Business Finance Exam 1-Joyce

capital budgeting

planning and managing a firm's long term investments

Capital Structure

mixture of long term debt and equity the firm uses

working capital management

firm's short term assets and short term liabilities

Sole Proprietorship

keeps all the profits; unlimited liability for debts

Goal of Financial Management

maximize the current value per share of existing stock

agency relationship

between stockholders and management

agency problem

the possibility of conflict of interest between the stockholders and management of a firm

agency costs

costs of the conflict of interest

dealer markers

dealers buy and sell for themselves; play a limited role

auction markets

match those who wish to sell with those who wish to buy; has a physical location

largest auction market in the US

new york stock exchange (NYSE)

corporate dividends

after tax income from corporation which becomes taxable for recipient

intrinsic value

discounted value of the cash that can be taken out of a business during its remaining life

equities

ownership rights in companies (common and preferred shares)

fixed income

predetermined payment schedules that usually include interest and principal payments

bond

contractual agreement between the issuer and bondholders

derivatives

value depends on the value of some underlying asset

security market index

represents a given security market, market segment, or asset class

market capitalization

measure of company "size"; calculated as price per share * number of shares outstanding

uses of finance

allocation of capital, consumption smoothing, allocation of risk, separation of management and ownership

proxy fight

develops when a group solicits proxies in order to replace the existing board

primary market

firm is raising capital; new securities are issued and sold for the first time

secondary market

previously issued securities are traded

OTC market

dealers conduct transactions over the phone or computer

stakeholder

someone who potentially has a claim on the cash flows of a firm (NOT STOCKHOLDER OR CREDITOR)

examples of stakeholders

employees, customers, suppliers, government, local communities

the balance sheet

shows assets, liabilities, and equity at a given time

Liquidity

speed and ease with which an asset can be converted to cash

financial leverage

use of debt in a firm's capital structure

book value

values shown on balance sheet

market value

what assets are currently worth

Which value (book/market) is more important to financial managers?

market

the income statement

measures performance over time

average tax rate

total taxes paid divided by total taxable income

marginal tax rate

the rate of the extra tax you would pay if you earned $1 more

Tax Cuts and Jobs Act of 2017

Corporate tax rates became a flat 21%

3 components of operating cash flow

earnings before interest and taxes (EBIT), depreciation, taxes

Balance Sheet Identity

total assets = total liabilities + owners equity

Net Working Capital (NWC)

current assets - current liabilities

Income Statement Equation

revenues - expenses = income

recognition principle

revenue is recognized at time of SALE

matching principle

production costs and other costs associated with the sale are recognized at the time of sale

cash inflows

cash coming into the firm

cash outflows

cash leaving the firm

Calculation of OCF

EBIT + depreciation - taxes

EBIT Calculation

sales - costs - depreciation

net capital spending

ending net fixed assets - beginning net fixed assets + depreciation

common size statement

balance sheet items are shown as a percentage of assets; income statement items are shown as a percentage of sales

financial ratios

relationships determined from a firm's financial information and used for comparison purposes

solvency

degree to which a company is able to meet its financial obligations

goal of ratio analysis

to take the numerous lines from both the income statement and balance sheet and to interpret this information in a meaningful way

liquidity measures

current ratio, quick ratio, cash ratio, NWC to total assets, interval measure

leverage measures

total debt, debt to equity, equity multiplier, long term debt, times interest earned, cash coverage

turnover measures

inventory, days' sales, receivables, days' sales in receivables, total asset, fixed asset, NWC

profitability measures

profit margin, ROA, ROE

market value measures

earnings per share, price earnings, price sales, market to book, Tobin's Q, enterprise value, EBITDA

DuPont Identity

breaking ROE into 3 parts; operating efficiency, asset use efficiency, and financial leverage

example of allocation of capital

financing of projects

example of consumption smoothing

saving and borrowing

example of allocation of risk

diversification, hedging

example of separation of management and ownership

stability, agency costs

similarities between finance and accounting

use of financial statements, managerial decision making

similarities between finance and economics

efficiency, tradeoffs, rationality, market focused

which form of business makes up majority (71%) of all businesses

sole proprietorship

which form of business makes up majority (84%) of revenue

corporations

2 main classes of equity

common stock (voting rights), preferred stock (non-voting)

composite assets

includes mutual funds and ETFs

mutual funds

financial intermediaries that pool funds from investors and buy assets

residual value is also known as

equity

income statement equation

Revenues - Expenses = Income

noncash items

expenses charged against revenues that do not directly affect cash flow (depreciation)