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Exam 1 > Principles Of Finance Finc 3610 > Flashcards

Principles Of Finance Finc 3610 Flashcards

1
Q

What are the three questions we ask in Corporation Finance?

A

1.) What should we invest in?
Firms perspective; firm’s invest in assets; long-term investments
2.) How do we finance those investments?
Long-term finance of the firm
3.) How do we manage the day-to-day operations of the firm?
Short-term cash flow management

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2
Q

Balance Sheet Identity

A

A =L + S.E.

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3
Q

What is capital budgeting?

A

The process of planning and managing the firm’s long-term investments.

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4
Q

How do we budget capital?

A
  1. Estimate cash flows. (Timing)
  2. Estimate the cost of those cash flows. (Risks)
  3. Discount the Cash Flows.
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5
Q

What is capital structure?

A

The mix of debt and equity describing how the firm is financed.

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6
Q

Costly current assets-current liab.

A

Net Working Capital

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7
Q

What does short-term cash flow management entail?

A
  • net working capital
  • cash management
  • credit management(a.r. who and how much)
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8
Q

Sell stock shares to public and receive money

A

Initial Public Offering(IPO)

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9
Q

sell additional shares of stock to public and get money

A

Seasoned equity offering(SEO)

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10
Q

Shares ownership to another investor and receive cash

A

Private placement

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11
Q

Firms sell stocks and bonds to investors securities and they give money to firms

A

Primary market

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12
Q

Bob sells stocks and bonds to Sue and she gives him money

A

Secondary Market

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13
Q

Debt is _______________

A

A promise to repay

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14
Q

Equity __________________

A

Gets everything else

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15
Q
  • One Owner
  • easy startup
  • taxed as personal income
  • Unlimited liability
  • life limited to that of the owner
  • difficulty in transferring ownership
A

Sole Proprietorship

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16
Q
  • two or more partners
  • easy start-up
  • taxed as personal income
  • unlimited liability
  • life limited to that of the owners
  • difficulty in transferring ownership
A

Partnership

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17
Q

A business created as a distinct legal entity composed of one or more individuals or entities

A

Corporation

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18
Q

Separation of ownership and control in corporations

A
  • Shareholders: elect/hire directors
  • Directors: hire/fire and monitor managers
  • Managers: run corporation
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19
Q
  • limited liability
  • easy transfer of ownership
  • unlimited life
  • equity is not limited
  • difficult start up
  • double taxation of earnings
A

Corporation

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20
Q

Goal of the firm is…

A

To maximize shareholder wealth

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21
Q

What is a principle-agent relationship?

A
  • Principle hires agent to sell home

- Allign goals to be the same

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22
Q

The cost of the conflict of interest between stockholders and management.

A

Agency Costs

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23
Q

Money firm loses because conflict of interest

  • wasteful spending
  • monitoring and auditing
A

Direct Agency Cost

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24
Q

Missed Opportunities

A

Indirect Agency Costs

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25
Q

How do we control agency conflicts?

A

Proxy fights and hostile takeovers

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26
Q

The annual report and form 10-K

A
  • Balance Sheet
  • Income Statement
  • Statement of Cash Flows
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27
Q

-Snapshot of firm at a single point in time

A

Balance Sheet

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28
Q

Measure of how quickly assets can be converted into cash without lose of value

  • cash
  • accounts receivable
  • inventory
A

Liquidity

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29
Q

Price you would pay to get asset today

A

Market Value

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30
Q

Price you pay for asset-depreciation over time

A

Book Value

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31
Q

Where on the balance sheet can we find the true(market) value of the firm?

A

You can’t/It’s not there

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32
Q

How do we find the true(market) value of total stockholders’ equity?

A

Not on balance sheet; look at stock price

Price per share(# shares)

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33
Q

What is the goal of the firm?

A
  • Maximize stockholders wealth

- Increase market value equity

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34
Q

Income Statement Equation

A

Revenues-Expenses

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35
Q

Statement of Cash Flows

A
  • Cash Flows from Operating Activities
  • Cash Flows from Investing Activities
  • Cash Flows from Financing Activities
36
Q

Sources and Uses of Funds

A

-Changes in Current Assets
-Changes in Current Liabilities
Decr. Assets=>source
Incr. Assets=>Use of Funds
Decr.L or SE=>Use of Funds
Incr. L or SE=>Source

37
Q

Financial statements are ________ looking.

