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Finance Skills For Managers > Finance Skills For Managers > Flashcards

Finance Skills For Managers Flashcards

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1
Q

Capital

A

A financial asset that can be used by a firm or individual - cash or machinery for ex

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2
Q

What are the 3 subspecialties of finance?

A
  1. Business finance
  2. Investments
  3. Financial institutions
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3
Q

Personal Finance Goals

A

Utility - total satisfaction received from consuming goods and services

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4
Q

What are the 3 main tasks that a financial manager does?

A
  1. investment decisions
  2. financing decisions
  3. Manage working capital
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5
Q

What are the 3 types of securities?

A
  1. Treasuries
  2. Corporate bonds
  3. Stocks
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6
Q

Treasuries

A

Bonds that are issued by the government

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7
Q

Money market

A

financial market used to borrow and lend money short term

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8
Q

Capital market

A

used for long-term assets that are held for greater than one year

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9
Q

What are the 2 types of financial markets?

A
  1. Money market

2. Capital market

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10
Q

Why do financial markets exist?

A

to manage liquidity and risk

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11
Q

Primary financial market

A

the financial market where securities (stocks and/or bonds) are first sold

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12
Q

Syndicate

A

a group that is temporarily formed to handle a bond or stock issue

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13
Q

How can firms place bonds with syndicates?

A

through a competitive or negotiated sale

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14
Q

Initial public offering (IPO)

A

when a privately held company first offers shares of stock to outside investors to raise capital, therefore becoming a publicly owned company

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15
Q

Secondary financial market

A

The stock market - markets where assets are priced

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16
Q

What are two types of secondary markets?

A
  1. Auction market

2. Dealer market

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17
Q

Auction market

A

secondary market with a physical location and where prices are determined by investors’ willingness to pay

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18
Q

Dealer market

A

secondary market where securities are bought and sold through a network of dealers who trade for themselves

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19
Q

Bid-ask spread

A

Compensation the specialist receives for risk associated with providing liquidity

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20
Q

What are the 3 roles of prices?

A
  1. convey information to consumers
  2. affect incentives
  3. affect the distribution of income
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21
Q

What is an efficient market?

A

when prices fully reflect the available information about securities

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22
Q

What are the 3 types of financial institutions?

A
  1. Depository
  2. Non-depository
  3. Securities and investment firms
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23
Q

Depository financial institution

A

financial institution that accepts monetary deposits and provides loans - includes savings banks, commercial banks, savings and loan associations, and credit unions

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24
Q

Non-depository financial institutions

A

financial institution that is not allowed to accept monetary deposits but can lend money - includes brokerage firms, investment firms, mutual funds, and hedge funds

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25
Q

Securities firms

A

financial institution that facilitates the investment of securities - includes underwriting

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26
Q

Investment firms

A

company that invests the capital of investors in financial securities - includes mutual funds and investment trusts

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27
Q

Mutual fund function

A

investment company that offers investments and buys securities on behalf of investors

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28
Q

Private equity function

A

financial institution that invests in an entity that is not publicly listed or traded using money received from institutional investors

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29
Q

What are the 3 types of economic indicators?

A
  1. Leading
  2. Lagging
  3. Coincident
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30
Q

Leading economic indicators

A
  1. Yield curve

2. Stock market return

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31
Q

Yield curve

A

basis for an interest rate on a loan

Normal: results when longer maturity bonds have higher interest rates than shorter ones

Inverted: when longer-term bonds have a lower interest rate than shorter-term bonds

Flat: when both short-term and long-term bonds have the same interest rate, indicating that the economy is in a transitional state

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32
Q

Stock market return

A

rising market = improving

declining market = worsening

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33
Q

Lagging indicators

A
  1. unemployment rate

2. consumer price index (CPI)

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34
Q

Consumer Price Index (CPI)

A

measures changes in the inflation rate

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35
Q

Coincident Indicators

A
  1. gross domestic product

2. personal income

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36
Q

Gross Domestic Product (GDP)

A

monetary value of all finished goods and services

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37
Q

securitization

A

process of combining several types of debt and reselling them as a package to investors

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38
Q

Bond holder

A

interested in projects that give them a higher chance of getting their investment back

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39
Q

What are the 2 types of interest rates?

