Fin 3110 Test 1

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Holding period return (%)

(Ending price - Beginning price + Distributions received) ------------------------- *100 Beginning Price

Three sections of the indirect method

1. Operating cash flows 2. Investing cash flows 3. Financing cash flows

The five competitive forces are:

1. The threat of new entrants 2. The threat of substitute products 3. The Bargaining power of buyers 4. The bargaining power of suppliers 5. The rivalry among current competitors

The corporate form of business organization has four major advantages over both sole proprietorships and partnerships:

1. limited liability 2. Permanency 3. Flexibility 4. Ability to raise capital

The objective of maximizing shareholder value considers three primary factors:

1.The level of cash flows available to shareholders (how much?) 2.The timing of these cash flows (When?) 3.The risk of these cash flows (what is probability it does not materialize?)

Common-size balance sheet

A balance sheet in which a firm's assets and liabilities are expressed as a percentage of total assets, rather than as dollar amounts.

Limited partnership

A business organization in which the liability of the partners is generally limited to their investment.

Partnership

A business organization in which two or more persons form a business with the intention of making a profit. In a general partnership, each partner has unlimited liability for the debts of the firm.

Corporation

A business organization that is created as a "legal person" separate and distinct from the individual or individuals who own the firm's stock. The primary characteristics and advantages of incorporating include limited liability for the firm's owners, permanency, and flexibility with respect to making changes in ownership.

General partnership

A business organization where each partner has unlimited liability for all obligations of the business.

Sole Proprietorship

A business owned by one person. The owner of a sole proprietorship has unlimited liability for debts incurred by the business.

LLC (Limited Liability Company)

A company similar to an S corporation but without the special eligibility requirements.

Options

A contract (often in the form of a security) that gives its holder the right to buy or sell an asset at a set price during a specified time period.

Forward contract

A contract calling for the delivery of a specified amount of some item at a future point in time at a price set at the present time. Compared to futures contracts, forward contracts are not liquid, can be customized with regard to the date or amount, and carry performance risk.

Futures contract

A contract calling for the delivery of a standardized quantity and quality of some item, such as a foreign currency, crude oil, or government securities, at a future point in time at a price set at the present time.

Eurocurrency

A currency that is deposited in a bank outside of the country of origin.

term loans

A debt obligation having an initial maturity (i.e., maturity at the time of issue) between 1 and 10 years. Term loans are usually repaid in installments over the life of the loan. This often is referred to as intermediate-term credit.

Efficient capital market

A financial market in which new information is quickly reflected in security prices in an unbiased manner.

Deterministic model

A financial planning model that projects single number estimates of a financial variable or variables without specifying their probability of occurrence.

Probabilistic models

A financial planning model that uses probability distributions as inputs and generates a probability distribution for financial variables as output.

Statement of cash flows

A financial statement showing the effects of a firm's operating, investing, and financing activities on its cash balance.

Income statement

A financial statement that indicates how a firm performed during a period of time

Balance sheet

A financial statement that lists a firm's assets, liabilities, and stockholders' equity at a point in time.

Multinational corporation

A firm with direct investments in more than one country.

Sensitivity analysis

A method of analysis in which a financial planning model is rerun to determine the effect on the output variable(s) (for example, profit) of given changes in the input variable(s) (for example, sales). Sensitivity analysis is sometimes called what if analysis.

Percentage of sales forecasting method

A method of estimating the additional financing that will be needed to support a given future sales level.

Cash budget

A projection of a company's cash receipts and disbursements over some future period of time.

Discriminant analysis

A statistical technique designed to classify observations (firms) into two or more predetermined groups based on certain characteristics (such as financial ratios) of the observations.

Principal

An amount of money that has been borrowed or invested.

Comparative analysis

An examination of a firm's performance based on one or more financial ratios, which are compared with the financial ratios of competitive firms or with an industry standard.

Trend analysis

An examination of a firm's performance over time. It is frequently based on one or more financial ratios.

Common Size Income Statement

An income statement in which a firm's income and expense items are expressed as a percentage of net sales, rather than as dollar amounts.

Financial planning models

Computerized representations of some aspect of a firm's financial planning process.

Agency costs

Costs incurred by owners of a firm when the firm is managed by others; includes monitoring costs, bonding costs, and any losses that cannot be eliminated economically by monitoring and bonding.

Noncash charges =

Depreciation + Deferred taxes

After-tax cash flow (ATCF) =

Earnings after tax + Noncash charges

Cash budgets can ____

Estimate more precisely both the amount of financing needed by a firm and the timing of those financial needs.

The procedures for preparing the statement of cash flows are issued by the

Financial Accounting Standards Board (FASB)

Secondary financial market

Financial markets in which existing securities are offered for resale. The New York Stock Exchange is a secondary market.

Capital markets

Financial markets in which long-term securities are bought and sold.

Primary financial market

Financial markets in which new securities from an issuing firm are bought and sold for the first time. Investment bankers are active in the primary markets.

Money markets

Financial markets in which short-term securities are bought and sold.

