Principles of financial management

Flashcard maker : Lily Taylor
Finance
It addresses how money is raised and used by individuals, businesses, and governments.
Corporation
This state-created entity is authorized to conduct business and offer it’s owner an investment with an unlimited life.
Treasurer
This position and title is held by the individual responsible for planning and managing how the firm is financed, when it’s funds are raised, and how it’s risks are managed.
Limited liability
An investors personal responsibility for businesses liabilities can never be less than zero or more than the amount invested in the firms common shares.
Limited partner
This is a participant in a partnership, whose personal assets may not be seized to satisfy the debts of the partnership.
Double taxation of dividends
This taxation currently applies to corporations and their owners but not to sole proprietorships, partnerships, or their owners.
Shareholder wealth maximization
This goal of financial management is measured by the effect of a decision or an action on the price of the firms common stock.
Stakeholder
This general term is given to an individual or a group that has interest in, or is affected by, a business.
Value
This is the present worth of the future cash flows generated by an asset or firm, discounted at a rate appropriate for the riskiness of the cash flows.
Treasurer
In larger organizations, this office holder supervises the firm’s credit and inventory managers, as well as the director of capital budgeting, and reports to the firm’s CFO.
False
The efficient markets hypothesis holds only if all investors are rational?
weak-form efficiency
What form of capital market efficiency is this based in: Current market prices reflect all information contained in past movements.
Marketing and selling practices
labor policy
community involvement
employment policy
product safety
Which of the following is/are emphasized in business ethics?
Marketing and selling practices
Investment appraisal
labor policy
community involvement
capital budgeting policy
employment policy
product safety
credit
capital budgeting
legal
treasury
accounting
security analyst relations
investments
The chief financial officer is responsible for which of the following departments?
credit
capital budgeting
production
legal
treasury
research and development
accounting
security analyst relations
investments
Finance
It deals with obtaining the right amount of money from the right sources at the right time, where “right” is determined by how the amounts, sources, and times affect the value of the individual or organization.
Limited Liability
Activist Investor
Profit margin
How much the company earns on its sales. Net income/sales
S Corporations
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.
HOSTILE TAKEOVER
The acquisition of a company over the opposition of its management.
SARBANES-OXLEY ACT
A law passed by Congress that requires the CEO and CFO to certify that their firm’s financial statements are accurate.
MARGINAL INVESTOR
An investor whose views determine the actual stock price.
CORPORATE RAIDERS
Individuals who target corporations for takeover because they are undervalued.
PARTNERSHIP
An unincorporated business owned by two or more persons.
CORPORATION
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.
INTRINSIC VALUE
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.
MARKET PRICE
The stock value based on perceived but possibly incorrect information as seen by the marginal investor.
LIMITED LIABILITY PARTNERSHIP (LLP)
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.
PROPRIETORSHIP
An unincorporated business owned by one individual.
SHAREHOLDER WEALTH MAXIMIZATION
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.
EQUILIBRIUM
The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying and selling a stock.
LIMITED LIABILITY COMPANY (LLC)
A popular type of organization that is a hybrid between a partnership and a corporation.
PRIVATE MARKETS
Markets in which transactions are worked out directly between two parties.
PHYSICAL LOCATION EXCHANGES
Formal organizations having tangible physical locations that conduct auction markets in designated (“listed”) securities.
OVER-THE-COUNTER (OTC) MARKET
A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities.
COMMERCIAL BANKS
The traditional department store of finance serving a variety of savers and borrowers.
FINANCIAL SERVICES CORPORATIONS
A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking.
CAPITAL MARKETS
The financial markets for stocks and for intermediate- or long-term debt (one year or longer).
SECONDARY MARKETS
Markets in which securities and other financial assets are traded among investors after they have been issued by corporations.
DERIVATIVES
Any financial asset whose value is derived from the value of some other “underlying” asset.
PUBLIC MARKETS
Markets in which standardized contracts are traded on organized exchanges.
SPOT MARKETS
The markets in which assets are bought or sold for “on-the-spot” delivery.
PRIMARY MARKETS
Markets in which corporations raise capital by issuing new securities.
MONEY MARKETS
The financial markets in which funds are borrowed or loaned for short periods (less than one year).
PUBLICLY OWNED CORPORATIONS
A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm’s management.
INITIAL PUBLIC OFFERING (IPO) MARKET
The market for stocks of companies that are in the process of going public.
DEALER MARKETS
Includes all facilities that are needed to conduct security transactions not conducted on the physical location exchanges.
MUTUAL FUNDS
Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.
FUTURES MARKETS
The markets in which participants agree today to buy or sell an asset at some future date.
GOING PUBLIC
The act of selling stock to the public at large by a closely held corporation or its principal stockholders.
MONEY MARKET FUNDS
Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts.
INVESTMENT BANKS
An organization that underwrites and distributes new investment securities and helps businesses obtain financing.
CLOSELY HELD, CORPORATIONS
A corporation that is owned by a few individuals who are typically associated with the firm’s management.
CARRYBACK
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.
