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MBA > Week 1 > Flashcards

Week 1 Flashcards

1
Q

3 interrelated elements in finance

A

time, money, risk

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2
Q

6 principles of finance

A
  1. money has a time value
  2. higher returns are expected for taking on more risk
  3. diversification of investments can reduce risk
  4. financial markets are efficient in pricing securities
  5. manager and stockholder objectives may differ
  6. reputation matters
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3
Q

money has a ___

A

money has a time value

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4
Q

what is expected if you take on more risk in finance

A

higher returns are expected for taking on more risk

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5
Q

when do you generally earn more returns

A

higher returns are expected for taking on more risk

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6
Q

3 areas of finance

A

institutions/markets,
investments,
financial management

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7
Q

what do you need to start or expand a business venture

A

money
ideas
understand: monetary system, financial institutions, , financial market interactions

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8
Q

what does modern business depend on

A

business is increasingly global in nature so the success of a business depends on the domestic economic environment we live in and in the developments abroad

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9
Q

what aspects of globalization is finance involved in

A

globalization encompasses the socio-economic reform process of eliminating barriers to trade, investment, cultural, information technology, and political issue across countries

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10
Q

how are financial markets catagorized

A

money and capital markets

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11
Q

money markets

A

debt securities that are issued and traded with maturities of one year or less

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12
Q

debt securities that are issued and traded with maturities of one year or less

A

money market

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13
Q

capital markets

A

debt instruments or securities are issued and traded with maturities longer than one year

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14
Q

debt instruments or securities issued and traded with maturities longer than one year

A

capital markets

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15
Q

primary markets

A

provide for the initial offering/origination of debt and equity securities

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16
Q

secondary markets

A

locations to trade debt securities like bonds/mortgages and equity securties/stock

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17
Q

definition of money

A

anything accepted as a means of paying for goods/services and paying off debt

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18
Q

2 basic functions of money

A

serves as a medium of exchange
AND
can be held & stored as a value/purchasing power that can be drawn upon at awill

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19
Q

what do economists believe about money and economic activity

A

economists generally believe that money supply “matters” when trying to “manage” economic activity

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20
Q

GDP

A

gross domestic product
economic activity

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21
Q

what is GDP comprised of

A

personal consumption expenditures (PCE)
government purchases (GP)
gross private deomestic investment
net exports

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22
Q

equation of GDP

A

GDP = PCE + GP + GPDI + NE
gross domestic product
personal consumption expenditures
government purchases
gross private domestic investment
net exports

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23
Q

PCE

A

personal consumption expenditures
expenditures by individuals for goods and survices

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24
Q

GPDI

A

gross private domestic investment
fixed investment in residential/non residential structures, producers durable equipment, changes in business inventories

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25
Q

NE

A

net export
exports minus imports

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26
Q

calculate net exports

A

exports - importas

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27
Q

velocity of money

A

divide GDP by the money supply = the number of times our money supply “turns over” to produce GDP
*measures the rate of circulation of the money supply

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28
Q

measures the rate of circulation of the money supply

A

velocity of money = number of times the money supply turns over to produce GDP

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29
Q

what happens when money supply exceeds the amount of money demanded

A

the public will spend more rapidly causing real economic activity/prices rise

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30
Q

what happens when the rate of growth of the money supply is too rapid

A

a too rapid rate of grouth in the money supply will ultimately result in rising prices or inflation because excess moeny will be used to bind up the prices of existing goods

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31
Q

what do Keynesians believe about the money supply

A

Keynesians beleive a change in the money supply first causes a change in interest rate levels which, in turn, alters the demand for goods and services
-decreases in money supply will likely cause interest rates to rise
THUS GDP will grow more slowly/even decline depending on how highter interest rates affect consumption and spending decisions

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32
Q

what is a country’s economic system tied to

A

a country’s economic system is necessarily tied to the international exchange of goods/services
-a well-developed international monetary system is necessariy for a successful global economy

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33
Q

what has the international monetary system historically been tied to

A

gold standard
1944: many of the world’s economic powers met and agreed to an international monetary system that was tied to US dollar/gold via fixed (pegged) exchange rates

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34
Q

when did major international currencies float against eacher

A

1973, major currencies were allowed to “float” against each other resulting in a flexible or floating exchange rate syewm
-today the current international monetary system is a “managed” floating echaange rate system (because sometimes central monetary authoriteis intervene)

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35
Q

AIS

A

Accounting Information System

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36
Q

objective of the AIS

A

Accounting Information System
-to provide all the financial information internally needed by management for business decision-making (management accounting) and to provide financial information to various external users concerned with the financial activities of hte organization (financial accounting)

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37
Q

use of bar codes in warehouses

A

keep track of inventory

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38
Q

what is the component of AIS that supplies information to external users

A

Financial accounting is a component of Accounting Information System that supplies information to external users. organizations that require/expect information to be reported and organizations that receive information on an as needed basis

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39
Q

why is the study of financial statements important

A

the competitivene3ss of hte global marketplace is continuing to expand at a fast pace and firms need to be positioned to leverage assets/credit, decrease debts, continuous improve
SO
must review financial statemnts/applicable ratios at prescheduled intervals

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40
Q

leadership/manager reviewing a firm’s finances

A

. The competitiveness of the global marketplace is continuing to expand at a fast pace and firms need to be positioned to leverage assets and credits, decrease debts, and continuously improve. As a resource in this regard, firms are able to review their financial statements and applicable ratios at prescheduled intervals. These reviews must be conducted in a manner that provides the managers of a firm with the ability to take proactive and/or corrective steps as needed. We can move to an important part of a company’s existence by becoming familiar with the fundamentals of financial analysis – the review of financial statements, as well as how to interpret those statements through ratio analysis.