A

Backwards

38
Q

The balance sheet shows _______ values.

A

Book

39
Q

Taxes Owed/Taxable Income

A

Average Tax Rate

40
Q

Applies to next dollar of income

A

Marginal Tax Rate

41
Q

Balance sheet items as a percentage of _____________

A

Total assets

42
Q

Income statement items as a percentage of ________________

A

Total sales

43
Q

Measurability to make payments on short-term obligations

A

Short-term solvency or Liquidity Ratios

44
Q

Measure of ability to make on long-term obligations

A

Long-term solvency or financial leverage ratios

45
Q

Measure how efficiently using assets

A

Asset Management or turnover Ratios

46
Q

Measure whether generating profit

A

Profitability Ratios

47
Q

Require something outside of financial statement

A

Market Value Ratios

48
Q

Current assets/Current liabilities

A

Current Ratio

49
Q

Current assets - Inventories/ Current Liabilities

A

Quick (Acid-Test) Ratio

50
Q

Cash/Current Liability

A

Cash Ratio

51
Q

Net Working Capital/Total Assets

A

Net Working Capital to Total Assets

52
Q

Current Assets/ Average Daily Operation Cost

A

Interval Measure

53
Q

Current Assets-Current Liabilities

A

Net Working Capital

54
Q

Total Liability/Total Assets or

Total Assets-SE/Total Assets

A

Total Debt Ratio

55
Q

Debt/Equity

A

Debt-equity Ratio

56
Q

Assets/Equity or

Equity+Liabilities/ Equity or

1+ (Debt/Equity)

A

Equity Multiplier

57
Q

Long-term Debt/Long-term Debt + Equity

A

Long-term Debt Ratio

58
Q

EBT/ Interest

A

Times Interest Earned (Tie) Ratio

59
Q

EBIT+Depreciation/ Interest

A

Cash Coverage Ratio

60
Q

Sales/Net Working Capital

A

Net Working Capital Turnover

61
Q

Sales/Net Fixed Assets

A

Fixed Asset Turnover

62
Q

Sales/Total Assets

A

Total Asset Turnover

63
Q

Net Income/Sales

A

Profit Margin

64
Q

Net Income/ Total Assets

A

Return on Assets

65
Q

Net Income/SE

A

Return on Equity

66
Q

Net Income/ Number of Shares

-Not really market value

A

Earning Per Share

67
Q

Price per share/Earning per share

A

Price-Earnings (PE) Ratio

68
Q

Price Per Share/Sales Per Share

A

Price-Sales Ratio

69
Q

Price per share/Book Value of Equity per share

A

Market-to-book Ratio

70
Q

Market Value+Book Value of Debt Cash/EBITDA

A

Enterprise Value-EBITDA Ratio

71
Q

(Net Income/Assets)(Assets/Equity)

A

Return on Equity

72
Q

With leverage, ____ is greater than _____.

A

Return on Equity, Return on Assets

73
Q

Breaks Return on Equity down into:

A
  • Profitability
  • Asset Use Efficiency
  • Financial Leverage
74
Q

Current Financial Statement of the firm

A

Ratio Analysis

75
Q

What’s driving return on equity

A

The DuPoint Identity

76
Q

Limitations on Financial Statements:

A
  • Benchmarking
  • Effects of Inflation
  • Seasonal Factors
  • “Window Dressing”
  • Different Operating and Accounting Practices
  • The Big Picture
77
Q

The amount an investment is worth after one or more periods

A

Future Value

78
Q

Interest earned only on the original principal amount invested

A

Simple Interest

79
Q

Interest earned on both the initial principle and the interest reinvested from prior periods

A

Compound Interest

80
Q

The process of accumulating interest on an investment over time to earn more interest

A

Compounding

81
Q

Future Value Equation

A

FV=PV(1+r)†

82
Q

The effects/benefits of compounding:

A
  • increase with the interest rate
  • increase with time
  • increase with the frequency of compounding
83
Q

The current value of future cash flows discounted at the appropriate discount rate
-value today of some future value

A

Present Value

84
Q

Calculate the present value of some future amount

A

Discount

85
Q

The rate used to calculate the present value of future cash flows

A

Discount Rate

86
Q

Present Value Equation

A

PV= FV/(1+R)†
or
FV(1/(1+r)†

87
Q

Solving Present Value and Future Value Problems

A

FV=PV(1+r)†

PV=FV/(1+r)†

Exam 1 (3 decks)

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