Exam one study guide Flashcards
What is finance all about
Creation of value:
via investing in assets
Two main decisions to make
- Investment decision (Capital budgeting decision)
2. Financing decision
What is firm’s objective?
Maximize shareholders wealth
[Formula] Shareholder wealth =
outstanding of shares x market price of stock
Is it true that corporations are managed in the interest of shareholders?
Yes
Agency problem
conflict between principals and agents.
Principals: shareholders
Agents: managers
How to ensure managers will act in the interest of shareholders?
agency costs to the principal. (Stock option)
Agency costs to the agents (bonding costs)
Financial management team
Treasurer
Chief financial officer
Is the firms objective to increase the current or future stock price?
current
Corporate finance is about investment in _____ assets
real
Individual investors invest in ____ assets
financial
What is the pros of a corporation?
- legal entity
- limited liability
- Separation of ownership and management control
- Double taxation
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?
no they are different
market value is more important
How does the active trading stocks issued by a firm in the stock market help the firm?
it helps with the business expansion
Firms ______ spending units
deficit
Individual investors _____ Spending units
surplus
primary market
debt equity. Firms
secondary market
financial asset. individual investors
investment:
sacrifice current consumption
Who are the two major players in an financial market?
Firms, individual investors
best system is a
free market place system
What market does individaul investors use to invest.
secondary market
Is a money market temporary or long term?
temporary, 1 year.
is a capital market temporary or long term
long term
If they issue you long-term debt its called ______ market
primary
Where do you invest in secondary markets?
exchanges, otc.
What is a traditional investment company?
Hedge fund
Why would someone seek out an investment company
funds are professional managed. Helps people who don’t want to constantly look at the market
Sometimes if you want \to exchange stocks you would need help from?
Brokerage firm
But sometimes you don’t need their assistance
Derivatives markets
contract between 2 parties
used for security.
A necessary condition for the financial market
places to contribute to the persistent economic
wealth and growth?
Competitive, Efficient and Fair Financial Market
System!
Sarbanes-Oxley Act of 2002
(Protect investors from the possibility of fraudulent
accounting activities.)
What acts made there be too much regulation?
Dodd frank wall street reform
Consumer protection act
What is a key component to the Dodd frank act
blocker rule restricts the way banks can invest, limit speculative trading and eliminating proprietary trading
Derivative markets players (4)
- households
- business firms
- government
- financial intermediaries
Balance sheet
snapshot of the firm’s status of “investment” and “financing position” at a given time.
Total value of assets
current assets, fixed assets (tangible fixed assets and intangible fixed assets)
Total Value of Liabilities and Shareholders Equity
Current liability
Long-term Debt
Shareholders’ equity
Which 3 are Financing structure
current liabilities
long term debt
shareholders equity
On the balance sheet, assets are listed in the ____ __ ______
order of liquidity
Balance sheet identity
assets = liabilities + shareholders equity
Most liquid asset:
Doesn’t last for more than one year.
Cash
Accounts receivable
inventory
Current liabilities
Account payable
Notes payable
What is considered long term debt
more than one year
What’s the ideal relationship between assets and liabilities
current asset should be more than liability
What is network Capital?
the difference between current asset and current liability
+ or - for network capital
it should be positive
Companies should invest in what?
network capital
Once the current asset disappear it becomes? Once the current liability disappear it becomes?
Net Working Capital;
doesn’t become anything
After the current liability disappears what is left?
long-term debt
shareholders’ equity
After the current liability disappears and there is only long-term debt and shareholders’ equity. What is that called?
Capital structure
What does the balance sheet provides
the book value of the assets, liabilities, and equity.
______ _____ is the price at which the assets, liabilities, or equity can actually be bought or sold now.
Market value.
Which is more important in the financial decision-making process (Market value or Book value)
Market value
Difference between net fixed asset and fixed asset
net fixed asset - takes out depreciation
fixed asset - still has depreciation
Income statement
You generally report ______ first and then deduct any ______ for the period
revenues
expenses
What is net sales or net value
Revenue
What is EBIT
earning before interest and taxes
What is EBT
earning before taxes
What is EAF? What is it under.
Earning after taxes
Income tax = EAF
How do you get EBIT?
Net sales (Revenue) - Cost of goods sold - Depreciation = earning before interest and taxes (EBIT)
How do you get EBT?
Earning before interest and taxes - interest paid = Taxable income (EBT)
How do you get earning after taxes ?
Taxable income - taxes = net income
What are the expenses after Earning after taxes or Net income?
Dividends
Retained earnings
What should you do with cash?
You should invest into the company. There is no point of holding cash.
How do you get total current assets on your balance sheet?
Cash + AR + Inventory
How do you get total assets on your balance sheet?
Net fixed assets + Current Total assets.
How do you get current liabilities on your balance sheet?
Account payable + Notes payable
How do you get total liabilities and owners equity?
Current total liabilities + Long term Debt + Owners equity (Common stock and paid-in surplus + retained earnings )
Marginal tax
the percentage paid on the next dollar earned
average tax rates
the tax bill / taxable income
Look at marginal tax Schedule
Review of financial statements (6)
_____ ___ is one of the most important
information that investors can derive from
financial statements
Cash flow
What is operating cash flow
operating cash flow
after tax flow
tax flow from sasets
What is OCF?
Operating cash flow
What does OCF show ?
shows the operating side cash flows available for
creditors and shareholders.
What is the formula for OCF?
OCF = EBIT + Depreciation – Taxes
What is ATCF?
After tax cash flow
What does ATCF show ?
shows CF available for shareholders
What is the formula for ATCF?
ATCF = OCF – Interest pmt
Cash Flow From Assets =
= Operating Cash Flow – Net Capital Spending – Changes in NWC
Cash Flow From
Assets (CFFA)
Cash Flow to Creditors
+
Cash Flow to Stockholders
Look at the last slide for replacement chapter 4
8
Perpetuity –
infinite series of equal
payments
Annuity –
finite series of equal payments
that occur at regular intervals
If the first payment occurs at the end of the
period, it is called an
ordinary annuity
If the first payment occurs at the beginning of
the period, it is called an
annuity due
For a given interest rate – the _____ the
time period, the lower the present value
longer
For a given time period – the _____ the
interest rate, the smaller the present value
higher
