Corporate Finance and Business Management Review

These flashcards cover fundamental concepts of corporate finance including financial statements, break-even analysis, risk and return (CAPM), investment appraisals (NPV, IRR), and cost of capital (WACC) based on the provided lecture notes.

General Partner

A member in a partnership who has unlimited liability and participates in the management of the business.

Private Enterprise Liability

A business type where the owner has unlimited liability.

Efficient Market Hypothesis

A principle stating that stock prices fully reflect all available information.

Agency Conflict

A conflict of interest between shareholders and managers primarily stemming from differences in goals and interests.

Corporate Income Tax Increase impact

Under constant risk conditions, an increase in corporate income tax leads businesses to have a tendency to increase the use of debt.

Balance Sheet

A financial statement that reflects the status of assets and capital (sources of funds) at a specific point in time.

Basic Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Equity}$$

Investing Cash Flow activity

An activity categorized under investing cash flows, such as spending cash to purchase machinery.

Direct Method (Cash Flow Statement)

A method of preparing the Cash Flow Statement that helps readers more easily see the sources and uses of cash.

Inventory Purchases

An item that decreases cash flow but does not immediately decrease profit during the period.

Credit Sales Revenue

An item that increases profit but does not immediately increase cash flow.

Straight-line Depreciation

An example of a fixed cost where the value of fixed assets is allocated evenly over time.

Economic Break-even Point

The output level at which $\text{Revenue} = \text{Total Operating Costs}$.

Financial Break-even Point

The output level at which $\text{Profit Before Tax} = 0$.

Fixed Cost impact on Break-even

When fixed costs increase, the break-even points will also increase.

Total Cost vs. Production Cost

The basic difference between these two is the inclusion of selling and general administrative expenses in total cost.

Non-deductible Input VAT

A type of input Value Added Tax that cannot be deducted, resulting in an increase in business expenses.

Special Consumption Tax Impact

Affects a business primarily by increasing the selling price and costs.

Corporate Income Tax Effect

Decreases the after-tax cash flows of the business.

Gross Profit Formula

$$\text{Gross Profit} = \text{Net Revenue} - \text{Cost of Goods Sold}$$

Net Operating Profit Formula

$$\text{Net Operating Profit} = \text{Gross Profit} - \text{Selling Expenses} - \text{General and Administrative Expenses}$$

Unsystematic Risk

A type of risk that can be reduced or eliminated through portfolio diversification.

Beta Coefficient ($\beta$)

A measure reflecting the level of systematic risk of a stock relative to the overall market.

Beta ($\beta$) = 1.5

Indicates that the stock has a higher risk level than the market average.

CAPM Expected Return Formula

$E(R_i) = R_f + \beta \times (R_m - R_f)$, where $R_f$ is the risk-free rate and $R_m$ is the market return.

Goal of Portfolio Diversification

To reduce the overall risk of the investment portfolio.

Diversification and Unsystematic Risk relationship

As the number of assets in a portfolio increases, unsystematic risk gradually decreases and approaches zero.

Diversification Efficiency Factor

Depends most significantly on the correlation coefficient between the assets in the portfolio.

Net Present Value (NPV)

An indicator that measures the absolute added value that a project brings to the business.

Internal Rate of Return (IRR)

The discount rate that results in a Net Present Value (NPV) equal to zero.

Profitability Index (PI) = 1.2

Indicates that the project creates added value, as the index is greater than 1.

NPV and IRR Conflict

Conflicts in project selection using these two criteria often occur when projects have different scales of investment capital.

IRR Acceptance Criterion

A project is accepted if its $\text{IRR} \text{ exceeds or equals the Cost of Capital}$.

Retained Earnings

A source of capital classified as part of the business's Equity.

Cost of Retained Earnings advantage

Usually lower than the cost of new common stock because it does not involve issuance costs.

Bond vs. Equity Cost

Under normal conditions, the cost of debt (bonds) is lower than the cost of equity.

Cost of Debt in WACC

The specific cost used for debt when calculating WACC is the after-tax cost of debt.

WACC as Discount Rate

Used because it reflects the minimum rate of return required by investors.

WACC Reduction Factor

An increase in the Corporate Income Tax rate can decrease WACC (due to the tax shield on debt), assuming other factors remain constant.

Non-dilutive Capital Source

Bank loans are a source of capital that does not dilute the ownership rights of current shareholders.