Intro. to business chapter 9 Finance: Acquiring and Using Funds to Maximize Value Flashcards

Vocabulary flashcards based on Chapter 9 of BUSN 12th Edition covering financial management, ratio analysis, sources of short-term and long-term funds, capital structure, current asset management, and capital budgeting.

Financial Capital

The funds a firm uses to acquire its assets and finance its operations.

Finance

The functional area of business that is concerned with finding the best sources and uses of financial capital.

Goal of Financial Management

To maximize the value of the firm to its owners.

Fiduciary Duty of Financial Managers

The obligation of managers to make decisions that are most consistent with the interests of ownership when conflicts arise.

Risk

The degree of uncertainty regarding the outcome of a decision.

Risk-Return Trade-Off

The observation that financial opportunities that offer high rates of return are generally riskier than opportunities that offer lower rates of return.

Financial Ratio Analysis

Computing ratios that compare values of key accounts listed on a firm’s financial statements.

Liquid Asset

An asset that can quickly be converted into cash with little risk of loss.

Liquidity Ratios

Financial ratios that measure the ability of a firm to obtain the cash it needs to pay its short-term debt obligations as they come due.

Current Ratio

A key liquidity ratio that compares current assets to liabilities.

Asset Management Ratios

Financial ratios that measure how effectively a firm is using its assets to generate revenues or cash (also called activity ratios).

Inventory Turnover

A key asset management ratio that calculates how quickly a firm sells its inventory to generate revenue.

Average Collection Period

A key asset management ratio that shows how long it takes for a firm to collect from customers.

Financial Leverage

The use of debt in a firm’s capital structure.

Leverage Ratios

Ratios that measure the extent to which a firm relies on debt financing in its capital structure.

Interest Coverage

A key leverage ratio that compares a firm’s annual earnings to its annual interest expenses.

Profitability Ratios

Ratios that measure the rate of return a firm is earning on various measures of investment.

Net Profit Margin

The key profitability ratio that indicates the percentage a firm earns on each dollar of revenue, after paying all operating expenses, interest, and taxes.

Budgeted Income Statement

A projection showing how a firm’s budgeted sales and costs will affect expected net income (also called a pro forma income statement).

Budgeted Balance Sheet

A projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets (also called a pro forma balance sheet).

Cash Budget

A detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash.

Trade Credit

Spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment.

Spontaneous Financing

Financing that arises during the natural course of business without the need for special arrangements.

Factor

A company that provides short-term financing to firms by purchasing their accounts receivables at a discount.

Line of Credit

A financial arrangement between a firm and a bank in which the bank preapproves credit up to a specified limit, provided that the firm maintains an acceptable credit rating.

Revolving Credit Agreement

A guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement.

Commercial Paper

Short-term (and usually unsecured) promissory notes issued by large corporations.

Retained Earnings

The part of a firm’s net income it reinvests.

Covenant

A restriction lenders impose on borrowers as a condition of providing long-term debt financing.

Corporate Bonds

Corporations’ own formal IOUs, which they sell to investors.

Equity Financing

Funds provided by the owners of a company.

Debt Financing

Funds provided by lenders (creditors).

Capital Structure

The mix of equity and debt financing a firm uses to meet its permanent financing needs.

Pros and Cons of Debt Financing

Pros include tax-deductible interest expense and acquiring funds without requiring existing stockholders to invest more or sell new stock. Cons include the requirement to make fixed payments and covenants imposed by creditors.

Pros and Cons of Equity Financing

Pros include being more flexible, less risky, and imposing no required payments. Cons include lack of debt tax benefits, potential ownership dilution, and forgoing the opportunity to use financial leverage.

Dodd-Frank Act

A law enacted in the aftermath of the financial crisis of 2008–2009 that strengthened government oversight of financial markets and placed limitations on risky financial strategies such as heavy reliance on leverage.

Cash Equivalents

Safe and highly liquid assets that many firms list with their cash holdings on their balance sheet.

U.S. Treasury Bills

Short-term marketable IOUs issued by the U.S. federal government.

Money Market Mutual Funds

A mutual fund that pools funds from many investors and uses these funds to purchase very safe, highly liquid securities.

Capital Budgeting

The process a firm uses to evaluate long-term investment proposals.

Time Value of Money

The principle that a dollar received today is worth more than a dollar received in the future.

Present Value

The amount of money that, if invested today at a given rate of interest called the discount rate, would grow to become some future amount in a specified number of time periods.

Net Present Value (NPV)

The sum of the present values of expected future cash flows from an investment, minus the cost of that investment.