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Finance Final Exam
Final Exam Study Guide Notes
70
Finance
Undergraduate 3
04/29/2012

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Term
Finance
Definition
The ways people and organizations raise and allocate capital, use monetary resources and account for the risks involved.
Term
Financial Management
Definition
The process for and the analysis of making financial decisions in the business context.
Term
Financial Markets
Definition
The places and processes that facilitate the trading of financial assets between investors
Term
Investors
Definition
Those who buy securities or other assets in hopes of earning a return and getting more money back in the future.
Term
Retained Earnings
Definition
The portion of company profits that are kept by the company rather than distributed to the stockholders as cash dividends
Term
Investment
Definition
The analysis and process of choosing securities and other assets to purchase
Term
financial Institutions
Definition
The organizations that facilitate the flow of capital between investors and companies
Term
International Finance
Definition
The use of finance theory in a global business environment
Term
Risk
Definition
A potential future negative impact to value and/or cash flows. It is often discussed in terms of the probability of loss and the expected magnitude of the loss.
Term
Financial Asset
Definition
A general term for securities like stocks, bonds, and other assets that represent ownership in cash flow.
Term
Real Assets
Definition
Physical property like gold, machinery, equipment, or real estate.
Term
Real Markets
Definition
The places and processes that facilitate the trading of real assets.
Term
Time value of money (TVM)
Definition
The theory and application of valuing cash flows at various points in time
Term
Defined Benefit Plan
Definition
A retirement plan in which the employer sets aside money for the employees' retirement benefits
Term
Defined Contribution Plan
Definition
A retirement plan in which the employee contributes money and directs its investment. The amount of retirement benefits is directly related to the amount of money contributed and the success of its investment.
Term
Individual Retirement Account (IRA)
Definition
A self-sponsored retirement program.
Term
401k plan
Definition
A defined contribution plan that is sponsored by corporate employers.
Term
Sole proprietorship
Definition
A business entity that is not legally separate from its owner
Term
Unlimited Liability
Definition
A situation in which a person's personal assets are at risk from a business liability
Term
Equity
Definition
An ownership interest in a business enterprise.
Term
Angel Investors
Definition
Individuals who provide small amounts of capital and expert business advice to small firms in exchange for an ownership stake in the firm.
Term
Venture Capitalists
Definition
Similar to angel investors except that they are organized as groups of investors and can provide larger amounts of capital
Term
General Partnership
Definition
A form of business organization where the partners own the business together and are personally liable for legal actions and debts of the firm.
Term
Public Corporation
Definition
A company owned by a large number of stockholders from the general public
Term
Double Taxation
Definition
A situation in which two taxes must be paid on the same income
Term
Limited Liability
Definition
Limitation of a person's financial ability to a fixed sum or investment
Term
Invisible Hand
Definition
A metaphor used to illustrate how an individual pursuing his own interests also tends to promote the good of the community
Term
Agency Problem
Definition
The difficulties that arise when a principal hires an agent and cannot fully monitor the agent's actions
Term
option
Definition
The opportunity to buy stock at a fixed price over a specific period of time
Term
Corporate Governance
Definition
The set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control
Term
Fiduciary
Definition
The legal duty between two parties where one party must act in the interest of the other party
Term
Restricted Stock
Definition
A special type of stock that is not transferable from the current holder to others until specific conditions are satisfied.
Term
Common Stock and Paid-in-surplus
Definition
Cash that common stockholders paid to the firm when it originally issued the stock
Term
Retained Earnings
Definition
The cumulative earnings the firm has reinvested rather than pay out as dividends
Term
Net Working Capital
Definition
The difference between a firm's current assests and current liabilities
Term
Financial Leverage
Definition
The extent to which debt securities are used by a firm
Term
Capital Structure
Definition
The amount of debt versus equity financing to maintain on the balance sheet.
Term
Book Value
Definition
Assets are listed on the balance sheet at the amount the firm paid for them
Term
Market Value
Definition
Assets are listed at the amount the firm would get if it sold them.
Term
Gross Profit
Definition
Net sales minus cost of goods sold
Term
Average Tax Rate
Definition
Percentage of each dollar of taxable income that the firm pays in taxes
Term
Marginal Tax Rate
Definition
The amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.
Term
Ratio Analysis
Definition
The process of calculating and analyzing financial ratios to assess the firm's performance and to identify actions needed to improve firm performance
Term
Liquidity Ratios
Definition
Measure the relation between a firm's liquid or current assets and its current liabilities
Term
Asset Management Ratios
Definition
Measure how efficiently a firm uses its assets as well as its accounts payable
Term
Debt Management Ratios
Definition
Measure the extent to which the firm uses debt versus equity to finance its assets
Term
Market Value Ratios
Definition
Ratios that relate a firm's stock price to its earnings and book value
Term
DuPont System of Analysis
Definition
An analytical method that uses the balance sheet and income statement to break the ROA and ROE ratios into component prices
Term
Common-size Financial Statements
Definition
Dividing all balance sheet amounts by total assets and all income statement amounts by net sales
Term
Internal Growth Rate
Definition
The growth rate a firm can sustain if it finances growth using only internal financing, that is, retained earnings growth.
Term
Sustainable Growth Rate
Definition
The growth rate a firm can sustain if it finances growth using both debt and internal financing such that the debt ratio remains constant
Term
Time Series Analysis
Definition
Analzing firm performance by monitoring ratio trends
Term
Cross-Sectional Analysis
Definition
Analyzing the performance of a firm against one or more companies in the same industry
Term
Interest rate
Definition
The cost of borrowing money denoted as a percent
Term
Simple Interest
Definition
Interest earned only on the
Term
Discounting
Definition
The process of finding present value by reducing future values using the discount, or interest, rate
Term
Discount Rate
Definition
The interest rate used to discount future cash flow(s) to be present
Term
Rule of 72
Definition
An approximation for the number of years it will take an investment to double in value
Term
Annuity
Definition
A stream of level and frequent cash flows paid at the end of each time period-often referred to as an ordinary annuity
Term
Consols
Definition
Investment assets structured as perpetuities
Term
Annuity Due
Definition
An annuity in which cash flows are paid at the beginning of each time period
Term
Annual Percentage Rate (APR)
Definition
The interest rate per period times the number of periods in a year
Term
Effective Annual Rate (EAR)
Definition
An interest rate that reflects annualizing with compounding figured in
Term
Amortized Loan
Definition
A loan in which the borrower pays interest and principal over time
Term
Loan Principal
Definition
The balance yet to be paid on a loan
Term
Fixed-income securities
Definition
Any securities that make fixed payments
Term
Indenture Agreement
Definition
Legal contract describing the bond characteristics and the bondholder and issuer rights
Term
Call
Definition
An issuer redeeming the bond before the scheduled maturity date.
Term
Bond Price
Definition
Current price that the bond sells for in the bond market
Term
Agency Bonds
Definition
Bonds issued by U.S. Government Agencies
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