Practical Financial Management – Chapters 1, 3, 5, 6, 7, 8 – Flashcards
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real asset
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an object that provides a service
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financial asset
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a legal document representing a claim to income
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stock ownership
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holder of a share owns a piece of the company that issued the stock
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two sources of cash in the future
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dividends and eventual selling price of the share
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bond
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represents a debt relationship
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security
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another name for a financial asset like a stock or a bond
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investing
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a person or organization buying a financial asset
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mutual fund
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pools the contributions of many investors and employees a professional manager to select securities that match a particular set of investment goals
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financial market
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a framework or organization in which people can buy and sell securities in accordance with well-defined rules and regulations
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stock market
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best known financial market
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stockbroker
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licensed to trade securities on behalf of investors
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financing
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raising money to acquire or to do something
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portfolio
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collection of securities
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chief financial officer
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corporate executive in charge of the finance department
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CFO activities
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keeping records, paying employees and suppliers, receiving customer payments, borrowing money, purchasing assets, selling stock, and paying dividends
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controller
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in charge of accounting
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treasurer
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supervises most other financial functions
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language of finance is..
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accounting
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in finance...
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cash is king
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financial theory
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a body of thought that is studied and continually developed by highly trained experts, usually professors
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sole proprietorship
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single entrepreneur; needs local permit to declare business open; profits taxed as personal income; multiple sources of possible investment
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corporation
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legal process of incorporation and registrations with state using a lawyer; separate legal entity subject to corporate tax on whatever it earns; investing through "shares"
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limited liability companies and s-type corporations
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let small businesses avoid double taxation
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double taxation
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profits of businesses are taxed twice, once at corporate rates and once at individual rates, before entrepreneur gets to spend and of the businesses' earnings
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agency problem
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conflict of interest between the stockholders and management
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agency relationship
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created when a person hires another and gives him/her decision-making authority over something
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creditor
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anyone owed money by a business including lenders, vendors, employees, or the government
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financial analysts
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interpret info about companies and make recommendations to investors
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annual report
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primary sources of financial info and are required of companies that sell their stock to the general public
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orientation of the financial analyst
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critical and investigative
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statement of cash flows
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statement detailing the actual movement of cash in and out of the company; shows where money came from and whit it was spend on during the period covered
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free cash flow
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allows the estimation of whether a company will provide cash or require it in the future
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ratio analysis
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involves taking sets of numbers out of the financial statements and forming ratios with them
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current ratio
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gives quick indication of whether the company will have the means to pay its bills during the next year - measures liquidity
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average collection period (ACP)
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measures the time it takes to collect on credit sales
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inventory turnover
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ives an indication of the quality of inventory as well as how well it is managed
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return on sales
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measures control of the income statement: revenue, cost, and expense
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return on assets
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adds the effectiveness of asset management to return on sales
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return on equity
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adds the effect of borrowing to return on assets
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market capitalization
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per-share price of stock multiplied by the numbers of shares outstanding
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price/earnings ratio
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indication of the value of the stock market places on a company
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book value
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total value of equity on its balance sheet
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du pont equations
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expresses relationship between ratios that give insights into successful operation; can be used to isolate problems
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financial markets
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connect production's need for many with consumption's available savings
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term
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refers to the length of time between the present and the end or termination of something
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maturity matching
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a product's duration should match the term of the financing that supports it
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capital markets
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deal in long-term debt and stock
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money markets
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deal in short-term debt
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primary market
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initial sale of a security
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secondary market
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subsequent sales between investors
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investment bank
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helps companies market their securities
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financial intermediary
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sells shares in itself and invests the funds collectively on behalf of its investors
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broker
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licensed to assist people in trading securities
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floor brokers
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trade on the floor of the exchange
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designated market makers
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maintain orderly markets in specific stocks
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ECNs
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are replacing traditional methods of trading stocks
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securities and exchange commission
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sale of securities is regulated by the federal government through it
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disclosure
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what securities law is primarily aimed at
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privately held companies
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can't sell securities to the general public
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publicly traded companies
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can sell securities broadly after a prospectus is approved by the SEC
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prospectus
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gives detailed info about the firm's business, its financing, and the background of its principal officers
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red herring
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an unapproved prospectus
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initial public offering
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initial sale of a security
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sarbanes-oxley act
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established the public company accounting oversight board industry; prohibits consulting by public accounting firms; requires CEOs to certify that financial controls are adequate and that financial statements are not false or misleading
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predatory lending
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making loans to people who clearly can't afford them
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negative amortization loans
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principal increases until the rates resets, increasing payment dramatically
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adjustable-rate mortgages
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charge interest at rates that move with financial markets , but initially have lower rates than comparable fixed-rate loans
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credit default swaps
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are agreements to pay another the amount lost on a defaulted debt security
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run
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a mass withdrawal from an investor
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bonds are the...
