Foundations Ch 9
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the funds a firms uses to acquire its assets and finance its operation
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financial capital
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the fucntional area of business that is concerned with finding the best sources and uses of financial capital
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finance
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legal and ethical obligation to make decisions consistent with the financial interest of their firms owners
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fiduciary duty
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the degree of uncertainty regarding the outcome of a decision
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risk
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financial opportunities that offer high rates of return, are generally riskier than opportunities that offer lower rates of return
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risk-return tradeoff
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computing ratios that compare values of key accounts listed on a firms financial statements
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financial ratio analysis
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an asset that can quickly be converted into cash with little risk of loss
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liquid asset
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measure the ability of a firm to obtain the cash it needs to pay its short-term debt obligations as they come due
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liquidity ratios
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most commonly used liquid ratio: current assets/current liabilities
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current ratio
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financial ratios that measure how effectively a firm is using its assets to generate revenues or cash
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asset management ratios
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asset management ratio- cgs/ inventory, how many times goods are sold and replaced in a year
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inventory turnover
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asset managment ratio- accounts receivable/daily credit slaes tells the average amount of days a customer pays in
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average collection period
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measures the extent to which a firm relies on debt to meet its financing needs
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leverage ratios
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the use of debt to meet a firm's financing needs (highly leveraged means relies heavily on debt)
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financial leverage
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divides a firms total liabilities by its total assets the higher the ratio the more leveraged the firm
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debt-to-asset ratio
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ratio that measures how successful a business is at earning a profit
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profitability ratios (EPS and ROE)
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a projection showing how a firms budgeted sales and costs will affect expected net income
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budgeted income statement
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a projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets
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budgeted balance sheet
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a detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash
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cash budget
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invest in risky opportunities that offer the possibility of high rates of return, typically wealthy and provide funds in exchange for a share of ownership
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angel investors/ venture capitalists
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spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment
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trade credit
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when the company places its order without requiring any additional paperwork or special arrangements
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spontaneous financing
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a company that provides short-term financing to firms by purchasing their accounts receivables at a discount
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factor
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a financial arrangement between a firm and a bank in which the bank pre-approves credit up to a specified limit, provided that the firm maintains an acceptable credit rating
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line of credit
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specifies the length of the loan, the rate of interest and other terms and conditions of the loan
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promissory note
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a guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of an agreement
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revolving credit agreement
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short term ( and usually unsecured) promissory notes issued by large corporations (IOUs)
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commercial paper
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commercial paper backed by collateral
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asset backed commercial paper
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the only time the corporation receives financial capital from the sale of its stock when it is initially issued
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newly issued stock
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the part of a firms net income it reinvests
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retained earnings
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calls for a regular schedule of fixed payments sufficient to ensure that all interest and principle are repaid by the end of the loans term
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term loan
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a requirement a lender imposes on the borrower as a condition of the loan
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covenant
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formal IOUs issued by corporations that they sell to investors. certificates of debt
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corporate bonds
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funds provided by the owners of a company
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equity financing
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funds provided by the lendors (creditors)
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debt financing
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the mix of equity and debt financing a firm uses to meet its permanent financing needs
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capital structure
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EBIT
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earnings before interest and tax
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looking for ways to replace much of the debt in a companys capital structure with more equity
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deleveraging
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a law enacted in the aftermath of the financial crisis of 2008-2009 that strengthened government oversight of financial markets and placed limitations on risky financial strategies, such as heavy reliance on leverage
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Dodd-Frank Act
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safe and highly liquid assets that can be converted into cash quickly and easily. offer better financing return than currency or demand deposits
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cash equivalents
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short term marketable IOUs issued by the U.S. federal government
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U.S. Treasury Bills (t- bills)
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a mutual fund that pools funds from many investors and uses these funds to purchase very safe highly liquid securities
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money market mutual funds
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the process a firm uses to evaluate long-term investment proposals
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capital budgeting
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a dollar received today is worth more than a dollar received in the future because the sooner you receive a sum of money, the sooner you can put that money to work to earn more money
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time value of money
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requires funds to remain deposited for a fixed term. withdrawal of funds before the term expires results in a financial penalty
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certificate of deposit (CD)
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the amount of money that, if invested today at a given rate of interest would grow to become some future amount in a specified number of time periods
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present value
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the sum of the present values of expected future cash flows from and investment, minus the cost of that investment
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net present value (NPV)
