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Financial Management > Final - Part 1 > Flashcards

Final - Part 1 Flashcards

1
Q

Capital Budgeting

A

the process of planning and managing a firm’s long-term investments

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2
Q

What is the essence of capital budgeting

A

Evaluating the size, timing, and risk of future clash flows

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3
Q

Capital structure

A

mixture of debt and equity maintained by a firm

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4
Q

Working capital management

A

a firm’s short-term assets and liabilities

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5
Q

sole proprietorship

A

business owned by one person

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6
Q

Advantages of a sole proprietorship

A
  1. simplest type of business to start
  2. least regulated form of organization
  3. owner keeps all the profits
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7
Q

Disadvantages of a sole proprietorship

A
  1. Owner has unlimited liability for business debt
  2. all business income is taxed as person income
  3. life of sole proprietorship is limited to owner’s life span
  4. amount of equity that can be raised is limited to the amount of the proprietor’s personal wealth
  5. ownership may be difficult to transfer
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8
Q

Partnership

A

A business formed by two or more individuals or entities

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9
Q

Partnership advantages

A

same as sole proprietor

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10
Q

partnership disadvantage

A

same as a sole proprietorship which can be summed up to having an inability to raise cash for investment

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11
Q

Corporation

A

A business created as a distinct legal entity composed of one or more individuals or entities

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12
Q

Advantages of a corporation

A
  1. ownership can be easily transferred
  2. life of a corporation is unlimited
  3. limited liability for stockholders
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13
Q

Disadvantages of a corporation

A
  1. double taxation (taxed twice at corporate and personal level)
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14
Q

What is the goal of financial management

A

The goal of financial management is to maximize the current value per share of the existing stock

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15
Q

Agency problem

A

the possibility of conflict of interest between stockholders and management of a firm

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16
Q

Primary Market Transaction

A

the corporation is the seller, and the transaction raises money for the corporation

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17
Q

Secondary market transaction

A

Involves one owner or creditor selling to another

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18
Q

What are the two types of secondary markets

A
  1. Dealer markets
  2. Auction markets
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19
Q

What is the balance sheet formula

A

Assets = Liabilities + Stockholders Equity

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20
Q

Net Working Capital

A

Difference between a firm’s current assets and its current liabilities

21
Q

Liquidity

A

Refers to the speed and ease with which an asset can be converted to cash

22
Q

Cash flow

A

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

23
Q

Operating Cash flow

A

cash generated from a firm’s normal business activities

24
Q

capital spending

A

refers to the net spending on fixed assets

25
Q

change in net working capital

A

measured as the net change in current assets relative to current liabilities for the period being examined and represents the amount spent on networking capital

26
Q

Financial Ratios

A

relationships determined from a firm’s financial information and used for comparison purposes

27
Q

Why evaluate financial statements?

A
  1. internal uses include performance evaluation and planning purposes
  2. Useful to external parties such as potential investors, competitors, and credit rating agencies
28
Q

Percentage of sales approach

A

a financial planning method in which accounts are varied depending on a firm’s predicted sales levels

29
Q

Internal Growth Rate

A

Maximum growth rate a firm can achieve without external financing of any kind

30
Q

Sustainable growth rate

A

maximum growth rate a firm can achieve without any external equity financing while maintaining a constant dept-equity ratio

31
Q

What factors does a firm’s sustain growth rate depend on?

A
  1. profit margin
  2. dividend policy
  3. financial policy
  4. total asset turnover
32
Q

Coupon

A

Stated interest payment made on a bond

33
Q

Face Value or par value

A

the principal amount of a bond that is repair at the end of the term

34
Q

coupon rate

A

annual coupon divided by the face value of the bond

35
Q

Maturity

A

specified date on which the principal amount of a bond is paid

36
Q

What happens to the value of the bond’s remaining cash flow when interest rises?

A

The value of the bond’s remaining cashflow declines and the bond is worthless

37
Q

What happens to a bond when interest rates fall?

A

The bond is worth more

38
Q

Par Value bond

A

Bond that sells exactly at face value

39
Q

This type of bond sells for less than face value

A

Discount bond

40
Q

Bond that sells for more than face value

A

Premium bond

41
Q

Call provision

A

an agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity

42
Q

Deferred Call Provisions

A

prohibit the company from redeeming a bond prior to a certain date

43
Q

Protective covenant

A

limits certain actions that might be taken during the loan’s term, usually to protect the lender’s interest

44
Q

term structure of interest rates

A

the relationship between nominal interest rates on default-free, pure discount securities and time to maturity

45
Q

Inflation Premium

A

the portion of a nominal interest rate that represents compensation for expected future inflation

46
Q

interest rate risk premium

A

the compensation investors demand for bearing interest rate risk

47
Q

Default Risk Premium

A

the portion of nominal interest rate or bond yield that represents compensation for the possibility of default

48
Q

taxability premium

A

the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status

49
Q

Liquidity Premium

A

the portion of nominal interest rate or bond yield that represents compensation for lack of liquidity

Financial Management (2 decks)

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