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41
Q

GAAP

A

General Accepted Accounting Practices

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42
Q

3 most important financial statements

A

income statement
balance sheet
statement of cash flow

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43
Q

aka income statement

A

profits & losses statement

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44
Q

aka profits & losses statement

A

income statement

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45
Q

what is the income statement directly linked to

A

the income statement (profits & losses) is directly linked tot he balance sheet and statement of cash flow

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46
Q

what does the income statement report

A

income statement reports the revenues generated & expenses incurred by a company over an accounting period (quarter/year)

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47
Q

reports revenue generated & expenses incurred by a company over a period of time (quarter/year…)

A

income statement

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48
Q

aka balance sheet

A

Statement of Financial Position

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49
Q

Statement of Financial Position

A

aka balance sheet

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50
Q

what shows the snapshot of hte financial situation of the company

A

balance sheet

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51
Q

what provides an insight into the financial inner-workings of hte company

A

balance sheet (Statement of Financial Position)

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52
Q

how to use the balance sheet

A

aka Statement of Financial Position
Assets = Liabilities + equity
balance stateement must blance

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53
Q

Assets =

A

Assets = Liabilities + equity
MUST BALANCE
this is the balance sheet/Statement of Financial Position statement

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54
Q

Liabilities + Equity =

A

L + E = Assets
Balance sheet MUST BALANCE

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55
Q

what must a company have for every asset

A

for every asset, the company will have some combination fo debt or equity financing for it

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56
Q

how is the statement of cash flow useful

A

statement of cash flow is a useful tool in determining a company’s ability to generate cash flows
-summarizes the cash recepits/cash payments during the period from a company’s operating, investing, and financing activities

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57
Q

3 business activities covered by the statement of cash flow

A

operating activities
financing activities
investing activities

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58
Q

operating activities of a business

A

(1/3 of the statement of cash flow)
expenses of the company required to maintain its business operations

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59
Q

expenses of a company needed to maintain business operations

A

operating activities

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60
Q

investing activities of a company

A

all investing activities the company has purchased or sold duirng that accounting period

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61
Q

financing activities of a company

A

changes in teh company’s debt, loands, or dividends account

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62
Q

what can be confusing about statement of cash flow

A

is a change in the account a source or use
-ask Q “does the transaction lead to an increase or decrease in cash?”

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63
Q

important question to ask about the different components on the statement of cash flow

A

Does the transaction lead to an increase or decrease in cash?

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64
Q

why is the study of financial statements important?

A

The study of financial statements is an important one. The competitiveness of the global marketplace is continuing to expand at a fast pace and firms need to be positioned to leverage assets and credits, decrease debts, and continuously improve. As a resource in this regard, firms are able to review their financial statements and applicable ratios at prescheduled intervals. These reviews must be conducted in a manner that provides the managers of a firm with the ability to take proactive and/or corrective steps as needed. We can move to an important part of a company’s existence by becoming familiar with the fundamentals of financial analysis – the review of financial statements, as well as how to interpret those statements through ratio analysis.

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65
Q

forms of business organizations in the US

A

sole proprietorshiop, partnership, corporation

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66
Q

aka single business ownership

A

sole proprietorship

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67
Q

what is a corporation

A

business organized under the laws of a particualar state

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68
Q

Finance Equations and Calculations

Asset Ratios

Inventory turnover = Sales or cost of goods sold/ Inventory

Days’ sales in inventory=(Ending Inventory × 365 days)/ Cost of goods sold

Accounts receivable turnover = Credit sales /Accounts receivable

Average collection period (ACP)=(Accounts receivable × 365 days /Credit sales)=365 days /Accounts receivable turnover

Accounts payable turnover = Cost of goods sold /Accounts payable

Average payment period (APP)=Accounts payable × 365 days /Cost of goods sold=365 days/ Accounts payable turnover

Fixed asset turnover = Sales/ Net fixed assets

Sales to working capital = Sales/ Working capital

Total asset turnover = Sales/ Total assets

Liquidity Ratios

Current ratio = Current assets/ Current liabilities

Quick ratio (acid-test ratio) = Current assets – Inventory/ Current liabilities

Cash ratio = Cash and marketable securities /Current liabilities

Current ratio using Inventory: Current ratio – Quick ratio=Inventory. Add inventory result to current assets and to current liabilities and then divide to calculate a new current ratio.

Debt Management Ratios

Debt ratio = Total debt/ Total assets

Debt-to-equity = Total debt/ Total equity

Equity multiplier = Total assets/ Total equity or Total assets/ Common stockholders’ equity

Times interest earned = EBIT/ Interest

Profitability Ratios

Gross profit margin = Sales − Cost of goods sold/ Sales

Operating profit margin = EBIT/ Sales

Profit margin=Net income available to common stockholders /Sales

Basic earnings power (BEP) = EBIT/ Total assets

Return on assets (ROA)=Net income available to common stockholders /Total assets

Return on equity (ROE)=Net income available to common stockholders/ Common stockholders’ equity

Dividend payout=Common stock dividends /Net income available to common stockholders

Market Value Ratios

Market-to-book ratio = Market price per share /Book value per share

Price-earnings (PE) ratio = Market price per share/ Earnings per share

Other

Assets = Liabilities + Equity

Percentage formula: to find X if P of it is Y. Use the formula Y/(1-0.30)=X

Net working capital = Current assets − Current liabilities

Earnings per share (EPS) = Net income available to common stockholders /Total shares of common stock outstanding

Dividends per share (DPS) =Common stock dividends paid /Number of shares of common stock outstanding

Book value per share (BVPS) =Common stock + Paid-in surplus + Retained earnings /Number of shares of common stock outstanding

Market value per share (MVPS) =Market price of the firm’s common stock

GDP = PCE + GP + GPDI + NE.

Treasury securities are 0 DRP.

Approximate return - Rule of 72 is the approximate number of years to double an investment. It calculated by dividing 72 by the annual rate of return.

FCF===[EBIT (1 − Tax rate) + Depreciation] − [ΔGross fixed assets + ΔNet operating working capital][NOPAT + Depreciation] − Investment in operating capital Operating cash flow − Investment in operating capital

ROA: Net income available to common stockholders +Profit margin + Total asset turnover

ROE: ROA×Equity multiplier or Total assets/Common stockholders’ equity

Retention ratio (RR)=Addition to retained earnings/Net income available to common stockholders

Retention ratio (RR)=Addition to retained earnings Net income available to common stockholders. For the Retention ratio: (1 – payout ratio).

