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Social Science
Economics
Finance
Finance Learning Goals for Exam #2
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Terms in this set (41)
CH 3- Financial Statements and Ratio Analysis
...
The annual stockholders' report, which publicly owned corporations must provide to stockholders, documents...
the firm's financial activities of the past year
The annual stockholders' report includes
the letter to stockholders and other information about the firm's activities and strategies
AND
four key financial statements:
#1. income statement
#2. the balance sheet
#3. the statement of stockholders' equity (or its abbreviated form, the statement of retained earnings)
#4. the statement of cash flows
Financial statements of companies that have operations whose cash flows are denominated in one or more foreign currencies must be translated into?
U.S. dollars in accordance with FASB Standard No. 52
Ratio analysis enables stockholders, lenders, and the firm's managers to
evaluate the firm's financial performance
Ratio analysis can be performed on a
cross-sectional or a time-series basis
benchmarking is a popular type of
cross-sectional analysis
Analysts can assess a firm's liquidity, or the ability of the firm to pay its bills as they come due, by calculating the
current ratio and the quick (acid-test) ratio
activity ratios measure the
speed with which accounts are converted into sales or cash
Analysts use the inventory turnover ratio, the accounts receivable collection period, and the average payment period (for accounts payable) to
assess the activity of those current assets and liabilities
total asset turnover measures the
efficiency with which the firm uses its assets to generate sales
the more debt a firm uses, the greater its
financial leverage, which magnifies risk and return
financial dbt ratios measure both
the degree of indebtedness and the ability to service debts
a common measure of indebtedness is which ratio
the debt ratio
the ability to pay fixed charges can be measured by
times interest earned and fixed-payment coverage ratios
The common-size income statement, which shows each item as a percentage of sales, can be used to
determine gross profit margin, operating profit margin, and net profit margin
Other measures of profitability include
earnings per share, return on total assets, and return on common equity
market ratios include the
price/earnings ratio and the market/book ratio
a summary of all ratios can be used to perform a complete ratio analysis using
cross-sectional and time-series analysis
the DuPont system of analysis is a diagnostic tool used to find
the key areas responsible for the firm's financial performance
the DuPont system of analysis enables the firm to break the return on common equity into 3 components...
profit on sales, efficiency of asset use, and use of financial leverage
CH 4- Long-and Short-Term Financial Planning
...
Understand the financial planning process, including long-term (strategic) financial plans and short-term (operating) financial plans.
2 aspects: planning and profit planning
cash planning: cash budget/forecast
profit planning: pro forma income statemnet and balance sheet
long term (strategic): for preparing short-term (operating) financial plans
long term: from 2-10 yrs
short term: 1-2 yrs
Understand tax depreciation procedures and the effect of depreciation on the firm's cash flows.
depreciation: most imp factor affecting a firm's cash flow
determined by the MACRS standards in the fed tax code
Discuss the firm's statement of cash flows, operating cash flow, and free cash flow.
cash flows: divided into cash flow from operating, investment and financing activities
reconciles changes in the firm's cash flows and markeetable securities
free cash flow: to value companies, the amount of cash flow available to creditors and owners
Discuss the cash-planning process and the preparation, evaluation, and use of the cash budget.
uses the cash budget, based on sales forecast, to estimate short-term cash surpluses and shortages
cash budget: for 1 yr period divided into months
to calc net cash flow
ending cash: add beginning cash and net cash flow
Explain the procedures used to prepare and evaluate the pro forma income statement and the pro forma balance sheet.
pro forma income statement: developed by calc past % relationships between cost and expense items and the firms sales and then applying percentages to forecasts
understates profits when sales increasing and overstates when sales decreasing
judgmental approach:values of certain balance shet accounts are estimated and the firms' balancing financing is used as a balancing/plug figure
Evaluate the approaches to pro forma financial statement preparation and the common uses of pro forma statements
assume past condition is an accurate indicator of future
pro forma statements: used to forecast and analyze the firm's profitability and overall financial performance to make adjustments to operations
CH 5- time value of money
...
Discuss the role of time value in finance, the use of computational tools, and the basic patterns of cash flow.
TVM used to asses value of expected cash flow streams
alternatives: compounding to find FV or discounting to find PV
3 types of cash flow patterns: single amnt/lump sum, annuity, mixed stream
Understand the concepts of future value and present value, their calculation for single amounts, and the relationship between them.
FV: relies on compound interest to translate current dollars into future dollars
PV: the amount of money today that is equivalent to the given future amnt, considering the return can be earned
Find the future value and the present value of both an ordinary annuity and an annuity due, and find the present value of a perpetuity.
annuity: a pattern of equal periodic cash flows
ordinary annuity: cash flows occur at the END of the period
annuity due: cash flows occur at the BEGINNING of the period
Calculate both the future value and the present value of a mixed stream of cash flows.
mixed stream of cash flows: unequal periodic cash flows that reflect no pattern
future value of a mixed stream: sum of the FVs of each cash flow
pv: sum of PVs of the indiv cash flows
Understand the effect that compounding interest more frequently than annually has on future value and on the effective annual rate of interest.
