Exam 1 Prep Flashcards
What is finance?
A subfield of economics
Make decisions regarding what assets to buy/sell and when to buy/sell these assets
What is the cycle of money?
The flow of money through the economy, from lenders/investors to borrowers.
What are primary markets?
Markets where new securities are issued and sold for the first time.
What are secondary markets?
Markets where used securities are traded among investors.
What are the different types of firms?
Sole proprietorships, partnerships, corporations, and limited liability companies.
What is the role of a financial manager?
To make investment decisions, manage financial resources, and ensure the firm’s financial health.
What are the functions of financial management?
Investment decisions, financing decisions, and dividend decisions.
What are the goals of corporations?
Maximizing shareholder wealth and ensuring long-term sustainability.
What are agency issues?
Conflicts of interest between management and shareholders.
What is a balance sheet?
A financial statement that summarizes a company’s assets, liabilities, and equity.
What is the accounting identity?
Assets = Liabilities + Equity.
What is an income statement?
A financial statement that shows a company’s revenues and expenses over a specific period.
What is net income?
The profit of a company after all expenses and taxes have been deducted.
What is EBIT?
Earnings Before Interest and Taxes.
What is operating cash flow?
Cash generated from normal business operations.
What is the difference between cash flows and earnings?
Cash flows represent actual cash transactions, while earnings include non-cash items.
Why does money have time value?
Because of impatience, a dollar today is worth more than a dollar in the future
What is compound interest?
Interest calculated on the initial principal and also on the accumulated interest from previous periods.
What is future value?
The value of an investment at a specific date in the future based on an assumed rate of growth.
What is the formula for future value?
FV = PV * (1 + r)^n.
What is present value?
The current worth of a future sum of money based on a specific rate of return.
What is the formula for present value?
PV = FV / (1 + r)^n.
What is the Rule of 72?
A formula to estimate the number of years required to double the invested money at a fixed annual rate of return.
What are annuities?
equal, constant, periodic cash outflow/inflow (rent mortagage, car loan)
What is the future value of an annuity?
The total value of a series of cash flows at a specified point in the future.
What is the present value of an annuity?
The current worth of a series of future annuity payments discounted at a specific interest rate.
What is an annuity due?
An annuity where payments are made at the beginning of each period.
What is an ordinary annuity?
An annuity where payments are made at the end of each period.
What is a perpetuity?
A financial instrument that pays a constant cash flow indefinitely.
What is the formula for finding waiting time and the interest rate?
Not specified in the outline.
What are lottery problems in finance?
Problems involving the calculation of present or future value of lottery winnings.
What are loan payment methods?
Methods to repay borrowed money, including amortization and interest-only payments.
Main areas of finance
Corporate finance and investments
What is a money market
Short, investors buy or sell within a year
What is a capital market
Long, financial assets that have maturities past a year
Enterprise value
Mkt val equity + debt - cash
Ultimate source of any return of investment for investors
Operating cash flow
Cash flow=
EBIT + Dep - Tax
How to calculate EBIT
rev- operating expenses
(sometimes includes depreciation)
or
net income +interest+ taxes+depreciation
How to calculate cash flow
EBIT + depreciation - tax
