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Date Created: 01/18/15
Finance 300 Final Study Guide What is another name for volatility Risk How can managers reduce volatility Diversify What is capital budgeting The decisionmaking process with reSpect to investment in xed assets Capital structure decision The decisionmaking process with funding choices and the mix of longterm sources of funds Working capital management The management of the rm39s current assets and shortterm nancing What is the fundamental goal of a rm To create value for the company39s owners quotmaximization of shareholder39s wealthquot What are the 5 basic principles of nance 1 Cash ow is what matters 2 Money has time value 3 Risk requires a reward 4 Market prices are generally right 5 Con icts of interest cause agency problems What is a sole proprietorship A business owned bv a sinqle individual What is a general partnership A partnership where all partners are fullv liable for the indebtedness incurred bv the partnership What is a limited partnership A partnership where one or more of the partners has limited liabilitv restricted to the amount of capital thev invest in the partnership What is a corporation An entity that legally functions separate and apart from its owners What is an SCorporation A corporation that because of Speci c quali cations is taxed as though it were a partnership What is a limited liability company A cross between a partnership and a corporation under which the owners retain limited liabilitv but the companv is run and is taxed like a partnership What is an Income Statement A business statement that indicates the amount of pro ts generated bv a rm over a given time period What is the most basic form of an Income Statement Sales Expenses Pro ts What is the Cost of Goods Sold The cost of producing or acquiring a product or service to be sold in the ordinary course of business What is Gross Pro t Sales or revenue minus COGS What is Earnings before Taxes taxable income Operating income less nancing costs cost incurred bv a companv that often includes interest eXpenses and preferred dividends What is Net Income It represents a rm39s loss or pro ts for the period What is Earnings per Share It is how much income was made on a per share basis How Earnings per Share calculated Net Income of common stock shares outstanding What is Dividends Per Share The amount of dividends a rm pays for each share outstanding How is Dividends per Share calculated Total Dividends of common shares outstanding What is a CommonSized Income Statement lt expresses expenses and pro ts on a relative basis so that a rm39s income performance can be compared across time and with competitors What is a Pro t Margin Financial ratios that re ect the level of the rms pro t relative to its sales measures how well the rm is doing nancially How do you calculate Gross Pro t Margin Gross Pro tNet Sales What is a Gross Pro t Margin lt denotes the gross pro t earned by the rm as a percentage of its net sales How do you calculate Operating Pro t Margin Operating IncomeSales What is an Operating Pro t Margin It serves as an overall measure of the companv39s ooeratino effectiveness How do you calculate Net Pro t Margin Net IncomeSales What is Net Pro t Margin It measures the net income of the rm as a percent of sales What is a Balance Sheet It is a business statement that provides a snapshot of the rm39s nancial position at a speci c point in time presenting its asset holdings liabilities and ownersupplied capital stockholders equity What is the most basic form of a Balance Sheet Total Assets Total Liabilities Debt Total Shareholders39 Equity What is Accounting Book Value The value of an asset shown on a rm39s balance sheet represents the historical cost of the asset rather than its current market value of replacement cost What are Current Assets Assets that are relatively liduid eXDected to be turned into cash within 12 months What is considered Cash Cash on hand demand deposits and short term marketable securities that can be quickly converted into cash needed to conduct business Operations What is Accounts Receivable It is money owed by customers who purchased goods or services from the rm on credit What is considered part of inventories Raw materials work in process and nished goods held by the rm for eventual sale What are Fixed Assets Long term in nature and will be used over a number of years What is a Depreciation Expense A noncash expense to allocate the cost of depreciable assets over the life of an asset goes on income statement What is Accumulated Depreciation The sum of all depreciation taken over the entire life of a depreciable asset goes on balance sheet What is a Gross Fixed Asset The original cost of a rm39s xed assets What is Net Fixed Assets Gross xed assets minus the accumulated depreciation taken over the life of the assets What are considered Liabilities Monev that has been borrowed and must be repaid at some predetermined date What is Equity It represents the shareholders investment in the company What is Current Debt Bills due to be paid within 12 months What is Accounts Payable It is monev owed to subpliers for goods or services purchased in the ordinarv course of business trade credit is a form of credit extension What are Accrued Expenses They are expenses that have been incurred but not vet paid in cash What is Longterm Debt Loans from banks or other sources that lend money for longer than 12 months What is Mortgage A loan to nance real estate where the lender