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BCIT BUSA 2150 > Finance Mid-Term > Flashcards

Finance Mid-Term Flashcards

1
Q

Agency Problem

A

Prevent managers from acting in their own best interests, rather than in the best interest of owners

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2
Q

Prevent managers from acting in their own best interests, rather than in the best interest of owners

A

Agency Problem

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3
Q

Separation Theory

A

Investors are best off if the company’s investment decisions are separate from the investors’ preferences

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4
Q

Four factors that determine the cost of capital in an economy

A
  • Production opportunities
  • Time preference for consumption
  • Risk
  • Inflation
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4
Q

Money Markets

A

Where short-term debt securities are bought and sold primarily by dealers (dealers buy/sell for themselves at their own risk)

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4
Q

Where short-term debt securities are bought and sold primarily by dealers (dealers buy/sell for themselves at their own risk)

A

Money Markets

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4
Q

Capital Markets

A

Where long-term debt and shares of stock are sold primarily by brokers and agents (brokers match buyers and sellers but do not take ownership of security themselves)

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4
Q

Investors are best off if the company’s investment decisions are separate from the investors’ preferences

A

Separation Theory

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4
Q

Factors that determine the value of a firm

A

PV of its expected free cash flows, discounted at the weighted average cost of capital

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5
Q

Where long-term debt and shares of stock are sold primarily by brokers and agents (brokers match buyers and sellers but do not take ownership of security themselves)

A

Capital Markets

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6
Q

Money Markets Vs. Capital Markets

A

Money Markets - Where short-term debt securities are bought and sold primarily by dealers (dealers buy/sell for themselves at their own risk)
Capital Markets - Where long-term debt and shares of stock are sold primarily by brokers and agents (brokers match buyers and sellers but do not take ownership of security themselves)

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7
Q

Money Markets - Where short-term debt securities are bought and sold primarily by dealers (dealers buy/sell for themselves at their own risk)
Capital Markets - Where long-term debt and shares of stock are sold primarily by brokers and agents (brokers match buyers and sellers but do not take ownership of security themselves)

A

Money Markets Vs. Capital Markets

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8
Q

Primary Market

A

Where the original sale of the security occurs. The corporation or government that issues the security receives the proceeds from the sale

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9
Q

Where the original sale of the security occurs. The corporation or government that issues the security receives the proceeds from the sale

A

Primary Market

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10
Q

Secondary Market

A

Where securities are bought or sold after the original sale. The entity that originally issued the security is not involved in a secondary market transaction

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11
Q

Where securities are bought or sold after the original sale. The entity that originally issued the security is not involved in a secondary market transaction

A

Secondary Market

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12
Q

Primary Vs. Secondary Markets

A

**Primary Market **- Where the original sale of the security occurs. The corporation or government that issues the security receives the proceeds from the sale.
Secondary Market - Where securities are bought or sold after the original sale. The entity that originally issued the security is not involved in a secondary market transaction.

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13
Q

Private Markets

A

Trades are worked out directly between two parties; lack liquidity

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14
Q

Trades are worked out directly between two parties; lack liquidity

A

Private Markets

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15
Q

Public Markets

A

Standardized contracts are traded on an organized market; more liquid and transparent

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16
Q

Standardized contracts are traded on an organized market; more liquid and transparent

A

Public Markets

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17
Q

Private Vs. Public Markets

A

Private Markets - Trades are worked out directly between two parties;** lack liquidity**
Public Markets - Standardized contracts are traded on an organized market; more liquid and transparent

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18
Q

Main Problem With Balance Sheet

A
  • Assets are shown at historic cost and do not reflect current market value
  • Book value is usually not market value
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19
Q

Net Cash Flow (NCF)

A

An alternative measure of profitability that adjusts net income for the fact that some expenses (depreciation and amortization) do not involve the use of cash

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20
Q

An alternative measure of profitability that adjusts net income for the fact that some expenses (depreciation and amortization) do not involve the use of cash

A

Net Cash Flow (NCF)

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21
Q

Net Cash Flow (NCF) Formula

A

Net Cash Flow = Net Income + Depreciation and Amortization

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22
Q

Free Cash Flow (FCF)

A

Cash flow available after all necessary investments in Total Net Operating Capital; can be paid out to debtholders and shareholders

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23
Q

Cash flow available after all necessary investments in Total Net Operating Capital; can be paid out to debtholders and shareholders

A

Free Cash Flow (FCF)

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24
Q

Free Cash Flow (FCF) Uses

A

Used to pay dividends, interest, repay principal, and buy back shares. If FCF is negative, it is financed by selling shares and/or borrowing

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25
Q

Liquidity

A

The firm’s ability to meet sudden cash requirements and to meet its short-term obligations

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26
Q

The firm’s ability to meet sudden cash requirements and to meet its short-term obligations

A

Liquidity

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27
Q

Long Term Solvency and Leverage

A

The degree to which the firm is fianced with borrowed money

28
Q

The degree to which the firm is fianced with borrowed money

A

Long Term Solvency and Leverage

29
Q

Asset Management-Turnover Measures

A

The firm’s ability to put its assets to good use

30
Q

The firm’s ability to put its assets to good use

A

Asset Management-Turnover Measures

31
Q

Profitability Measures

A

The firm’s ability to generate sufficient profits in comparison to its level of sales and invested capital

32
Q

The firm’s ability to generate sufficient profits in comparison to its level of sales and invested capital

A

Profitability Measures

33
Q

Market Value

A

The value that investors assign to the firm

34
Q

The value that investors assign to the firm

A

Market Value

35
Q

The DuPont Analysis

A

Integrates profitability, productivity, and leverage to understand the firm’s financial strategy

