Midterm Flashcards
The process of planning and managing a firms long-term assets is called __________
Capital Budgeting
A ______________________ is a legal “person,” separate and distinct from its owners, and it has many of the rights, duties, and privileges of an actual person.
Corporation
According to the textbook, the goal of financial management is to _____________________.
Maximize the current value per share of the current stock
The possibility of conflicts of interest between the stockholders and the management of the firm is known as the ___________________.
Agency Prolem
Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm is called a _____________.
Stakeholder
Finance is a sub-discipline of ____________.
Economics
The traditional “buy low and sell high” mantra of finance is operational if and only if _________________
1) Market prices and intrinsic values occasionally diverge; 2) Market values generally return to intrinsic values over time; and 3) Tools exist to identify divergence of market values from intrinsic values
Finance is the study of the optimal _____________________.
1) Procurement of capital; 2) Deployment of capital; 3) Distribution of free cash flows to creditors and shareholders
Which of the following types of capital usually has the highest cost of capital (is the most expensive for the firm requesting the capital)?
Venture Capital (you are selling you business equity and a share of future cash flows)
The difference between a firm’s current assets and its current liabilities is called ________________________.
Net Working Capital (NWC)
_________________ are the set of standards and procedures by which audited financial statements are prepared.
GAAP
The ______________ tax rate is the rate of the tax you would pay if you earned one more dollar.
Marginal
__________________ is money spent on fixed assets less money received from the sale of fixed assets.
Net Capital Spending
Any cash used to repurchase stock would be considered __________________.
Cash flow to shareholders
Financial planning provides a plethora of benefits. Which of the following is/are benefits offered by financial planning?
1) Helps avoid surprises; 2) Allows for the exploration of several options; 3) Helps to ensure feasibility
Forecasted financial statements are typically referred to as ____________.
Pro-forma statements
The ratio of cash dividends/net income is known as the ________________ ratio.
Dividend-payout
The maximum growth rate a firm can achieve without external financing of any kind is called the ____________ growth rate.
Internal growth rate
Which of the following would increase a firm’s sustainable growth rate?
Decreasing the dividend payout ratio
What does top-down forecasting rely on - brief explanation . . .
Top-down forecasting involves first an analysis of the market within which a company does business. We want to know the size of the market, relevant segments we conduct business in, our market share in each segment, and the historical growth rates in the market overall, the segments, and our market share. When we know the market size (and segment size) we can estimate what our market share will be in the future. We will then multiply our estimated market share by the market size to estimate our forecasted revenue.
Explain how you might go about estimating the depreciation expense for Marriott International, Inc. if you were forecasting its financial statements for the next year.
Depreciation expenses are driven by growth in sales (revenue) as cash is converted to assets as a means of generating revenue. These assets are depreciated over time. I would estimate future revenue, look at current assets as a % of sales for the current year to estimate net change in fixed assets and factor in the how the assets were depreciated in the prior year to current year. Alternatively, you may use a SALY approach and consider prior year’s depreciation expenses.
Interest earned on both the initial principal and the interest reinvested from prior periods is known as _____________ interest.
Compound
An annuity for which the cash flows occur at the beginning of the period (instead of the end) is known as a(n) _______________.
Annuity Due
An annuity in which the cash flows continue forever is called a(n) _____________.
Perpetuity
