Fin 3110 Test 1
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