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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
How do we control agency conflicts?
Proxy fights and hostile takeovers
26
The annual report and form 10-K
- Balance Sheet - Income Statement - Statement of Cash Flows
27
-Snapshot of firm at a single point in time
Balance Sheet
28
Measure of how quickly assets can be converted into cash without lose of value - cash - accounts receivable - inventory
Liquidity
29
Price you would pay to get asset today
Market Value
30
Price you pay for asset-depreciation over time
Book Value
31
Where on the balance sheet can we find the true(market) value of the firm?
You can't/It's not there
32
How do we find the true(market) value of total stockholders' equity?
Not on balance sheet; look at stock price | Price per share(# shares)
33
What is the goal of the firm?
- Maximize stockholders wealth | - Increase market value equity
34
Income Statement Equation
Revenues-Expenses
35
Statement of Cash Flows
- Cash Flows from Operating Activities - Cash Flows from Investing Activities - Cash Flows from Financing Activities
36
Sources and Uses of Funds
-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
Financial statements are ________ looking.
Backwards
38
The balance sheet shows _______ values.
Book
39
Taxes Owed/Taxable Income
Average Tax Rate
40
Applies to next dollar of income
Marginal Tax Rate
41
Balance sheet items as a percentage of _____________
Total assets
42
Income statement items as a percentage of ________________
Total sales
43
Measurability to make payments on short-term obligations
Short-term solvency or Liquidity Ratios
44
Measure of ability to make on long-term obligations
Long-term solvency or financial leverage ratios
45
Measure how efficiently using assets
Asset Management or turnover Ratios
46
Measure whether generating profit
Profitability Ratios
47
Require something outside of financial statement
Market Value Ratios
48
Current assets/Current liabilities
Current Ratio
49
Current assets - Inventories/ Current Liabilities
Quick (Acid-Test) Ratio
50
Cash/Current Liability
Cash Ratio
51
Net Working Capital/Total Assets
Net Working Capital to Total Assets
52
Current Assets/ Average Daily Operation Cost
Interval Measure
53
Current Assets-Current Liabilities
Net Working Capital
54
Total Liability/Total Assets or Total Assets-SE/Total Assets
Total Debt Ratio
55
Debt/Equity
Debt-equity Ratio
56
Assets/Equity or Equity+Liabilities/ Equity or 1+ (Debt/Equity)
Equity Multiplier
57
Long-term Debt/Long-term Debt + Equity
Long-term Debt Ratio
58
EBT/ Interest
Times Interest Earned (Tie) Ratio
59
EBIT+Depreciation/ Interest
Cash Coverage Ratio
60
Sales/Net Working Capital
Net Working Capital Turnover
61
Sales/Net Fixed Assets
Fixed Asset Turnover
62
Sales/Total Assets
Total Asset Turnover
63
Net Income/Sales
Profit Margin
64
Net Income/ Total Assets
Return on Assets
65
Net Income/SE
Return on Equity
66
Net Income/ Number of Shares | -Not really market value
Earning Per Share
67
Price per share/Earning per share
Price-Earnings (PE) Ratio
68
Price Per Share/Sales Per Share
Price-Sales Ratio
69
Price per share/Book Value of Equity per share
Market-to-book Ratio
70
Market Value+Book Value of Debt Cash/EBITDA
Enterprise Value-EBITDA Ratio
71
(Net Income/Assets)(Assets/Equity)
Return on Equity
72
With leverage, ____ is greater than _____.
Return on Equity, Return on Assets
73
Breaks Return on Equity down into:
- Profitability - Asset Use Efficiency - Financial Leverage
74
Current Financial Statement of the firm
Ratio Analysis
75
What's driving return on equity
The DuPoint Identity
76
Limitations on Financial Statements:
- Benchmarking - Effects of Inflation - Seasonal Factors - "Window Dressing" - Different Operating and Accounting Practices - The Big Picture
77
The amount an investment is worth after one or more periods
Future Value
78
Interest earned only on the original principal amount invested
Simple Interest
79
Interest earned on both the initial principle and the interest reinvested from prior periods
Compound Interest
80
The process of accumulating interest on an investment over time to earn more interest
Compounding
81
Future Value Equation
FV=PV(1+r)†
82
The effects/benefits of compounding:
- increase with the interest rate - increase with time - increase with the frequency of compounding
83
The current value of future cash flows discounted at the appropriate discount rate -value today of some future value
Present Value
84
Calculate the present value of some future amount
Discount
85
The rate used to calculate the present value of future cash flows
Discount Rate
86
Present Value Equation
PV= FV/(1+R)† or FV(1/(1+r)†
87
Solving Present Value and Future Value Problems
FV=PV(1+r)† PV=FV/(1+r)†

Exam 1 (3 decks)

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