has rst claim on the property in event the borrower is unable to repay the loan What is Equity The shareholder39s investment in the rm What are Preferred Stockholders They have claims on the rm39s income and assets after creditors but before common stockholders they generally receive dividend that is xed in amount What are Common Stockholders They are investors who own the rm39s common stock residual owners of the rm and receive whatever income is leftover after paying all eXDenses What is Common Stock Shares that represent ownership in a corporation What is Par Value The arbitrarv value a rm puts on each share of stock prior to its being offered for sale What is Additional Paidin Capital The amount a company receives from selling stock to investors above par value What is Treasury Stock The rms stock that has been issued and then repurchased by the rm What is Retained Earnings The cumulative pro ts retained in a business Up to the date of the balance sheet earnings that have been retained in the business rather than being distributed to shareholders What is Net Working Capital The difference between a rms current assets and its current liabilities calculated How is Net Working Capital calculated Current Assets Current Liabilities What is Debt Ratio It measures the extent to which a rm has been nanced with m How is Debt Ratio calculated Total DebtTotal Assets What is a CommonSized Balance Sheet The rm39s assets and sources of debt and eduitv are exoressed as a percentage of its total assets What is Accrual Basis Accounting The revenue is recorded when it is earned whether or not the revenue has been received in cash expenses are recorded when thev are incurred even if the monev has not actuallv been paid out What is Free Cash Flow The amount of cash available from operations after the rm pavs for the investments it has made in Operating working capital and xed assets cash is available to distribute to the rm39s creditors and owners What is a Statement of Cash Flows A statement that focuses on identifying the sources and uses of cash that explain the change in a rm39s cash balance reported on the balance sheet What is a Current Ratio A ratio that indicates the rms degree of liquidity by comparing its current assets to its current liabilities How do you calculate Current Ratio Current AssetsCurrent Liabilities What is an Acidtest Quick Ratio A ratio that is more strinoent measure of liduiditv than the current ratio in that it excludes inventories and other current assets those that are least liquid from current assets How do you calculate an Acid Test Ratio Cash Accounts ReceivableCurrent Liabilities What is the Average Collection Period lt expresses how rapidly the rm is collecting its credit accounts How do you calculate the Average Collection Period ARCredit Sales365 ARDaily Credit Sales What is an Accounts Receivable Turnover Ratio expresses how often accounts receivable are quotrolled overquot during a year How do you calculate an AR Turnover Annual Credit SalesAccounts Receivable What is Debt Ratio It measures the extent to which a rm has been nanced with debt How do you calculate Debt Ratio Total DebtTotal Assets What is Times Interest Earned It measures a rm39s abilitv to meet its interest pavments from its annual Operating earnings How do you calculate Times Interest Earned Operating Pro tsInterest Expense What is Compound interest Interest that occurs when interest paid on the investment during the rst period is added to the principal then during the second period interest is earned on this new sum What is Future value The amount to which vour investment will grow What is the equation for Future value present value x 1 rn or FVn PV1 rn What is the Future value factor The value of 1 rn used as a multiple to calculate an amount s future value What is Simple interest If vou onlv earned interest on our initial investment it would be referred to as simple interest What is Annuity A series of equal dollar payments made for a speci ed number of years What is an Effective annual rate EAR The annual compound rate that produces the same return as the nominal or quoted rate when something is compounded on a nonannual basis What are Debentures Any unsecured long term debt more risky than secured bonds and must provide investors with a higher yield What are Subordinated debentures A debenture that is subordinated to other debentures in terms of its pavments in case of insolvencv What are Mortgage bonds A bond secured bv a lien on real prooertv What are Eurobonds Bonds that are issued in a country different from the one in which the currency of the bond is denominated What is Par value It is on the face of a bond the stated amount that the rm is to repay upon the maturity date What is Coupon interest rate The interest rate contractuallv owed on a bond as a percent of its par value What is a Yield to maturity The rate of return that is implied by the market prices of the rm39s bonds the rate of return a bondholder will receive if the bond is held to maturity What is a Current yield The ratio of a bond39s annual interest payment to its market price What is Working capital The rms total investment in current assets What is Net working capital The difference between the rm39s current assets and current liabilities How do you calculate Net working capital current assets current liabilities What is Risk return tradeoff The greater the rm39s reliance on shortterm debt or current liabilities in nancing its assets the greater the risk of illiquidity