Financial Management

Financial Asset

non-physical whose value is derived from a contractual claim, such as bank deposits, bonds, and participations in companies' share capital

Bond

a type of security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged

Non-financial Assets

includes both tangible property

Financial Transaction

an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment.

Cash Transaction

any transaction where money is exchanged for a good, service, or other commodity

Credit Transactions

transactions that use credit involve a deferred payment for the goods or services rendered.

Credit Card

an example of a credit, where the card issuer (usually a bank) gives the customer a line of credit with which they can make purchases

Loans and Mortgages

an example of a credit, the lender agrees to give out a lump sum (the "principal") to the borrower, who pays back the loaned amount over a set period of time (called a "term")

Interest Rate

additional percentage on top of the initial amount borrowed

Mortgages

are similar to loans, but are usually for a larger amount of money and over a longer term, often for buying real estate

External Transactions

are any business transactions that involve more than one party

Internal Transactions

only affect one business, like shifting goods between different departments in a business which does not change the overall finances of the company

Financial Institution

company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange

Commercial Banks

a type of financial institution that accepts deposits, offers checking account services, makes business, personal, and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses

Investment Banks

specialize in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings, including initial public offerings (IPOs)

Insurance Companies

for individuals or corporations, is one of the oldest financial services, protection of assets and protection against financial risk, secured through insurance products, is an essential service that facilitates individual and corporate investments that fuel economic growth

Brokerage Firms

mutual fund and exchange-traded fund (ETF) provider Fidelity Investments, specialize in providing investment services that include wealth management and financial advisory services

Loanable Funds Market

in any given economy, the primary source of investment

National Savings

total public and private savings when there is no international borrowing and lending

Interest Rate

dictates the price at which savers and borrowers agree to either lend or borrow, return savers (investors/suppliers) receive back for allowing borrowers to use their money for a defined period, the price borrowers pay for borrowing money

Government Borrowing

running budget deficits, they will have to finance their activities by borrowing from the loanable funds market

Interest Rate Decrease

a shift to the right causes

Private Savings Behavior

will cause the supply curve to shift to the left, resulting in a rise in interest rate, and is prone to many external factors

Capital Flows

can shift the supply of loanable funds, as financial capital determines the amount borrowers have available for borrowing

Loanable Funds Market Model

is used to simplify what happens in the economy when borrowers and lenders interact, an adjustment of the market model for goods and services

Balance Sheet

a snapshot of the finances of an organization as of a particular date and it provides an overview of how well the company manages its assets and liabilities

Assets = Liabilities + Owners Equity

Asset Formula

Income Statement

provides a summary of operations for the entire year, the income statement starts with sales or revenues and ends with net income

Cashflow Statement

a combination of both the income statement and the balance sheet, for some analysts, the cash flow statement is the most important financial statement because it provides a reconciliation between net income and cash flow

Return on Equity

a measure of a company's financial performance

ROE = net income / shareholders’ equity

ROE Formula

Profit Margin

a common measure of the degree to which a company or a particular business activity makes money

(revenue - cost) / revenue x 100

Profit Margin Formula

Return on Asset

shows how efficiently a company uses its assets to generate profits and reveals what earnings are generated from invested capital

> 5%

considered good ROA

> 10%

considered strong ROA

> 20%

considered excellent ROA

ROA = net income / average total assets

formula for ROA

Bond Issuer

someone that loans from a creditor

Investors

purchase bonds because of the predictable and stable income they offer compared to other investment vehicles

Bond Valuation

process of determining the fair price, or value of a bond

Fixed

a bond’s interest payments and face value are?

Maturity Date

refers to the length of time until the bond’s principal is schedules to be repaid to the bondholder

Coupon Rate / Discount Rate

refers to the interest payments that a bondholder receives, represented as a fixed percentage of a bond’s face value

Current Price

This refers to a bond’s current value, and is typically what’s discussed when someone mentions “bond valuation.”

Indenture

refers a legal and binding agreement, contract, or document between two or more parties

Coupon Interest Payment = Par Value x Coupon Rate

bond valuation formula

Coupon Interest Payment = Total Annual Coupon Payment / Per Value of Bond

bond valuation formula

Stock Valuation

the process of calculating the value of goods or materials owned by a company or available for sale in a store at a particular time, or the value that is calculated method of calculating theoretical values of companies and their stocks

Undervalued

stocks that are bought

Overvalued

stocks that are sold

Gordon Growth Model

often simple and fairly reliable but many companies do not pay dividends

Absolute Valuation Models

attempt to find the intrinsic or true value of an investment based only on fundamentals

Relative Valuation Models

operate by comparing the company in question to other similar companies, is a lot easier and quicker to calculate than the absolute valuation model, which is why many investors and analysts begin their analysis with this model

Dividend Discount Model

one of the most basic of the absolute valuation models, the dividend discount model calculates the true value of a firm based on the dividends the company pays its shareholders

Blue Chip Companies

companies that pay stable and predictable dividends that are typically mature in well-developed insutries

Pay-out Ratio

a financial metric showing the proportion of earnings a company pays its shareholders in the form of dividends, expressed as a percentage of the company's total earnings

Pay-out ratio = dividends per share / earnings per share

pay-out ratio formula

Discounted Flow Model

the big advantage of this approach is that it can be used with a wide variety of firms that don't pay dividends, and even for companies that do pay dividends

Two-Stage DCF Model

most commonly used form of DCF Model where the free cash flows are generally forecasted for five to 10 years, and then a terminal value is calculated to account for all the cash flows beyond the forecasted period

Mature Firms

companies suited for the DCF Model

Comparable Model

can be used in almost all circumstances is due to the vast number of multiples that can be used, such as the price-to-earnings (P/E), price-to-book (P/B), price-to-sales (P/S), price-to-cash flow (P/CF), and many others

Similar

Law of One Price states that two similar assets should set for _____ prices

Law of One Price

law for comparable model