Finance Principles Quiz Moja Lakini Excluding Chapter 4!

Corporate Finance

The area of finance dealing with financial decisions made by corporations, including capital budgeting, capital structure, and working capital management.

Investments

The area of finance focused on buying and selling financial assets like stocks and bonds.

Financial Institutions

Organizations that facilitate the flow of funds between savers and borrowers

International Finance

The area of finance dealing with cross-border investments, exchange rates, and global financial markets.

Capital Budgeting

The process of deciding which long-term investments or projects a business should undertake.

Capital Structure

The mix of debt (bonds, loans) and equity (stock) a firm uses to finance its investments.

Working Capital Management

Managing a firm's day-to-day finances, including paying employees and suppliers.

Sole Proprietorship

A business owned by a single individual with unlimited liability, income taxed once as personal income.

Partnership

A business owned by two or more people; general partners have unlimited liability, limited partners have limited liability.

General Partner

A partner who actively runs the business and faces unlimited liability for obligations.

Limited Partner

A partner who does not actively manage the business and has limited liability (only loses their investment).

Corporation

A legal entity separate from its owners, offering limited liability, unlimited life, and easy ownership transfer, but subject to double taxation.

S-Corp

A corporation with a special tax status allowing income to pass to shareholders to avoid double taxation; limited to 100 shareholders.

LLC (Limited Liability Company)

A business structure offering personal liability protection; must file annual reports; outside investment only from banks.

C-Corp

A corporation where owners/shareholders are taxed separately from the entity; can have multiple classes of stock.

Limited Liability

The owners of a corporation are only liable up to the amount they invested; personal assets are protected.

Double Taxation

Corporate income is taxed at the corporate rate, and dividends paid to shareholders are taxed again at the personal rate.

Agency Problem

A conflict of interest between principals (stockholders) and agents (managers) when managers pursue their own interests over shareholder value.

Agency Relationship

The relationship where stockholders (principals) hire managers (agents) to run the company on their behalf.

Agency Costs

The costs of monitoring and controlling the actions of managers to align their behavior with shareholder interests.

Shareholder Primacy

The theory (Friedman, 1970) that a business's main social responsibility is to increase profits—investors are most important.

Stakeholder Theory

The theory (Freeman, 1984) that firms must consider the interests of all stakeholders: customers, suppliers, employees, investors, communities, etc.

Stakeholders

All parties with an interest in a firm, including investors, employees, customers, suppliers, management, and society.

Primary Market

The financial market where new securities are issued and sold for the first time (ex. IPO).

Secondary Market

The financial market where existing securities are bought and sold between investors (ex: NYSE, NASDAQ).

Dealer Market

A secondary market where dealers buy and sell securities from their own inventory (ex: NASDAQ).

Auction Market

A secondary market where buyers and sellers are matched and transact directly (ex: NYSE).

Listed Securities

Stocks that are traded on an official exchange (ex: NYSE, NASDAQ).

OTC (Over-the-Counter) Securities

Securities traded directly between parties without a centralized exchange (ex: bonds, currencies, derivatives).

Balance Sheet

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

Balance Sheet Identity (Formula)

Total Assets = Total Liabilities + Shareholders' Equity

Liquidity

The ease of converting an asset to cash without significant loss of value.

Current Assets

Assets expected to be converted to cash within one year (e.g., cash, accounts receivable, inventory).

Fixed Assets

Assets with a relatively long life; can be tangible (equipment, real estate) or intangible (patents, trademarks).

Current Liabilities

Debts due within one year (e.g., accounts payable, notes payable, accruals).

Long-Term Debt

Debt obligations due in more than one year.

Shareholders' Equity

The owners' claim on assets after liabilities are paid; includes common stock and retained earnings.

Retained Earnings

The portion of net income that is reinvested in the firm rather than paid out as dividends.

Book Value

The value of assets, liabilities, or equity as reported on the balance sheet (historical cost).

Market Value

The price at which assets, liabilities, or equity can be bought or sold in the market.

Income Statement

A "video" of a firm's operations over a specified period, showing revenues and expenses.

Income Statement Identity (Formula)

Revenues - Expenses = Income

Matching Principle (GAAP)

Revenue is recognized when earned, and expenses are matched to the period of revenue recognition.

