Business Finance Test 1

a bond's annual interest divided by its face value

coupon rate

bond ratings classify bonds based on

default risk

assets are listed this way on a balance sheet

depending order of liquidity

Computing the present value of a future cash flow to determine what that cash flow is worth today is called:

discount cash flow variation

Next year's expected dividend divided by the current market price per share

dividend yield

cash payments to shareholders

dividends

principal amount of a bond

face value

provides useful information that can serve as a basis for forecasting future performance

financial statement analysis

John is investing $5 today so he can have $50 later. the $50 is referred to as

future value

the comparison of a company's financial performance across time is known as

horizontal analysis

a company's required rate of return, typically its cost of capital is also called the

hurdle rate

any changes to a firm's projected future cash flows that are caused by adding a new project

incremental cash flows

an additional cost incurred only if a company pursues a particular course of action is an

incremental cost

the maximum growth rate that a firm can achieve without any additional external funding

internal growth rate

The rate that yields a net present value of zero for an investment

internal rate of return

the expected selling price of a firm and its assets given the current economic situation

market value

current assets minus current liabilities

net working capital

the cash a firm generates from its normal business activities

operating cash flow

the potential benefit lost by choosing a specific alternative course of action among two or more

opportunity cost

calculation that determines the length of time it takes an investment to generate sufficient cash flows to recover its initial cost

payback method

shareholders are granted the priority in the purchase of newly issued shares in an effort to maintain their current level of ownership

preemptive right

this type of stock rarely has voting rights

preferred stock

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

premium

which ratio would you want to use to determine if a business can pay its bills given its current level of cash and accounts receivable

quick ratio

the measurement of key relationships among financial statement items is known as

ratio analysis

common size income statements present all income statement values as a percentage of

sales revenue

an account that is managed for the sole purpose of redeeming bonds

sinking fund

a firm has four positive NPV opportunities available but they have a mandate that they can only choose two a year. This is called

soft rationing

the amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation

tax shield

the relationship between nominal returns, real returns, and inflation

the Fischer effect

the financial statement that summarizes a firm's accounting value as of a particular date

the balance sheet

the accounting statement that measures the revenues, expenses, and net income of a firm over a period of time

the income statement

an estimate of an assets value to the company, calculated by discounting the future cash flows from the investment at the projects required rate of return and then subtracting the initial amount of the investment is known as

the net present value

Concept that means a dollar today is worth more than a dollar tomorrow

time value of money

common size financial statements present all balance sheet account values as a percentage of

total assets

these two capital budgeting concepts ignore the time value of money

average accounting return and payback

operating cash flows minus the change in net working capital minus net capital spending

cash flows from assets

dividends paid minus net new equity raised

cash flows to stockholders

this type of stock has voting rights but is last in line for money if the company goes bankrupt

common stock

the process of earning interest on prior interest earnings

compounding

average net income of a project divided by the project's average book value

average accounting return or accounting rate of return

a company has beginning retained earnings of $318,423. For the year, the company earned net income of $11,318 and paid dividends of $7500. Whats the value of the retained earnings account at the end of the year

$322,241

Lew's Auto Repair has cash of $18,600, accounts receivable of $34,500, accounts payable of $28,900, inventory of $97,800, long-term debt of $142,000, and net fixed assets of $363,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $85,000 and the fixed assets for $349,000. The firm could collect 100 percent of its receivables as they are secured. What is the market value of the firm's assets?

$487,100

Wilberton's has total assets of $537,800, net fixed assets of $412,400, long-term debt of $323,900, and total debt of $388,700. What is the current ratio?

1.94

written agreement that contains the specific details related to a bond issue

bond indenture

interest paid minus new net borrowing

cash flow to creditors

Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:

annual percentage rate

an electronic network of securities dealers larger than the NYSE

NASDAQ

a cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions is

a sunk cost

an annuity with payments at the beginning of the period

annuity due