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Fin 301 > Exam one study guide > Flashcards

Exam one study guide Flashcards

1
Q

What is finance all about

A

Creation of value:

via investing in assets

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2
Q

Two main decisions to make

A
  1. Investment decision (Capital budgeting decision)

2. Financing decision

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3
Q

What is firm’s objective?

A

Maximize shareholders wealth

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4
Q

[Formula] Shareholder wealth =

A

outstanding of shares x market price of stock

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5
Q

Is it true that corporations are managed in the interest of shareholders?

A

Yes

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6
Q

Agency problem

A

conflict between principals and agents.
Principals: shareholders
Agents: managers

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7
Q

How to ensure managers will act in the interest of shareholders?

A

agency costs to the principal. (Stock option)

Agency costs to the agents (bonding costs)

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8
Q

Financial management team

A

Treasurer

Chief financial officer

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9
Q

Is the firms objective to increase the current or future stock price?

A

current

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10
Q

Corporate finance is about investment in _____ assets

A

real

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11
Q

Individual investors invest in ____ assets

A

financial

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12
Q

What is the pros of a corporation?

A
  • legal entity
  • limited liability
  • Separation of ownership and management control
  • Double taxation
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13
Q

Is it possible that the market value of stock is
not the same as the accounting value in the
balance sheet? Which one is more important?

A

no they are different

market value is more important

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14
Q

How does the active trading stocks issued by a firm in the stock market help the firm?

A

it helps with the business expansion

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15
Q

Firms ______ spending units

A

deficit

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16
Q

Individual investors _____ Spending units

A

surplus

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17
Q

primary market

A

debt equity. Firms

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18
Q

secondary market

A

financial asset. individual investors

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19
Q

investment:

A

sacrifice current consumption

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20
Q

Who are the two major players in an financial market?

A

Firms, individual investors

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21
Q

best system is a

A

free market place system

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22
Q

What market does individaul investors use to invest.

A

secondary market

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23
Q

Is a money market temporary or long term?

A

temporary, 1 year.

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24
Q

is a capital market temporary or long term

A

long term

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25
Q

If they issue you long-term debt its called ______ market

A

primary

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26
Q

Where do you invest in secondary markets?

A

exchanges, otc.

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27
Q

What is a traditional investment company?

A

Hedge fund

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28
Q

Why would someone seek out an investment company

A

funds are professional managed. Helps people who don’t want to constantly look at the market

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29
Q

Sometimes if you want \to exchange stocks you would need help from?

A

Brokerage firm

But sometimes you don’t need their assistance

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30
Q

Derivatives markets

A

contract between 2 parties

used for security.

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31
Q

A necessary condition for the financial market
places to contribute to the persistent economic
wealth and growth?

A

Competitive, Efficient and Fair Financial Market

System!

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32
Q

Sarbanes-Oxley Act of 2002

A

(Protect investors from the possibility of fraudulent

accounting activities.)

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33
Q

What acts made there be too much regulation?

A

Dodd frank wall street reform

Consumer protection act

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34
Q

What is a key component to the Dodd frank act

A

blocker rule restricts the way banks can invest, limit speculative trading and eliminating proprietary trading

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35
Q

Derivative markets players (4)

A
  1. households
  2. business firms
  3. government
  4. financial intermediaries
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36
Q

Balance sheet

A

snapshot of the firm’s status of “investment” and “financing position” at a given time.

37
Q

Total value of assets

A

current assets, fixed assets (tangible fixed assets and intangible fixed assets)

38
Q

Total Value of Liabilities and Shareholders Equity

A

Current liability
Long-term Debt
Shareholders’ equity

39
Q

Which 3 are Financing structure

A

current liabilities
long term debt
shareholders equity

40
Q

On the balance sheet, assets are listed in the ____ __ ______

A

order of liquidity

41
Q

Balance sheet identity

A

assets = liabilities + shareholders equity

42
Q

Most liquid asset:

A

Doesn’t last for more than one year.

Cash
Accounts receivable
inventory

43
Q

Current liabilities

A

Account payable

Notes payable

44
Q

What is considered long term debt

A

more than one year

45
Q

What’s the ideal relationship between assets and liabilities

A

current asset should be more than liability

46
Q

What is network Capital?

