Business Finance 3120 Final Exam

financial statement

an accounting-based picture of a firm’s financial position

balance sheet

reports firm’s assets, liabilities and equities at a particular point in time

liquidity

the time and effort needed to convert the accounts to cash, the ease with which an asset can be converted into cash

current assets

normally convert to cash within one year

marketable securities

example of current assets

fixed assets

have a useful life exceeding one year and are made up of PPE, patents and trademarks

liabilities

funds provided to the firm by lenders

current liabilities

constitute the firm’s obligations due within one year

long-term debt

include those obligations with maturities of more than one year

stockholders’ equity

the difference between a firm’s total assets and total liabilities

preferred stock

a hybrid security with characteristics of both long-term debt and common stock

common stock and paid-in-surplus

the fundamental ownership claim in public or private company

retained earnings

the portion of company profits that are kept by the firm rather than distributed to the stockholders as cash dividends

net working capital

current assets - current liabilities, the measure of the firm’s ability to pay obligations as they come due

which assets remain relatively liquid

cash and inventory

which assets remain relatively illiquid

fixed assets

financial leverage

refers to the extent to which a firm chooses to finance its ventures or assets by issuing debt securities

capital structure

represents management's risk and return preference

book (or historical cost) value

the amount the firm paid for the assets

market value

the amount the firm would get if it sold the assets

income statement

shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time

average tax rate

percentage of each dollar of taxable income that the firm pays in taxes

marginal tax rate

amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns

statement of cash flows

a financial statement that shows the firm’s cash flows over given period of time

cash flows from operations

cash flows that are the direct result of the production and sale of the firm’s products

cash flows from investing activities

cash flows associated with the purchase or sale of fixed or other long-term assets

cash flows form financing activities

result from debt and equity financing transactions

net change in cash and marketable securities

the sum of the cash flows from operations, investing activities, and financing activities

free cash flows

the cash actually available for distribution to the investors in the firm after the investments that are necessary to sustain the firm’s ongoing operations are made

net operating profit after taxes (NOPAT)

the net profit a firm earns after taxes, but before any financing costs

statement of retained earnings

reconciles net income earned during a given period and any cash dividends paid with the change in retained earnings over the period

earnings management

The process of controlling a firm’s earnings

sarbanes-oxley act

Requires that a firm’s senior management must sign off on the financial statements of the firm, certifying the statements as accurate and representative of the firm’s financial condition during the period covered, passed in 2002, aims to prevent deceptive accounting

net income

the bottom line on the income statement

earnings per share (EPS)

measure company’s profitability

dividends per share (DPS)

Higher dividend paying stocks attract more investors (Startup, small cap, techs, typically don’t pay out dividends, value companies pay out majority in dividends, and have lower RE, whereas startups, tech companies and small cap retain their earnings to grow their companies)

Book value per share (BVPS)

can be used to predict the possible market price of a share at a given time in the future

market value per share (MVPS)

market price of the firm’s common stock, (what investors think the value of the firm is based off of current information and future expectations. Trade on information you get today about how you think stock will be affected 6-12 months from now)

gross profit

net sales (revenue) minus cost of goods sold.

EBIT

earnings before interest and taxes

EBITDA

earnings before interest, taxes, depreciation, and amortization.

EBT

earnings before taxes

weighted-average cost of capital (WACC)

average cost per dollar of capital raised. the weighted-average after-tax cost of the capital used by a firm, with weights set equal to the relative percentage of each type of capital used.