If you know the retention ratio and net income and want the dividend payout:

ratio is (1 - the retention ratio) * net income

Internal growth rate= ROA × RR1 − (ROA × RR)

Sustainable growth rate= ROE × RR1 − (ROE × RR)

Future value in 1 year = FV1 =PV × (1 + i )

Future value in N years = FVN = PV × (1 + i)N

Future value in N periods =FVN =PV × (1 + i period 1 ) × (1 + i period 2 ) × (1 + i period 3 ) × …× (1 + i period N )

Present value of next period’s cash flow = PV = FV1 /(1 + i )

Present value of cash flow made in N years: PV = FV / (1 + i)N

Present value with different discount rates: =PV = FVN(1+iperiod 1) × (1 + i period 2) × (1 + iperiod 3) × …×(1 + iperiod N)

NOTE: If you use Excel for FV or PV, make sure to add negative sign for the amount.

Bond price =PV of annuity (PMT, i, N) + PV (FV, i, N)

NOTE: Bond price will be $1000.00 for all questions/problems in this course.

Constant growth model: P0=D0(1 + g)/i − g= D1/i – g

Constant Growth Assumption: Annual Dividend*(1+ Expected Growth%)/(Required return%- Expected Growth%)

Expected return: i=Dividend yield + Capital gain or D1P0+ g

P/E=Current stock price/Per-share earnings for last 12 months

Dollar return: Capital gain or loss + Income; (Ending value – Beginning value) + Income

Percentage return:(Ending value – Beginning value + Income Beginning value)* 100%

Total risk = Firm−specific risk + Market risk

Rate of return will be calculated as: (Expected Price + Dividend - Current Price) / Current Price

Required return = Risk-free rate + Risk premium

Expected return=Rf+β(RM−Rf)

Free Cash Flow: Operating cash flow−Investment in operating capital=[EBIT(1−Tax rate)+Depreciation]−[ΔGross fixed assets + ΔNet operating working capital]

Depreciation: (Depreciable basis−Ending book value)/Life of asset

Payback Decision Rule: Accept project if calculated payback ≤ Maximum allowable payback; Reject project if calculated payback > Maximum allowable payback

NPV Decision Rule: Accept the project if the NPV is positive and reject the project if the NPV is NPV is negative. If a conflict in ranking occurs, the decision rule is to accept the project with the highest positive NPV instead of the project with the highest IRR that is greater than the hurdle rate.

IRR Decision Rule: Accept project if IRR ≥ Cost of capital; Reject project if IRR < Cost of capital

Operating cycle: Days’ sales in inventory + Average collection period; (Inventory × 365/Cost of goods sold) + (Accounts receivable × 365/Credit sales)

Cash cycle: Operating cycle − Average payment period; Operating cycle – (Accounts payable × 365)/Cost of goods sold

Average payment period (APP): Operating cycle−Cash cycle

Payables turnover = 365/APP

Dividends = Net income − Retained earnings necessary to fund positive NPV projects

Simple dividend payout ratio: dividends/net income

Current Yield when only % and price are known: %/price

Value of the stock: $Dividend/Required return%

Stock price: P/E * earnings per share

Market capitalization: Shares * Stock price

% Equity + % Debt will always equal 100%

Estimated Yield to Maturity Formula: (Annual Interest Payment) + (Face Value - Current Price)/(Years to Maturity)/(Face Value + Current Price)/2

WACC = WdKd + WpKp + WeKe

Weight of DebtCost of Debt+Weight of EquityReturn on Equity

Sample input in Excel: =0.4(0.06)+0.6(0.17)

A
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69
Q

what is finance the study of?

A

finance is the study of value and how it is determined

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70
Q

what must you know about risk in terms of finance

A

assessing risk and ascertaining the appropriate return for hte preceived level of risk

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71
Q

how are the three fundamental principles of finance meant to be used

A

not meant to be directly related to each other -each stands on its own- but they work together in shaping financial theory

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72
Q

first fundamental principle of finance

A

The value of any asset = the preset value of the cash flow the asset is expected to produce over its economic life

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73
Q

basis for all methods used for determining the value of virtually anything

A

The First Fundamental Principle of Finance: the value of any asset is = the preset value of the cash flows the asset is expected to produce over its economic life

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74
Q

value of a dollar

A

a dollar today is NOT = dollar tomorrow
- you can invest it so it is worth more in a year. so it is worth more later

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75
Q

what is the basis of value for an asset

A

the basis of value for an asset stems from the cash flows the asset is expecte dto rduce

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76
Q

what determines the cash flow of an asset

A

the nature of hte asset determines the nature and timing of the cash flows produced by the asset

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77
Q

why might multiple financial specialists make different judgements for the expected cash flow from an asset?

A

each may make a different assumption

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78
Q

what type of financial analysts are the most talented/successful

A

there is a lot of judgement in finance so the analysts who develop good judgment get paid well. not expected to have good judgment starting out but will grow over time. managers whose judgment proves effective climbs the corporate ladder successfully

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79
Q

eeconomic life of assets

A

different assets have different lives.
-e.g. when a firm purchaaes a new machine for production, it assigns its economic life base dont he nature of the asset for purposes of depreciation
- bonds have a limited expected life (maturity date) while stocks last forever

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80
Q

what must we determine when we attempt to value an asset

A

-determine the discount rate
-size/timing of the cash flows the asset is expected to produce
-when its economic life ends/asset expected to be sold or taken out of ervice

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81
Q

discount rate

A

the cost that is appropriate for the perceived level of risk for the given asset
-determined by the level oif risk associated w/the asset anin question

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82
Q

assets & discount rate

A

different types of assets will use different discount rates to determine the present value of cash flow

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83
Q

MACRS

A

modified accelerated cost recovery system

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84
Q

how is MACRS used

A

modified accelerated cost recovery system
depreciation system used for tax purposes
-allows the capitalized cost of an asset to be recovered over a specified period via annual deductions
-puts fixed assets into classes that have set depreciation periods

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85
Q

what does MACRS do to assets

A

modified accelerated cost recovery system
- puts fixed assets into classes that have set depreciation periods