A
  1. Simple interest

2. Compound interest

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40
Q

Simple interest

A

Principal × Interest Rate

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41
Q

Compounding interest

A

interest on interest

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42
Q

What is an interest rate composed of?

A
  1. Opportunity cost
  2. Risk
  3. Inflation
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43
Q

Risk

A

the possibility that the actual return will differ from the expected return

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44
Q

What are interest rates made of?

A
  1. Risk free rate

2. Risk premium

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45
Q

Risk free rate

A

rate of return on an investment with no risk

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46
Q

What are the 3 components of interest rates?

A
  1. Opportunity cost
  2. Risk
  3. Inflation
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47
Q

What is the interest rate calculation?

A

Risk free rate + risk premium

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48
Q

Risk premium

A

compensation for the amount of risk taken on by investors

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49
Q

Nominal rate

A

rate at which money grows over time including inflation - does not measure actual purchasing power

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50
Q

Real rate

A

nominal minus expected inflation rate

51
Q

time value of money (TVM)

A

present money is worth more than future money

52
Q

What are the 3 variables of TVM?

A
  1. amount of cash flows
  2. timing of cash flows
  3. rate at which the value of cash flows changes over time
53
Q

Compounding

A

finding a future value given a present value

54
Q

Discounting

A

finding a present value given a future value

55
Q

Annuities

A

a stream of cash flows of an equal amount paid every consecutive period

56
Q

What are the 3 different types of annuities?

A
  1. Ordinary annuity
  2. Annuity due
  3. Perpetuities
57
Q

Ordinary annuity

A

series of equal payments made at the end of consecutive periods over a fixed length of time

58
Q

Annuity due

A

paid at the beginning of consecutive periods

59
Q

Perpetuity

A

constant stream of identical cash flows that continues forever

60
Q

What are the measures of return?

A
  1. Holding period return

2. Annualize based on simple interest

61
Q

Holding period return

A

return that an investor gets over the entire period during which they own a financial security

62
Q

What are the types of risk?

A

Market risk and firm specific risk

63
Q

Interest rate risk

A

probability that changes in interest rates will impact the value of a bond - market risk

64
Q

Default risk

A

probability of borrower’s failure to repay a contractual obligation - firm specific

65
Q

Price risk

A

potential for the decline in the price of a security relative to the market - diversifiable

66
Q

Diversification

A

process of “spreading” your money over many different assets

67
Q

Risk separation

A

dispersing assets geographically instead of concentrating them in one location

68
Q

Time diversification

A

concept that riskier financial securities have lower risk in the long term

69
Q

What are the 4 uses of financial ratios?

A
  1. Standardization
  2. Flexibility
  3. Focus
  4. Evaluation
70
Q

Standardization ratio analysis

A

making financial data comparable across firms

71
Q

What are three main comparison methods used in ratio analysis?

A
  1. Trend analysis
  2. Cross-sectional analysis
  3. Progress measurement
72
Q

Trend analysis

A

looks at a firm’s financial ratios over time and compares the performance this year with performance in the past

73
Q

Cross-sectional analysis

A

compares a firm’s financial ratios with those of a peer group

74
Q

What are the 5 types of ratios?

A
  1. Liquidity
  2. Leverage
  3. Activity
  4. Market
  5. Profitability
75
Q

Liquidity ratios

A

measure a firm’s ability to meet short-term obligations without raising external capital

76
Q

Activity ratios

A

measure how well the company uses its assets to generate sales or cash

77
Q

Leverage ratios

A

considers how the firm is financed

78
Q

Profitability Ratios

A

used to judge how profitable the company is

79
Q

Market ratios

A

used to evaluate the current share price of a public firm’s stock

80
Q

DuPont Framework

A

expanded formula of the return of equity

81
Q

Cash budgets

A

forecast of future events less than a year

82
Q

What are the steps to creating a cash budget?

