FM Quiz 1 Chapters 1-4

Capital Budgeting

The process of planning and managing a firm’s long-term investments in assets.

Capital Structure

The mix of debt and equity a firm uses to finance its operations.

Working Capital Management

Managing the firm’s short-term assets and liabilities.

Liquidity

How easily an asset can be converted to cash without significant loss.

Net Working Capital (NWC)

Current Assets – Current Liabilities; an indicator of short-term financial health.

CFO (Chief Financial Officer)

Oversees both the treasurer and controller; responsible for financial decision-making.

Agency Problem

Misaligned incentives between managers (agents) and shareholders (principals).

Stakeholders

All parties with interest in firm’s operations, including employees, suppliers, customers, and regulators.

Securities Act of 1933

Requires disclosure at the time of issuing new securities.

Times Interest Earned (TIE)

Measures how many times a company can pay its interest with operating income.

Future Value (FV)

The amount an investment is worth after one or more periods of growth at a specified interest rate.

Present Value (PV)

The current value of a future amount of money, discounted back to today using a specific interest rate.

Net Present Value (NPV)

The difference between the present value of future cash inflows and the initial investment.

Earnings Per Share (EPS)

Net income per share of stock; a core indicator of profitability per unit of ownership.

Price-to-Earnings (P/E) Ratio

How much investors pay for $1 of earnings; high P/E indicates growth expectations.

DuPont Identity

Breaks ROE into three components: Profit Margin, Total Asset Turnover, and Equity Multiplier.

Gross Profit Margin

The percentage of revenue that exceeds the cost of goods sold.

Annuity

A series of equal payments made at regular intervals for a fixed period of time.

Perpetuity

A stream of equal payments that continues forever.

Time Value of Money (TVM)

A dollar today is worth more than a dollar tomorrow due to its earning potential.

Historical Cost

The original monetary value of an asset; used in calculating book value.

Debt vs. Equity

Debt represents fixed obligations (interest + principal) while equity is a residual claim.

Board Oversight

Independent directors who enhance governance and minimize agency problems.