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Fall 23 > Fin 301 Mid Term MAIN > Flashcards

Fin 301 Mid Term MAIN Flashcards

1
Q

Explain Capital Budgeting

A

planning and managing a firm’s long-term investments (fixed assets) , identify investments where the value of cash flow generated by the asset exceeds the cost of the asset

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2
Q

Explain Net Working Capital Management

A

Involves managing the firm’s short-term assets and liabilities (everyday activities)

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3
Q

Explain Capital Structure

A

determining the mix of long-term debt and equity that is used to finance its operations

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4
Q

What is an example of Capital Budgeting?

A

Opening a Walmart in a new town (do we need it?) and updating an operating system

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5
Q

Explain a Sole Proprietorship

A

owned by one person, least regulated, unlimited personal liability, owner keeps all profits

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6
Q

Explain a General Partnership

A

partners share in gain/loss, both equal in unlimited liability

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7
Q

Explain a Limited Partnership

A

limited partner that does not participate in business and is only liable for their portion of particpation

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8
Q

Explain a Corporation

A

a business created as a formal legal entity, separate and distinct from its owner, public ownership, limited liability, strict regulation

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9
Q

How often are Corporations taxed?

A

Taxed twice, once when profits are reported and once if dividends are paid

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10
Q

Explain an LLC

A

hybrid of partnership and corporation, limited liability for owners but operated and taxed like a corporation

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11
Q

What is the primary goal of financial management?

A

maximize current value per share of existing stock

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12
Q

What are five secondary goals of financial management? (SAMMM)

A

Survive

Avoid Bankruptcy

Minimize Costs

Maximize Profits

Maintain Steady Growth

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13
Q

Explain the Sarbanes Oxley Act

A

Enacted by Congress, aimed to protect investors from corporate abuse

Management is responsible for accuracy of financial statements

No false statements

Annual report that contains an assessment of internal control structure and financial reports

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14
Q

Explain the Agency problem

A

Highlights potential conflicts of interest between stockholders and management

Owners: priority to seek new investment and raise share value

Management: pursue job security, corporate luxury, higher compensation at expense of shareholders

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15
Q

What is a primary market?

A

Markets in which the original sale of securities by governments and corporations occurs (IPO)

Public Offering, securities sold to public and debt/equity registered with SEC

Private Placement, negotiated sale with another company, avoids expense of IPO

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16
Q

What is a secondary market? (etrade)

A

Markets in which securities are bought and sold to the public after original sale

Owners or creditors sell to one another

Corporation is not directly involved

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17
Q

What is a dealer Market?

A

no physical location, transactions are made by a dealer electronically

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18
Q

What is an auction market?

A

sellers and buyers of securities are matched at a physical site

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19
Q

What is a balance sheet?

A

One day snapshot of the firms accounting value

What the firm owns and what they owe

Prepared at the end of the month

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20
Q

What is Net Working Capital?

A

Difference between Current Assets and Current Liabilities

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21
Q

Debt vs Equity

A

Financial Leverage: The amount of debt in a firm’s capital structure

More debt a firm has, the greater its leverage

Too much leverage puts the firm at risk of financial distress or failure

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22
Q

Market Value vs Book Value

A

Market Value: True worth of the firm TODAY

Book Value: Historical cost of the firm Used for GAAP

No relationship between the two

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23
Q

What is GAAP?

A

Generally Accepted Accounting Principles

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24
Q

What is the realization principle?

A

Recognize revenue when earnings process is virtually complete, and the transaction value is known

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25
Q

What is the matching principle?

A

Revenues must be matched with costs incurred to generate them

26
Q

Average Tax Rate

A

Total Tax Bill / Taxable Income

27
Q

Marginal Tax Rate

A

The tax rate charged for one additional dollar of income

28
Q

What is Cash Flow Identity?

A

Difference between the number of dollars that came in and the number that went out

NOT the same as statement of cash flows, not equal

29
Q

What is a statement of cash flows?

