Finance Chapter 2

cash flows from investing activities

Cash flows associated with the purchase or sale of fixed or other long-term assets

preferred stock

a hybrid security that has characteristics of both long-term debt and common stock

market value

assets are listed at the amount the firm would get if it sold them

book (or historical cost) value

assets are listed on the balance sheet at the amount the firm paid for them

current assets

assets that will normally convert to cash within one year

fixed assets

assets with a useful life exceeding one year;physical (tangible) assets such as plant and equipment, and less tangible assets like patents and trademarks

cash flows from operations

cash flows that are the direct result of the production and sale of the firm's products

cash flows from financing activities

cash flows that result from debt and equity financing transactions

DPS

Dividends per share

EBT

Earnings before Taxes

EBIT

Earnings before interest and taxes

EPS

Earnings per share

Statement of retained earnings

Financial statement that reconciles net income earned during a given period and any cash dividends paid with the change in retained earnings over the period

Income statement

Financial statement that reports the total revenues and expenses over a specific period of time

NOPAT

Net operating profit after taxes; net profit a firm earns after taxes but before any financing costs

current liabilities

Obligations of the firm that are due within one year; including accrued wages and taxes, accounts payable, and notes payable

OCF

Operating Cash Flow

long-term debt

obligations of the firm that are due in more than one year; another type of liability;includes long term lans and bonds with maturities of more than one year

EBITDA

earnings before interest, taxes, depreciation, and amortization

statement of cash flows

financial statement that shows the firm's cash flows over a period of time

liabilities

funds provided by lenders to the firm

stockholders' equity

funds provided by the firm's preferred and common stock owners;difference between total assets and total liabilities of a firm

Gross Profit

net sales minus cost of goods sold

BVPS

Book value per share

MVPS

Market value per share

MACRS

Modified Accelerated Cost Recovery System; one of the accounting methods to choose to record depreciation against fixed assets; the other is the straight line method

positive cash flow from operations

managers and investors look for positive cash flows from operations as a sign of a successful firm-positive cash flows from the firm's operations is precisely what gives the firm value

Financial Statement

Statement that provides an accounting-based picture of a firm's financial position.

Balance Sheet

The financial statement that reports a firm's assets, liabilities, and equity at a particular point in time

What does a negative free cash flow value mean?

The firm's operations produce no cash flows available for investors

amortization

is the paying off of debt with a fixed repayment schedule in regular installments over a period of time for example with a mortgage or a car loan.

What does a positive free cash flow value mean?

it means that the firm may distribute funds to its investors (debt holders and stockholders).

Marketable securities

short-term, low-rate investment securities held by the firm for liquidity purposes

marginal tax rate

the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns

capital structure

the amount of debt versus equity financing held on the balance sheet

Net Income

the bottom line on the income statement

Free Cash flows

the cash that is actually available for distribution to the investors in the firm after the investments that are necessary to sustain the firm's ongoing operations are made

depreciation

the charge against income that reflects the estimated dollar cost of the firm's fixed assets

Retained Earnings

the cumulative earnings the firm has reinvested rather than pay out as dividends

Net working capital

the difference between a firm's current assets and current and current liabilities

Liquidity

the ease of conversion of an asset into cash at a fair value

financial leverage

the extent to which debt securities are sued by a firm

common stock and paid-in surplus

the fundamental ownership claim in a public or private company

Average Tax Rate

the percentage of each dollar of taxable income that the firm pays of taxes

Earnings Management

the process of controlling a firm's earnings

Net change in cash and marketable securities

the sum of the cash flows from operations, investing activities, and financing activities