest,bonds/interest,rental/rent)
growth and capital gains/losses (stocks,bonds, rental value)
total return
amount received - amount invested
1 component - bonds
2 component - stocks
risk - return trade off
when expected return > required return - invest
assumption of risk
the more volatile, the riskier it is
interest formula
int. = principal * int rate * fraction of a year