Optimization models

Financial planning models that determine the values of financial decision variables that maximize (or minimize) some objective function such as profits (or costs).

Pro forma financial statements

Financial statements that project the results of some assumed event, rather than an actual event.

Controller

Has responsibility for all accounting-related activities

Liquidity ratios

Indicate a firm's ability to meet short-term financial obligations.

Financial leverage management ratios

Indicate a firm's capacity to meet short and long-term debt obligations.

Asset management ratios

Indicate how efficiently a firm is using its assets to generate sales.

Dividend policy ratios

Indicate the dividend practices of a firm.

Strategic planning is ____

Long range in nature and deals with the overall direction of the firm.

Market Value Added (MVA) =

Market value - Capital

Profitability ratios

Measure how effectively a firm's management generates profits on sales, assets, and stockholders' investments.

Market-based ratios

Measure the financial market's evaluation of a company's performance.

Financial assets consists of ____

Money, debt securities, and equity securities.

Treasurer

Normally concerned with the acquisition, custody, and expenditure of funds.

Agency Relationships

Occur when one or more individuals (principals) hire another individual (agent) to perform a service on their behalf. Agency relationships often lead to agency problems and costs. Two of the most important agency relationships in finance are the relationship between stockholders (owners) and managers and the relationship between owners and creditors.

Listed security exchanges

Organized secondary security markets that operate at designated places of business. The New York Stock Exchange (NYSE) is an example of a listed security exchange.

OTC security markets

Organized secondary security markets that operate at designated places of business. The New York Stock Exchange (NYSE) is an example of a listed security exchange.

Shareholder wealth

Present value of the expected future returns to the owners (that is, shareholders) of the firm. It is measured by the market value of the shareholders' common stock holdings—that is, the price per share times the number of shares outstanding

Proxy statements

Reports or forms (also called 14A Filings) that publicly traded firms are required to file with the SEC prior to their annual meetings detailing, among other things, matters to be discussed and voted upon.

LIBOR

The London Interbank Offered Rate is the rate of interest at which banks in the Eurocurrency market lend to each other.

Cash flow

The actual amount of cash collected and paid out by a firm.

Stakeholders

The constituent groups in a firm, including stockholders, bondholders, suppliers, customers, employees, community neighbors, and creditors.

Profit

The difference between revenues and costs

Indirect quote

The foreign currency price of one unit of the home currency.

Securities and Exchange Commission (SEC)

The government regulatory agency responsible for administering federal securities legislation.

Book value

The historic cost of a company's assets.

Direct quote

The home currency price of one unit of a foreign currency.

Exercise price

The price at which an option holder can purchase or sell a company's stock. This also is termed the strike price.

Forward rates

The rate of exchange between two currencies being bought and sold for delivery at a future date.

Discount rate

The rate of interest used in the process of finding present values; also called the required rate of return.

Stockholders' equity

The total of a firm's common stock at par, contributed capital in excess of par, and retained earnings accounts from the balance sheet. It sometimes is called the book value of the firm, owners' equity, shareholders' equity, or net worth.

Financial analysis

The utilization of a group of analytical techniques, including financial ratio analysis, to determine the strengths, weaknesses, and direction of a company's performance.

Present value

The value today of a future payment (or a series of future payments) evaluated at the appropriate discount rate.

Eurodollars

U.S. dollars deposited in banks outside the United States.

Semistrong-form market efficiency

When no investor can expect to earn excess returns based on an investment strategy using any publicly available information.

Weak-form market efficiency

When no investor can expect to earn excess returns based on an investment strategy using such information as historical price information.

Strong-form market efficiency

When security prices fully reflect all information, both public and private.

Economic Value Added (EVA) =

[Return on total capital (r) - Cost of capital (k)] X Capital

Generally Accepted Accounting Principles (GAAP)

a set of accounting standards that is used in the preparation of financial statements

LLP (Limited Liability Partnership)

a type of partnership in which all partners are limited partners

Financial middlemen include:

brokers, dealers, and investment bankers.

Financial intermediaries include

commercial banks, thrift institutions, investment companies, pension funds, insurance companies, and finance companies

Corporations issue ___ ___ to investors who lend money to the corporation and ___ ___ to investors who become owners

debt securities; equity securities.

Operational planning is ____

designed to be a blueprint detailing where the firm wants to be at some future point in tome and what resources are needed to get there.

The primary purpose of the SEC is to ___

ensure full disclosure of security information so that investors, individuals, and institutions alike have credible and timely information on which to base their investment decisions.

Shareholder wealth

number of shares outstanding X market price

Capital markets are considered to be efficient if ____

security prices instantaneously and fully reflect, in an unbiased way, all economically relevant information about a security's prospective returns and the risk of those returns.

There may be a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. This is attributed to ___

separation of ownership and control in corporations

Economic value added

the difference between a firm's annual after-tax operating profit and its total annual cost of capital.

The agent

the party who acts on behalf of the principal and has a legal responsibility to act in the best interests of the principal in an agency relationship.

Risk

the possibility that actual future returns will deviate from expected returns.

The most widely accepted objective of the firm is ___

wealth maximization


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