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primary vehicle for making debt investments
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base interest rate
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pure interest plus expected inflation
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risk premium
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difference between the interest rate charged on a given loan and the rate charged on a zero-risk loan
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default risk
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the chance the borrower won't pay principal or interest
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liquidity risk
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being unable to sell the bond of a little known issuer
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maturity risk
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long-term bond prices change more with interest rate swings that short-term bond prices
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risk-free rate
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approx. the yield on short-term treasury bills
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real interest rates
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have no adjustment for inflation
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yield curve
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plots interest against term for otherwise similar loans
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normal curve
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slopes upward reflecting higher rates on longer loans
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expectations theory
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curve slopes up or down on the basis of people's expectations about the general level of future interest rates
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liquidity preference theory
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the yield curve should be upward-sloping because lenders generally prefer short-term loans
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market segmentation theory
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loan terms define independent segments of the debt market, which set separate rates
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present value
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amount that must be deposited at interest today to have the sum at that time
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time line
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a graphic portrayal of a time value problem
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opportunity cost
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the benefit that would have been available from its next best use
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annuity
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a stream of equal payments , made or received, separated by equal intervals of time
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future value of an annuity
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the sum, at its end, of all payments and all interest if each payment is deposited when received
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compounding
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earning interest on previously earned interest
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sinking fund
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provides cash to pay off a bond's principal at maturity
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effective annual rate
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annually compounded rate that pays the same interest as a lower rate compounded more frequently
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amortized loan
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constant payment is made periodically, usually monthly, over the loan's term
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loan amortization schedules
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detail the interest and principal in each loan payment
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perpetuity
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a stream of regular payments that goes on forever
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return
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expressed as an amount or a percentage, what an investor receives for investing her money
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bond issue
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allows an organization to borrow from many lenders at one time under a single agreement
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promissory note
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legal evidence of debt
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par or face value
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amount the issuer intends to borrow at the coupon rate of interest
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coupon rates
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interest at rates set at the time of issue
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maturity risk
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"price risk" and "interest rate risk"; emphasizes the fact that the degree of risk is related to the maturity (term) of the bond
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call provisions
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allow bond issuers to retire bonds before maturity by paying a premium to bondholders
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convertible bond
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exchangeable for a fixed number of shares of the issuing company's stock at the bondholder's discretion
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convertible's offer...
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lower interest rates, stocks above market value, and have few restrictions
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conversion premium
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the excess of a convertible's market value over its value as a stock or a bond
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mortgage bonds
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secured by real estate
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debentures
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unsecured bonds
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junk bonds
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issued by risky companies and pay high interest rates
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bond ratings
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gauge the probability that issuers will fail to meet their obligations
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bond indentures
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attempt to prevent firms from becoming riskier after the bonds are purchased
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sinking funds
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provide money for the repayment of bond principal
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value of stock
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depends on the present value of those future cash flows
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stock's intrinsic value
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based on assumptions about future cash flows made from fundamental analyses of the firm and its industry
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normal growth
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k>g
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gordon model
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a simple expression for forecasting the price of a stock that's expected to grow at a constant, normal rate
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two-stage growth model
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allows us to value a stock that's expected to grow at an unusual rate for a limited time
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cumulative voting
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gives minority interests a chance at some representation on the board
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preferred stock
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pays a constant dividend and is valued as a perpetuity
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securities analysis
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the art and science of selecting investments
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fundamental analysis
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looks at a company and its business to forecast value
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technical analysis
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bases value on the pattern of past prices and volumes
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efficient market hypothesis
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info moves so rapidly in financial markets that price changes occur immediately, so it's impossible to consistently beat the market to bargains
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call option or call
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an option to buy a stock
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put option
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an option to sell at a specified price
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black-scholes option pricing model
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determines option prices as a function of the following variables: underlying stocks' current price, option's strike price, time remaining until expiration, volatility of the market, and risk-free interest rate