A
  1. Determine cash receipts
  2. Estimate cash disbursements
  3. Create the cash budget
83
Q

Profit forecasting

A

projection of future earnings after all costs are subtracted from sales

84
Q

Balance sheet forecasting

A

Using sales growth and profit forecast to understand future implications

85
Q

discretionary financing needed (DFN)

A

additional financing needed given a firm’s expectations for future growth

86
Q

Financial Forecasting vs. Budgeting

A

budget: quantified expectation of what a business wants to achieve
financial forecasting: estimate of what will actually be achieved

87
Q

Spontaneous accounts

A

Accounts that vary naturally with sales

88
Q

discretionary accounts

A

Accounts that do not vary automatically with sales but are left to the discretion of management

89
Q

How to calculate DFN

A

Projected total assets - projected total liabilities - projected owners equity

90
Q

sustainable growth rate (SGR)

A

growth rate that allows a firm to maintain its present financial ratios without issuing new equity

91
Q

Ways to Reduce DFN

A

Slow sales growth
examine capacity constraints
lower dividend payments

92
Q

Dividend

A

distribution of profits to shareholders

93
Q

capital budgeting criteria

A

calculations used to determine if a project will add value to the firm

94
Q

Net present value (NPV)

A

the sum of the present values of all of the expected cash inflows and outflows - calculated by adding the cash inflows and then subtracting the cash outflows

95
Q

Internal rate of return (IRR)

A

the rate of return that a firm earns on its capital projects

96
Q

Profitability index (PI)

A

The ratio of payoff to investment

97
Q

Bonds

A

the primary means of borrowing money in the corporate world

98
Q

Fixed income securities

A

security where the borrower pays a fixed interest payment to investors annually

99
Q

Par value

A

The sum of money that a corporation promises to pay at the expiration of a bond; also called face value

100
Q

Yield to maturity

A

The rate of return received on a bond purchased today at market price and held until maturity

101
Q

Premium bond

A

bond whose price is above its par value

102
Q

Common stock

A

stock that represents equity in a firm and allows the right to vote at shareholder meetings

103
Q

Preferred stock

A

A hybrid security that has no fixed maturity, has fixed payments, and does not confer voting rights on bondholders

104
Q

dividends in arrears

A

A feature of preferred stock specifying if a company ignores preferred stock dividends, it cannot pay anything to its common stockholders

105
Q

Capital investment

A

the sum of money invested to purchase long-term assets

106
Q

Intrinsic value

A

the value of an investment without referring to its market value

107
Q

How to value preferred stock

A

Annual fixed dividend divided by the discount rate

108
Q

How to value common stock

A

Dividend to be paid next year divided by the discount rate minus the constant growth rate

109
Q

Beta

A

how the price of a security varies with the market

110
Q

Defensive assets

A

beta less than 1

111
Q

Capital budget

A

process of evaluating and planning for purchases of long-term assets

112
Q

What are the Criteria to Consider for Capital Investment?

A
  1. includes all cash flows that occur during the life of the project
  2. considers TVM
  3. incorporates the cost of capital
113
Q

Incremental cash flows

A

Cash flows that result from accepting a project

114
Q

Incidental cash flows

A

cash flows that are created by the project, but are not revenues or costs

115
Q

Standard deviation

A

Smaller the SD the better

116
Q

Ar turnover

A

Company’s ability to collect debts

117
Q

Leverage multiplier

A

How much capital comes in the form of debt - assets/equity

118
Q

Net margin

A

How much profit is generated as a percentage of revenue

119
Q

Current ratio

A

measures whether a firm has enough resources to meet its short-term obligations

120
Q

Market to book ratio

A

assets minus liabilities

121
Q

Leverage ratios

A

assesses the ability of a company to meet its financial obligations

122
Q

Hurdle rate

A

the minimum rate of return on a project required by an in investor

123
Q

Bond vs stock payments

A

Stocks: partial ownership in a company - stocks must appreciate in value and be sold later on the stock market

Bonds: loan from you to a company - bonds pay fixed interest over time

Finance Skills For Managers (1 decks)

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