Fin part 1: Non-Quat Flashcards
- Major effects on managers of Great Depression on 1930s
Recognize to avoid bankruptcy and regulation
- Significant changes in the US economic system in recent years
-supply~side economic policies
-deregulation of major industries
-strong international competition
-rapid advances in tech
-constant restructuring
-joint venture activites
- Primary goal of Finance
Profit and wealth maximization
- Wealth maximization vs profit maximization
-Wealth Max: consists of activities that manage the financial resources to increase the stakeholders’ value
-Profit Max:consists of the activities that manage the financial resources intending to increase the Company’s profitability
- Agency problem
Some CEO cheats-> minimize the problem = stock options
- Primary vs. secondary markets
IPO-> Primary Market -> Sells new shares to the public
-Munipod Bonds -> Tax exempt bonds, lower interest rate, issued by state/local gov
- Functions of financial manager
Prepare a budget -> call financial planning and control
- Risk-return tradeoff
-A relationship between risk and the rate of return
-higher the risk, the higher the potential reward
- Finance principle of leverage
Operating = Fixed Cost
Leverage = Magnify return
- Financial manager’s dilemma
- the management of current assets and current liabilities
-Maximizing the value of the firm
- Portfolio effect
Decreasing Risk ( all eggs in one basket = higher the risk)
*More investing random is the key!!
- Valuation principle
-the value of any financial asset is the present value of the expected cash flows
-EX: you have a cash amount of $10,000. You have locked them in your safe for 5 years. After 5 years, you will experience a fall in their value as compared to their value 5 years ago.
Matching principle
A firm matches the maturity structure of its assets w/the maturity structure of liabilities and equity
-a firm should finance its short term financial needs w/short term funds & vice versa w/ long term
Capital markets, common stock, corporate bonds, municipal bonds
-Capital Markets: market w/long term funds such as bonds, preferred stock, and common stock
-Common Stock: Stock held by the residual owners of the company
-Corporate Bonds: A bond is a debt obligation, like an IOU
-Municipal Bonds: debt obligations issued by public entities that use the loans to fund public projects such as the construction of schools, hospitals, and highways
- Maturities of money market instruments
-Short term
-Less than a yr
- Characteristics of treasury bills, commercial paper bankers’ acceptances, negotiable CDs, corporate bonds, municipal bonds, and common stock
-Money Market Instruments, sold @discount basis, sold @Market
-Doesn’t offer fixed coupon (except long term bonds)
- Rights of common stockholders
voting power,
-ownership,
-the right to transfer ownership,
a claim to dividends,
-the right to inspect corporate documents,
-the right to sue for wrongful acts
- Real vs. nominal interest rate
-The nominal interest rate, or coupon rate, is the actual price borrowers pay lenders, without accounting for any other economic factors.
-The real interest rate accounts for inflation, giving a more precise reading of a borrower’s buying power after the position has been redeemed
-A nominal interest rate equals the real interest rate plus a projected rate of inflation.
- Sole proprietorship, partnership, and corporation characteristics
Sole Proprietorship: low start up cost, freedom, unlimited liability
~Not TRUE: LIMITED Liability!
Partnership: a business entity formed by an agreement between two or more individuals to carry on a business.
~One of the worst parts of a partnership is that you can be responsible for something someone else has done. In one case, the courts can seize the assets of all the partners to do reasonable damages.
There can also be some incredibly tricky situations when one partner wants to dissolve the business and the others don’t.
While you may not pay as many taxes in a partnership, you are still legally and somewhat financially tied to your partner(s).
Avg of Corporation: Limited Liability, raise $,
~Point in Time
- Types of ratios and usefulness of ratios
-Current Ratio:
~describes the relationship between a company’s assets and liabilities
~So, a higher ratio means the company has more assets than liabilities
-Quick Ratio:
~ is the value of a business’s “quick” assets divided by its current liabilities
-Debt Ratio:
~a financial ratio that measures the extent of a company’s leverage
- Balance sheet and components
-A finance sheet reflects a company’s finance
-assets, liabilities, and shareholders’ equity.
