Financial management study guide

What does just in time inventory involve?

(1) quality production that continually satisfies customer requirements (2) close ties between suppliers, manufacturers, and customers (3) minimization of the level of inventory

What is meant by financial leverage?

A measure of the amount of debt used in the capital structure of the firm

What is just in time inventory?

A system of inventory management that stresses taking possession of inventory just before the time it is needed for production or sale. It greatly reduces the cost of carrying inventory.

Areas of corporate governments. Which group has the ultimate responsibility? (3 stages)

Bureaucratic control based, market based, and relational governance.

What is meant by free cash flow?

Cash flow from operating activities, minus expenditures required to maintain the productive capacity of the firm, minus dividend payouts.

3 key measurements of liquidity

Current ratio and quick ratio.

The key difference between current and quick ratios

Current ratio is current assets divided by the current liabilities which is a measure of the firms ability to pay off its current assets. Quick ratio is current assets minus inventory divided by current liabilities. It eliminates inventory from current assets.

Difference between individual and institutional shareholders?

Institutional investors are large investors such as pension funds or mutual funds. Individual investor is an individual who purchases small amounts of securities for him/herself as opposed to institutional also called retail investor and small investor.

How does depreciation effect cash flow and profitability?

It depends if depreciation is listed as an expense. If it is the it reduces the amount of tax that a company must pay. Thus, depreciation affects cash flow by reducing the amount of cash a business must pay in income taxes.

What kinds of stuff can corporate restructure involve ?

It involves changing the structural archetype around which resources and activities are grouped and coordinated. Companies commonly organize around function, business line, customer segment, technology platform, geography or a combination between all of these.

What are money market mutual funds? What do they invest in? What is a major advantage to a company?

Money market mutual funds is an open ended mutual fund that invests in short term debt securities such as treasury bills and commercial paper. A major advantage is risk reduction and dividend reinvestment.

Difference between maximizing profits vs maximizing shareholders wealth?

Profits focus is on short term earnings, while the wealth focuses on increasing the overall value of the business entity over time.(long term)

What is meant by liquidity?

The relative convertibility of short-term assets to cash. Thus, marketable securities are highly liquid assets, while inventory may not be.

3 money market short term securities. Which of the 3 is the safest, the most marketable, and pays the least interest.

Treasury bills, Bank certificate of deposits, and commercial paper. Treasury bills are the safest, certificates of deposits would be the most marketable while commercial paper pays the least amount of interest.

Basics of a statement of cash flows

cash flows from operating activities, cash flow from investing activities, and cash flow from financial activities.

5 c's credit. Which two are significant and which one is subjective

character, capital, capacity, conditions, and collateral. Character and capacity are the two most significant while conditions is most subjective.

Difference between dividends and interest in tax treatment

dividends do not reduce the corporations net income or its taxable income. Interest rates reduce the corporations net income and its taxable income.

What is meant by insider trading?

insider trading occurs when someone uses information that is not available to the public to profit from trading in a company's publicly traded securities

How is it measured? (shareholders wealth)

its measured by market value of the firms common stock

how to calculate profit margin

net income/sales

after tax profit margin

net income/total sales x100

Examples of institutional investors?

pension funds, mutual funds, endowment funds, hedge funds, insurance companies and commercial banks

Major profitability ratios

profit margin, return on assets, and return on equity.

gross profit margin

revenue-cost of goods sold/revenue

Price earnings ratio

the ratio for valuing a company that measures its current share price relative to its per-share earnings. It can be calculated by market value per share/ earnings per share.

Importance of institutional investors?

they have the ability to vote large blocks of shares for the election of the board of the directors