FINA 4310-Exam 1 Ch 1-4

What is corporate finance

in a nut shell

• buy raw materials

• assemble a workforce

• produce and sell finished goods or services

What is capital budgeting

process of making and managing expenditures on LONG-LIVED assets

What is capital structure

represents the proportions of the firm’s financing from current liabilities, long-term debt and equity

What is net working capital

defined as current assets minus current liabilities

Where do short-term cash flow problems come from

the mismatching of cash inflows and outflows

Who is the treasurer

responsible for handling cash flows, managing capital expenditures, and making financial plans

What is the controller

accounting function, which includes taxes, cost, and financial accounting and information systems

What is true about the cash flows in relation to bondholders and stockholders

the cash flows should be greater than the cash flows put into the firm

What is the main goal for financial managers

make money or add value

What are other goals for financial managers

1. survive

2. avoid financial distress and bankruptcy

3. beat the competition

4. maximize sales on market share

5. minimize costs

6. maximize profts

7. maintain steady earnings growth

Goals that involve:

• sales

• market share

• cost control

are focused on

earnings or increasing profits

Goals that involve:

• bankruptcy avoidance

• stability

• safety

are focused on

controlling and risk

What is the agency problem

basically management putting their goals before a stockholders

What is agency relationship

relationship between stockholders and management

What is the one factor that affects the agency problem

the way in which the employee is COMPENSATED

What is agency cost

refers to the costs of the conflict of interest between stockholders and management

What are the two reasons why managers would act in stockholders interest

1. managerial compensation

2. control of the firm

Why is managerial compensation a reason managers would act in stockholders interest

the better the stock option and financial performance the more its worth

Why is control of the firm a reason managers would act in stockholders interest

stockholders elect boards→boards are in charge of hiring or firing management

What is a proxy fight

situation where unhappy stockholders that replace existing management

What is a stakeholder

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

What is the basis of the Sarbanes Oakley act

it protects investors from corporate abuses in financial reporting

What is the basis of the securities act

focused on the issuance of new securities AND on the disclosure requirements involving insider trading and reporting

What is a balance sheet

accountants snapshot of the firms accounting value on a particular date as though the firm stood momentarily still

Assets are organized by

liquidity

Liabilities and SE reflects

the types of proportions of financing . Typically organized in the order in which they would typically be paid over time

What is accounting liquidity?

ease and quickness with which assets can be converted into cash WITHOUT losing value

What is the most liquid asset

current asset

2nd place is accounts receivable

What are the three accounting concerns

1. accounting liquidity

2. debt vs equity

3. value vs cost

Why is debt vs equity a concern

liabilities are debts and are frequently associated with nominally fixed cash burdens, that put the firm in default of a contract if not paid

What is an income statement

measures performance over a specific period of time

What is the operation section in an income statement

firms revenue and expenses from principal operations

What is the non operating section in an income statement

the financing costs (interest expense)

What are non cash items

expenses that go against revenues but do not affect cash flows

What is depreciation

reflects estimate of cost used up in production process

What is deferred taxes

result from the difference between actual income and time taxable income

What are short run costs

equipment, resources and commitments

bond interest, overhead, and property taxes

What are long-run costs

all costs that are variable

raw materials and wages for laborers

What are product costs

total productions costs incurred during a period

What are period costs

allocated to a time period

selling, general, admin

example-presidents salary

What is average tax rate

tax bill divided by your taxable income

the percentage of your income that goes to pay taxes

What is the marginal tax rate

tax you would pay if you earned one more dollar

When is net working capital positive

when current assets are greater than current liabilities

What does the total adjustable cash flows include

includes the adjustments for capital spending and additions to net working capital

What is the free cash flow

cash that the firm is free to distribute to creditors and stockholders because it is not needed for working capital or fixed asset investments

What are common size statements

working with percentages instead of dollars to compare companies

What does short term solvency or liquidity measure

provides info on firms liquidity; the primary concern is the firms ability to pay its bills over the short run without undue stress

What does it mean if a company has a high current ratio

the higher the better, it means the company is more liquid

What does the long-term solvency measure

addresses the firms long-run ability to meet its obligations or more generally the financial leverage

What is the total debt ratio

all debts of all maturities to all creditors

What is the times interest owed

how well a company has its interest obligations covered

What is cash coverage

the firms ability to generate cash from operations and is frequently used as a measure of cash flow available to meet financial obligations

Asset management or turnover measures

how efficient or intensive a firm uses its assets to generate sales

What is inventory turnover

the higher the ratio the more efficiently we are managing inventory

What is the receivables turnover

how fast we can sell products

What does profitability measure

how efficient the firm uses its assets and how efficient the firm manages its operations

What is the return on asset

measures the profit per dollar of assets

What is the return on equity

measures of how the stockholders fared during the year

What does the market value measure

based on information not necessarily contained in financial statements

What is the price earnings ratio

measures how much investors are willing to pay per dollar of current earnings

What is concluded if the market to book ratio is less than 1

the firm has NOT been successful in creating value for shareholders

What is market capitalization useful for

potential buyers

What is enterprise value

measure of firm that is very closely related to market capitalization measures the market value of outstanding shares of stock plus the market value of outstanding interest bearing debt

What does the EV multiple allow

allows the comparison of one firm with another when there are differences in capital structure, taxes, or capital spending

What is the capital intensity ratio

amount of assets needed to generate $1 in sales

What is the internal growth rate

maximum growth rate that can be achieved with not external financing of any kind

What is sustainable growth rate

maximum rate of growth a firm can maintain without increasing its financial leverage

What are the determinants of growth

1. profit margin

2. dividend policy

3. financial policy

4. total asset turnover

5. sustainable growth rate

What are problems with financial planning models

1. cash flow size

2. risk

3. timing

What is future value

value of a sum after investing over one or more periods

What is present value

how much you would need today to equate the future value

What is the Net present Value

Present value of future cash flows minus the present value of the cost of the investment

What is compounding

process of leaving the $ in the financial market and lending it for another year

What is the APR

annual interest rate without consideration of compounding

What is an annuity

level stream of regular payments that lasts for a fixed # of periods

What is a pure discount loan

simplest form of loan; the borrower receives money today and repays a single lump sum at some time in the future

What is an interest only loan

calls for the borrower to pay interest each period and to repay the entire principal at some point in the future

What is an amortized loan

the lender may require the borrower to repay parts of the loan amount over time