Fin 304

Unincorporated business owned by a single individual that offers ease of formation and no corporate income tax, but subjects the owner to unlimited liability (Chapter 1)

Proprietorship

Unincorporated business owned by two or more individuals with tax pass-through benefits, but unlimited personal liability for owners (Chapter 1)

Partnership

Legal business structure distinct from its owners, offering limited liability and easy transfer of ownership, but subject to double taxation (Chapter 1)

Corporation

Long-term managerial decisions regarding which projects to invest in, how to finance them, and dividend payouts (Chapter 1)

Capital investment decisions

Short-term managerial decisions dealing with current assets and current liabilities, such as cash and inventory levels (Chapter 1)

Working capital management decisions

An estimate of a stock's true long-run value based on accurate risk and return data (Chapter 1)

Intrinsic value

The market state where a stock's actual market price equals its intrinsic value (Chapter 1)

Market equilibrium

Conflict that arises when managers pursue personal interest over the wealth maximization of stockholders (Chapter 1)

Stockholder-manager conflict

Conflict arising because stockholders prefer higher-risk projects with large upside potential, while bondholders prioritize risk limitation (Chapter 1)

Stockholder-debtholder conflict

Financial statement providing a snapshot of a firm's financial position at a single specific point in time (Chapter 3)

Balance sheet

Financial statement detailing a company's revenues, expenses, and net earnings over a specified accounting period (Chapter 3)

Income statement

Financial statement showing how operating, investing, and financing activities impact cash flows over a given period (Chapter 3)

Statement of cash flows

Financial statement showing the changes in equity items, including earnings retained versus dividends paid (Chapter 3)

Statement of stockholders' equity

Measure of profit generated strictly from core business operations, before subtracting interest charges and income taxes (Chapter 3)

Operating income ($EBIT$)

Non-cash expenses charged on the income statement to account for the historical cost of tangible and intangible assets used up in production (Chapter 3)

Depreciation and amortization

Metric used by analysts and lenders to measure gross cash generated by operations prior to interest, taxes, and non-cash expense deductions (Chapter 3)

$EBITDA$ (Earnings Before Interest, Taxes, Depreciation, and Amortization)

Formula for Current Ratio (Chapter 4)

$$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$$

Formula for Quick Ratio (Chapter 4)

$$\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventories}}{\text{Current Liabilities}}$$

Formula for Days Sales Outstanding ($DSO$) (Chapter 4)

$$\text{DSO} = \frac{\text{Accounts Receivable}}{\text{Average Sales per Day}} = \frac{\text{Accounts Receivable}}{\frac{\text{Sales}}{365}}$$

Formula for Inventory Turnover Ratio (Chapter 4)

$$\text{Inventory Turnover} = \frac{\text{Sales}}{\text{Inventories}}$$

Formula for Total Assets Turnover Ratio (Chapter 4)

$$\text{Total Assets Turnover} = \frac{\text{Sales}}{\text{Total Assets}}$$

Formula for Fixed Assets Turnover Ratio (Chapter 4)

$$\text{Fixed Assets Turnover} = \frac{\text{Sales}}{\text{Net Fixed Assets}}$$

Formula for Debt-to-Capital Ratio (Chapter 4)

$$\text{Debt-to-Capital} = \frac{\text{Total Debt}}{\text{Total Invested Capital}}$$

Formula for Debt-to-Assets Ratio (Chapter 4)

$$\text{Debt-to-Assets} = \frac{\text{Total Debt}}{\text{Total Assets}}$$

Formula for Times-Interest-Earned ($TIE$) Ratio (Chapter 4)

$$\text{TIE} = \frac{\text{EBIT}}{\text{Interest Charges}}$$

Formula for Operating Margin (Chapter 4)

$$\text{Operating Margin} = \frac{\text{EBIT}}{\text{Sales}}$$

Formula for Profit Margin ($PM$) (Chapter 4)

$$\text{Profit Margin} = \frac{\text{Net Income}}{\text{Sales}}$$

Formula for Basic Earning Power ($BEP$) (Chapter 4)

$$\text{BEP} = \frac{\text{EBIT}}{\text{Total Assets}}$$

Formula for Return on Assets ($ROA$) (Chapter 4)

$$\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}}$$

Formula for Return on Equity ($ROE$) (Chapter 4)

$$\text{ROE} = \frac{\text{Net Income}}{\text{Total Common Equity}}$$

Formula for Return on Invested Capital ($ROIC$) (Chapter 4)

$$\text{ROIC} = \frac{\text{EBIT}(1 - T)}{\text{Total Invested Capital}}$$

Formula for Price/Earnings ($P/E$) Ratio (Chapter 4)

$$\text{P/E} = \frac{\text{Price per Share}}{\text{Earnings per Share}}$$

Formula for Market/Book ($M/B$) Ratio (Chapter 4)

$$\text{M/B} = \frac{\text{Market Price per Share}}{\text{Book Value per Share}}$$

Formula for the Basic DuPont Equation evaluating $ROA$ (Chapter 4)

$$\text{ROA} = \text{Profit Margin} \times \text{Total Assets Turnover} = \left(\frac{\text{Net Income}}{\text{Sales}}\right) \times \left(\frac{\text{Sales}}{\text{Total Assets}}\right)$$

Formula for the Extended DuPont Equation evaluating $ROE$ (Chapter 4)

$$\text{ROE} = \text{Profit Margin} \times \text{Total Assets Turnover} \times \text{Equity Multiplier} = \left(\frac{\text{Net Income}}{\text{Sales}}\right) \times \left(\frac{\text{Sales}}{\text{Total Assets}}\right) \times \left(\frac{\text{Total Assets}}{\text{Total Equity}}\right)$$

Formula for Equity Multiplier ($EM$) (Chapter 4)

$$\text{Equity Multiplier} = \frac{\text{Total Assets}}{\text{Total Equity}}$$

Quoted annual interest rate that ignores compounding within the year (Chapter 5)

Nominal interest rate ($I_{\text{SIMPLE}}$ or $APR$)

Interest rate charged or earned per compounding period, defined relative to the nominal rate and periods per year (Chapter 5)

Periodic interest rate ($I_{\text{PER}} = \frac{I_{\text{SIMPLE}}}{m}$)

The annual rate of interest actually earned or paid, taking full account of compounding intra-year periods (Chapter 5)

Effective Annual Rate ($EAR$ or $EFF\%$)

A loan that is scheduled to be repaid through equal periodic payments containing both principal and interest components over time (Chapter 5)

Amortized loan

Loan feature requiring regular payments for a period, followed by one single large payment covering the entire remaining principal at maturity (Chapter 5)

Balloon note