New Basic Questions Flashcards
What is a company’s liquidity ratio and how Can a Company Quickly Increase Its Liquidity Ratio? What does it indicate
• Ability to pay off its current debts with its current assets.
o using sweep accounts
o cutting overhead expenses
o paying off liabilities.
• A higher liquidity ratio indicates a company is in a better position to meet its obligations, but can also indicate that a company isn’t using its assets efficiently.
What are Accounts Payable AP? Where is it shown? Where does changes in AP reflect?
- Amounts due to vendors or suppliers for goods or services received that have not yet been paid for
- All outstanding amounts are shown as AP on balance sheet
- Increase or Decrease in total AP reflects on CF
What are KPI’s? What do they measure?
• Key Performance Indicators = set of quantifiable measurements o Measure company success • Can be Financial o Net profit, revenue - specific expenses, liquidity • Can be Customer-Focused o Per customer efficiency, satisfaction • Process Focused o Measure and monitor performance
What are Capital Markets? What do they consist of?
- Places where savings and investments are moved between suppliers and demanders of capital
- Primary Market (new securities) + Secondary Market (already issued securities)
- Ex: Stock market & Bond Market
What is Capital Stock?
Where is it recorded?
What is it used for?
Disadvantages?
- Amount of common shares that a company is authorised to issue
- Recorded on BS under Shareholder’s Equity
- Issuing CS = raise money without debt
- Company relinquishes control + dilutes value of outstanding shares
What is Cost of Capital?
• Return needed to take on a capital project,
such as purchasing new equipment or constructing a new building
What is Equity?
- Represents the value that would be returned to shareholders, if all assets are liquidated and all debts paid off
- Equity = Shareholder’s Equity = Assets-Liabilities
What is Series A Financing? Advantages & Disadvantages of Financers
• Investment in a privately held start-up
after it has shown progress in building its business model
and demonstrates the potential to grow and generate revenue,
- financiers gain a large or controlling interest in the start-up
- byt risking their investment
What is Series B Financing? Disadvantage? Who are Financers?
- Second round of funding for a company that has met certain milestones and is past the initial startup stage
- Investors usually pay higher price at this stage then series A investors
- Private Equity Investors, Venture capitalists, crowdfunded equity, credit investments
Private vs. Public Company: What are they? What is the Difference? What Advantage?
• Private: owned by company’s founders, management or a group of private investigators
• Public: company that has sold all or a portion of itself to the public
• Differences
o Public exposure
Private are not required to disclose financial info
Public are required to file reports available to shareholder and public
• Public advantage: raise capital by selling stock or bonds
What is Equity Financing? Advantages? Disadvantages?
• Selling a portion of a company’s equity in return for capital
• main advantage: there is no obligation to repay the money: places no additional financial burden
• Disadvantage:
o have to give the investor a percentage of your company
o have to share profits and consult with your new partners any time you make decisions affecting the company
What is Debt Financing? Advantages? Disadvantages?
• Loan: borrowing of money and paying it back with interest
• Advantages:
o lender has no control over your business
o Interest paid is tax deductible
o Easy to forecast: loans don’t fluctuate
• Disadvantage:
o Debt is a bet on your future ability to pay back the loan
Equity Financing vs. Debt Financing: What’s the difference?
- Debt financing involves the borrowing of money whereas equity financing involves selling a portion of equity in the company.
- Creditors look favorably upon a relatively low debt-to-equity ratio, which benefits the company if it needs to access additional debt financing in the future.
What is NPV? How is it calculated? What is it used for?
• Net Present Value
o Difference between present value of inflows and outflows over time
o To calculate, need to estimate future cf’s and discount them
o Used to calculate current total value of a future stream of payments
What is IRR? How is it calculated? What is it used for?
• Internal Rate of Return
o Annual growth that an investment is expected to generate
o Calculated like NPV but by setting NPV to zero
o Analysing and comparing potential rates of annual return of investment