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86
Q

why must you know the expected economic life of the asset

A

the expected economic life of the asset must be established in order to be able to determine the time span over which cash flows can be expected

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87
Q

2nd Fundamental Principle of Finance

A

there is a direct relationship between risk and return

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88
Q

relationship between risk and return

A

as perceived risk increases, required return will also increase

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89
Q

how is risk understood

A

the chance of a bad outcome

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90
Q

what is risk in finance

A

probability of not earning the return you expect from your investment over a given period of time

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91
Q

standard deviation of a data set

A

measures the average deviation from the mean

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92
Q

2 rules of rational investing

A

if 2 investments have the same expected return but different levels of risk, choose the investment with less risk

if two investments have the same level of risk but different expected returns, choose the investment with the higher expected return

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93
Q

which should you choose if you have 2 investments with the same expected return but different levels of risk

A

choose the one with the less risk

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94
Q

which should you choose if 2 investments have the same level of risk but different expected returns

A

choose the one with higher expected returns

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95
Q

what will rational investors do

A

either maximize their expected return for a given level of risk or minimize the risk for a given level of expected return
= will want a higher rate of return for a higher risk

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96
Q

yield =

A

yield is another word for return. specificially the % return

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97
Q

3rd fundamental principlal

A

there is an inverse relationship between price and yield
-if an assets price increases, it return will decrease
-

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98
Q

relationship between price and yield

A

yield = return
if an assets price increases, its return will decrease

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99
Q

what happens as the denominatior of a fraction increases (constant numerator like 1)

A

number gets smaller

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100
Q

precept

A

general rule intended to regulate behavior or thought

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101
Q

relationship between the present value of a cash flow/asset & discount rate

A

present value of a cash flow (asset) is INVERSELY RELATED to its discount rate
-increasing the discount rate decreases the present value

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102
Q

how is the discount rate used

A

the discount rate is used to calculate the present value of a cash flow determined by the nature of hte cash flow as well as the relative riskiness of hte cash flow

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103
Q

what does the discount rate used affect

A

different types of assets will require different discount rates SO discount rate used will affect the value determined for hte asset

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104
Q

what happens when we discount cash flows to determine their present value

A

we are removing value to account for return to investors over time

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105
Q

why does the timing of cash flow from an asset matter

A

the timing of cash flows of an asset is importatn
-sooner is better (later cash flows are more heavily discounted reducing their preset value)

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106
Q

what happens to a cash flow at the end of the first time period

A

a cash flow that occurs at the end of hte first time period is discounted for one period toi obtain its present value WHILE a cash flow that occurs at the end of hte second time period isdiscounted for two periods to obtain its present value

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107
Q

what happens over time due to the discounting process

A

the further out the cash flows occurs, the more value gets removed in the discounting process and consequently the lower th peresent value
-SO an asset with larger cash flows comes earlier in its economic life will have a higher presentr value that a similar one in which the larger cash flows come later since the earlier large cash flows will not be discounted as much

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108
Q

what is discount rate used to reflect

A

discount rate is used as a reflection of the riskiness of the cash flow

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109
Q

what is present value of a cash flow affected by

A

presenty value of a cash flow is affected by the size of hte cash flow, timing of it, and discount rate used to determine its present value

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110
Q

relationship between present value of a cash flow or asset & perceived risk

A

higher the risk, higher the discount rate, and lower the present value

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111
Q

what kind of relationship between risk and return

A

positive relationship

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112
Q

what kind of relationship between return and value

A

negative

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113
Q

cash flows subjected to less discountign

A

less value returned

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114
Q

APR

A

annual percentage rate
- charged for the use of credit
- the number APR quoteds you is not the rate you will actually pay

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115
Q

role of finance in a business

A

determine how money is to be raised, spent, and invested

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116
Q

what is important to remember about funds raised from different sources

A

funds raised from different csources have different costs and different associated risks

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117
Q

what does the chief financial officer decide about bonds offered by their company

A

whether to issue a bond,
for what maturity,
and paying what interest rate
OR to issue equity (preferred or common)
and whidividends to pay shareholders

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118
Q

what aspect about finance directly impacts other decisions the firm will make

A

ability to raise money quickly and at a reasonable cost impacts decisions like…
- what products to make, how to make them, (based on production processes and the cash flows realized from the products)
- CFO also determines how much cash to make available for operatiosn and wehre to invest leftover cash

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119
Q

short-term decisions a firm must make about finances

A

how much cash to keep on hand
how much inventory to keep on shelves
how much credit to extend and to whom
whether to pay the bills quickly to get a discount or pay them leter at full price

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120
Q

long-term financial decisions

A

which production assets to purchase,
whether to use manual or anutomated process,
whether to build a production facility or rent one,
purchase own fleet of trucks or contract out,…

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121
Q

what is important ot remember about any major decision a firm makes

A

any major decision a firm makes commits the firm to a long-term plan

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122
Q

what type of discipline is finance

A

a strategic discipline

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123
Q

how does CEO, CFO, and other top managers choose which option to invest in

A

based on firm’s strategic plan and value of each option

124
Q

what is it every manager’s responsibility to do

A

maximize the intrinsic value of a firm
- some focus on maximizing shareholder wealth (generally translates to maximize the firm’s common stock price
SHORT SIGHTED: stock prices can be manipulated and generally doesn’t add long-term value
thus, promote maximizing the intrinscic value of a firm ((intrinsic common stock price)

125
Q

stakeholders for a business

A
  • customers (depend on good/service)
  • suppliers (live/die based on the success/fail of the businesses they supply
  • employees (take pride in work and devote a better part of hteir week to the firm’s success)
  • investors supply the firm with the funds they need to continue in business
  • community is invested in teh firm’s success
126
Q

what is important to remember about your employees

A

they devote the better part of their week to your firm’s success

127
Q

Coco Cola flop

A

1985: New Coke. to compete w/ Pepsi
1. changed a program that didn’t need to be changed
2. tgook original product off the market
original product “Coke Class” brought back 3 months later and Coke II d/c 7yrs later

128
Q

what was one of the reasons Obama bailed out GM

A

many reason but also was because of the impact on the local community. numerous local businesses made virtually all of its revenue from supplying the local GM plant

