FINC 3810 Exam 1

You are in charge of purchasing fixed assets. In other words what are you in charge of at the firm?

Capital budgeting

The Dog and Bob Corp is trying to decide how much debt it should use in relation to its outstanding equity. The choosing of how much debt and equity to use is referred to as the firm's...

Capital structure

When the manager of the firm is trying to decide how to pay for long-term investments [fixed assets] what is this called in finance?

Capital structure

Our firm wants to see if it has enough money to pay investors. What should management be looking at to answer this question?

Cash flow from assets

Financial manager

Chief financial officer [CFO]

Who is the manager of the firm working and making decisions for a public corporation?

Common shareholders

The primary goal of the financial manager is to maximize which of the following?

Common stock

Which of the following would I need to invest if I want to get a return around 12% per year [assume I am investing for at least 10 years]?

Common stock

If we are trying to calculate net new equity what should be used from the balance sheet?

Common stock and paid-in capital

Financial institutions

Companies that specialize in financial matters Example: banks, insurance companies, brokerage firms

Standard financial statements

Compare financial information year-to-year Compare companies of different sizes, particularly within the same industry

Peer-group analysis

Compare to similar companies or within industries

Agency problem

Conflict of interest between principal and agent

Problems with financial analysis

Conglomerates Global competitors Different accounting procedures Different fiscal year ends Differences in capital structure Seasonal variations and one-time events

Basic areas of finance

Corporate finance [Business finance] Investments Financial institutions International finance

Capital budgeting =

Current assets Fixed assets

Liquidity ratios

Current ratio Quick ratio Cash ratio

Equity =

Debt Common stock

Elsinore Brothers Inc would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

Dividend payout ratio

Advantages of a sole properiorship

Easiest to start Least regulated Single owner keeps all of the profits Taxed once as personal income

Non-cash items

Expenses charged against revenue that do not affect cash flow Example: Depreciation

Types of partnerships

General partnership Limited partnership

What is the biggest disadvantage of being a public corporation?

Government regulation

Time-trend analysis

How the firm's performance is changing through time Has internal and external uses

Compound interest

Interest earned on principal and on interest received

Simple interest

Interest earned only on the original principal

Asset management

Inventory turnover Days' sales in inventory Receivables turnover Days' sales in receivables Payables turnover Days' costs in payables Total asset turnover Capital intensity ratio

Advantages of a corporation

Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital

Disadvantages of a sole properiorship

Limited to life of owner Equity capital limited to owner's personal wealth Unlimited liability Difficult to sell ownership interest

Types of financial ratios

Liquidity ratios [Short-term solvency] Financial leverage ratios [Long-term solvency ratios] Asset management [Turnover ratios] Profitability ratios Market value ratios

Should we use book value or market value for decision making purposes?

Market value ; Because it is the true value

The primary goal of financial management is to maximize which one of the following for a corporation?

Market value of existing stock

What should be the goal of management?

Maximize stock price

What is the goal of financial management?

Maximize the current value per share of the company's existing stock Maximize the market value of the existing owners' equity

Which of the following best describes what the manager of the firm should do?

Maximize the value of the firm

Profit margin

Measures firm's operating efficiency

Income statement

Measures performance over a specified period of time Report revenues first and then deduct any expenses for the period

Total asset turnover

Measures the firm's asset use efficiency

Equity multiplier

Measures the firm's financial leverage

All of the following are determinants of firm growth except...

Net income

Cash flow

One of the most important pieces of information that can be derived from financial statements

Treasurer

Oversees cash management, credit management, capital expenditures, and financial planning

Controller

Oversees taxes, cost accounting, financial accounting, and data processing

Market value ratios

PE ratio Price sales ratio Market to book ratio Book value per share Enterprise value EBITDA

What can the firm do to reduce the agency problem between the manager of a public corporation and its shareholders?

Pay the manager based on decisions that increase the value of the firm

Why evaluate financial statements?

Performance evaluation Planning for future Creditors Suppliers Customers Stockholders

Agency relationship

Principal hires an agent to represent its interests Stockholders [principals] hire managers [agents] to run the company

Profitability ratios

Profit margin Return on assets Return on equity

DuPont identity includes...

Profit margin Total asset turnover Equity multiplier

Determinants of growth

Profit margin Total asset turnover Financial leverage Dividend policy

Benchmarking

Ratios need to be compared to something

Advantages of a partnership

Two or more owners More capital available Relatively easy to start Income taxed once as personal income

Disadvantages of a partnership

Unlimited liability Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership

Corporation

A legal "person" distinct from owners and a resident of a state

Balance sheet

A snapshot of the firm's assets and liabilities at a given point in time

Marginal tax rates

% tax paid on the next dollar earned

Should we use cash flows or accounting income when making decisions?

Accounting income ; Because it recognizes revenue when it is fully earned

Ratio analysis

Allow for better comparison through time or between companies Used both internally and externally

The balance sheet includes...

Assets Liabilities/Owner's Equity Balance sheet identity Net working capital Liquidity

Sole properietorship

Business owned by one person

Partnership

Business owned by two or more persons

Accounting income [GAAP]

Recognize revenue when it is fully earned. Match expenses required to generate revenue to the period of recognition

GAAP Matching Principle

Recognize revenue when it is fully earned. Match expenses required to generate revenue to the period of recognition.

Types of corporations

S-corp Limited liability company

Why do agency problems exist within a corporation?

Separation of ownership and management

Disadvantages of a corporation

Separation of ownership and management [Agency problem] Double taxation Regulation

Effects of compounding include...

Simple interest Compound interest

Forms of business organization

Sole proprietorship Partnership Corporation

Liquidity

Speed and ease of conversion to cash without significant loss of value Valuable in avoiding financial distress

Future value

The amount an investment is worth after one or more periods.

Book value

The balance sheet value of the assets, liabilities, and equity

Present value

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

We are examining our standardized financial statements and we notice that our investment in fixed assets is declining. From what we have discussed in class which of the following statements best describes why we should or should not be concerned?

The firm's investment in fixed assets going down tells us the value of the firm will probably drop in the future

What best describes why the manager should be interested in the firm's financial statement and ratios?

The manager is looking for strengths and weaknesses in the financial statements and ratios because strengths will lead to a lower cost of doing business

Why is the manager of the firm worried about how the firm's ratios compare to the industry?

The manager is worried that if there is a problem with the ratios investors will require a greater return from the firm

Market value

The price at which the assets, liabilities, or equity can actually be bought or sold

Benchmarking includes...

Time-trend analysis Peer group analysis

Financial leverage ratios

Total debt ratio Debt equity ratio Equity multiplier Times interest earned Cash coverage

Average tax rates

Total taxes paid divided by total taxable income

Investments

Work with financial assets such as stocks and bonds

The Doug and Bob Corp has $120,000 in current assets and $109,000 in current liabilities. These values are referred to as the firm's...

Working capital