36
Q

Integrates profitability, productivity, and leverage to understand the firm’s financial strategy

A

The DuPont Analysis

37
Q

Limits to Financial Analysis

A

Different accounting policies
Firms using “window dressing” to make financial statements look better
Highly summarized financial statements with few details
High levels of inflation or deflation can cause distortions in the firm’s financial results
Difficult to make industry comparisons when the firm operates business that cross many different industries

38
Q

Ordinary Annuity Vs. Annuity Due

A

Ordinary = “END”
Due = “BGN”

39
Q

Nominal Rate

A

The rate quoted by the bank, broker, etc; not used in calculations unless **compounding **occurs only once per year

40
Q

The rate quoted by the bank, broker, etc; not used in calculations unless **compounding **occurs only once per year

A

Nominal Rate

41
Q

Periodic Rate

A

The rate charged or earned each “period”

42
Q

The rate charged or earned each “period”

A

Periodic Rate

43
Q

Effective Annual Rate

A

The **annual rate **that takes into account any compounding

44
Q

The **annual rate **that takes into account any compounding

A

Effective Annual Rate

45
Q

Net Operating Working Capital Policy

A
  • Relaxed Policy
  • Restricted Policy
  • Moderate Policy
46
Q

Relaxed Policy

A

Large amounts of cash, inventory, and A/R and minimal levels of A/P and accruals

47
Q

Large amounts of cash, inventory, and A/R and minimal levels of A/P and accruals

A

Relaxed Policy

48
Q

Restricted Policy

A

Low amounts of C/A and high levels of A/P and accruals

49
Q

Low amounts of C/A and high levels of A/P and accruals

A

Restricted Policy

50
Q

Restricted Policy

Moderate Policy

A

Between the two extremes

51
Q

Between the two extremes

A

Moderate Policy

52
Q

Short-Term Financing Policies

A
  • Maturity Matching (Self Liquidating)
  • Aggressive Policy
  • Conservative Policy
53
Q

Maturity Matching (Self Liquidating)

A
  • Permanent NOWC financed with long-term debt and/or equity
  • Temporary NOWC financed with short-term debt
  • “Matching” asset term and financing term
54
Q

Aggressive Policy

A
  • Use short-term debt to finance some or all of your temporary NOWC and some or all of your permanent NOWC
  • May save interest expense because short-term interest rates are lower than long-term rates
  • Risk that your short-term loan may not be renewed “rollover risk”
55
Q

Conservative Policy

A
  • Use long-term debt to finance ALL of your permanent NOWC and some of all of your temporary NOWC
  • Rollover risk is reduced but likely faces higher interest costs
  • Need to invest excess cash when temporary NOWC is at a low point
56
Q

Cash Inflows

A
  • Collection of cash sales and accounts receivable
  • Sale of capital assets
  • Issuance of additional debt and equity
57
Q

Cash Outflows

A
  • Payment of accounts payable
  • Payment of wages, taxes, and other cash expenses
  • Capital expenditures (“capex”)
  • Long-term financing expenditures (cash dividends, interest, repayment of debt principal)
58
Q

Short-Term Financing Advantages

A
  • Faster/easier to obtain
  • Appropriate for temporary NOWC needs caused by seasonality
  • Not “locked in” to an amount or an interest rate for a long time
  • Fewer covenants than for long-term debt
  • Usually cheaper
59
Q

Short-Term Financing Diadvantages

A
  • Volatile interest costs as rates change
  • No long-term commitment by lenders-face “roll over” risk if loan not renewed
60
Q

Factoring Receivables

A
  • Borrower sells the receivable to a factor who is then responsible for collecting them
  • Factor will charge a fee for collecting the receivables and assuming the credit risk; the factor will also charge interest on the funds advanced to the seller before collection
61
Q

Types of Short-Term Financing

A
  • Accounts Payable (Trade Credit)
  • Short-Term Bank Loans
  • Money Market
62
Q

Spontataneous Financing

A

Expands and contracts along with sales

63
Q

Accounts Payable (trade credit)

A
  • Spontaneous
  • Terms of credit usually provide a discount for early payment
64
Q

Cost of Trade Credit

A

The cost of not taking the discount offered

65
Q

The cost of not taking the discount offered

A

Cost of Trade Credit

66
Q
  • Spontaneous
  • Terms of credit usually provide a discount for early payment
A

Accounts Payable (trade credit)

67
Q

Short-Term Bank Loans

A
  • Non-spontaneous
  • The loan will have a maturity of 1 year or less
  • Firm will have to provide collateral security
  • Loan agreement will include covenants (Covenants - Promises made by the borrow to do certain things)
68
Q
  • Non-spontaneous
  • The loan will have a maturity of 1 year or less
  • Firm will have to provide collateral security
  • Loan agreement will include covenants (Covenants - Promises made by the borrow to do certain things)
A

Short-Term Bank Loans

69
Q

Money Market

A
  • Non-spontaneous
  • Commercial Paper
  • Bankers’ Acceptances
70
Q
  • Non-spontaneous
  • Commercial Paper
  • Bankers’ Acceptances
A

Money Market

71
Q

Commercial Paper

A

Short-term notes with 30 to 365 days maturities back by a bank line of credit in denominations of 100,000; usually less costly than bank loans

72
Q

Short-term notes with 30 to 365 days maturities back by a bank line of credit in denominations of 100,000; usually less costly than bank loans

A

Commercial Paper

73
Q

Bankers’ Acceptances

A

A variant of commercial paper where for a fee, a bank guarantees the paper’s principal and interest

74
Q

A variant of commercial paper where for a fee, a bank guarantees the paper’s principal and interest

A

Bankers’ Acceptances

BCIT BUSA 2150 (7 decks)

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