Finance 5200

the study of applying specific value to things we own, services we use and decisions we make
financial management
concentrates on valuing things from the perspective of a company or firm, subarea that deals with a firm's decisions in acquiring and using the cash that is received from investors or from retained earnings
four important variables in the business environment
1) the organizational form of the business. 2) the agency relationship between the managers and owners of a firm. 3) ethical considerations as finance is applied to the real world. 4) the source and implications of the current financial crisis
financial markets
mechanisms by which capital is exchanged
those who buy securities or other assets in hopes of earning a return and getting more money back
retained earnings
basically the funds the firm keeps for its ongoing operations
what the government imposes on the company and individuals to help fund public services
the subarea of finance that involves methods and techniques for making decisions about what kinds of securities to own which firms securities to buy, and how to pay the investor back in the form that the investor wishes
financial institutions and markets
facilitate capital flows between investors and companies, vital players that contribute to the dynamics of interest rates
international finance
the use of finance theory in a global business environment
the uncertainty that future cash flows are unpredictable in timing and size
financial asset
something worth money
time value of money (TVM)
the method for relating expected or future cash flows to today's value, must account for both the timing and the risk level of the cash flows
defined benefit plan
a retirement plan in which the employer funds a pension generally based on each employee's years of service and salary
defined contribution plan
a retirement plan in which the employee contributes money and directs its investment. The amount of retirement benefits are directly related to the amount of money contributed and the success of its investment
401k plan
a defined contribution plan that is sponsored by corporate employees
individual retirement account
a self-sponsored retirement program
sole proprietorship
a business entity that is not legally separated from its owner
unlimited liability
a situation in which a person's personal assets are at risk from a business liability
an ownership interest in a business enterprise
angel investors
individuals who provide small amounts of capital and expert business advice to small firms in exchange for an ownership stake in the firm
venture capitalists
similar to angel investors except they are organized as as groups of investors and can provide larger amounts of capital
general partnership
a form of business organization where the partners own the business together and are personally liable for legal actions and debts of the firm
public corporation
a legally independent entity entirely separate from its owners
double taxation
corporate income is taxed, shareholders are then taxed at the personal level when profits are paid out as dividends
limited liability
corporations assume liability for their own debts so shareholders only have this
hybrid organizations
offer single taxation and limited liability to all owners
maximization of shareholder wealth
a view that management should first and foremost consider the interests of shareholders in its business decisions
a person or organization that has a legitimate interest in a corporation
invisible hand
a metaphor used to illustrate how an individual pursuing his own interests also tends to promote the good of the community
agency problem
the difficulties that arise when a principal hires an agent and cannot fully monitor the agent's actions
chief executive officer
the highest-ranking corporate manager
nonwage compensation often in the form of company car, golf club membership, etc.
the opportunity to buy stock at a fixed price over a specific period of time
employee stock option plan (ESOP)
an incentive program that grants options to employees typically managers as compensation
corporate governance
the set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control
board of directors
the group of directors elected by stockholders to oversee management in a corporation
examine the firm's accounting systems, comment on whether financial statements fairly represent the firm's financial position
investment analysts
follow a firm, conduct their own evals of the company's business activities and report to the investment company
investment banks
help firms access capital markets, advise managers how to interact with those capital markets, monitor firm performance
credit analysts
examine a firm's financial strength for its debt holders
the study of values, morals and morality
a legal duty between two parties where one party must act in the interest of the other party
subprime mortgage borrowers
charged higher interest rates because of their higher chance of default
process where loan originators sell the rights to the payments on the loans to other financial institutions or investors
mortgage-backed securities
securities that represent a claim against the cash flows from a pool of mortgage loan
ratio analysis
calculating and analyzing financial ratios to assess a firm's performance and to identify actions that could improve firm performance
liquidity ratios
measure the relationship between a firm's liquid or current assets and its current liabilities
current ratio
current assets/current liabilities
quick ratio
(current assets - inventory)/current liabilities
cash ratio
cash and marketable securities/current liabilities
asset management ratios
measure how efficiently a firm uses its assets, and how efficiently the firm manages its accounts payable
inventory turnover
sales or cost of goods sold/inventory
days' sales in inventory
(inventory * 365 days)/sales or cost of goods sold
average collection period
(accounts receivable * 365 days)/credit sales
accounts receivable turnover
credit sales/accounts receivable
average payment period
(accounts payable * 365 days)/cost of goods sold
accounts payable turnover
cost of goods sold/accounts payable
fixed asset turnover
sales/fixed assets
sales to working capital
sales/working capital
total assets turnover
sales/total assets
capital intensity
total assets/sales
debt management ratios
measure the extent to which the firm uses debt vs. equity to finance its assets
capital structure
the amount of debt vs. equity to issue
debt ratio
total debt/total assets
total debt/total equity OR equity multiplier - 1
equity multiplier
total assets/total equity OR total assets/common stockholder's equity OR debt-to-equity + 1
times interest earned
fixed-charge coverage
earnings available to meet fixed charges/fixed charges
cash coverage
(EBIT + depreciation)/fixed charges
profitability ratios
show the combined effects of liquidity, asset management, and debt management on the overall operating results of the firm
profit margin
net income available to common stockholders/sales
basic earnings power
EBIT/total assets
return on assets
net income available to common stockholders/total assets
return on equity
net income available to stockholders/common stockholder's equity
dividend payout
common stock dividends/net income available to common stockholders
market value ratios
relate a firm's stock price to its earnings and its book value
market-to-book ratio
market price per share/book value per share
price-earnings ratio
market price per share/earnings per share
DuPont system of analysis
uses the balance sheet and income statement to break the ROA and ROE ratios into component places
ROA = Profit margin * Total asset turnover
ROE = ROA * Equity Multiplier
common-size financial statements
made by dividing all balance sheet amounts by total assets and all income statement amounts by net sales
internal growth rate
(ROA Retention Rate)/[1 - (ROA Retention Rate)]
retention ratio
addition to retained earnings/net income available to common stockholders
sustainable growth rate
(ROE RR)/[1-(ROE RR)]
time series analysis
measurement of the performance of a firm over time
cross-sectional analysis
measurement of the performance of a firm against one or more companies in the same industry
shows the magnitude of cash flows at different points in time
cash we receive
cash that leaves us
interest rate
cost associated with allowing your money to be used
future value
the value of money in the future for a cash inflow or outflow now
present value
the amount a future cash flow is worth today
the process of adding interest earned every period on both the original investment and the reinvested earnings
simple interest
interest earned only on the original deposit
the process of finding present value by reducing the future values using the discount or interest rate
discount rate
the interest rate used to discount future cash flows to the present
rule of 72
an approximation for the number of years needed for an investment to double in value
a stream of level and frequent cash flows paid at the end of each time period - often referred to as an ordinary annuity
an annuity with cash flows that continue forever
investment assets structured as perpetuities
annuity due
an annuity in which cash flows are paid at the beginning of each time period
annual percentage rate
the interest rate per period times the number of periods in a year
effective annual rate
an interest rate that reflects annualizing with compounding figured in
amortized loan
a loan in which the borrower pays interest and principal back over time
loan principal
the balance yet to be paid on a loan
amortization schedule
a table detailing the periodic loan payment, interest payment, and debt balance over the life of the loan