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Proforma statements

Describes the results of a firm's past operations, they present a forecast of what will happen in the future.

Net Working capital

is the difference between its current assets and current liabilities.

Cash Equivalents

are very safe and highly liquid assets that can be converted into cash so easily that firms view them as part of their cash holdings.

Commercial paper

consists of short term unsecured promissory notes issued by major corporations with excellent credit rations.


short-term IOU's issued by the U.S. government

Money market Mutual Funds

raise funds by selling shares to large numbers of investors. They then pool these funds to purchase a portfolio of short-term, liquid securities.

Spontaneous Financing

certain sources of funding arise naturally, during the normal course of business operations.

Trade Credit

which arises when supplies ship materials, part, or goods to a firm without requiring payment at the time of delivery, is the major source of spontaneous financing for most firms.

line of credit

under this type of arrangement, a bank agrees to provide the firm with funds up to some specified limit, as long as the borrower's credit situation doesn't deteriorate.

Revolving Credit agreement

is another way firms can arrange for bank credit. This is similar to a line of credit, except that the bank makes a formal, legally binding commitment to provide the agreed-upon funds.


is a company that buys the accounts receivable of other firms

Capital Budgeting

refers to the procedure a firm uses to plan for its investment in assets or projects that it expects will yield benefits for more than a year.


earning interest in the current time period on interest from previous periods

Time value of money

the principle that a dollar received today is worth more than a dollar received in the future.

Present Value

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.


the process of converting a future cash flow to its present value

discount rate

the rate of interest used when computing the present value of some future cash flow.

Net Present value

the sum of the present values of expected future cash flows from an investment minus the net cost of that investment. It measures the increase in shareholder value expected to result form an investment.

Capital structure

the mix of equity and debt financing a firm uses to meet its permanent financing needs


Conditions lenders place of firms that seek long-term debt financing

Retained Earnings

That part of net income that a firm reinvests.

Financial Leverage

The use of debt in a firm's capital structure.

Proforma income statement

forecasts sales, expenses, and net income

Proforma Balance sheet

project the types and amounts of assets a firm will need to carry out its future plans and shows the amount that additional financing the firm must obtain to acquire those assets.

Managing accounts receivable

important for firm to have a well though out policy that balances the advantages of offering credit with the costs. Setting credit terms, Establishing credit standards, Deciding on an appropriate collection policy.

Managing Inventories

Inventories are stocks of goods, materials, parts, and work in process that firms hold as a part of doing business. Funds tied up in inventories represent a major investment.


found by adding the present value of all of its estimated future cash flows and subtracting the initial cost of the investments form the sum.

Advantage to Financial Leverage

Increases the expected return on the stockholders investment

Disadvantage to Financial Leverage

Increases the firm financial risk

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