Finance 350 Exam 1
Corporation
A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n):
decrease; operating
According to the statement of cash flows, an increase in interest expense will ______ the cash flow from ______ activities.
Financial Institutions
Banks and Funds
Borrowers
Corporations and Governments
concentrated ownership
Large institutional owners, shareholder activism
common-sized income statement
compute all line items as a percent of sales
Sole Proprietorship
1. Ownership: 100% owned by a single individual, owner usually manages the company, difficult to transfer ownership 4. Liability: Unlimited personal liability 5. Ability to raise capital: is difficult
market for corporate control
A corporate raider will buy up enough shares to gain control of the board and fire incompetent managers, the threat of takeover may also keep managers in line
Uses of cash
Activities of a firm that require the spending of cash
probability a firm will encounter financial distress increases.
As the degree of financial leverage increases, the:
dividend payments less net new equity raised.
Cash flow to stockholders is defined as:
Peer group analysis
Compare to similar companies or within industries; SIC and NAICS codes
Common-sized balance sheet
Compute all accounts as a percent of total assets
Capital Structure
Determining the number of shares of stock to issue is an example of a ______ decision.
Financial Markets
Equity and Bonds
.5
If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?
Net Working Capital
It is positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out. Usually positive in a healthy firm
Current assets minus current liabilities.
Net working capital is defined as:
Dividends paid
On the statement of cash flows, which one of the following is considered a financing activity?
short-term solvency
Ratios that measure a firm's liquidity are known as ______ ratios.
Accounting Transparency
Sarbanes-Oxley Act
Which one of the following is an example of working capital management?
Should the firm require immediate payment from customers or offer credit terms?
Agency Relationship
Stockholders hire managers to run the company
Capital Structure
The mix of debt and equity
Last years total assets
When developing a common-size balance sheet to evaluate last year's performance, all accounts are expressed as a percentage of:
cash inflow (source of cash)
activities that bring cash in such as selling products or assets, borrowing money, or issuing securities; decrease in asset account, increase in liability or equity account
Ratios
allow for better comparison through time or between companies
Cash flows
are calculated from the firm's point of view, the sign represents the direction of cash flow; Positive: inflow, Negative: outflow
Taxes
can be very important for the decisions making process
Advantages of standardized statements
compare financial information over time, particularly as the company grows compare companies of different sizes, particularly within the same industry
In a typical corporate organization structure:
controller reports to the chief financial officer
Total Asset Turnover
is a measure of the firm's asset use efficiency -how well does it manage its assets
Equity Multiplier
is a measure of the firm's financial leverage
Profit Margin
is a measure of the firm's operating efficiency-how well it controls costs
Independent board of directors
is composed of mostly outsiders and remains independent of management
Cash Flow
is one of the most important pieces of information that a financial manager can derive from financial statements
Turnover ratios
measure how actively and efficiently the company are using its assets to generate returns
Liquidity ratios
measure how well the company can meet its short-term obligations
Income Statement
more like a video of the firms operations for a specific period of time
Liquidity
refers to the speed and ease with which an asset can be converted to cash. Is valuable to a company
Dealer Markets
the market where you have several traders carry and inventory and provide prices at which they stand ready to buy and sell the security
marginal tax rate
the percentage paid on the next dollar earned
Time-Trend Analysis
Used to see how the firm's performance is changing through time; Internal and external uses
Equity multiplier, net profit margin, and total asset turnover
Which one of the following accurately lists the three components of the DuPont identity?
Income statement
Which one of the following financial statements summarizes a firm's revenue and expenses during a period of time?
Proxy
Which one of the following grants an individual the right to vote on behalf of a shareholder?
Sale of a new share of stock from a corporation to an individual investor
Which one of the following is a primary market transaction?
Increase in common stock
Which one of the following is a source of cash for a tax-exempt firm?
Should the firm purchase a new machine for the production line?
Which one of the following questions involves a capital budgeting decision?
Some large companies are listed on Nasdaq.
Which one of the following statements concerning stock exchanges is correct?
Liquid assets are valuable to a firm.
Which one of the following statements related to liquidity is correct?
A positive cash flow to creditors represents a net cash outflow from the firm.
Which one of the following statements related to the cash flow to creditors must be correct?
A pandemic that required restaurants to limit the number customers allowed inside
You recently purchased a restaurant that had equal market and book values. The purchase included the building, fixtures, and inventory. Which one of the following would be most likely to cause the market value of the restaurant to fall below its book value?
Liqudity
a ________ asset is one that can be quickly sold without significant loss of value
Balance sheet
a snapshot of the firms assets and liabilities at a given point in time
Corporation
1. Ownership: Typical separation of owners and managers, easy transfer of ownership 2. Liability: Limited to owners initial investment 3. Ability to raise capital: The least difficult of all forms
Partnership
1. Ownership: Usually ran by two or more people 2. Liability: is unlimited 3. Ability to raise capital: is less difficult than sole proprietorship
utilizing its total assets more efficiently
Dominic's Custom Draperies has a fixed asset turnover rate of 1.13 and a total asset turnover rate of .94. Its competitor, Window Fashions, has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .91. Both companies have similar operations. Based on this information, Dominic's must be _____ than Window Fashions.
average
Total income taxes divided by total taxable income equals the ______ tax rate.
Market Value
the price at which the assets, liabilities, or equity can actually be bought or sold; more important for the decision making process
average tax rate
the tax bill / taxable income
Capital Budgeting Decision
what long term investments should the firm take on Ex: What product will the firm sell? should old equipment be replaced with new equipment?
Capital Structure Decisions
where will the firm get the long term financing to pay for the investment Ex: What should the mix of equity and debt be
Working capital decisions
How to manage the everyday financial activities of the firm Ex:How many days of credit can we extend on to customers? How much inventory should we carry?
best represent the interests of the current owners of the firm.
Financial managers should strive to maximize the current value per share of the existing stock to:
Debt Security
Holder is a creditor of the firm No say in running the firm Fixed Payment Receives payment before anything is paid to equity holder If firm cannot pay, debt holders will take over ownership of firm assets limited liability
Equity Security
Holder is a owner of the firm Has say in running the firm Payment is not fixed receives what left over after all debt holders are paid If firm cannot pay debt holder, losses control of firm to debt holder limited liability
Savers
Households and Governments
Agency Problem
Managers will peruse their own private interest at the expense of the shareholder
profitability
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ______ ratios.
operating cash flow.
The cash flow that results from a company's ongoing, normal business activities is called:
Primary Markets
The market in which securities are sold by the company public and private placement of securities, SEC registration, and underwriters
Auction Market
The market where buyers and sellers are matched with little dealer activity
Secondary Market
The market where securities have already been issued and are traded between investors , New York stock exchanged the over counter market
Finance
The process of transferring money from savers to borrowers
Financial Leverage
The use of debt; The use of this magnifies both gains and losses of shareholders
cash outflow (use of cash)
activities that involve spending cash, such as buy assets pay off debt, repurchase stock, or pay dividends ; Increase in asset account, decrease in liability or equity account