WACC unconstrained

percentage of equity*cost of equity
+percentage of preferred stock*cost of preferred stock
+percentage of debt*after tax cost of debt
= E/(E+P+D)ie + P/(E+P+D)ip + D/(E+P+D)id(1-Tc)

WACC constrained

percentage of equity*cost of equity
+percentage of preferred stock*cost of preferred stock
+percentage of debt*after tax cost of debt
= E/(E+P+D)ie + P/(E+P+D)ip + D/(E+P+D)*id

cost of equity: capital asset pricing model (CAPM)

ie = Rf +B(Rm-Rf)

cost of equity: constant growth model

ie = (D1/Po) + G

cost of preferred stock: constant growth model

ip = D1/Po

cost of equity

average of CAPM & constant growth

cost of debt unconstrained

revenues less than $25M

cost of debt constrained

no tax write-off for debt interest if revenues are more than $25M

3 most common liquidity measures

current ratio (want over 1), quick ratio, and working capital

net worth

assets - liabilities

out of current assets

if a company experiences loses, where do they usually take this out of first

T-bills

what is a typical current asset that is the most liquid and safe, shortest amount of time until they mature

PPE

what’s not easy to sell?

the more liquid an asset

the lower the return

the less liquid an asset

the higher rate of return

bondholders, preferred, then common stockholders (residual claimants)

order of getting paid back if a company goes bankrupt

false

dividends paid to shareholders are tax deductible

municipal bonds and owning stock in another corporation

what are the two exceptions to interest received being taxable?

cash source

increasing liabilities (or equity) by selling new common stock

cash source

decreasing non cash assets, like a drop in accounts receivable

cash use

decreasing liabilities (or equity), such as paying off a bank loan

cash use

increasing non cash assets, such as buying inventory

cash source

net income

cash source

depreciation

cash source

decrease a fixed asset

cash source

increase a current liability

cash source

increase long-term debt

cash source

sell common/preferred stock

cash use

net losses

cash use

increase a non cash current asset

cash use

increase a fixed asset

cash use

decrease a current liability

cash use

decrease long-term debt

cash use

repurchase common or preferred stock

cash use

pay dividends

payback (PB)

generates decision rules and associated metrics for choosing projects based on how quickly they return their initial investment

0=sum(n=0 --> PB) [CFn]

discounted payback

payback recognizing time value of money

0=sum(n=0 --> DPB) [CFn/(1+i)^n]

net present value (NPV)

generates a decision rule and associated metric for choosing projects based on the total discounted value of their cashflows
(sum of all cashflows PVs)

NPV = CF0v^0 + CF1v^1 + ... + CFn*v^n
= sum(n=0 --> N) [CFn*v^n]

internal rate of return (IRR)

generates decision rules and associated metrics for choosing projects based on the implicit expected geometric average of a project's rate of return (set NPV = 0)

0 = CF0v^0 + CF1v^1 + ... + CFn*v^n
= sum(n=0 --> N) [CFn*v^n]

NPV profile

a graph of a project’s NPV as a function of the cost of capital

modified internal rate of return (MIRR)

a capital budgeting method that converts a project's cashflows using a more consistent reinvestment rate prior to applying IRR decision rule

profitability index (PI)

a decision rule and associated methodology for converting the NPV statistic into a rate-based metric

20%

typical downpayment on a home

economists aren’t forecasting a big drop in mortgage rates this year

since the fed reserve cut short-term interest rates 3 times last year, and the moves didn’t translate to lower mortgage rates, what is happening?

policymakers could bring the economy back from the precipice by cutting interest rates

if the hit to inflation proves temporary and inflation looks set to resume its decline toward the fed’s 2% target, then

a half century ago, Hyundai Motors was little known, a company protected by a virtual ban on imported cars and then high tariffs

how did Seoul show that tariffs can have desired results?

at first created thousands of high-paying jobs as Argentine factory workers assembled Samsung TVs and Nokia cellphones

positive effect of Kirchner imposing tariffs up to 35% on imported electronics and other strict restrictions

created inefficient businesses with huge costs for the treasury and taxpayers. Consumers got substandard products and paid twice as much for a television made in Argentina compared with a customer in neighboring, free-market Chile

negative effect of Kirchner imposing tariffs up to 35% on imported electronics and other strict restrictions

about one-third

how many consumers surveyed said they are concerned about losing their job in the next 12 months?

3.6%

what did pending homes sales in February decline from? (also the weakest year for home sales since 1995)