Financial Management FIN3403 Kevin Krieger UWF Exam 1

What do the "retained earnings" and "common stock" entries of a balance sheet represent?

Common Stock: represents the ownership of the company Retained earnings: represents the amount left over after dividends have been paid out to its owners.

How are interest earned and interest expense treated in terms of tax for households? Corporations? Are there any big differences?

Households do not have the option to deduct the interest they pay from their taxes (with the exception of mortgages and student loans) Corporation do have the ability to deduct the taxes they pay from their taxes. Why? It all but the purpose of the interest. The government is trying to incentivize productive borrowing.

What does Fixed assets turnover ratio answer?

How efficiently are we generating revenue from our existing fixed assets?

What does total assets turnover ratio answer?

How efficiently is our company using assets to generate revenue?

What does Daily Sales Outstanding Ratio answer?

How many days on average does it take for us to collect on our credit sales?

What doe times-interest-earned ratio answer?

How many times could we cover our interest charges with our pretax earnings.

What does Inventory turnover ratio answer?

How well are we turning inventory into sales?

What does the current ratio answer?

How well could we cover our bills that are shortly coming due if we liquidate all of our "near cash" assets?

What does quick ratio answer?

How well could we cover our bills that are shortly coming due if we liquidate all of our "near cash" assets? BUT what if we are not allowed to scrap inventory back for cash?

Advantages of a corporation

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

Disadvantages of a corporation

-double taxation -cost of setup and report filing More financial regulation

How to calculate Capital Expenditures (CapEx)? Need to know this to find Free Cash Flows.

CapEx=ΔPP&E+Current Depreciation =New Net Fixed assets-Old Net Fixed Assets+Depreciation and amortization OR =New Gross Fixed Assets-old Gross Fixed Assets

What kind of tax structure does the US have for Federal Income Tax?

The U.S. federal income tax is a progressive tax system. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes, and a lower income tax rate on people with lower incomes. The percentage rate increases at intervals as taxable income increases.

Intrinsic Value

The actual value that a stock is worth, regardless if investors believe its worth more or less.

Market Value

The value of a company according to the stock market.

Book value

Theoretically, the amount that would be paid to shareholders if the company was liquidated and all liabilities were paid off.

What does the debt ratio answer?

What amount of leverage are we using in terms of total debt and total assets?

Market Equilibrium

When market price of a stock is equal to its intrinsic value