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HM 435 Exam 2
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Gravity
Terms in this set (48)
Balance Sheet
Financial position for a point in time.
A = L - O.E.
Current/ Short-Term Assets
Cash
AR
Inventories
Deferred Income
Receivable Income
Prepaids
Long-Term Assets
Investments
Property / equipment
Goodwill
Current Liabilities
Accounts Payable
Maturing Debt
inquired Expenses
Salaries Payable
Long-Term Liabilities
Long-Term Debt
Deferred Tax
Loans
Owners Equity
Paid In Capital
Stocks
Retained Earnings
Income Statement
Measures Firm Performance
Rev
- Direct (f&b / Rooms)
- Indirect (Labor / Supplies / Merit)
- Noncash Expenses (Depreciation)
- Interest
=Earnings b4 Tax
- Tax
=NI
Statement of Cash Flows
Use of cash over a period of time.
Operating activities (NI + Depr - AR - AP)
+ Investing activities( - purch invests - purch equip)
+ Financing activities (Loans/Int/Sales - Div)
=NI
Goodwill
The difference in value due to the boost from marketing
Statement of Retained Earnings
Changes in the R.E. portion of the balance sheet over a period of time.
Uniform Systems of Accounts
Standardized income statement that allows for easier comparability between properties.
Liquidity Ratios
Ability of a firm to cover its current debts (liabilities, ex. bills).
☼ AKA Working Capital
☼ Impacted by AP, AR, Current Loans, Current Assets, Cash
☼ You don't want current ratio or working capital to be below 1!
Turnover Ratios
Management's effectiveness regarding managing assets to generate rev
☼ High Inventory Turnover could be due to mgmt inefficiences
Solvency Ratios
Ability to meet long-term debt.
/ extent of the use of debt financing.
Investor Ratios
Related to stocks.
Activity Ratios
Key measures of operating performance.
Efficient Portfolio
The portfolio providing the highest return for a given level of risk.
Expected Value
The weighted average of potential outcomes.
Risk
Uncertainty about weather an outcome will differ from expectations.
Risk Aversion
Not wanting to lose what you currently have.
Whereby investors must be compensated for bearing risk.
Loss Aversion
Prefer to avoid loss vs. acquire gain.
Probability Distribution
Potential distribution of dividends (outcomes); based on the probability of each outcome.
Helps us quantify risk.
Standard Deviation
Measures risk. How likely is the expected / weighted avg. & if not, how far are you from the mean.
Variance
A measure of dispersion around an expected value, or mean.
Coefficient of Variation
Measures which has a lower / higher risk btwn investments w/ different SDs.
☼ The ratio of SD of returns to expected returns.
*
Key to calculating /deciding which investment to invest in
High COV
vs.
Low COV
High COV = High SD, High Variation = High Risk
Low COV = Low SD, Low Variation, Low Risk (ex. Risk Averse)
Diversification
Holding two or more assets in a single portfolio
to maximize return and minimize risk.
Correlation Coefficient
Extent to which the returns of 2 assets move together over time. Ranges from -1.0 to +1.0.
☼ Ideal pair of assets would have a rho close to 0. = lowest possible SD.
Market Portfolio
A theoretical portfolio of all traded assets that is also the
most efficient/ best combo of returns vs. risk.
How to Hold the Market Portfolio
Maximum Diversification = 30 Assets in a portfolio.
Investors hold a proxy for the mkt portfolio (ex. mutual funds)
Capital Market Line
A line connecting the
risk-free rate of return through the market portfolio.
☼ The slope measures risk vs. return.
Above vs. Below The Capital Market Line
Above:
Doing better, more returns than necessary. (Investors really like you )
Below = the opposite.
Risk-Free Assets
Guaranteed Returns.
ex. Gvt issued securities, treasury bills.
*Good for risk-adverse people.
Systematic Risk
Impacts entire system.
☼ Cannot be eliminated in a diversified portfolio.
☼ Investors are most concerned with this!
Unsystematic Risk
Related to 1 specific business or industry.
☼ Can be eliminated through diversifying a portfolio. (adding assets)
Beta
Predictive tool
measuring an asset's systematic risk vs. the mkt port (m).
Mkt port. always has a base β of 1. (Ex. if a stock has a β2 it is x2 as risky as the mkt. )
The lower β is to 1, the less risky you are compared to the mtk.
**Restaurants usually have β < 1.
Security Market Line (SML)
A straight line measuring the return of a security vs. Beta.
Capital Asset Pricing Model (CAPM)
Min expected return, given the risk on the SML.
The slope/ Beta of the SML.
**If higher return than required, value created, project accepted.
**If lower return, value lost, project rejected.
Time Value of $
Basis of financial mathematics
-requires use of interest rates which show changing value over time.
Investors prefer to receive a fixed amount today vs. equal amount in the future.
Helps evaluate risk over time.
Compounding
The process of a present value earning interest and growing to a future value.
☼ earning interest on the interest that you earn.
Discounting
Finding the present value of a future payment.
☼ The interest rate used in the process is called the discount rate.
Annuity
2+ equal, periodic fixed payments, w/ a pre-determined end-date.
☼ Ordinary A payments begin 1 period after the PV.
☼ Payments on the A begin the same date as the PV.
Deferred Annuity
Payments that begin 2 periods after the PV.
Perpetuity
An infinite series of never-ending, uniform payments.
☼ No future value.
Ex. Preferred Stock.
How to find the Future Value of a timeline?
The FV is always the last year of that timeline. Ex. 3 yr timeline, FV = yr 3.
Interest Rate
The ROE %.
Also the cost paid on a loan expressed as a %.
Nominal Annual Interest Rate
The interest rate as stated in a contract. Does not take into account compounding.
Principal
The original amount of money invested or borrowed. The interest rate return on an investment or the interest rate cost of a lose is computed as a percentage of the principal.
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