A

the difference between current asset and current liability

47
Q

+ or - for network capital

A

it should be positive

48
Q

Companies should invest in what?

A

network capital

49
Q

Once the current asset disappear it becomes? Once the current liability disappear it becomes?

A

Net Working Capital;

doesn’t become anything

50
Q

After the current liability disappears what is left?

A

long-term debt

shareholders’ equity

51
Q

After the current liability disappears and there is only long-term debt and shareholders’ equity. What is that called?

A

Capital structure

52
Q

What does the balance sheet provides

A

the book value of the assets, liabilities, and equity.

53
Q

______ _____ is the price at which the assets, liabilities, or equity can actually be bought or sold now.

A

Market value.

54
Q

Which is more important in the financial decision-making process (Market value or Book value)

A

Market value

55
Q

Difference between net fixed asset and fixed asset

A

net fixed asset - takes out depreciation

fixed asset - still has depreciation

56
Q

Income statement

You generally report ______ first and then deduct any ______ for the period

A

revenues

expenses

57
Q

What is net sales or net value

A

Revenue

58
Q

What is EBIT

A

earning before interest and taxes

59
Q

What is EBT

A

earning before taxes

60
Q

What is EAF? What is it under.

A

Earning after taxes

Income tax = EAF

61
Q

How do you get EBIT?

A

Net sales (Revenue) - Cost of goods sold - Depreciation = earning before interest and taxes (EBIT)

62
Q

How do you get EBT?

A

Earning before interest and taxes - interest paid = Taxable income (EBT)

63
Q

How do you get earning after taxes ?

A

Taxable income - taxes = net income

64
Q

What are the expenses after Earning after taxes or Net income?

A

Dividends

Retained earnings

65
Q

What should you do with cash?

A

You should invest into the company. There is no point of holding cash.

66
Q

How do you get total current assets on your balance sheet?

A

Cash + AR + Inventory

67
Q

How do you get total assets on your balance sheet?

A

Net fixed assets + Current Total assets.

68
Q

How do you get current liabilities on your balance sheet?

A

Account payable + Notes payable

69
Q

How do you get total liabilities and owners equity?

A

Current total liabilities + Long term Debt + Owners equity (Common stock and paid-in surplus + retained earnings )

70
Q

Marginal tax

A

the percentage paid on the next dollar earned

71
Q

average tax rates

A

the tax bill / taxable income

72
Q

Look at marginal tax Schedule

A

Review of financial statements (6)

73
Q

_____ ___ is one of the most important
information that investors can derive from
financial statements

A

Cash flow

74
Q

What is operating cash flow

A

operating cash flow
after tax flow
tax flow from sasets

75
Q

What is OCF?

A

Operating cash flow

76
Q

What does OCF show ?

A

shows the operating side cash flows available for

creditors and shareholders.

77
Q

What is the formula for OCF?

A

OCF = EBIT + Depreciation – Taxes

78
Q

What is ATCF?

A

After tax cash flow

79
Q

What does ATCF show ?

A

shows CF available for shareholders

80
Q

What is the formula for ATCF?

A

ATCF = OCF – Interest pmt

81
Q

Cash Flow From Assets =

A

= Operating Cash Flow – Net Capital Spending – Changes in NWC

82
Q

Cash Flow From

Assets (CFFA)

A

Cash Flow to Creditors
+
Cash Flow to Stockholders

83
Q

Look at the last slide for replacement chapter 4

A

8

84
Q

Perpetuity –

A

infinite series of equal

payments

85
Q

Annuity –

A

finite series of equal payments

that occur at regular intervals

86
Q

If the first payment occurs at the end of the
period, it is called an

A

ordinary annuity

87
Q

If the first payment occurs at the beginning of

the period, it is called an

A

annuity due

88
Q

For a given interest rate – the _____ the

time period, the lower the present value

A

longer

89
Q

For a given time period – the _____ the

interest rate, the smaller the present value

A

higher

Fin 301 (9 decks)

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