FIN 601 Midterm
source of cash
A decrease in an asset account or increase in a liability or equity account is considered a ____ of cash
use of cash
An increase in an asset account or decrease in a liability or equity account is considered a ____ of cash
1
EAR = APR are the same if m = ___
greater than 1
EAR is greater than APR if m is ______
Depreciation and Amortization
Give an example of a non cash expense
use of cash
If there's an increase in accounts receivable, there has been a ____ of cash
if the bond is selling at a premium (market interest rate goes lower than the contract interest rate from when the bond was originally issued so the bond price would now be greater than the face value) the bond issuer will want to call the bond back so they can refinance it at this lower interest rate
In what scenario would you (the bond issuer) want to call back a callable bond?
statement of cash flows
Statement that summarizes the sources and uses of cash
is to maximize the current value per share of the existing stock (increase the market value per share)
The goal of financial management
low, high
____ coupon rate bonds have more price risk than ____ coupon rate bonds
Sole Proprietorship
a business owned by one person
working capital management
a firm's short-term assets (inventory) and it's short-term liabilities (money owed to suppliers); answers the question: how will we manage our everyday financial activities
increased chance of bankruptcy
a high debt ratio means what
- simplest to start and least regulated - owner keeps all the profits, but has unlimited liability for business debts (there's no distinction between personal and business income in regard to taxation and assets for payment) - life is limited to the owner's life span - amount of equity that can be raised is limited to the amount of the proprietor's personal wealth - ownership is difficult to transfer because you're selling the whole business
advantages/ disadvantages of a sole proprietorship
Partnerships based on a relatively informal agreement are easy and inexpensive to form General partners have unlimited liability for business debts on the part of the ownersand partnership terminates when a general partner wishes to sell out or dies All income is taxed as personal income to the partners; amount of equity raised is limited to the partners' combined wealth Ownership is not easily transferred because it requires a new partnership to be formed A limited partner's interest can be sold without dissolving the partnership but finding a buyer can be difficult
advantages/disadvantages of partnerships
it can be converted to cash within a year
an asset is considered under what circumstances
provides a snapshot of a firm's financial position at one point in time
balance sheet
the decision to issue additional shares of stock; how much should the firm borrow, what mixture of debt and equity is best, what are the least expensive sources of funds for the firm
give an example of a capital structure decision
the minimum level of cash to be kept in a checking account; how much cash should we keep in the firm, how much inventory should we carry
give an example of a working capital management decision
coupon rate = current yield
if a bond is selling at par (face value), how is the coupon rate effected
sales
if a formula calls for COGS and you dont have it, what can you use instead?
EAR
if you increase the number of times something is being compounded, will you get a higher EAR or APR?
summarizes a firm's revenues and expenses over a given period of time.
income statement
annual
interest rate is always written as a ___ rate
inverse
market interest rate and bond price have a ____ relationship
forward back
market value looks _____ and book value looks _____
partnership
similar to a proprietorship except that there are two or more owners
reports the impact of a firm's activities on cash flows over a given period of time.
statement of cash flows
shows how much of the firm's earnings were retained, rather than paid out as dividends
statement of retained earnings
longer
the _____ the bond's maturity, the more risk there will be
Annual percentage rate (APR)
the interest rate charged per period multiplied by the number of periods per year
Effective Annual Rate (EAR)
the interest rate expressed as if it were compounded once per year (annually); used when comparing different investments
corporation
the most important form (in terms of size) of business organization in the US; a legal "person," separate and distinct from its owners, that has many of the rights, duties, and privileges of an actual person
marginal tax rate
the percentage paid on the next dollar earned
capital budgeting
the process of planning and managing a firm's long-term investments; evaluating the size, timing, and risk of future cash flows is the essence of this; answers the question: what long-term investments should we take on?
capital structure
the specific mixture of long-term debt and equity the firm uses to finance its operations; answers the question: where will we get the long-term financing to pay for our investment?
corporate finance
the study of the relationship between business decisions and the value of the stock in the business
average tax rate
the tax bill / taxable income
general partnership
type of partnership where all the partners share in gains and losses and all have unlimited liability for all partnership debts
limited partnership
type of partnership where one or more general partners will run the business and have unlimited liability, but there will be one more limited partners who will not actively participate in the business and their liability is limited to the amount they've contributed
discount rate yield to maturity (YTM) market interest rate expected rate of return
what are all of the other terms used to mean required rate of return (rd)?
managerial compensation packages threat of corporate control institutional ownership
what are three ways to fix the agency problem?
how cost efficient the company is; measures the firm's operating efficiency
what does Profit Margin tell you
a bond that makes no coupon payments (PMT = 0) and is thus initially priced at a deep discount
what does it mean for a bond to be a zero coupon bond?
there are different cash flows each period
what does it mean for there to be uneven cash flows
for each $1 in AR, we've generated $18 in sales OR the company turns over AR 18 times in a year (the higher the number the better)
what does it mean if ARTO = 18
the company can't cover their expenses
what does it mean if the interest coverage ratio is less than 1
for each $1 in fixed assets, we generated $1.20 in sales
what does it mean if we have a FATO = 1.2
the firm's financial leverage
what does the equity multiplier measure
how well the company manages its assets; measures the firm's asset use efficiency
what does total asset turnover tell you?
Accounts payable, other current liabilities, and common stock, notes payable, and long-term debt
what five things are liability and equity accounts
corporations
what form of business experiences double taxation
corporations
what form of business is the agency problem most commonly associated with
should we open a new store, introduce a new product etc.
what is an example of a capital budgeting decision?
since the money is paid off over time instead of all at once there's less of a chance that all the money will be defaulted on, therefore, there's less risk and rd decreases
what is the benefit of a sinking fund?
ordinary annuity - cash flows (payments) are happening at the end of the year annuity due - payments are happening at the beginning of the year
what is the difference between an ordinary annuity and an annuity due?
par bond
what kind of bond are you dealing with if coupon rate = rd, Price = face value
premium bond
what kind of bond are you dealing with if coupon rate > rd, Price > face value
discount bond
what kind of bond are you dealing with if the coupon rate < rd, price < face value
Projected cash flows to shareholders (increasing NI will increase dividends which will make stock value go up) Timing of the cash flow stream (quarterly is worth more than annually) Riskiness of the cash flows
what three factors affect stock price?
Accounts receivable, inventory, and net fixed assets
what three things are asset accounts
Pure discount loans: the simplest form of loan; the borrower receives money today and repays a single lump sum at some time in the future Amortized loan: loan where the lender may require the borrower to repay parts of the loan amount over time
what's the difference in a pure discount loan and an amortized loan
a perpetuity is an annuity in which the cash flows continue forever
what's the difference in an annuity and a perpetuity?
The balance sheet provides the book value of the assets, liabilities, and equity Market value is the price at which the assets, liabilities, or equity can actually be bought or sold.
what's the difference in book value and market value?
- compound interest is earned on both the initial principal and the interest reinvested from prior periods - simple interest is earned only on the original principal amount invested; it's not reinvested so it's the same initial amount each year
what's the difference in compound interest and simple interest?
if there is no debt financing
when does ROA = ROE
when some debt financing is used
when is ROE > ROA
agency problem
when there is a conflict of interest between the principle (stockholders) and the agent (managers)
Treasurer
who typically handles the three financial management decisions
it allows a standardized way to compare companies
why do we use financial ratios?