EBIT (Earnings Before Interest and Taxes) def + formula

Operating income; calculated as Sales - COGS - Operating Expenses - Depreciation.

EBT ( Earning Before Taxes Formula)

EBT = EBIT - Interest Expense

ROE (Return on Equity) Formula -> ROE = Net Income ÷ Total Common Equity

Interest Definition + Formula

Cost of debt financing, Debt × Interest Rate

Taxes Definiton + Formula

Corporate tax owed. EBT × Tax Rate

Operating Cash Flow (OCF)

The cash generated from a firm's normal operations; key measure of firm value.

OCF Formula 1

OCF = EBIT(1 - Tax Rate) + Depreciation

OCF Formula 2

OCF = [(Sales - Costs)(1 - Tax Rate)] + (Depreciation × Tax Rate)

Financial Ratios

Tools used to compare a firm's performance over time or against industry peers.

Liquidity Ratios

Measure a firm's ability to pay short-term obligations without undue stress.

Current Ratio formula + definiton

CR= Current Assets ÷ Current Liabilities. Measures short-term solvency.

Quick Ratio: A stricter liquidity measure excluding inventory.

Quick Ratio (Formula)

Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities

Cash Ratio ( Definition plus formula)

The most conservative liquidity measure, Cash ÷ Current Liabilities.

Leverage Ratios

Measure a firm's long-term ability to meet financial obligations and its use of debt.

Debt Ratio (Formula)

Debt Ratio = Total Debt ÷ Total Assets OR (Total Assets - Total Equity) ÷ Total Assets

Times Interest Earned (TIE)

Measures how well a firm can cover interest payments (must be > 1).

Times Interest Earned (TIE) (Formula)

TIE = EBIT ÷ Interest

Asset Management Ratios

Measure how efficiently a firm uses its assets to generate sales.

Inventory Turnover ( Definition + Formula)

COGS ÷ Inventory. How many times inventory is sold per year.

Days' Sales in Inventory ( Definition + Formula)

365 ÷ Inventory Turnover. Average days inventory sits before sale.

Receivables Turnover ( Definition + Formula)

Sales ÷ Accounts Receivable. Measures efficiency of credit collections.

Days' Sales in Receivables (Definition + Formula)

365 ÷ Receivables Turnover. Average days to collect credit sales.

Total Asset Turnover (Definition + Formula)

Sales ÷ Total Assets. Sales generated per dollar of assets.

Profitability Ratios

Return measures indicating how efficiently a firm uses and manages assets.

Profit Margin ( Definition + Formula)

Net Income ÷ Sales. Measures operating efficiency and cost control.

ROA (Return on Assets) Formula + Definition

Net Income ÷ Total Assets. Measures efficiency in using assets to generate profit.

ROE (Return on Equity) Definition + Formula

Net Income ÷ Total Common Equity. Measures return to shareholders.

Market Value Ratios

Compare earnings, sales, and book value to what investors are willing to pay per share.

PE Ratio (Price-Earnings) Definition

Classifies stocks as growth (high) or value (low).

PE Ratio (Price-Earnings) Formula

PE Ratio = Price per Share ÷ EPS

Price-to-Sales Ratio ( Definition )

Used for young companies without earnings.

Price-to-Sales Ratio (Formula)

Price per Share ÷ (Sales ÷ Shares Outstanding)

Market-to-Book Ratio (Definition)

< 1 suggests managers are destroying value.

Market-to-Book Ration (Formula)

Market Value per Share ÷ Book Value per Share.

Du Pont Identity (Definition + Formula)

Breaks down ROE into three components. ROE = Profit Margin × Total Asset Turnover × Equity Multiplier.

Du Pont Expanded (Formula)

ROE = (Net Income ÷ Sales) × (Sales ÷ Total Assets) × (Total Assets ÷ Total Common Equity)

Benchmarking

Comparing a firm's ratios to a standard, such as its own historical performance (time-trend) or industry peers.

Time-Trend Analysis

Analyzing how a firm's performance changes over time.

Peer Group Analysis

Comparing a firm to other companies in the same industry.