Managerial Finance Exam 1

Coordinates activities of the treasurer and the controller

VP of Finance

Handles cost and financial accounting, tax payments, and management information systems

Controllers Office

Responsible for managing the firms cash and credit, financial planning, and capital expenditures

Treasurers Office

The process of planning and managing a firms long term investments

Capital Budgeting

The mixture of debt and equity maintained by a firm

Capital Structure

Refers to a firms short-term assets and liabilities

Working Capital Management

A business owned by a single individual

Sole Proprietorship

A business owned by 2 or more individuals or entities

Partnership

A business created as a distinct legal entity composed of one or more individuals or entities

Corporation

Refers to the fact that a benefit corporation must consider how an action will affect shareholders, employees, customers, the community, and the environment

Accountability

In addition to standard corporate reports, a benefit corporation must provide an annual report detailing how the company pursued a public benefit during the year, or any factors that inhibited the pursuit of this goal

Transparency

Refers to the idea that a benefit corporation must provide a public benefit, either to society as a whole or the environment

Purpose

Relationship between stockholders and management

Agency Relationship

The possibility of conflict of interest between the stockholders and management of a firm

Agency Problem

The costs of the conflict of interest between stockholders and management

Agency Costs

Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm

Stakeholders

A way of bringing buyers and sellers together to buy and sell debt and equity securities

Financial Market

The corporation is the seller, and the transaction raises money for the corporation

Primary Market

Involves one owner or creditor selling to another

Secondary Market

In stock and long term debt are called over the counter (OTC) markets, meaning the dealers are connected electronically instead of transacting in a central location

Dealer Markets

Has a physical location, primary purpose is to match those who wish to sell with those who wish to buy

Auction Markets

Financial statement showing a firms accounting value on a particular date

Balance Sheet

Has a relatively long life, can be tangible or intangible

Fixed Assets

Has a life of less than 1 year, asset will convert to cash within 12 months

Current Assets

Have a life of less than one year (meaning they must be paid within the year)

Current Liabilities

A debt that is not due in the coming year

Long Term Liabilities

Current Assets less current liabilities

Net Working Capital

The speed and ease with which an asset can be converted to cash

Liquidity

The use of debt in a firms capital structure

Financial Leverage

The values shown on the balance sheet for the firms assets

Book Values

Financial statement summarizing a firms performance over a period of time, usually a quarter or a year

Income Statement

Recognize revenue when the earnings process is virtually complete and the value of an exchange of goods or services is known or can be reliably determined

Recognition or Realization Principle

Revenues are determined as described previously and then match those revenues with the costs associated with producing them

Matching Principle

Expenses charged against revenues that do not directly affect cash flow, such as depreciation

Noncash Items

Include things as raw materials, direct labor expense, and MOH, reported on income statement as COGS

Product Costs

Incurred during a particular time period and might be reported as SGA expenses

Period Costs

Total taxes paid divided by total taxable income

Average Tax Rate

Amount of tax payable on the next dollar earned

Marginal Tax Rate

The difference between the number of dollars that came in and the number of dollars that went out

Cash Flow

Cash flow from the firms assets is equal to the cash flow paid to suppliers of capital to the firm

Cash Flow Identity

The total of cash flow to creditors and cash flow to stockholders

Cash Flow from Assets

Cash generated from a firms normal business activities

Operating Cash Flow

Refers to the net spending on fixed assets

Capital Spending

A firms interest payments to creditors less net new borrowing

Cash Flow to Creditors

A firms interest payments to creditors less net new borrowing

Cash Flow to Creditors

Dividends paid out by a firm less net new equity raised

Cash Flow to Stockholders

A firms financial statement that summarizes its sources and uses of cash over a specified period

Statement of Cash Flows

A measurable value that shows how a company is progressing toward achieving a key business objective

Key Performance Indicators (KPI)

A standardized financial statement presenting all items in percentage terms. Balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales

Common-Size Statement

A standardized financial statement presenting all items relative to a certain base year amount

Common-Base Year Statement

Relationships determined from a firms financial information and used for comparison purposes

Financial Ratios

Intended to provide information about a firms liquidity

Short-Term Solvency Ratios

The average daily operating cost for start up companies

Burn Rate

Intended to address the firms long-term ability to meet its obligations

Long-Term Solvency Ratios

Intended to describe how efficiently or intensively a firm uses its assets to generate sales

Asset Management, or Turnover Measures

Intended to measure how efficiently a firm uses its assets and manages its operations

Profitability Measures

Based on information not necessarily contained in financial statements

Market Value Measures

Popular Expression breaking ROE into 3 parts: operating efficiency, asset use efficiency, and financial leverage

Dupoint Identity

A U.S. government code used to classify a firm by its type of business operations

Standard Industrial Classification (SIC) Code

A statement of what is to be done in the future

Financial Plan

The long range time period on which the financial planning process focuses

Planning Horizon

The process by which smaller investment proposals of each of a firms operational units are added up and treated as one big project

Aggregation

Businesses with sales that are strongly affected by the business cycle

Cyclical Businesses

The “driver” meaning that the user of the planning model will supply this value, and most other values will be calculated based on it

Sales Forecast

A forecasted balance sheet, income statement, and statement of cash flows

Pro Forma Statements

The projected balance sheet will contain changes in total fixed assets and NWC

Asset Requirements

Part of the plan that should discuss dividend and debt policy

Financial Requirements

The designated source or sources of external financing needed to deal with any shortfall or surplus in financing and thereby bring the balance sheet into balance

The Plug

The plan will have to state explicitly the economic environment in which the firm expects to reside over the life of the plan

Economic Assumptions

A financial planning method in which accounts are varied depending on a firms predicted sales level

Percentage of Sales Approach

The amount of cash paid out to shareholders divided by net income

Dividend Payout Ratio

The addition to retained earnings divided by net income, also called the plowback ratio

Retention Ratio

A firms total assets divided by its sales or the amount of assets needed to generate $1 in sales

Capital Intensity Ratio

Calculates the funds a company must raise externally to support a projected increase in sales

External Financing Needed (EFN)

The maximum growth rate a firm can achieve without external financing of any kind

Internal Growth Rate

The maximum growth rate a firm can achieve without external equity financing while maintaining a constant debt-equity ratio

Sustainable Growth Rate