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FIN-350 Midterm

Terms in this set (69)

Finance
the science and art of managing money
2 Factors of Finance
Personal & Business
3 Types of Business
sole proprietorship, partnership, corporation
Sole Proprietorship
A business owned by one person
Partnership
a business owned by two or more people
Corporation
a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.
Stockholders
People who have ownership in a corporation
Common Stock
Corporation's basic ownership share; also generically called capital stock.
Goal of a Firm
maximize shareholder wealth
3 Steps of Making a Decision
Timing, Cash flow, Risk
Business Ethics
principles and standards that determine acceptable conduct in business
Marginal cost-benefit analysis
Added benefit exceeds added cost
Corporate Governance
the system of governing a company so that the interests of corporate owners and other stakeholders are protected
Individual Investor
An individual who owns relatively small quantity of shares so as to meet personal investment goals
Institutional Investors
investment professionals such as banks, insurance companies, mutual funds, and pension funds that are paid to manage and hold large quantities of securities on behalf of others
Government Regulation
Shapes the corporate governance of law firms
Principle-Agent Relationship
An arrangement in which an agent (CEO) acts on the behalf of a principal (Shareholder)
Agency Problem
Managers focus on personal goals instead of goals of the shareholders
Agency Cost
arise from agency problems that are borne by shareholders and represent a loss of shareholder wealth
Financial Market Environment
Firms that require funds that can obtain them in 3 ways: financial institutions, financial markets, private placement
Financial Institution
Takes the savings of individuals, businesses, and governments into loans or investments
Shadow Banking
lending and other financial activities conducted by unregulated institutions or under unregulated conditions.
Glass-Steigal Act
created a barrier between commercial and investment banking and established the FDIC
Shadow Banking System
a group of institutions that engage in lending activities, much like traditional banks, but do not accept deposits and therefore are not subject to the same regulations as traditional banks
Financial Markets
forums in which suppliers of funds and demanders of funds can transact business directly
Private Placement
involves the sale of a new security directly to an investor or group of investors
Money Market
Large purchase between institution and company short-term investment maturity is less than 1 year
Public Offering
When a firm offers bonds or stock for sale to the general public
Marketable Securities
Short-term debt (US Treasury bill)
Capital Market
buying and selling debt instruments. 2 Types: Primary (securities are first issued) & Secondary (receives pre-owned securities)
2 Parts of Secondary Capital market
Broker Market & Dealer Market
Broker Market
The securities exchanges on which the two sides of a transaction, the buyer and seller, are brought together to trade securities.
Dealer Market
No middle man. Buyer and seller are not brought together directly but instead have their order executed by securities.
Firm's Perspective
They can raise money
Investor's Perspective
They can make money
Efficient Market
allocates funds to their most productive uses as a result of competition among wealth-maximizing investors and determines and publicizes prices that are believed to be close to their true value.
Behavioral Finance
an emerging field that blends ideas from finance and psychology, argue that stock prices and prices of other securities can deviate from their true values for extended periods
Insider Trading
The buying or selling of a security by someone who has access to material, nonpublic information about the security.
Marginal Tax Rate
the rate at which additional income is taxed
Average tax rate
a firm's taxes divided by its taxable rate
Generally Accepted Accounting Principles (GAAP)
the practice and procedure guidelines used to prepare and maintain financial records and reports; authorized by the Financial Accounting Standards Board (FASB)
Financial Accounting Standards Board (FASB)
The primary accounting standard-setting body in the United States.
Public Company Accounting Oversight Board (PCAOB)
A nonprofit corporation that oversees auditor
Financial Statements
Income Sheet, Balance Statement, Statement of Cash Flow, Retained Earnings
Income Statement
Financial summary of company's operations' results during a specific period
Earnings Per Share (EPS)
Money earned during a period on behalf of each outstanding share of common stock (Earnings Available for Common Stockholders/Numbers of Shares of Common Stock outstanding)
Dividend Per Share
Money amount of dividends paid to common Stock (Stockholders/Number of shares of common stock outstanding)
Balance Sheet
Summary of a firm's financial position at a given point in time.
Profit for the Sale of a Stock
(Common Stock + Par) /Number of Shares
Statement of Retained Earnings
reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and the end of that year
Statement of Cashflows
A Summary of firms operating investment and financing cashflows and reconciles them with its changes in cash and marketable securities during the period
ratio analysis
methods of calculating and interpreting financial ratios to analyze and monitor the firm's performance
Cross-Sectional Analysis
the comparison of different firms' financial ratios at the same point in time; involves comparing the firm's ratios to those of other firms in its industry or to industry averages
Benchmarking
Cross-sectional analysis in which the firm's ratio values are compared to those of a key competitor.
time series analysis
evaluation of the firm's financial performance over time using financial ratio analysis
Current Ratio
Measures the ability of a firm to reach its short-term obligations (current assets/current liabilities) **if it's (< 1), they can pay off their debts
Quick Asset Test Ratio
Excludes inventory which is generally the least liquid current asset (Current Assets - Inventory)/Current Liabilities
Activity Ratios
The speed at which various accounts are converted into sales or cash or inflows and outflows
2 Liquidity Ratios
current ratio and quick (asset test) ratio
Inventory Turnover ratio
measures the activity or liquidity of a firms inventory (cost of goods sold/ inventory)
average age of inventory
average number of days sales and inventory (365/inventory turnover)
average collection period
the average amount of time needed to collect accounts receivable (accounts receivable/ average sales per day)
average payment period
average amount of time needed to pay accounts payable (accounts payable/ average purchases per day)
average purchases per day
(cost of goods sold/ 365)
total asset turnover
indicates the efficiency with which the firm uses its assets to generate sales (sales/ total assets)
debt ratios
measures the proportion of a firms assets financed by a firms banks ( total liabilities/ total assets)
debt to equity ratio
measures the relative proportion of total liabilities and common stock equity used to finance the firm's total assets (total liabilities/ common stock equity)
time interest earned ratio
the firms ability to make contractual interest payments sometimes called the interest coverage ratio (EBIT/interest)
fixed-payment coverage ratio
measures the firm's ability to meet all fixed-payment obligations (EBIT + lease payments/ interest + lease payments +{principal payments +preferred stock dividends } x [1/(1-T)]
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