Finance EXAM 1

Net Working Capital

current assets - current liabilities

Working Capital Management

Short-term financial managment

Marginal Tax Rate

Tax rate for the next dollar that we make

Effective Tax rate

Total tax/net profit before taxes. Shows the overall tax rate

Market Value

The value of the firm or other asset on the open market today

Book Value

The historical value of the firms assets, or what the firm paid, minus depreciation

Common Sized Financial Statements

Financial statements expressed as percentages, ie. Income statement is expressed as a percentage of revenue

Dupont Identity

ROE= Profit Margin x Total Asset Turnover x Equity Multiplier

Internal Growth Rate

Maximum rate a firm can achieve without outside financing. 

ROA x b

1-ROA x b

Sustainable Growth Rate

Maximum rate a firm can achieve without outside financing while maintaining a consistent debt-equity ratio

ROE x b

1-ROE x b

Business Entities

Corporation- Limiter liability but double taxation

LLC- limited liability without the double taxation

Partnership

Sole Proprietorship

Equity Multiplier

1+ debt/equity Ratio

Inventory ratios

Cost of goods sold/ inventory

Current Ratio

Current assets/Current liabilities

Quick ratio

Current assets-Inventory/Current Liabilities

ROA

Net income/ Total Assets

ROE

Net Income/Total Equity

PE Ratio (Price Earnings Ratio)

price per share/earnings per share

Future Value

What a current investment is going to be worth in the future $1(1+g)^n

Present Value

What a future sum is worth now $1/(1+g)^n

Simple Interest

Only the principal earns the interest

Compound Interest

Both the principle and past years interest earn interest

Compounding

The concept of interest on interest

Ordinary Annuity

A stream of equal payment with the payment coming at the end of the period

Annuity Due

A stream of equal payments with the payment coming at the beginning of the period

What is a mortgage

is a specialized loan used to buy or refinance a home or other real estate.

Amortized loan

All of the principle will be paid at the end of the loan term

Bond Yields

is the annualized return an investor realizes on a bond investment. It represents the income received (interest) relative to the bond's price.

Capital Budgeting

the formal process businesses use to evaluate, prioritize, and decide on major long-term projects or investments

Required ROR

The minimum return an investor requires to make an investment

Expected ROR

 The return that an investment is expected to earn based on the historical market performance

Call Provision

The ability of the bond issuer to pay off the bonds prior to maturity

Real Rate 

Nominal Rate adjusted for inflation

Nominal Rate

The stated or calculated rate without adjusting for inflation

Coupon Rate

Stated rate on a bond

BK liquidation priority

is the "payout line" that determines who gets paid first when a person or company goes broke and sells off everything they own.

Board Voting

Straight vs cumulative

Dividends

Know how to use the dividend growth model

Dividend Yield

A stock’s expected cash dividend divided by its current price 

Payback period

The number of years that it takes to make your investment back without adjusting for TVM

Net Present Value

Initial investment less the PV of all future cash flows. You will need to know how to calculate this 

SOX

Sarbanes-Oxley

Discount Rate

The rate we use when discounting future cash flows to present value

Internal Rate of Return

The rate we achieve when the NPV = 0

Opportunity Cost

Opportunities that we forego in order to move forward with a different project

Sunk Cost

Non-recoverable expense that has already been incurred

Pro Forma

Financial statement projections that help us evaluate potential projects

dividend growth model

a model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate

Retention Ratio

addition to retained earnings/Net Income (the b in the growth rate formula)

common sized financial statements present balance sheet account values as a percentage of

total assets

liquidity

measures how quickly a firm can convert assets into cash to pay short-term debts.