A

A firm’s financial statement that summarizes its sources and uses of cash over a specified period

30
Q

Common size statements for balance sheet

A

Show items as percentages of asset, found by dividing by total assets

31
Q

Common size statements for income statement

A

Show items as percentages of sales

Percentages are found by dividing by Total Net Sales

32
Q

Current Ratio

A

One of the most widely used measures of short-term liquidity

To a creditor, the higher the current ratio, the better; (2:1) or better is desired

33
Q

Debt to Equity Ratio

A

shows how much of a company is owned by creditors

(Important Variation of Total Debt Ratio) = Total Debt / Total Equity

34
Q

Long Term Debt to Equity

A

shows how much of a business’ assets are financed by long-term financial obligations, such as loans

Long Term Debt to Equity = Long Term Debt / Total Equity

Comfortable figure is 1/3

35
Q

Total Asset Turnover Ratio

A

Sales / Total Assets

Reciprocal of Capital Intensity Ratio

Also known as 1 / Capital Intensity Ratio

36
Q

Market Value Ratio

A

Based on the market price per share of a stock, not on financial statements (must be publicly traded)

37
Q

Price Earning Ratio

A

how much an investor is willing to pay for a dollar of current earnings

38
Q

DuPont Identity

A

Breaks return on equity (ROE, net income / equity) into three parts

Operating Efficiency
(Measured by Profit Margin)

Asset Use Efficiency
(Measured by Total Asset Turnover)

Financial Leverage
(Measured by Equity Multiplier)

39
Q

What are the six ingredients to a successful financial plan? (FESAPP)

A

Financial Requirements

Economic Assumptions

Sales Forecast

Asset Requirements

Pro Forma Statements

Plug it in

40
Q

Financial Planning

A

Formulates the way in which financial goals are to be achieved

Avoids “stumbling into the future backwards”

Anticipating possible problems before they arrive

41
Q

Short Run

A

(1 Year): the budget

42
Q

Long Run

A

Planning Horizon, (2-5 years), what financial planning focuses on

43
Q

External Financing Needed

A

Assets does not equal liabilities + owners’ equity (HAS TO)

44
Q

Capital Intensity Ratio

A

Represents the amount of assets needed to generate $1 of sales

Reciprocal of Total Assets Turnover

For Rosengarten, it was 3:1, took $3 to generate $1 of sales

45
Q

EFN and Growth Rate

A

External Financing Needing (EFN) and growth are related

Growth is a convenient means of examining the interactions between investment and financing decisions

All other things being equal, the higher the rate of growth in sales or assets, the greater the need external financing

46
Q

Internal Growth Rate (%IGR)

A

The maximum growth rate a firm can achieve without external financing of any kind (taking on additional long-term debt or raising new equity)

ROA = return on assets

B = retention ratio

47
Q

Sustainable Growth Rate (%SGR)

A

The maximum growth rate a firm can achieve without equity financing while maintaining the same debt/equity ratio (taking on debt is ok). Use year 1

48
Q

Rule of 72

A

(time it takes for money to double): t = 72/%r or %r = 72/

49
Q

Future Value

A

amount an investment is worth after one or more periods

50
Q

Compounding

A

accumulating interest on an investment over time to earn more interest

51
Q

Investing for a Single Period

A

If you invest $100 in a savings account yearly that has a 10% annual interest rate…

Your investment will grow 1+r per dollar invested

R = .10, so 1.10 dollars per dollar invested

Have $110 dollars at the end of the year

52
Q

Investing for More than One Period

A

Interest on Interest

Interest earned on the reinvestment of previous interest earned

53
Q

Compound Interest

A

Interest earned on both the initial principal and the interest invested from the prior periods

54
Q

Simple Interest

A

Interest earned only on the original principal amount invested

55
Q

Present Value vs Future Value

A

The Present Value Factor is the reciprocal or the inverse of the Future Value Factor

56
Q

Present Value of Annuities

A

A series of constant or level cash flows that occur at the end of a period or some fixed number of periods

College loans, home loans, car loans,

57
Q

Annuity Due

A

An annuity for which the cash flows occur at the beginning of a period

Lease and rental payment

58
Q

Perpetuities

A

An annuity in which the cash flows continue forever, the cash flow is the same each year

Preferred stock

59
Q

Stated Interest Rate

A

The interest rate expressed in terms of the interest payment made each period.

%APR on a loan or a quoted loan

60
Q

Effective Annual Rate (%EAR)

A

The interest rate expressed as if it were compounded once per year. It is the compounded interest during the year as if it only happened once a year

Use EAR when you see compounded

61
Q

Annual Percentage Rate (APR)

A

Interest rate charged per period multiplied by the number of periods per year

All lenders must disclose a %APR on consumer loans

%APR is a quoted rate or stated rate

Fall 23 (18 decks)

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