Introduction to Finance Flashcards
Characteristics of a sole trader and partnership
+ Easy and Cheap to set up
- Unlimited personal liability
- Firm and owner have the same legal identity.
Two types of partners in a partnership
A General Partner runs the firm on a day to day basis.
A Limited Partner is not involved in managerial decisions, but has limited liability, thus financial liability is limited to a fixed sum and can only lose their initial investment.
Limited Liability Companies
A business structure that protects its owners from the companies debts and legal issues.
Characteristics of a corporation
- Separate legal identity to owners, thus limited liability.
- Ownership represented by share of stock e.g. shareholders / equity
- Easy to transfer ownership by selling stocks.
-Double taxation (Profit and Dividends)
The 3 Responsibilities of a Financial Manager
- Investment Decisions e.g. acquiring assets
- Financial Decisions e.g. How to fund investments
- Cash / Working Capital Management on a day to day basis
Difference between the Primary & the Secondary Market
The Primary is where stocks are issued.
The Secondary is where stocks are traded.
Relationship between Board of Directors and CEO’s.
Board of Directors have ownership and decision-making authority.
CEO runs the business after being delegated tasks by the BoD.
Book Value of Equity / Stockholder equity
Remaining assets for shareholders after all debt is paid.
Stockholder equity = Total Assets - Total Liabilities
Net Working Capital
Current assets - Current Liabilities
Market Value of Equity (Market capitalisation)
Share price * Number of shares Issued
Market to Book Ratio
Book Value of Equity / Market Value of Equity
Low M/B ratio = Value stock (stable growth)
High M/B ratio = Growth stock (fast growth)
Enterprise Value
Used to calculate the value of a company, and measures potential takeover.
Market value of Equity + Debt - Cash
Ratio below 10 is attractive.
How do Receivables and Payables apply to cash flow ?
Receivables deduct cash as money is yet to be paid.
Payables add cash as borrowed money is available.
How does Depreciation and Amortisation apply to income statements and cash flow?
Reduces profit in income statements. but…
Adds to cash flow as it is a non-cash item.
Gross Profit Margin (Profitability Ratios)
Gross Profit / Sales x 100
Operating Profit Margin (Profitability Ratios)
Operating Profit / Sales x 100
EBIT Margin (Profitability Ratios)
EBIT / Sales x 100
Net Profit Margin (Profitability Ratios)
Net Profit / Sales x 100
Current ratio (Liquidity Ratios)
Current Assets / Current Liabilities
Cash ratio (Liquidity Ratios)
Cash / Current Liabilities
Quick Ratio (Liquidity Ratios)
(Cash + Short Term investments + Recievables)
/ Current Liabilities
Price to Earnings (P/E) ratio
Share price / Earnings per share
Enterprise Value to EBIT
Market value of Equity + Debt - Cash / EBIT
Enterprise Value to Sales
Market value of Equity + Debt - Cash / Sales
Enterprise Value to EBITDA
Market value of Equity + Debt - Cash / EBITDA
Arbitrage
Exploiting price differences in different markets to maximise profits.
Law of One Price
States that the same good should be sold at the same price in different locations.
No arbitrage price of security
Price of security = PV of all cash flows paid by security.
Perpetuity present value formula
PV = C * (perpetuity cash flow) / r (interest w/out 1)
Growing perpetuity present value formula.
PV = C / r - g (rate of growth)
Annuity present value formula
PV = C / r ( 1 - (1 / 1 + r ^n))
Growing annuity present value formula
C / r - g * (1 - (1 + g / 1 + r) ^n)
Difference between Effective Annual Interest and Annual Percentage Rate
EAR is annual interest with compounding.
APR is annual interest without compounding.
Discount rate period conversion formula
( 1 + r ) ^n - 1
How to convert APR to an EAR
1 + EAR = (1 + (APR / K )) ^k
How to calculate NPV
NPV = PV (benefits) - PV costs)
Internal rate of return formula
(Future Value / Present Value) ^ 1/ periods - 1
Coupons Payment formula
CPN = Coupon rate % * Face Value / Coupon payments per year
Yield to Maturity formula
(Face Value / Price of the bond) ^ 1 / n - 1
Valuing Stocks for a one-year investor
Div1 + P1 / 1 +rE (cost of capital equity)
Valuing stocks for a multi-year investor
(Div1 / 1 + rE) + (Div2 / (1 + rE)^2) + (DivN + Pn / (1 + rE)^N)
Total Return (rE) Formula
rE = Dividend Yield + Capital Gain Rate
rE = Div1 / P0 + P1 - P0 / P0
