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Principles of Finance > Exam 1: Chapter 1-5 > Flashcards

Exam 1: Chapter 1-5 Flashcards

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1
Q

What are the determinants of a firms probability and growth?

A
  1. Profit Margin: Operation efficiency
  2. Total Asset Turnover: Asset use efficiency
  3. Financial leverage: Choice of optimal debt ratio
  4. Dividend Policy: Choice of how much to pay shareholders vs. reinvesting in the firm.
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2
Q

What is perpetuity?

A

Perpetuity is an infinite series of equal payments that continue indefinitely

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3
Q

What is annuity?

A

Annuity is a finite series of equal payments that has a specific end date

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4
Q

What is the difference between annuity and perpetuity?

A

A perpetuity is an infinite series of equal payments that continue indefinitely. It is different from an annuity, which has a finite number of payments. Perpetuities have no end date, while annuities have a specific end date

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5
Q

What is annual annuity?

A

When the first payment occurs at the beginning of the period

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6
Q

What is ordinary annuity?

A

When the first payments occurs at the end of the period

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7
Q

What are some problems and pitfalls in financial statement analysis?

A
  1. Conglomerates
    a. Lack of readily available comparable
  2. Global competitors
  3. Different accounting procedures
  4. Different fiscal year ends
  5. Differences in capital structure
  6. Seasonal variation and one-time events
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8
Q

What is dividend policy?

A

The decision-making process of a company in determining how much of its earnings should be distributed to shareholders as dividends and how much should be retained for reinvestment in the firm

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9
Q

What does financial leverage refer to?

A

It refers to the use of debt to finance a company’s operations and investments, and it involves finding the optimal debt ratio that maximizes the company’s value

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10
Q

What is total asset turnover?

A

Total asset turnover is a measure of a company’s efficiency in using its assets to generate revenue.

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11
Q

What is profit margin?

A

Profit margin is a measure of a company’s profitability

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12
Q

What is the role of a financial manager

A

The financial manager is responsible for making decisions regarding long-term investments, obtaining financing for those investments, and managing the day-to-day financial activities of the firm

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13
Q

What are the 4 common ratios

A
  1. Current Ratio: Used to asses a company’s short term liquidity
  2. Debt-to-equity: To measure a company’s financial leverage
  3. Gross profit margin: To evaluate a company’s profitability
  4. Return of equity: To asses the return generated for shareholders’ investment
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14
Q

What are Standardized Financial statements useful for?

A
  1. Comparing financial information year-to-year
  2. Comparing companies of different sizes within the same industry
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15
Q

What does Standardized Financial Statements involve?

A

Adjusting the financial data to make them comparable across different time periods or companies

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16
Q

What is average tax?

A

average tax is the total tax paid divided by the total taxable income

17
Q

What is marginal tax?

A

Percent of tax paid on the next dollar earned

18
Q

What is fixed cost?

A

Costs that do not change with the level of production or sales.
Example: rent or salaries.

19
Q

What are variable cost?

A

Cost that change with the level of production or sales.

Example: Raw materials or Direct labor cost

20
Q

What is an income statement?

A

An income statement is a financial statement that shows a company’s revenues, expenses, and net income over a specific period of time

21
Q

What is a balance sheet?

A

A balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time

22
Q

What is account value (book value)?

A

The value of assets, liabilities and equity as recorded on the balance sheet

23
Q

What is market value?

A

Market value is the true value of items in the market

24
Q

What conflicts of interest can arise between a manager and an owner?

A
  1. Excessive compensation
  2. Pursuing personal projects at the expense of the company
  3. Making decisions that benefit themselves rather than the shareholders.
25
Q

What are the difference business organizations

A
  1. Sole Proprietorship
  2. Partnership
    a. General
    b. Limited
  3. Corporation
    a. S-Corp
    b. LLC
26
Q

Define a Sole Proprietorship

A

Business owned by one person

27
Q

What are the advantages of a Sole Proprietorship?

A
  1. Easiest to start.
  2. Least regulated
  3. Single owner keeps all the profits.
  4. Taxed once as personal income.
28
Q

What are the disadvantages of a Sole Proprietorship?

A
  1. Limited to life of the owner
  2. Equity capital limited to owner’s personal wealth.
  3. Unlimited liability
  4. Difficult to sell ownership interest.
29
Q

What is a Partnership?

A

Business owned by two or more people

30
Q

What are the advantages of a Partnership?

A
  1. Two or more owners
  2. More capital available
  3. Relatively easy to start
  4. Income taxed once as personal income.
31
Q

What are the disadvantages of a Partnership?

A
  1. Unlimited Liability
  2. General Partnership
  3. Limited Partnership
  4. Partnership dissolves when one partners dies or wishes to sell.
  5. Difficult to transfer ownership.
32
Q

What is a Corporation?

A

A legal “person” from owners and a resident of a state.

33
Q

What are the advantages of a Corporation?

A
  1. Limited Liability
  2. Unlimited Life
  3. Separation of ownership and management
  4. Transfer of ownership is easy
  5. Easier to raise capital
34
Q

What are the disadvantages of a Corporation?

A
  1. Separation of ownership and management (agency problem)
  2. Double taxation (income taxed of the corporate rate and then dividends taxed at personal rate while dividends paid are not tax deductible.)
35
Q

What are the types of Financial Management Decisions?

A
  1. Capital Budgeting: What long term investments or projects the business should take on
  2. Capital Structure: Deciding whether or not we should use debt or equity to pay for our assets
  3. Work Capital Management: How do we manage the day-to-day finances of the firm

Principles of Finance (1 decks)

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