129
Q

controversary at Amazon the same year he became the richest man in theworld

A

Jeff Bezos became richest man in the world in 2017 but more than 10% of 6K employees in Ohio were on food stamps

130
Q

CEO of Amazon

A

Jeff Bezos

131
Q

Stop BEZOS Act

A

2018: Bernie Sanders act to require large employers like Amazon/Walmart pay the government for various forms of public assistance like food stamps/medicaoid/public housing received by their employees
- zero chance of passing but did begin a national conversation about corporate subsidies paid for with taxpayers funds

132
Q

what does Walmart say about its low wages

A

Walmart Claims its strategy is low prices but hte low rwages are why so many WalMart are on public assistence

133
Q

Walmart family in 2012

A

6 people in the Walton family had combined wealth of $90M which is more than the bottom 30% of US earners

134
Q

what does the local community receive from businesses

A

ongoing source of labor,
restaurants for meals/outings,
local businesses as customers/suppliers,
retail stores for employee convenience
**efforts made/money spent on supporting the local community often pays dividends for hte firm in term s of good public relations and support from the lcoal vogernment

135
Q

socially responsible investing

A

give back to community

136
Q

green funds

A

mutual funds that limit investimets to firms that limit their carbon footprint and contribute to environmental protection, firms developing alternative energy sources, ethical corport governance

137
Q

purpose of socially responsible investiong & green firms

A

to tell corporate executives that how they choose to operate their businesses matters to investors

138
Q

what is Enron

A

energy firm in 1985 Houston that was a merger of two smaller ones
in 1990s, used fradulent accounting practices to transfer liabilityies off its balance sheet making the firm appear less risky and thus keeping its stock pricesartificially elevated while also making the firm seem more profitable than it was
- marketing analysits found out in August 2001
- problematic b/c management had insisted that the employees invest their pensions heavily in Enron stock so when the firm filed for bankruptcy, the employees lost their jobs and life saving

139
Q

SEC

A

Securities and Exchange

140
Q

EPS

A

earnings per share

141
Q

stock buyback hx

A

1982, SEC passed rule 10b-18 which makes stock buyback esier
- repurchasing shares reduces the number of shares outstanding, increases earnings per share. higher EPS cause sthe market to reprice the stock upwards
- buiyback doesn’t do anything for the firm other than put upward pressure on the stock price - not real value added. but increases int ehsock price helps motivate top managers becasue lets them meet their goals and achieve huge bonuses
- so top mamagers are motivated to continue the practice since it benefits them

142
Q

theory of corporate sustainability

A

corporations have an ethical obligation to run the business in a way that is sustainable for all parties involved

143
Q

what is true sustainability

A

sustainability for everyone, not just the shareholders

144
Q

how can you measure the market price of a stock

A

published all day long and changes constantly with traded based on new information

145
Q

3 ways to increase the present value of hte firm’s expected future cash flow

A

maximize the size of the expected future cash flows,
obtaint he cash flows sooner rather than later,
redce the riskiness of cash flow

146
Q

what does MACRS schedule offer

A

MACRS schedule for depreciation of production assets offers higher depreciation rates earlier int he assets life, increasing the early cash flow from the asset

147
Q

creative ways to obtain cash flows sooner rather than later

A
  • MACRS schedule rather than straight line depreciation,
    purchasing dept could propose purchasing contracts with its suppliers that reward volume purchases with lower prices or rebates for meeeting certain volume targets
    **good relationships with suppliers makes it easier to implement
    -
148
Q

how do you manage purchasing expenses

A

manage relationships with suppliers. prices increases are inevitable but good working relathiopships wmakes them work for all parties involved

149
Q

increases operating expenses over time

A

salary increaseshow

150
Q

3 general types of financial decisions made by the CRO

A

capital budgeting, working capaital management, capital structure
How do we invest long-term to implement our strategic plan?
How do we manage our funds in the short term to suppoert production?
How do we obtain the funds we need

151
Q

what do cpaital budgeting decisions involve

A

large initial purchases and large cash inflows form sales revenues over an extended period of time
- each decision of this time commits the fiirm to utilizingthe assets for years

152
Q

working capital

A

current assets & liabilities
(the short-term balance sheet accounts used to support day to day operations
**must manage to prevent costly interruptions to production

153
Q

how do you prevent costly interruptions to production

A

manage working capital

154
Q

short-term accounts used to support day to day operations

A

working capital

155
Q

examples of typical working capital questions

A

How much cash to have available for production? (cash does not earn interest)
how much credit should be extended to customers and at what interest rate,
how much inventory should be kept in stock,
should we pay cash for operationg purchases or use trade credit?
how much short=-term debt should be used to support operations?

156
Q

cash & interest

A

cash does not earn interest

157
Q

capital structure

A

mixture of debt and equipty the firm uses to purchase its assets and uspport operations

158
Q

typical capital structure issues

A

Should we issue bonds or stocks
what maturity should the bonds be assigned
what interest rate is appropriate for the bonds
what divident should we pay the common shareholder

159
Q

what does the value of a firm derive from

A

value of the firm derives from the cash flow it produces

160
Q

how does the stock market set a price for a firm’s common stock

A

based on its expectations regarding the firm’s future cash flows
- optimistic or pessimistic
- investors vote with wallet

161
Q

how does the news affect the stock market

A

expectations of future cash flows are shaped by the news puvblished about the firm (top management changes, lawsuits, annual reports)

162
Q

things the CRFO must determine the value of decisiosn

A

introducign a new product
entering a new product
utilizing a new production process
acquiritng another firm
changing the location of corporate HQW
* none of these decisions are purely financial in tature, they all have value and it is the functuion of finance to determine the appropriate value

163
Q

wealth managers

A

work with people to develop an investment strategy and creaqte a portfolio to meet long-term needs

164
Q

investment manager

A

recomend or select/purchase securities on behalf of other investors
- financially savvy sales people to get investors to invest in teh securities or funds they are offering

165
Q

broker

A

broker at an investment firm offers a selection of possible investments for their clients to choose from