ECONOMIC VALUE ADDED (EVA)
Excess of NOPAT over capital costs.
CAPITAL GAIN
The profit from the sale of a capital asset for more than its purchase price.
FREE CASH FLOW (FCF)
The amount of cash that could be withdrawn without harming a firm’s ability to operate and to produce future cash flows.
AVERAGE TAX RATE
Taxes paid divided by taxable income.
BALANCE SHEET
A statement of a firm’s financial position at a specific point in time.
AMORTIZATION
A noncash charge similar to depreciation except that it represents a decline in value of intangible assets.
NET OPERATING WORKING CAPITAL (NOWC)
Current assets minus non-interest-bearing current liabilities.
OPERATING INCOME
Earnings from operations before interest and taxes (i.e., EBIT).
RETAINED EARNINGS
They represent the cumulative total of all earnings kept by the company during its life.
NET WORKING CAPITAL
Current assets minus current liabilities.
STATEMENT OF STOCKHOLDERS’ EQUITY
A statement that shows by how much a firm’s equity changed during the year and why this change occurred.
WORKING CAPITAL
Current assets.
ANNUAL REPORT
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.
STATEMENT OF CASH FLOWS
A report that shows how items that affect the balance sheet and income statement affect the firm’s cash flows.
TRADITIONAL IRAS
Individual retirement arrangements in which qualified contributions are tax deductible and income and capital gains on investments within the account are not taxed until the money is withdrawn after age 5912.
ROTH IRAS
Individual retirement arrangements in which contributions are not tax deductible but the future income and capital gains within these accounts are not taxed if the money is withdrawn after age 5912.
ALTERNATIVE MINIMUM TAX (AMT)
Created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
PROGRESSIVE
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.
S CORPORATIONS
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.
CAPITAL LOSS
The loss from the sale of a capital asset for less than its purchase price.
STOCKHOLDERS’ EQUITY
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.
MARGINAL TAX RATE
The tax rate applicable to the last unit of a person’s income.
NOPAT, OR NET OPERATING PROFIT AFTER TAXES
The profit a company would generate if it had no debt and held only operating assets.
EBITDA
Earnings before interest, taxes, depreciation, and amortization.
CARRYFORWARD
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.
INCOME STATEMENTS
Reports summarizing a firm’s revenues, expenses, and profits during a reporting period, generally a quarter or a year.
DEPRECIATION
The charge to reflect the cost of assets depleted in the production process. Depreciation is not a cash outlay.
MVA, OR MARKET VALUE ADDED
The excess of the market value of equity over its book value.
RETURN ON TOTAL ASSETS (ROA)
The ratio of net income to total assets.
MARKET VALUE RATIOS
Ratios that relate the firm’s stock price to its earnings and book value per share.
RETURN ON COMMON EQUITY (ROE)
The ratio of net income to common equity; measures the rate of return on common stockholders’ investment.
TREND ANALYSIS
An analysis of a firm’s financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition.
INVENTORY TURNOVER RATIO
This ratio is calculated by dividing sales by inventories.
PROFITABILITY RATIOS
A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results.
BASIC EARNING POWER (BEP) RATIO
This ratio indicates the ability of the firm’s assets to generate operating income; it is calculated by dividing EBIT by total assets.
TIMES-INTEREST-EARNED (TIE) RATIO
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.
BENCHMARKING
The process of comparing a particular company with a subset of top competitors in its industry.
TOTAL ASSETS TURNOVER RATIO
This ratio is calculated by dividing sales by total assets.
QUICK, OR ACID TEST, RATIO
This ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities.
ASSET MANAGEMENT RATIOS
A set of ratios that measure how effectively a firm is managing its assets.
PROFIT MARGIN
This ratio measures net income per dollar of sales and is calculated by dividing net income by sales.
DEBT MANAGEMENT RATIOS
A set of ratios that measure how effectively a firm manages its debt.
CURRENT RATIO
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.
PRICE/EARNINGS (P/E) RATIO
The ratio of the price per share to earnings per share; shows the dollar amount investors will pay for $1 of current earnings.
TOTAL DEBT TO TOTAL CAPITAL
The ratio of total debt to total capital.
MARKET/BOOK (M/B) RATIO
The ratio of a stock’s market price to its book value.
FIXED ASSETS TURNOVER RATIO
The ratio of sales to net fixed assets.
RETURN ON INVESTED CAPITAL (ROIC)
The ratio of after-tax operating income to total invested capital; it measures the total return that the company has provided for its investors.
OPERATING MARGIN
This ratio measures operating income, or EBIT, per dollar of sales; it is calculated by dividing operating income by sales.
LIQUID ASSET
An asset that can be converted to cash quickly without having to reduce the asset’s price very much.
DAYS SALES OUTSTANDING (DSO) RATIO
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.
“WINDOW DRESSING” TECHNIQUES
Techniques employed by firms to make their financial statements look better than they really are.
LIQUIDITY RATIOS
Ratios that show the relationship of a firm’s cash and other current assets to its current liabilities.
DUPONT EQUATION
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.

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