Week 1 (Chapter 1 & 2) Flashcards
This includes information from the class notes.
Ratio Analysis
- Liquidity
- Efficiency
- Profitability
- Financing
Current Ratio
Current Assets / Current Liabilities
Quick Ratio
Cash + AR + Marketable Securities / Current Liabilities
Total Asset Turnover
Sales / Total Assets
Average Collection
Accounts Receivable / Sales x 365
Inventory Days
Inventory / COGS x 365
Accounts Payable Days
Accounts Payable / COGS x 365
Cash Conversion Cycle
AR Days + Inventory Days - Accounts Payable Days
Corporate Finance (definition)
The practice of managing the money that flows in and out of businesses
Financial Managers Duties
- Financing
- Financial Management
- Capital Budgeting
- Risk Management
- Corporate Governance
Financing Function
Raising capital to support a company’s operations and investment programs
Financial Management Function
Managing a firm’s day to day cash flows and determining the optimal holdings of short term assets and developing short and intermediate term financial plans so that the firm can adequately operate
Capital Budgeting Function
Selecting the best projects in which to invest the firm’s resources, based on each project’s perceived risk and expected return
Risk Management Function
Managing the firm’s exposure to risk in order to maintain the optimum risk-return trade-off and thereform maximize shareholder value
Corporate Governance Function
Developing a corporate governance structure capable of ensuring that managers act ethically and in stockholders’ interests
On ownership interest is called _________ and money borrowed from creditors is termed __________.
equity, debt
Captial raised by professional investors are ______________.
venture capitalists
Primary Market Transaction
When a corporation sells securities to investors to raise capital
Secondary Market Transactions
Trades between investors, which generate no cash for the firm but makes the securities attractive to other investors which raises the price
Money Market
The market for debt issuance maturing in one year or less
Notes
Longer term debt instruments maturing in less than 7 years
Corporate Bonds
Debt instruments with maturities of more than 7 years
Hedge
The act of offsetting market risks such as interest-rate and currency fluctuations.
Securities and Exchange Commission (SEC)
Federal agency that oversees the fiar reporting of financial information to investors of public companies
Sarbanes-Oxley Act (SOX)
Requirements on firms that include: restrictions on board membership, exectuve compensation, relationships with auditors and requirefirms to provide documentation of internal controls that protect investors from fraud
Legal forms of business organizations
- Sole Proprietorships
- Partnerships
- Corporations
- Limited Liability Companies (LLC)
Five core principles of corporate finance
- Time value of money
- Trade off between risk and return
- Diversification
- Efficient markets
- No arbitrage
(NOPAT) Net Operating Profits After Taxes
Earnings Before Interest and Taxes X (1 - Corporate Tax Rate)
(OCF) Operating Cash Flow
NOPAT + Depreciation
(FCF) Free Cash Flow
OCF - change in gross fixed assets - (change in current assets - change in accounts payable - change in accruals)
Average Collection Period
Average Daily Purchases
Annual Purchases / 365
Inventory Turnover Ratio
COGS / Inventory
Average Age of Inventory
365 / (COGS / Inventory)
Average Daily Sales
Annual Sales / 365
Average Payment Period
Accounts Payable / Average Daily Purchases
Fixed Asset Turnover
Sales / Net Fixed Assets
Debt Ratio
Total Liabilities / Total Assets
Assets to Equity Ratio
Total Assets / Common Stock Equity
Debt to Equity Ratio
Long Term Debt / Stockholders Equity
Times Interest Earned (TIE)
Earnings before interest and taxes / Interest Expense
Gross Profit Margin
Gross Profit / Sales
Net Profit Margin
Earnings available for common stockholders / Sales
Earnings Per Share
Earnings available for common stockholders / Number of shares of common stock outstanding
Return on Total Assets
Earnings Available for common stockholders / Total Assets
Return on Common Equity
Earnings available for common stockholders / Common stock equity
Return on Asset (ROA)
Net profit margin X Total Asset Turnover
or
(Earnings available for common stockholders / Sales) x (Sales / Total Assets)
ROE = ROA X A/E
(Earnings available for common stockholders / Total Assets) X (Total assets / Common Stock Equity)
or
Earnings available for common stockholders / Common Stock Equity
Price per Earnings Ratio
Market price per share of common stock / Earnings per share
Book value per share
Common stock equity / number of shares of common stock outstanding
