Test One

Principles of finance vocab

Finance is the ——— of managing money

art and science

What are the laws of finance?

• More value is preferred to less

• The sooner cash is received the more value it has

• Less risky assets are more valuable than risker assets

What is the primary goal of a corporation?

Stockholder wealth maximization

Are most managers (and people) risk adverse?

Yes most people want to be compensated for taking additional risk

What is the agency issue?

An agency relationship exists whenever a principal hires an agent to act as on their behalf and is given decision making authority

What are some agency costs? (Cost incurred by stockholders)

• Monitoring expenses...audit

• Bonding expenses...fidelity bond

• Opportunity costs...missed investments due to corporations large size
  and red tape

• Structuring Expenses...most popular, powerful, and expensive

  • Bonuses

  • Stock options

What is a finance institution?

An intermediary that channels the savings of individuals, businesses, and government into loans/ investments.

Is a financial institution a form of direct or indirect finance?

Indirect finance

What is the NASDAQ?

National Association of Securities Dealers Automated Quotations is a secondary market organized exchange

What is the NYSE?

New York Stock Exchange is a secondary market organized exchange

What is a primary market?

New shares/bonds are issued to gain capital

What is a secondary market?

used securities are sold (don’t help the person who issues the stock)

What is the Tax Loss Carryback and Carryforward?

A corporation has an operating loss it can take the loss back up to 3 yrs back and forward up to 20 yrs

What is the equation for net worth?

Net worth = Assets - liabilities

What is cross-sectional (benchmarking) analysis?

Analyzing multiple firms at the same point and time ( use industry averages for comparison)

What is time series analysis?

Analyzing one firm over a period of time (Allows for trend analysis)

What is panel data (combined) analysis?

allows for comparison or multiple firms over various points in time ( more useful bc more data is used)

What do liquidity ratios do?

Demonstrate firm’s ability to meet short-term obligations as they
come due

What do activity ratios do?

Measure how effectively the firm manages its assets

What are debt management ratios used for?

Indicates the degree to which the firm uses other peoples’ money to generate profits

WHat are profitability ratios used for?

Measures the returns of the firm relative to various financial variables

What do market value ratios do?

Give management an indication of what investors think of the company’s past performance and future prospects

What is the equation for current ratio and what category is it in?

Current ratio = current assets/ current ratios

liquidity ratio

What is the equation for a quick (acid test) ratio? What category?

Quick ratio= (current assets - inventories) / current liabilities

Liquidity ratio

What is the equation for the inventory turnover ratio? What category?

Inventory turnover ratio = cost of goods sold / inventory

activity ratio

What is the equation for the average collection period? What category?

Average collection period = Accounts receivable / average sales per day = Accounts receivable / (annual sales / 365)

Activity ratio

What is the equation for the average payment period? What category?

average payment period = accounts payable / average purchases per day = accounts payable / (annual purchases / 365)

activity ratio

What is the equation for fixed assets turnover? What category?

Fixed assets turnover = Sales / net fixed assets

activity ratios

What is the equation for total assets turnover? What category?

Total assets turnover = sales / total assets

Activity ratio