Financial Management: Chapters 1 – 5 – Flashcards

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.

An unincorporated business owned by one individual.

An unincorporated business owned by two or more persons.

A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability.

A special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation. [or] A small corporation that, under Subchapter S of the Internal Revenue Code, elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of the corporate form of organization.

A popular type of organization that is a hybrid between a partnership and a corporation.

Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It provides personal asset protection from business debts and liabilities but is taxed as a partnership.

An estimate of a stock's "true" value based on accurate risk and return data. The intrinsic value can be estimated, but not measured precisely.

The price at which a stock sells in the market.

A representative investor whose actions reflect the beliefs of those people who are currently trading a stock. It is the marginal investor who determines a stock's price.

The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying and selling a stock. [or] The condition under which the expected return on a security is just equal to its required return, and the price is stable.

Individuals who target corporations for takeover because they are undervalued.

The acquisition of a company over the opposition of its management.

The primary financial goal for managers of publicly owned companies implies that decisions should be made to maximize the long-run value of the firm's common stock.

A form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.

The markets in which assets are bought or sold for "on-the-spot" delivery.

The markets in which participants agree today to buy or sell an asset at some future date.

The financial markets in which funds are borrowed or loaned for short periods (less than one year).

The financial markets for stocks and for intermediate- or long-term debt (one year or longer).

Markets in which corporations raise capital by issuing new securities.

Markets in which securities and other financial assets are traded among investors after they have been issued by corporations.

Markets in which transactions are worked out directly between two parties.

Markets in which standardized contracts are traded on organized exchanges.

Securities whose values are determined by the market prices or interest rates of other assets. [or] Any financial asset whose value is derived from the value of some other "underlying" asset.

An organization that underwrites and distributes new investment securities and helps businesses obtain financing.

The traditional department store of finance serving a variety of savers and borrowers.

A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking.

Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.

Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts.

Formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities.

A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities.

Includes all facilities that are needed to conduct security transactions not conducted on the physical location exchanges.

A corporation that is owned by a few individuals who are typically associated with the firm's management.

A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management.

The act of selling stock to the public at large by a closely held corporation or its principal stockholders.

The market for stocks of companies that are in the process of going public.

One of the cornerstones of modern finance theory. It implies that, on average, asset prices are about equal to their intrinsic values. The logic behind this is straightforward. If a stock's price is "too low," rational traders will quickly take advantage of this opportunity and buy the stock, pushing prices up to the proper level. Likewise, if prices are "too high," rational traders will sell the stock, pushing the price down to its equilibrium level.

Rather than assuming that investors are rational, these theorists borrow insights from psychology to better understand how irrational behavior can be sustained over time.

A report issued annually by a corporation to its stockholders. It contains basic financial statements as well as management's analysis of the firm's past operations and future prospects.

A statement of a firm's financial position at a specific point in time.

A report summarizing a firm's revenues, expenses, and profits during a reporting period, generally a quarter or a year.

A report that shows how items that affect the balance sheet and income statement affect the firm's cash flows.

A statement that shows how much a firm's equity changed during the year and why this change occurred.

It represents the amount that stockholders paid the company when shares were purchased and the amount of earnings the company has retained since its origination.

They represent the cumulative total of all earnings kept by the company during its life.

Current assets.

Current assets minus current liabilities.

Current assets minus non-interest bearing current liabilities.

The sum of current liabilities and long-term liabilities.

The charge to reflect the cost of assets depleted in the production process. Depreciation is not a cash outlay.

A noncash charge similar to depreciation except that it represents a decline in value of intangible assets.

Earnings from operations before interest and taxes (i.e., EBIT).

Earnings before interest, taxes, depreciation, and amortization.

The amount of cash that could be withdrawn without harming a firm's ability to operate and to produce future cash flows.

The profit a company would generate if it had no debt and held only operating assets.

The excess of the market value of equity over its book value.

Excess of NOPAT over capital costs.

A tax system where the tax rate is higher on higher incomes. The personal income tax in the United States, which ranges from 0% on the lowest incomes to 39.6% on the highest incomes, is progressive.

The tax rate applicable to the last unit of a person's income.

Taxes paid divided by taxable income.

Ordinary corporate operating losses can be carried backward for 2 years and carried forward for 20 years to offset taxable income in a given year.

Ordinary corporate operating losses can be carried backward for 2 years and carried forward for 20 years to offset taxable income in a given year.

Created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

The profit (loss) from the sale of a capital asset for more (less) than its purchase price.

An asset that can be converted to cash quickly without having to reduce the asset's price very much.

Ratios that show the relationship of a firm's cash and other current assets to its current liabilities.

This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future.

This ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities.

A set of ratios that measure how effectively a firm is managing its assets

This ratio is calculated by dividing sales by inventories.

This ratio is calculated by dividing accounts receivable by average sales per day. It indicates the average length of time the firm must wait after making a sale before it receives cash.

The ratio of sales to net fixed assets.

This ratio is calculated by dividing sales by total assets.

A set of ratios that measure how effectively a firm manages its debt.

The ratio of total debt to total capital.

The ratio of earnings before interest and taxes (EBIT) to interest charges; a measure of the firm's ability to meet its annual interest payments.

A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results.

This ratio measures operating income, or EBIT, per dollar of sales; it is calculated by dividing operating income by sales.

This ratio measures net income per dollar of sales and is calculated by dividing net income by sales.

The ratio of net income to total assets.

The ratio of net income to common equity; measures the rate of return on common stockholders' investment.

The ratio of after-tax operating income to total invested capital; it measures the total return that the company has provided for its investors.

This ratio indicates the ability of the firm's assets to generate operating income; it is calculated by dividing EBIT by total assets.

Ratios that relate the firm's stock price to its earnings and book value per share.

The ratio of the price per share to earnings per share; shows the dollar amount investors will pay for $1 of current earnings.

The ratio of a stock's market price to its book value.

A formula that shows that the rate of return on equity can be found as the product of profit margin, total assets turnover, and the equity multiplier. It shows the relationships among asset management, debt management, and profitability ratios.

The process of comparing a particular company with a subset of top competitors in its industry.

An analysis of a firm's financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition.

Techniques employed by firms to make their financial statements look better than they really are.

An important tool used in time value analysis; it is a graphical representation used to show the timing of cash flows.

The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate.

The value today of a future cash flow or series of cash flows.

The future value of an annuity over N periods.

The present value of an annuity of N periods.

The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied.

The process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding.

Occurs when interest is not earned on interest.

Occurs when interest is earned on prior periods' interest.

The best return that could be earned on assets the firm already owns if those assets are not used for the new project.

A series of equal payments at fixed intervals for a specified number of periods.

An annuity whose payments occur at the end of each period.

An annuity whose payments occur at the beginning of each period.

A stream of equal payments at fixed intervals expected to continue forever.

A series of cash flows where the amount varies from one period to the next.

This term designates equal cash flows coming at regular intervals.

This term designates a cash flow that's not part of an annuity.

The arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added once a year.

The arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added twice a year.

The arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added twice a year.

The periodic rate times the number of periods per year.

The annual rate of interest actually being earned, as opposed to the quoted rate.