Financial Management Exam 1 Terms (chapters 1-4)

times interest earned ratio

EBIT ÷ interest

net profit margin

Earnings available for common stockholders ÷ Sales

return on total assets (ROA)

Earnings available for common stockholders ÷ Total assets

FCF = OCF - NFAI - NCAI

Free cash flow equation:

Sales * Net Profit Margin

How do you solve for "Earnings Available for Common Stockholders"

Average Collection Period * (Sales/365)

How do you solve for Accounts Receivable?

Earnings available for common shareholders/ ROE

How do you solve for total common stock equity?

percent-of-sales method

This method starts with the sales forecast and then expresses the cost of goods sold, operating expenses, interest expense, and other accounts as a percentage of projected sales.

principle-agent relationship

is an arrangement in which an agent acts on the behalf of a principal. For example, shareholders of a company (principals) elect management (agents) to act on their behalf.

corporation

is an entity created by law. Corporations have the legal powers of an individual in that it can sue and be sued, make and be party to contracts, and acquire property in its own name.

management

is concerned with all aspects of the firm's financial situation, and it attempts to produce financial ratios that will be considered favorable by both owners and creditors.

managerial finance

is concerned with the duties of the financial manager working in a business.

money market

is created by a financial relationship between suppliers and demanders of short-term funds

capital gain

is the amount by which the sale price of an asset exceeds the asset's purchase price.

Free Cash Flow

is the amount of cash flow available to investors (creditors and owners) after the firm has met all operating needs and paid for investments in net fixed assets (NFAI) and net current assets (NCAI).

financial services

is the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments.

Marginal cost-benefit analysis

is the economic principle that states that financial decisions should be made and actions taken only when the added benefits exceed the added costs

time-series analysis

is the evaluation of the firm's financial performance over time using financial ratio analysis

Primary Market

is the financial market in which securities are initially issued; the only market in which the issuer is directly involved in the transaction.

Average Tax Rate

is the firm's taxes divided by taxable income.

Depreciation

is the portion of the costs of fixed assets charged against annual revenues over time

securitization

is the process of pooling mortgages or other types of loans and then selling claims or securities against that pool in a secondary market.is the process of pooling mortgages or other types of loans and then selling claims or securities against that pool in a secondary market.

Long term financial plans

lay out a company's planned financial actions and the anticipated impact of those actions over periods ranging from 2 to 10 years.

market/book (M/B) ratio

market price per share of common stock / book value per share of common stock

Double Taxation

occurs when after-tax corporate earnings are distributed as cash dividends to stockholders, who then must pay personal taxes on the dividend amount.

public securities

of securities, which is the sale of either bonds or stocks to the general public.

short-term (operating) financial plans

plans specify short-term financial actions and the anticipated impact of those actions.

corporate governance

refers to the rules, processes, and laws by which companies are operated, controlled, and regulated.

Securities Act of 1933

regulates the sale of securities to the public via the primary market.

Securities Exchange Act of 1934

regulates the trading of securities such as stocks and bonds in the secondary market.

Moetgage backed securities

represent claims on the cash flows generated by a pool of mortgages and can be purchased by individual investors, pension funds, mutual funds, or virtually any other investor

marginal tax rate

represents the rate at which additional income is taxed.

Quick Ratio

(current assets - inventory) / current liabilities

Gramm-Leach-Bliley Act

(1999) allows business combinations (e.g. mergers) between commercial banks, investment banks, and insurance companies, and thus permits these institutions to compete in markets that prior regulations prohibited them from entering.

average age of inventory

= 365 ÷ Inventory turnover

NCAI

= Change in CA - Change in (A/P + Accruals)

NFAI

= Change in net fixed assets + Depreciation

Operating Cash Flow (OCF)

A firm's _____ is the cash flow a firm generates from normal operations—from the production and sale of its goods and services.•

book value per share

Common Stock Equity/Common Stock Shares Outstanding

Inventory turnover

Cost of goods sold ÷ Inventory

current ratio

Current assets ÷ Current liabilities

Price/Earnings (P/E) Ratio

Market price per share of common stock ÷ Earnings per share

EBIT * (1-T)

NOPAT (net operating profit after taxes)

[EBIT *(1 - T)] + Depreciation

OCF equation

total asset turnover

Sales ÷ Total assets

Federal Deposit Insurance Corporation (FDIC)

The Glass-Steagall Act (1933) established the __________ which provides insurance for deposits at banks and monitors banks to ensure their safety and soundness.

Securities Exchange Commission

The Securities Exchange Act of 1934 created the ____, which is the primary government agency responsible for enforcing federal securities laws.

