EXAM ONE Flashcards
Why is Competitive Advantage Important?
- It’s necessary for a business to survive in the long run
- It generates significant value to the business
Do competitive advantages last forever?
It depends, you have to protect it, and others will try to replicate your success
Basic accounting equation
Assets = Liabilities + Equity
What does financing buy us (the company)
We use money to buy stuff, which generates sales
If it takes a lot of “stuff” to make a profit…
Not a great return, unless we’re using other people’s money
What do firms do with extra cash?
Pay expenses (taxes & salaries), Pay investors, Keep money in the firm
Cash Inflow must equal
Cash outflow
If input is less than output needs…
there is a problem
Where businesses and individuals go to raise capital
Financial Markets
Name examples of some transactions in a Financial Market
- A business may need to get a loan to build a new plant
- A business might want to buy another business
Financial market transactions tend to happen through
Intermediaries
Examples of Intermediaries
- Commercial Banks
- Investment Banks
- Brokerage Firms
Explain the Theory of the Firm
A set of theories that explain why firms exist, how they operate, and how they make decisions
Managers hold better information than shareholders, and shareholders know it
Asymmetric Information
Managerial actions convey information about the true state of the company
Asymmetric Information
When a principal hires an agent to act on their behalf
Agency Relationship
Agency relationships exist between shareholders and managers in
Corporations
How does the conflict between managers and shareholders manifest itself
- Avoiding risk
- Reduced effort
- Entrenching investment
- Taking excessive risk
How can the conflict between Agency relationships be resolved
- Managerial compensation plans
- Direct intervention by shareholders
- The threat of firing
The goal of all businesses is to…
Maximize company value
Why do we care about Financial statements?
- FS is the language of business
- Gives insight into the business
- A snapshot of the business’ health
What is on the Balance Sheet?
- Total Assets
- Total Liabilities
- Shareholder’s Equity
What is Net Working Capital?
- Generally a positive in a financially healthy firm
- Gives an indication of liquidity
The cash that keeps the business running
Net Working Capital
The stuff:
- Machines
- Buildings
- Warehouses
Fixed or Long-Term Assets/Tangible
Not stuff:
- Goodwill
- Accruals
Intangible Assets
Liabilities longer than a year
Long-term
Liabilities less than a year
Current
Cash Flow from Assets Equation
CFC + CFS
Refers to cash generated from a firm’s normal business activities
Operating Cash Flow
Refers to the net spending on fixed assets
Capital Spending
Is measured as the net change
in current assets relative to current liabilities for the period being
examined and represents the amount spent on net working
capital
Change in NWC
Change in NWC only happens each year
Correct
DuPont System focuses on
- Expense Control: (P.M)
- Asset Utilization: (TATO)
- Debt Utilization: (E.M)
ROE equation
ROA * EM
or
PM * TATO * EM
ROA Equation
PM * TATO