166
Q

mutual fund manager

A

creates a portfolio of securities and markets it to the investing community

167
Q

seucrity analyst

A

must learn asm much about a firm as possible in order to make a recommendation on the firm’s securities buy/hold/sell

168
Q

what type of business is a priprietorship

A

small business

169
Q

benefit of a proprietorship

A

totaol control of business operations,
business income belongs to proprietor

170
Q

disadvantage of a proprietorship

A

profits/losses are reflected in the proprietors tax returns and taxes are paid at individual rates (highter than corporation)
- no formal books to review so raising money is a fucntion ofthe credit worthiness of the propreitor and propretor bears all lieability for hte borrow funds
largest concern = liability

171
Q

liability & proprietorship

A

proprietors have unlimited liability. so sole responsibility for all obligations of the business (expenses, taxes, lawsuits, fines…)
- if they are hit with a large obligation like a lawsuit, the court can take away their business and the owner’s personal assets
- insurance can reduce risk but still risk

172
Q

proprietorship owned by 2 peope

A

partnership

173
Q

corporations difference from proprietorship and partnership

A

corporations are legal entities separate from owners

174
Q

obligations of being a public corporationh

A

must have an annual report verified by an accounting firm
- include audited financial statemnts that reflect the results the firm experience over th past year

175
Q

main disadvantage of corporations

A

double taxation
- pays taxes on operationg earnings arfter interest is deducted and the balance is netincome

176
Q

S corporations

A

corporation doesn’t pay taxes themselves but passes the profits along ot the owners where the income is taxed at individual rates
- professional services like doctors, lawyers, podiatrists, accountantsq

177
Q

secret to business

A

to be successful, you msut invest in projects that earn more than cost
- strategic choices need 2 essential bits fo information: what does it cost, and what earn

178
Q

estimating cash flows for projects

A

art & sicence
mistakes are inevitable

179
Q

primary duty of a CFO

A

acquire capital for the firm when needed
-most firms do not have enough to fund all of hteir capital projects on an ongoing basis. so they need to raise funds. understad the market

180
Q

why do markets exist?

A

to bring entities that have funds (insurance companies or pension funds) to those who need funds

181
Q

when are people motivated to invest

A

when they believe the return from the investment will be worth the risk

182
Q

important thing to remember about risk in finance

A

there are different levels of risk tolerance in the financial markets

183
Q

who issues stocks

A

corporations

184
Q

who issues bonds

A

corporations/cgovernments

185
Q

IPO

A

initial public offerings

186
Q

examples of flotation costs

A

Flotation costs include legal fees, certificate printing fees, registration fees, stock exchange listing fees, and underwriting fees.

187
Q

floatation costs

A

Flotation costs are incurred by a publicly-traded company when it issues new securities and incurs expenses, such as underwriting fees, legal fees, and registration fees. Companies must consider the impact these fees will have on how much capital they can raise from a new issue.

188
Q

primary market transactions

A

corporation is the seller of the securities and recipient of the funds (minus flotation costs

189
Q

SEO

A

seasoned equity offerings

190
Q

IPO

A

initial public offering
-a firm’s common stock is sold to the public for the first time

191
Q

a firm’s common stock is sold to the public for the first time

A

IPO: initial public offering

192
Q

difference between IPO and SEO

A

initial public offering versus seasoned equity offering
-IPO: firm’s common stock is sold to the publif for the first time
SEO: seasoned equity offerings
-firm offers additional shares of a stock that is already publically traded

193
Q

private placement

A

negotiated sale to a specific buyer

194
Q

SEC

A

Securities & Exchange Commission

195
Q

register w/SEC

A

all public offerings do debt and equity must register but private placements do not

196
Q

what does the SEC do

A

Securities & Exchange
- federal body that regulates stocks and bond market

197
Q

federal body that regulates the stock and bond market

A

SEC: Securities & Exchange

198
Q

registration process w/SEC

A

Securities & Exchange Commission
- issuing entity must disclose a good deal of information about the corporation prior to selling any securities
- costs associated w/public offerings can be susbtantial

199
Q

private placements & SEC

A

priivate placemsents don’t have to register w/SEC so they dont’ have regulations or underwriters. so no flotation fees

200
Q

underwriters

A

investmetn banks that help corporations sell new issues publically

201
Q

secondary market transactions

A

one owner of a stock sells it to a new owner OR debtholder sells a bond to the new bdebtholder
- funds do not flow to the corporation BUT an active secondary market is crucial for success when issuing new seucrities int eh primary market

202
Q

2 types of secondary markets

A

either dealer or auction markets

203
Q

dealer markets

A

dealers buy or sell socks/bonds. generally for themselves and at their own risk

204
Q

auction markets

A

broekrs match up buiyers and sellers to facilitate transactions (new york stock exchange(

205
Q

money market

A

exists to trade securities that have maturities of less than one year

206
Q

exists to trade securities that have maturities of less than one year

A

money market

207
Q

how can individuals invest in money market securities

A

via money market mutual fund

208
Q

how do corporations and goverments (any level) raise money

A

in the capital market

209
Q

purpose of the capital market

A

for long-term debt and equity securities (securities with more than one yera to maturity)

210
Q

what do firms use capital market transactiosn to do

A

purchase long-term assets like building or production equipment

211
Q

efficient market hypothesis

A

financial markets are expected to be efficient at processing information effectively and reflecting it in current stock market
-when stories about a publically held corporation hit the news, response
*unexpected & good news: stock prices increase
*unexpected & bad: stock prices decrease
(little/no movement if expected news)
increase/decreases based on stories of high/low impact

212
Q

why might a pharmaceutical company’s stock not go up the day a new drug is approved?