Interest can compound at intervals ranging from annually to daily and even continuously
The more often interest compounds, the larger the future amount that will be accumulated, and the higher the effective, or true, annual rate (EAR)
The annual percentage rate (APR)—a nominal annual rate—is quoted on credit cards and loans
The annual percentage yield (APY)—an effective annual rate—is quoted on savings products
Describe the procedures involved in (1) determining deposits needed to accumulate a future sum, (2) loan amortization, (3) finding interest or growth rates, and (4) finding an unknown number of periods.
all the math problems
CH 6-interest rates and bond valuation
only need 6.2-6.4
(32) 6.2- gov and corporate bonds
(52) 6.3- valuation fundamentals
(62-91) 6.4- bond valuation
everything but interest rats and required returns
Review the legal aspects of bond financing and bond cost.
corporte bonds: long-term debt instruments indicating that a corporation has borrowed an amount that it promises to repay in the future under clearly defined terms
bond indenture: states all conditions of the bond issue
Discuss the general features, yields, prices, ratings, popular types, and international issues of corporate bonds
return on a bond: YTM, YTC (call)
eurobonds/foreign bonds: to borrow large amounts internationally
Understand the key inputs and basic model used in the bond valuation process.
keey inputs: cash flows, timing, risk and required return
The value of any asset is equal to the present value of all future cash flows it is expected to provide over the relevant time period
Apply the basic valuation model to bonds, and describe the impact of required return and time to maturity on bond values.
value of a bond: PV of its coupon payments + pv of its par value
discount rate: used to determine bond value is the required return, which may differ from the bond's coupon rate
A bond can sell at a discount, at par, or at a premium, depending on whether the required return is greater than, equal to, or less than its coupon rate
The amount of time to maturity affects bond prices
The price of a bond will approach its par value as the bond moves closer to maturity
The chance that interest rates will change and thereby alter the required return and bond value is called interest rate risk
The shorter the amount of time until a bond's maturity, the less responsive is its market value to a given change in the required return
Explain yield to maturity (YTM), its calculation, and the procedure used to value bonds that pay interest semiannually.
Yield to maturity is the rate of return investors earn if they buy a bond at a specific price and hold it until maturity
YTM can be calculated by using a financial calculator or by using an Excel spreadsheet
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Forecasting Risk [LO1] What is forecasting risk? In general, would the degree of forecasting risk be greater for a new product or a cost-cutting proposal? Why?
economics
Three significant U.S. interest rates from 1980 and 1993 are shown in the following table: $$ \begin{array}{lcc} & 1980(\%) & 1993(\%) \\ \hline \text { Three-month U.S. government bills } & 11.39 & 3.00 \\ \text { Long-term U.S. government bonds } & 11.27 & 6.59 \\ \text { Prime rate } & 15.26 & 6.00 \end{array} $$ Give a justification for the stark contrasts you observe. Comment specifically on (1) the fact that rates were substantially higher in 1980 than in 1993 and (2) the contrast between the long-term and short-term rates in 1993 and 1980.
finance
Tolbert Enterprises Inc. manufactures bathroom fixtures. The stockholders’ equity accounts of Tolbert Enterprises Inc., with balances on January 1, 2012, are as follows: $$ \begin{array}{lr} \text{Common Stock, \$10 stated value (600,000 shares}&\\ \quad\text{authorized, 400,000 shares issued)}&\$4,000,000\\ \text{Paid-In Capital in Excess of Stated Value}&750,000\\ \text{Retained Earnings}&9,150,000\\ \text{Treasury Stock (40,000 shares, at cost)}&600,000\\ \end{array} $$ The following selected transactions occurred during the year: Jan. 4. Paid cash dividends of $0.13 per share on the common stock. The dividend had been properly recorded when declared on December 1 of the preceding fiscal year for$46,800. Apr. 3. Issued 75,000 shares of common stock for $1,200,000. June 6. Sold all of the treasury stock for$725,000. July 1. Declared a 4% stock dividend on common stock, to be capitalized at the market price of the stock, which is $18 per share. Aug. 15. Issued the certifi cates for the dividend declared on July 1. Nov. 10. Purchased 25,000 shares of treasury stock for$500,000. Dec. 27. Declared a $0.16-per-share dividend on common stock. 31. Closed the credit balance of the income summary account,$950,000. 31. Closed the two dividends accounts to Retained Earnings. Instructions 1. Enter the January 1 balances in T accounts for the stockholders’ equity accounts listed. Also prepare T accounts for the following: Paid-In Capital from Sale of Treasury Stock; Stock Dividends Distributable; Stock Dividends; Cash Dividends. 2. Journalize the entries to record the transactions, and post to the eight selected accounts. 3. Prepare a retained earnings statement for the year ended December 31, 2012. 4. Prepare the Stockholders’ Equity section of the December 31, 2012, balance sheet.
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Consider a process consisting of three resources in a worker-paced line and a wage rate of $10 per hour. Assume there is unlimited demand for the product. $$ \begin{array}{|c|c|c|} \hline \text{Resource} & \text{Processing Time (min/unit)} & \text{Number of workers} \\ \hline 1 & 10 & 2 \\ \hline 2 & 6 & 1 \\ \hline 3 & 16 & 3 \\ \hline \end{array} $$ a. How long does it take the process to produce 100 units starting with an empty system? b. What is the average labor content? c. What is the average labor utilization? d. What is the cost of direct labor?
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