D076 Finance Skills Pre-Assessment Review

Comprehensive vocabulary flashcards covering corporate finance fundamentals, economic indicators, ratio analysis, capital budgeting, and growth rate forecasting.

Accounting vs. Finance

Accounting is backward-looking, recording historical financial transactions, whereas finance is forward-looking and focused on the future.

Financing Decision

The process of deciding how to raise capital, such as choosing between issuing equity (stocks) or debt (bonds).

Capital Budgeting

The process of making investment decisions regarding which projects or long-term assets to spend money on.

Initial Public Offering (IPO)

The first sale of new securities by a company directly to investors, which takes place in the primary market.

Primary Market

A market where new securities are sold from the company to investors

Secondary Market

A market that involves subsequent trading among investors.

Lagging Indicators

Economic indicators that change after the economy has begun to follow a particular trend, helping to confirm long-term trends (e.g., unemployment rate and Consumer Price Index/CPI).

Leading Indicators

Economic indicators that change before economic shifts occur, providing forward-looking signals (e.g., the yield curve indicator).

Coincident Indicators

Economic indicators that change at the exact same time as shifts occur in the general economy.

Yield Curve

A specific financial tool classified under leading economic indicators that helps forecast future economic shifts.

Standard Deviation (Finance)

A statistical metric that measures total risk, where an increase indicates greater risk and a decrease indicates lower risk.

Risk Diversification

The practice of spreading investments across multiple different companies or assets to reduce unsystematic risk ('don't put all your eggs in one basket').

Risk Separation

The practice of physically dispersing assets across multiple locations or vehicles to prevent a single adverse event (such as fire or theft) from destroying everything.

Auditing

An independent examination of an organization\'s financial statements to verify accuracy and ensure regulatory compliance.

Benchmarking

The process of comparing an organization\'s business and financial metrics directly against competitors.

Boosting Return on Equity (ROE)

ROE can be boosted by: 1) making more profit on sales (higher net margin), 2) putting assets to work harder/faster (increasing asset turnover efficiency), and 3) using more borrowed money (debt leverage).

Accounts Receivable (AR) Collection

A measure of how frequently cash is collected; slower cash collection indicates poorer cash management and lower operating efficiency.

Efficiency Ratios

Ratios that measure how effectively a company utilizes its internal resources and inventory without wasting capital during production and operations.

Profitability Ratios

Ratios measuring the final earnings left over (the bottom line); primarily monitored by shareholders because it dictates stock growth and dividends.

Liquidity Ratios

Ratios measuring quick cash availability to pay immediate, short-term bills; primarily monitored by banks and short-term lenders to evaluate immediate debt-repayment ability.

Market Ratios

Ratios measuring a company\'s stock price performance in relation to its book value.

Flexibility (Ratios)

____ ratios have no strict legal constraints and can be tailored to a company\'s specific situation,

Standardization (ratio)

_______ ratios adhere to strict rules and rigid templates.

Trend Analysis

______ analysis compares the same company against its past performance over multiple years to spot improvement or decline.

Cross-Sectional Analysis

______ analysis compares multiple different companies at a single point in time.

Current Ratio

A short-term liquidity ratio that evaluates whether assets can convert to cash within a year to pay short-term bills; inclusion of inventory in the numerator distorts liquidity if inventory takes longer than a year to sell.

Current Ratio Formula

______= Current assets / current liabilities

Quick Ratio

A stringent liquidity metric evaluating whether a firm can pay off immediate current obligations without relying on inventory sales, which may be slow.

Leverage Ratio

A ratio evaluating a company\'s long-term debt and capital structure rather than short-term liquidity.

Inventory Ratio

An operational metric measuring management efficiency in selling and managing inventory, not the ability to meet short-term financial obligations.

Fixed Expenses vs. Variable Expenses

Fixed expenses remain constant regardless of business volume, whereas variable expenses fluctuate directly with usage and production.

Return on Assets (ROA) Formula

_____= Net Margin × Asset Turnover

ROA

A measure of return based on profitability and asset efficiency.

Discretionary Financing Need (DFN)

The external capital required to fund projected operations

DFN Formula

______= Projected total assets - projected liabilities - projected equity

Internal Growth Rate (IGR)

The maximum growth rate achievable without obtaining external financing, relying strictly on internally generated funds through retained earnings (RE).

Sustainable Growth Rate (SGR)

The maximum rate at which a company can grow its sales and assets without issuing new external equity.

Percentage of Sales Method

A financial forecasting approach used to project financial statements and compute DFN; when projected sales remain at or below full capacity, no new fixed assets are needed.

Hurdle Rate

The minimum acceptable rate of return on an investment; a project should be accepted if its Internal Rate of Return ($\text{IRR}$) exceeds this rate ($\text{IRR} > \text{Hurdle Rate}$).

Profitability Index (PI)

A capital budgeting metric measuring value created per dollar invested to compare projects with varying initial outlay sizes; projects are accepted when PI is high and rejected when PI is low.

Intrinsic Value

The true, fundamental worth of an asset or security independent of its current market price.

Undervalued securities

A security is ______ when $\text{Market Price} < \text{Intrinsic Value}$ (a favorable buying opportunity);

Overvalued Securities

it is _____ when $\text{Market Price} > \text{Intrinsic Value}$ (an unfavorable buying opportunity).

Common Stock

An equity security representing corporate ownership that entitles the holder to voting rights.

Preferred Stock

An equity security that carries no voting rights but grants priority over common stock regarding dividend payments.

Bonds

Debt securities providing fixed periodic payments with no corporate ownership or voting rights.

Secured Debt Return Expectation

Secured bondholders and banks typically accept lower interest rates because their loans have legal seniority and are backed by collateral.

Opportunity Cost (Capital Budgeting)

The value of the next best alternative given up when selecting a project; it must always be included as an upfront project cost.

Debt Financing Tax Shield

The tax benefit arising from debt financing, wherein interest payments made to bondholders or lenders are tax-deductible.

Cost of Capital

The minimum return required by investors, utilized as the discount rate to convert future cash flows into present cash value.

Net Present Value (NPV) Decision Rule

A capital budgeting criterion stating that if $\text{NPV} > 0$, the project generates value above the cost of capital and should be accepted.

Net Margin

The percentage of sales revenue kept as profit after deducting all expenses: NI / Sales

Market-to-Book Ratio

A stock valuation metric comparing a company's current share price to its accounting equity value per share.

Asset Turnover

An operational efficiency metric measuring how effectively a business utilizes its balance sheet resources to generate revenue.

Asset Turnover Formula

_____= Sales / asset turnover

Required Rate of Return

The minimum percentage return that investors and bondholders demand before committing capital, calibrated to the perceived risk.

Risk-Free Rate

The theoretical return on an investment carrying zero default risk, commonly benchmarked against U.S. Treasury securities.