A

2018 FDA approved an ovarian cancer drug by AstraZeneca but the company’s common stock price fell by 0.68% that day. Typically unexpected good news will make stock prices go up. but that approval was expected b/c it had been awaiting approval for years. had it not been approved, the stock prices would have significantly fallen

213
Q

“beating the market”

A

earning a higher return than is appropriate for the given level of risk
**if therte is a way to consistently beat the stock market, it is elusive

214
Q

who did well/not during the 2008 recession

A

S&P 500 lost +1/3 value but Walmart had a 20% return, Anhauser Busch earned 39%. financial & financial were on the brink of collapse but McDonalds and hasbro did fine
**not all industrices in teh stock market are affected equally by the financial crisis

215
Q

when are stock market bubbles created

A

corrections occur when certain stock prices are above their intrinsic value (create a “bubble”/disconnect between the stock’s intrinsic value and its market value(
- combo of news storeis and traading activities can occasiohnally drive a stock market priceabove its intrinsic price creating a buble. longer bubble ramins, bigger it gets. when truth is known, negative news stories trigger selling of stock which causes stock to fall

216
Q

examples of stock market buibbles

A

2000- internet bubble. led to recession
2007: real estate/financial industry collapse

217
Q

arbitrageur

A

one who does arbitrage.
the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.

218
Q

the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.

A

arbitrage

219
Q

characteristics of money market securities

A

highly liquid. relatively low risk. generally issued by entities w/exceptional credit

220
Q

T-Bills

A

treasury bills- debt securities issued by US Federal gov to finance the federal budget deficit

221
Q

safety of T-bills

A

Treasury bills. a money market security. safe b/c US government has never defaulted on its debt (but has come close)

222
Q

USG defaulting on debt

A

USG has never defaulted on its debt but has come close

223
Q

commercial paper

A

money market security
= IOU
short-term promissory note issued by a large corporation or financial institution w/exceptional credit
- issuer must be creditworthy b/c the note are unsecured. but the borrow is creditworthy so the commercial paper is considere4d safe and liquid. can trade

224
Q

banker’s acceptance

A

effectively a bank’s promise to pay
- used for international transactiosn so that the firm is owed is releived of the need to travel overseas to collect on the debt

225
Q

equity

A

stock

226
Q

aka stock

A

equity

227
Q

stock is sold in 2 forms

A

common and preferred eq

228
Q

stock that represents ownership in the issuing firm

A

common equity (common stock)

229
Q

common equity

A

represents ownership in the issuing firm,
have the right to any commmon dividends,
may vote on issues addressed by the board of directors but only to the degree to which they own shares
***they want to see stock go up in price (capital gain) so when they are ready, they can seel the stock for profit

230
Q

total return to the common shareholder =

A

dividend yield and the capital gains yield

231
Q

preferred equity

A

doesn’t represent ownership but does represent preference when it comes to dividends
**common dividends only get paid after preferred deividends are paid

232
Q

who gets paid first if a firm has to stop paying dividends for a period of time b/c of a hardship

A

preferred dividends must be payed back before common ones

233
Q

debt

A

loan that has to be repaid

234
Q

payment for the use of moeney

A

interest

235
Q

how is the interest rate earned for investing in debt determined

A

determined by risks associated w/the debt

236
Q

when does the USG issue treasury notes/bonds

A

when it wants to borrow funds for more than one year

237
Q

maturitys of T-notes/ & bonds

A

T-notes: 2-10 years
T-bonds: more than 10 yeas
*(principal is repaid at maturity with the final interest with the final interest payment

238
Q

who issues municipal bonds

A

“munis”
bonds issued by state/local governments|

239
Q

why are interest rates on municipal bonds lower than for other bonds of similar risk and m aturity

A

their interest payments aren’t federally taxable so interest ratess are typicall lower than other bonds of similar risk and maturity
- so popular with investor in high tax brackets

240
Q

corporate bonds

A

similar to T-notes/bonds but issued by a corporation. riskeier b/c corporations don’t have the power to print money to cover their debt and thus,, can default

241
Q

mutual fund

A

money manager pools money from many investors to create a portfolio

242
Q

importance of creating a mutual fund portfolio

A

nature is meant to be designedned to appeal to specific clients

243
Q

derivatives

A

financial securities whose value derives from the value of hte underlying asset

244
Q

forward contract

A

agreement between 2 parties to undertake a specific transaction at a future date (farmer negotiating to sell corn for their upcoming season to a grocery at a price agreed upon today. farmer/store locks in its selling/purchase price.)
it is a legal contract: if one party defaults, the other party has legal recourse in court

245
Q

future contracts

A

standardized forward contracts. liquid so they can be traded. commodities liek wheat/cofrfee/currencies like euro/yen, … used for hedging and speculating.

246
Q

hedging

A

managing risk

247
Q

financial options

A

derivative securities that give the buyer the right but not obligation to buy/sell the underlying financial asset at a fixe dprice over a specified period of time
*called options because the buyer can choose to not exercise the option -let it expiere w/o transacting-if scircumstance warrents it

248
Q

the Fed

A

Federal Reserve Bank
-central bank of us

249
Q

central bank of the US

A

Federal Reserve Bank
“the Fed”

250
Q

role of the Fed

A
  • regulates money supply
  • oversees the nations’ financial system
    -0 makes loans to member banks and financial institution
251
Q

who is responsibile for controlling inflation

A

the Fed

252
Q

how does the Fed slow down/jumpstart the economy when needed

A

the fed uses open-market sales and purchases of T-bills/adjustments to the discount rate as tools

253
Q

creation of The Fed

A

1913 b/c of multiple banking panics

254
Q

what is the Fed System made of

A

12 district banks,. board of governors who oversee the 123 banks, an dFOMIC to meet regulary to set the monetary policy

255
Q

how many Federal REserve Banks throughout the coutnry are there

A

12 district Federal REserve Banks in teh system

256
Q

who oversees the Federal REserve System district baks

A

Board of Gov ernors

257
Q

FOMC

A

Federal Open Market Committee
* part of the Fed that meets regurarily to set monerary policy

258
Q

FRED

A

Federal Reserve Economic Database
*party of the Fed. conducts reserac into the economy and reguarily publishers papers/maintains data for professional/academic use in FRED

259
Q

lender of last resort to financial institutions that can’t obtain credit and whose collapse woulde be detrimental to the economy

A

the Fed

260
Q

how does the Fed control the money supply

A

w/FOMIC. it uses open-market operations (buying or selling of Treasurey securities or foreign currencies) to make adjustmetns to the money supply

261
Q

what happens when the Fed wants to increase money supply

A

FOMIC instructs its traders to buy treasury securities on the open market. increasing the supply of money increases liquidity and ecreases the cost of money. both stimulates economic acitvity and speeds up the economy