- Income statement and components
- one of the three major financial statements that report a company’s financial performance over a specific accounting period
-revenue; cost of sales; sales, general, and administrative expenses; other operating expenses; non-operating income and expenses; gains and losses; non-recurring items; net income; and EPS
- Liquidity and current assets
-A current asset—sometimes called a liquid asset—is a short-term asset that a company expects to use up, convert into cash, or sell within one fiscal year or operating cycle.
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Liquidity is a company’s ability to convert assets to cash or acquire cash—through a loan or money in the bank—to pay its short-term obligations or liabilities.
- Major concern of the firm’s short-term creditors
-with whether a company will be able to repay short-term borrowings
- Current ratio
-Ratio of Current Assets to Current Liabilities
-CA/CL
- Quick ratio
- the dollar amount of liquid assets available against the dollar amount of current liabilities of a company
-CA minus Inventory/ CL
- Gross profit
-The excess of sales over the cost of goods sold
-Sales / COGS
- Total asset turnover
-the ratio of total sales or revenue to average assets
-Sales / TA
- Inventory turnover
-Ratio of sales to the ending inventory
-Sales / Inventory
- Profit margin
-Earnings after taxes divided by sales
-NIAT(net income after taxes)/ SALES
- Break-even
- is the point at which total cost and total revenue are equal
-Units:
~FC / (Price -VC)
-Dollars:
~FC/ (1-TVC/SALES)
- Stockholder equity- common stock, paid-in capital, and retained earnings
-the cumulative net contributions by stockholders plus retained earnings.
-common stock, paid-in capital, and retained earnings
- Return on assets
-a financial ratio that measures the profitability of a business in relation to its total assets
-a): Net Income/ TA
-b): Net Income/ Sales * Sales/ TA
- DuPont system and ROA
Du Point Model: Shows the relationship among return on investment, profit margin, and assets turnover
-Cal ROA:
1) Net Income/ Asset
2) Profit Margin/ Assest Turnover
ROE: Return on Equity
-the measure of a company’s net income divided by its shareholders’ equit
-Net Income/ Stockholder’s Equity
~Equity is TA minus Debt
- Operating leverage
-Extent to which fixed assets are used in a firm’s operation
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- Financial leverage
The extent to which funds with a Fixed Cost (debt and preferred stock) are used in a firm’s operation.
- DOL
-(S - VC)/(S-VC-FC)
-Degree of Operating Leverage: a financial ratio that measures the sensitivity of a company’s operating income to its sales
- DFL
EBIT(Earnings before income tax) / (EBIT -I)
-Degree in Financial Leverage: a leverage ratio that measures the sensitivity of a company’s earnings per share to fluctuations in its operating income, as a result of changes in its capital structure
- DCL
-(S-VC)/ (S-VC-FC-I)
-Degree of Combined Leverage: is a leverage ratio that summarizes the combined effect that the degree of operating leverage (DOL) and the degree of financial leverage has on earnings per share (EPS), given a particular change in sales.
- Business risk and DOL
Higher fixed costs lead to higher degrees of operating leverage; a higher degree of operating leverage creates added sensitivity to changes in revenue. More sensitive operating leverage is considered riskier since it implies that current profit margins are less secure moving into the future.
- Steps in the budgeting process
- Percent of sales method (budget preparation)
-used to develop a budgeted set of financial statements
-The basic steps to follow for this method are:
Determine whether there is a historical correlation between sales and the item to be forecasted.
Estimate sales for the forecast period.
Apply the applicable percentage of sales to the item to arrive at the forecasted amount.
- Sales budget
An estimated sales volume over a specified period of time, usually one year
- Depreciation and cash flow
-Depreciation does not have a direct impact on cash flow
-However, it does have an indirect effect on cash flow because it changes the company’s tax liabilities, which reduces cash outflows from income taxes.
- Accurals and cash flow
If either accrued expenses or accounts payable increase, a company’s cash flows increase as the cash remains in its possession for the time being — although payment must eventually be made.
- Pro forma income statement
-the statement prepared by the business entity to prepare the projections of income and expenses
-are projections based on your past income statements
- Pro forma balance sheet
-represents a future projection
-are used to project how the business will be managing its assets in the future.
- Sources and uses of funds statement
-reflect the impact of changes in the balance sheet contents on the organization’s cash-in-hand.
-These are the statements that also guide organizations in their short-term planning decisions that involve available funds
