Finance Exam Review - Chapters 1 to 4

Vocabulary practice flashcards covering key financial management concepts, formulas, and definitions from Chapters 1 through 4.

Goal of Financial Management

Increasing the current price per share of outstanding stock, finding values/projects or investments to increase firm value

Capital Structure

Reflects external financing (rely more heavily on debt or equity? - ratios: d/e, td, em)

Capital Budgeting

Trying to find projects or investments (what are required investments to do xyz → calculate those funds and if its worth it) that increase value (determining which long term investments ultimately increase value)

Working Capital Management

Managing day to day activities (current assets/liabilities – am i receiving payments from my clients at an acceptable rate/time period, am i paying suppliers in full, etc)

Agency Conflict

Management might have different ideas, unnecessary expenses that don’t provide benefit to sharholders or owners - ie business trips, outings etc

Balance Sheet Identity

The accounting identity where $TA = TD + TE = CA + NFA$, where Total Debt includes Current Liabilities and Long-Term Debt.

Net Working Capital (NWC)

Calculated as Current Assets (cash, inventory, accounts receivable) minus Current Liabilities (accounts payable, loans payable).

Marginal Tax Rate

The share of the next $1$ dollar in taxable income that would be added to a firm's total tax bill or liability.

Average Tax Rate

The average dollar that is added to taxable income across total tax liability.

Operating Cash Flow (OCF)

The cash flow generated directly from day-to-day business operations.

Cash Flow From Assets (CFFA)

The total cash flow generated by firm assets, defined as $OCF - NCS - \Delta NWC$, which equals Cash Flow to Creditors plus Cash Flow to Shareholders.

Cash Flow to Creditors

Calculated as interest paid minus the change in net new debt.

Common Size Statements

Financial statements where balance sheet items are listed as a percentage of total assets and income statement items are listed as a percentage of sales.

Current Ratio

A liquidity ratio calculated as current assets divided by current liabilities.

Quick Ratio

A liquidity ratio calculated by subtracting inventory from current assets and dividing by current liabilities.

Cash Coverage Ratio

A financial ratio calculated as $\frac{EBIT}{interest + depreciation}$.

Times Interest Earned (TIE)

A coverage ratio calculated as $\frac{EBIT}{interest}$, measuring how many times interest payments can be covered given current EBIT.

Inventory Turnover

A turnover ratio calculated as $\frac{COGS}{inventory}$, measuring how many times inventory is sold over the year.

Capital Intensity

The approximate amount a firm needs to spend in assets for the average dollar generated in sales.

Total Asset Turnover (TAT)

An efficiency ratio indicating the amount in sales generated by the average dollar invested in total assets.

Market-to-Book Ratio

Calculated as $\frac{\text{market value per share}}{\text{book value per share}}$; an increase over time indicates management is increasing firm value.

Internal Growth Rate

The growth rate achievable when cash is sourced solely from retained earnings without any external financing.

Sustainable Growth Rate

The growth rate achievable by adding equity and debt to maintain a constant capital structure.

Discounting

The process of calculating the Present Value (PV) of a future amount.

Compounding

The process of calculating the Future Value (FV) of a present amount using the formula $FV = PV \times (1+r)^T$.

Forms of Business Organization

Sole Proprietorship, Partnership (limited/general), LLC

Pros: More favorable tax benefits

Cons: Might have less capital to invest so slower levels of growth, unlimited liability

Corporation:

Pros: Seperation of owners and managers

Cons: Double taxation, seperation of owners and managers (agency conflict)

EBIT Formula

EBIT = Net Income + Interest + Tax

EBIT = Revenue - COGS - Operating expenses

Net Income Formula

NI = Total Revenue - Total Expenses

NI = Total Revenue - COGS - Operating Expenses - Interest - Taxes

Profit

Profit = Total Revenue - COGS