262
Q

what does FOMIC do when it wants to decrease money supply

A

FOMIC instructs its traders to sell Treasury securities on the open market. decreasign the money supply decreases liquidity and increases the cost of money which will dampen economic activity and slow the economy down. that’s how they control inflation

263
Q

how do banks make money

A

by charging more for money they lend than the money they pay their depositiors to use their funds (difference is the interest rate spread)

264
Q

interest rate spread

A

banks make money by charging more for the money they lend than the money they pay their depositors

265
Q

what do banks need to open

A

banks need a charter-authroization from the government to operate- before they can take deposits. b/c banks are part of the moeny supply susytem and deposits are federally insured, opening a bank is not as simple as operating a business

266
Q

required reserve ratio

A

commercial banks can’t lend out 100% of depositors money ab/c the Fed requires a minimum amound kept on hand to manage the withdrawl requests of the depositros and fund their oeprations

267
Q

S&L

A

Savings & Loans. take in and lend a percentage of the deposits out but the loans they make are priamrily mortage loans.

268
Q

mortgage loans

A

loans that are collatoraized by reakl estate. if the borrower defaults, the lender takes the real estate and sells it to recup their funds

269
Q

credit unions

A

financial institutions owned by the members,. usually associated w/an industry (Alliant Credit Union is in the airline industry)
- credit uniions loan out money to memebrs at rates tyhpically lower than available elsewhere
-members own the institution so residual income from operations is paid out as divident to its memebrs
-needs a charter to open

270
Q

S&L

A

Savings & Loans. take in and lend a percentage of the deposits out but the loans they make are primarily mortgage loans.

271
Q

how do insurance companies operate

A

insurance companies assume client’s risk for an ongoinging fee known as a premium. pool of premiums cover damages and invest the rest to earn interest

272
Q

how do life insurance companies assess risk for clients

A

acturies. use applied matehmatics to forecast likely claims. calculate the rpemiums necewssariy

273
Q

MEPRS

A

medical expense and performance reporting system

274
Q

ACHE

A

American College of Healthcare Executives
- says financial management primarily focuses on assets management w/an emphasis on cash flow analysis (working capital_, the capital structure composition, reis,k, and costs of various amounts of debt and equity sources, capital budgeting process, financial feasibility studies (business case analysis_

275
Q

financial statements

A

balance sheet,
income statemetn

276
Q

financial accountign

A

field of accounting that provides external users accounting information in prescribed formats that are generally historic in nature
includes: data entry, transaction analysis, and prepared financial statements like balance sheet and income statement

277
Q

managerial accounting

A

use of internal accounting for decision-making (cost identification, cost-value profit models)
- provide info to improve the efficiency and effectiveness of the use of resources

278
Q

financial planning

A

helps long-range financial plans
- supports the governing board in strategic positioning, test mission/vision against move reality and establish budget guidelines

279
Q

pricing clinical services

A

develop pricing strategy and support specific price negotiatives
0 to supprt maximum revenue tot he insitution and its

280
Q

securing long-term funds

A

manage debt, joint ventures, stock, and equity accounts
TO
minimize cost of capital, maximize return on investment

281
Q

what does financial accounting create

A

financial accounting creates financial reports to establish value of the organization and report to owners/external stockholders

282
Q

what does an organization’s budget support?

A

budgeting supports strategic decision-making, coordinates org-wide activities, and supports the setting of performance goals

283
Q

purpose of audits and compliance reviews

A

audits and compliance reviews guard against loss and diversion of property. helps comply w/contractual requirements

284
Q

primary purpose of financial accounting system

A

develop set of financial statements prepared in accordance with GAAP. also purpose =- financial information for decisoin makign
- a financial accounting system shouldbe flexible enough to provide cost informatino/past summaries presented future estimates

285
Q

GAAP

A

generally accepted accounting principles

286
Q

FASB

A

financial accounting standards board

287
Q

2 basic financial statements

A

balance sheet,
income statement

288
Q

balance sheet

A

represents the financial position of an organization at a single point in time
assets = liabilities + netw work/fund balance/equity

289
Q

represents the financial position of an organization at a single point in time

A

balance sheet

290
Q

assets =

A

liabilities - equity

291
Q

assets

A

accounts receiveable
inventories
cash
property, plant, equipment

292
Q

accounts receivable

A

money tot he org from patient and insurers for services the organization has already provided

293
Q

accounts payable

A

current liability that includes money owed btu not paid to vendors for supplies already received

294
Q

bottom line of the income statement

A

bottom line of the income statement is fund balance amount in the balance sheet

295
Q

accrual basis of accounting

A

revenues and expenses reported include the value of services whether or not cash has been received

296
Q

6 duties of hte Chief Financial Officer

A

per teh Committee on Ethics and Eligibility standards for financial executive institute

297
Q

CEEP

A

capital expense equipmment program
- for equipment under $100K
- super CREEP = equipmetn 10-250K

298
Q

TRO

A

Tricare Regional Office

299
Q

IGPBS

A

Integrated GLobal Presence and Basing Strategy
- funds to implement the repositioning of troops from overseas bases

300
Q

purpose of MEPRS:

A

provide a uniform system ofhealthcare cost managed for DOD MHS
- detaile dunoformed perfomrance indicators, common expense classification, cost, a
- designed so you can make meaningful comparision between the b at civilians

301
Q

occupied bed day

A

pt occupies a bed at the census taking hour

302
Q

submission of MEPRS reports

A

medical centers and hospitals must submit MEPRS reports but clinics subordinate to a parent has their results reported under parent expense and workflow data

303
Q

2 parts to a MEPRS report

A
  1. expense data
  2. manpower utilizator
304
Q

7 costs reportable under MEPRS

A

inpatient care
ambulatory care
dental care
ancillary care
support services
special programs
readiness

305
Q

workload measures

A

workload measures provides basis for comparing the amount of work performed w/athe amount of resources consumed in order to make better resource allocation decisions
- raw workload measures . (admissions, dispositions, occupied bed day, length of stay, average daily pt load visits)

MBA (3 decks)

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