Eurocurrency

The international equivalent of the domestic (U.S.) money market is the _____

average payment period

accounts payable/average purchases per day

average collection period

accounts receivable/average daily credit sales

financial managers

administer the financial affairs of all types of businesses—private and public, large and small, profit-seeking and not-for-profit.

efficient market

allocates funds to their most productive uses as a result of competition among wealth-maximizing investors anddetermines and publicizes prices that are believed to be close to their true value.

International Equity Market

allows corporations to sell blocks of shares to investors in a number of different countries simultaneously.

cash Budget

also called cash forecast. is a statement of the firm's planned inflows and outflows of cash that is used to estimate its short-term cash requirements.

Secondary Market

are financial markets in which preowned securities (those that are not new issues) are traded.

Financial markets

are forums in which suppliers of funds and demanders of funds can transact business directly.

stakeholders

are groups such as employees, customers, suppliers, creditors, owners, and others who have a direct economic link to the firm

Investment Banks

are institutions that assist companies in raising capital, advise firms on major transactions such as mergers or financial restructurings, and engage in trading and market making activities.

Commercial Banks

are institutions that provide savers with a secure place to invest their funds and that offer loans to individual and business borrowers.

creditors

are interested in the short-term liquidity of the company and its ability to make interest and principal payments.

Shadow Banking System

describes a group of institutions that engage in lending activities, much like traditional banks, but these institutions do not accept deposits and are therefore not subject to the same regulations as traditional banks.

institutional investors

are investment professionals, such as banks, insurance companies, mutual funds, and pension funds, that are paid to manage and hold large quantities of securities on behalf of others

individual investors

are investors who own relatively small quantities of shares so as to meet personal investment goals.

Bonds

are long-term debt instruments used by businesses and government to raise large sums of money, generally from a diverse group of lenders.

Incentive plans

are management compensation plans that tie management compensation to share price; one example involves the granting of stock options.

Dealer markets

are markets in which the buyer and seller are not brought together directly but instead have their orders executed by securities dealers that "make markets" in the given security.

Broker Markets

are securities exchanges on which the two sides of a transaction, the buyer and seller, are brought together to trade securities

marketable securities

are short-term debt instruments, such as U.S. Treasury bills, commercial paper, and negotiable certificates of deposit issued by government, business, and financial institutions, respectively.

business ethics

are the standards of conduct or moral judgment that apply to persons engaged in commerce

common stock

are units of ownership interest or equity in a corporation.

Agency costs

arise from agency problems that are borne by shareholders and represent a loss of shareholder wealth.

Agency problems

arise when managers place personal goals ahead of the goals of shareholders.

Financial Planning Process

begins with long-term, or strategic, financial plans that in turn guide the formulation of short-term, or operating, plans and budgets.

finance

can be defined as the science and art of managing money.

Operating Flows

cash cash flows directly related to sale and production of the firm's products and services.flows directly related to sale and production of the firm's products and services.

Investment Flows

cash flows associated with purchase and sale of both fixed assets and equity investments in other firms.

Financing Flows

cash flows that result from debt and equity financing transactions; include incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.

eurobond market

corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United State

Earnings Per Share (EPS)

earnings available for common stockholders/ Number of shares of common stock outstanding

intermediaries

financial institutions are ____ that channel the savings of individuals, businesses, and governments into loans or investments.

sales/total asset turnover

how do you solve for total assets?

ratio analysis

involves methods of calculating and interpreting financial ratios to analyze and monitor the firm's performance.

private placement

involves the sale of a new security directly to an investor or group of investors.

Sole Proprietorship

is a business owned by one person and operated for his or her own profit.

partnership

is a business owned by two or more people and operated for profit.

foreign. bond market

is a market for bonds issued by a foreign corporation or government that is denominated in the investor's home currency and sold in the investor's home market.

capital market

is a market that enables suppliers and demanders of long-term funds to make transactions.

sales forecast

is a prediction of the sales activity during a given period, based on external and/or internal data.

internal forecast

is a sales forecast based on a buildup, or consensus, of sales forecasts through the firm's own sales channels.

external forecast

is a sales forecast based on the relationships observed between the firm's sales and certain key external economic indicators.

Preferred stock

is a special form of ownership that has features of both a bond and common stock.

performance plans

tie management compensation to measures such as EPS or growth in EPS. Performance shares and/or cash bonuses are used as compensation under these plans.

debt ratio

total liabilities/total assets

Glass-Steagall Act

was an act of Congress in 1933 that created the federal deposit insurance program and separated the activities of commercial and investment banks.