FINA 3001 Quiz 1 Terms (Chapters 1,2,4,5)

Basic Areas of Finance

1. Corporate Finance = Business Finance

2. Investments

3. Financial Institutions

4. International Finance

5. Fintech

Financial Institution

Companies that specialize in financial matters

EX: Banks, Insurance Companies, and Brokerage Firms

FinTech

A company that uses the internet, mobile phones, software, and/or cloud services to provide a financial service.

Chief Financial Officer

The top financial manager in a firm

Treasuer

Oversees cash management, credit management, capital expenditures, and financial planning

Controller

Oversees taxes, cost accounting, financial accounting, and data processing

Capital Budgeting

The process of planning and managing a firm's long-term investments

Capital Structure

The specific mix of debt and equity that a company uses to fund its daily operations and long-term growth

Working Capital Management

The business process of monitoring and controlling a company’s short-term assets and liabilities to ensure proper daily operations

Sole Proprietorship

Business owned by one person

Partnership

Business owned by two or more people

Corporation

A legal business structure that exists separately from the people who own it

Goal of Financial Management

Maximize the market value of existing stock

Sarbanes-Oxley Act

Intended to strengthen protection against accounting fraud and financial malpractice

Agency Relationship

• Principal hires an agent to represent its interests

• EX: Stockholders (principals) hire managers (agents) to
  run the company.

Agency Problem

Conflict of interest between principal and agent

Net Working Capital

Current Assets - Current Liabilities

Balance Sheet Equation

Assets = Liabilities + Stockholder’s Equity

Book Value

the balance sheet value of the assets, liabilities, and equity

Market Value

true value; the price at which the assets, liabilities, or equity can actually be bought or sold.

Income Statement Equation

Net Income = Revenue - Expenses

GAAP Matching Principle

• Recognize revenue when it is fully earned, not when the cash comes in.

• Match expenses required to generate revenue to the period of recognition.

Marginal Tax

Percent tax paid on the next dollar earned.

Average Tax

Total taxes paid divided by taxable income.

Cash Flow From Assets Equation

Operating Cash Flow - Net Capital Spending - Change in net working capital (NWC)

Change in NWC Equation

Ending NWC − Beginning NWC

Operating Cash Flow Equation

Earnings before interest and taxes (EBIT) + Depreciation − Taxes

Net Capital Spending Equation

Ending net fixed assets − Beginning net fixed assets + Depreciation

Cash Flow to stockholders equation

Dividends paid − Net new equity raised

Present Value

The current value of future cash flows discounted at the appropriate discount rate

Future Value

The amount an investment is worth after one or more periods.

Simple Interest

Interest earned only on the original principal.

Compound Interest

Interest earned on principal and on interest received.

Present Value

The current value of future cash flows discounted at the appropriate discount rate

Future Value

The amount an investment is worth after one or more periods

Annuity

Finite series of equal payments that occur at regular intervals.

Perpetuity

infinite series of equal payments.

Ordinary Annuity

If the first payment occurs at the end of the period, it is called an

Annuity Due

If the first payment occurs at the beginning of the period, it is called an