BFIN 300 Terms for Midterm

Capital Budget

Process of planning and investing long term

Capital Structure

the way in which a company finances its operations and investments through various sources of funding, such as debt and equity

Working Capital Management

the managing of short-term assets and liabilities

Sole Proprietorship

One owner
The simplest form of business
Unlimited liability

Partnership

Two or more owners
Two types

limited partnership

form of partnership where one or more partners are not active in the daily running of the business

general parnership

partnership in which partners share equally in both responsibility and liability.

Corperation

a separate legal entity, easily transfer ownership

double taxation

corporate tax on net income then tax on dividends

Goals of Financial Management

profitability, risk management

Corporate Finance

Relationship between business decisions and how it impacts the value of the company

Sarbanes Oxley Act

Every publicly traded company is required to do an assessment of internal controls and financial reporting. After that, they need an independent auditor charged with assessing their job.

Agency Relationship

relationship between stockholders and management

conflict of interest

a situation in which an action by a company or individual results in an unfair benefit.

ex. Management pays themselves hella, but management doesn't want to pay dividends

Stakeholders

All the people who have a claim of the companies cash flow

Primary Market

First sale of stock (steve madden Wolf of wall street)

Broker

a person who is paid to buy and sell for someone else

What are financial statements

snapshot of a company, not the full picture

Balance Sheet (def and equation)

snapshot of a company's assets, liabilities, and equity at a specific point in time.

assets = liabilites + SE

liabilies

what a company owes

asset

what a company owns

Working capital formula

current assets - current liabilities

Liquidity

speed and ease of conversion to cash without significant loss of value.

financial leverage

the use of debt in a firm's capital structure

Book Value

the amount the company has paid for the asset, minus any depreciation or amortization expenses recorded.

In other words, it is the amount of money that would be left if the company sold the asset and paid off any related debts.

Market Value

current price at which an asset or security can be bought or sold in a free and open market.

Income Statement (def and formula)

Revenue - expenses = net income

Measure of performance over a period of time

Cash Flow Statement (def and formula)

Cash flow = cash flow from assets - cash flow to creditors + cash flow to shareholders

Measure cash coming in and cash leaving

3 types of cash flows

operating, investing, financing

Operating Cash Flow

cash inflows and outflows related to a company's primary business operations.

investment cash flow

cash inflows and outflows related to a company's investments in long-term assets

financing cash flows

cash inflows and outflows related to a company's financing activities

free cash flow

a company's ability to generate cash from its operations after accounting for capital expenditures.

Tangible assets

something that you can touch

Intangible asset

something that you can't touch but still has value

Basic cash flow formula

Source of cash - usage of cash

Source of cash

brings cash into the company (borrowing cash from bank, sales)

Use of cash

spending money (buying assets, paying stuff).

5 types of ratios

liquidity, financial, turnover, profitability, market-based

Liquidity Ratio (def and 2 examples)

Short term, liquidity

Current Ratio
Quick Ratio/Acid Test

Financial Leverage Ratio (def and 2 examples)

address a company's ability to meet it's financial obligations

Total Debt Ratio
Times Interest Earned

Turnover Ratio (def and 2 examples)

How efficiently a company's assets generate sales

Inventory Turnover
Inventory Days

Profitability Ratio (def and 3 examples)

How efficiently a business uses cash and manages operations, higher the better

Profit Margin
ROA
ROE

Market-based Ratio (def and 3 examples)

How much investor is willing to pay

Price-to-earnings ratio
Price-to-book value
Price-to-sales ratio

Future Value Formula

PV(1+r)

Two types of interest + defs.

Simple Interest - based solely on the original amount of a loan or investment
Compound Interest - Accumulating interest over time on principal + previous interest

Present Value Formula

FV/(1+r)

discount rate

determine the value of an investment or project based on its future expected cash flows

Present Value

The current value of a future cash flow.

discounted cash flow

The process of using time value of money skills and forecasting to value assets.

annuity

payment received every year

perpetuity

a fixed payment or stream of cash flows that continues indefinitely, with no specified end date

Effective Annual Rate

the interest rate expressed as if it were compounded once per year

Annual Percentage Rate (APR)

the annual rate of interest that is charged on a loan or credit card

pure discount loan (def and example)

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

Treasury bill

Interest Only Loan (def and example)

A loan that only requires the payment of interest for a stated period of time with the principal due at the end of the term.

Corporate bond

Amortized Loan

a loan that is repaid in equal payments over its life

Mortgage

Securites and Exchange Commission (SEC)

the federal agency that regulates companies that sell stocks and bonds;

investment bank

financial institution that specializes in issuing and reselling new securities

Brokers

individuals whose principal function is to bring buyers and sellers together to make sales

Exchanges

Physical trading location, minimize search cost

money market

financial market where short-term debt securities with high liquidity and low risk are traded

capital market

market in which money is lent for periods longer than a year

Foreign Exchange Market

a market in which currencies of different countries are bought and sold

derivatives market

a financial market where financial instruments that derive their value from an underlying asset or security are traded.

Debt

Fixed Payment to Investors
Not Owners of Business
Do Not Share In Firm Cash Flows

Equities

Firm Ownership
Receive Left Over Cash Flow
Cash Flows Not Fixed
Residual Value

Financial security

o A contract between the provider of funds and the user of funds. Goes over how much money and terms & conditions of repayment

fixed coupon bond

the most common type of bond, it pays a fixed interest rate and has a known maturity

zero coupon bond

a bond that makes no coupon payments and is thus initially priced at a deep discount

convertible bonds

Bonds that can be converted into common stock at the bondholder's option

callable bonds

bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity

face value (par value)

amount of money that the bond buyer (lender) lent the issuer and that the lender will receive on repayment

coupon rate

the interest rate that a bond issuer will pay to a bondholder

maturity

the time at which payment to a bondholder is due

yeild to maturity

the rate required in the market on a bond

bond indenture

a legal document that details all the conditions relating to a bond issue

Bond Ratings

A grade given to bonds that indicates their credit quality

default risk

the risk that the borrower will not pay the face value of a bond on the maturity date

Taxability premium

the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status

interest rate risk premium

the compensation investors demand for bearing interest rate risk

liquidity premium

the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity

common stock

including voting rights on major issues, in a company

Capital gain yield

% change of share price, rate of return

Dividend yield

Calculates how much dividend will be dived out per dollar of invested money

Dividend Priority

paid before dividends are paid to common stockholders

preferred stock

stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends.