FINC 3810 Exam 1
You are in charge of purchasing fixed assets. In other words what are you in charge of at the firm?
Capital budgeting
The Dog and Bob Corp is trying to decide how much debt it should use in relation to its outstanding equity. The choosing of how much debt and equity to use is referred to as the firm's...
Capital structure
When the manager of the firm is trying to decide how to pay for long-term investments [fixed assets] what is this called in finance?
Capital structure
Our firm wants to see if it has enough money to pay investors. What should management be looking at to answer this question?
Cash flow from assets
Financial manager
Chief financial officer [CFO]
Who is the manager of the firm working and making decisions for a public corporation?
Common shareholders
The primary goal of the financial manager is to maximize which of the following?
Common stock
Which of the following would I need to invest if I want to get a return around 12% per year [assume I am investing for at least 10 years]?
Common stock
If we are trying to calculate net new equity what should be used from the balance sheet?
Common stock and paid-in capital
Financial institutions
Companies that specialize in financial matters Example: banks, insurance companies, brokerage firms
Standard financial statements
Compare financial information year-to-year Compare companies of different sizes, particularly within the same industry
Peer-group analysis
Compare to similar companies or within industries
Agency problem
Conflict of interest between principal and agent
Problems with financial analysis
Conglomerates Global competitors Different accounting procedures Different fiscal year ends Differences in capital structure Seasonal variations and one-time events
Basic areas of finance
Corporate finance [Business finance] Investments Financial institutions International finance
Capital budgeting =
Current assets Fixed assets
Liquidity ratios
Current ratio Quick ratio Cash ratio
Equity =
Debt Common stock
Elsinore Brothers Inc would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?
Dividend payout ratio
Advantages of a sole properiorship
Easiest to start Least regulated Single owner keeps all of the profits Taxed once as personal income
Non-cash items
Expenses charged against revenue that do not affect cash flow Example: Depreciation
Types of partnerships
General partnership Limited partnership
What is the biggest disadvantage of being a public corporation?
Government regulation
Time-trend analysis
How the firm's performance is changing through time Has internal and external uses
Compound interest
Interest earned on principal and on interest received
Simple interest
Interest earned only on the original principal
Asset management
Inventory turnover Days' sales in inventory Receivables turnover Days' sales in receivables Payables turnover Days' costs in payables Total asset turnover Capital intensity ratio
Advantages of a corporation
Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital
Disadvantages of a sole properiorship
Limited to life of owner Equity capital limited to owner's personal wealth Unlimited liability Difficult to sell ownership interest
Types of financial ratios
Liquidity ratios [Short-term solvency] Financial leverage ratios [Long-term solvency ratios] Asset management [Turnover ratios] Profitability ratios Market value ratios
Should we use book value or market value for decision making purposes?
Market value ; Because it is the true value
The primary goal of financial management is to maximize which one of the following for a corporation?
Market value of existing stock
What should be the goal of management?
Maximize stock price
What is the goal of financial management?
Maximize the current value per share of the company's existing stock Maximize the market value of the existing owners' equity
Which of the following best describes what the manager of the firm should do?
Maximize the value of the firm
Profit margin
Measures firm's operating efficiency
Income statement
Measures performance over a specified period of time Report revenues first and then deduct any expenses for the period
Total asset turnover
Measures the firm's asset use efficiency
Equity multiplier
Measures the firm's financial leverage
All of the following are determinants of firm growth except...
Net income
Cash flow
One of the most important pieces of information that can be derived from financial statements
Treasurer
Oversees cash management, credit management, capital expenditures, and financial planning
Controller
Oversees taxes, cost accounting, financial accounting, and data processing
Market value ratios
PE ratio Price sales ratio Market to book ratio Book value per share Enterprise value EBITDA
What can the firm do to reduce the agency problem between the manager of a public corporation and its shareholders?
Pay the manager based on decisions that increase the value of the firm
Why evaluate financial statements?
Performance evaluation Planning for future Creditors Suppliers Customers Stockholders
Agency relationship
Principal hires an agent to represent its interests Stockholders [principals] hire managers [agents] to run the company
Profitability ratios
Profit margin Return on assets Return on equity
DuPont identity includes...
Profit margin Total asset turnover Equity multiplier
Determinants of growth
Profit margin Total asset turnover Financial leverage Dividend policy
Benchmarking
Ratios need to be compared to something
Advantages of a partnership
Two or more owners More capital available Relatively easy to start Income taxed once as personal income
Disadvantages of a partnership
Unlimited liability Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership
Corporation
A legal "person" distinct from owners and a resident of a state
Balance sheet
A snapshot of the firm's assets and liabilities at a given point in time
Marginal tax rates
% tax paid on the next dollar earned
Should we use cash flows or accounting income when making decisions?
Accounting income ; Because it recognizes revenue when it is fully earned
Ratio analysis
Allow for better comparison through time or between companies Used both internally and externally
The balance sheet includes...
Assets Liabilities/Owner's Equity Balance sheet identity Net working capital Liquidity
Sole properietorship
Business owned by one person
Partnership
Business owned by two or more persons
Accounting income [GAAP]
Recognize revenue when it is fully earned. Match expenses required to generate revenue to the period of recognition
GAAP Matching Principle
Recognize revenue when it is fully earned. Match expenses required to generate revenue to the period of recognition.
Types of corporations
S-corp Limited liability company
Why do agency problems exist within a corporation?
Separation of ownership and management
Disadvantages of a corporation
Separation of ownership and management [Agency problem] Double taxation Regulation
Effects of compounding include...
Simple interest Compound interest
Forms of business organization
Sole proprietorship Partnership Corporation
Liquidity
Speed and ease of conversion to cash without significant loss of value Valuable in avoiding financial distress
Future value
The amount an investment is worth after one or more periods.
Book value
The balance sheet value of the assets, liabilities, and equity
Present value
The current value of future cash flows discounted at the appropriate discount rate
We are examining our standardized financial statements and we notice that our investment in fixed assets is declining. From what we have discussed in class which of the following statements best describes why we should or should not be concerned?
The firm's investment in fixed assets going down tells us the value of the firm will probably drop in the future
What best describes why the manager should be interested in the firm's financial statement and ratios?
The manager is looking for strengths and weaknesses in the financial statements and ratios because strengths will lead to a lower cost of doing business
Why is the manager of the firm worried about how the firm's ratios compare to the industry?
The manager is worried that if there is a problem with the ratios investors will require a greater return from the firm
Market value
The price at which the assets, liabilities, or equity can actually be bought or sold
Benchmarking includes...
Time-trend analysis Peer group analysis
Financial leverage ratios
Total debt ratio Debt equity ratio Equity multiplier Times interest earned Cash coverage
Average tax rates
Total taxes paid divided by total taxable income
Investments
Work with financial assets such as stocks and bonds
The Doug and Bob Corp has $120,000 in current assets and $109,000 in current liabilities. These values are referred to as the firm's...
Working capital
