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Definition
| the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments. |
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| concerns the duties of the financial manager in a business |
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| actively manages the financial affairs of all types of businesses, whether private or public, large or small, profit seeking or not for profit |
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| a business owned by one person and operated for his or her own profit |
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| the condition of a sole proprietorship giving creditors the right to make claims against the owner's personal assets to recover debts owed by the business. |
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| a business owned by two or more people and operated for profit |
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| the written contract used to formally establish a business partnership |
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Definition
an entity created by law.
Limited partnership (LP)
limited liability company (LLC) |
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Definition
| the owners of a corporation, whose ownership, or equity takes the form of either common stock or preferred stock. |
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Definition
| the purest and most basic form of corporate ownership |
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Definition
| periodic distribution of cash to the stockholders of a firm. |
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Definition
| group elected by the firms stockholders and typically responsible for approving strategic goals and plans, setting general policy, guiding corporate affairs, and approving major expenditures. |
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Definition
| corporate oficial responsible for managing the firm's day to day operations and carrying out the policies established by the board of directors. |
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Definition
the amn't earned during the period on behalf of each outstanding share of common stock
period's total earnings
# of shares of common stock outstanding |
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Definition
| group of employees, customers, suppliers, creditor, and others who have a direct economic link to the firm |
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Term
| organization of the finance function |
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Definition
-treasurer
-controller
-foreign exchange manager |
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Term
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Definition
opportunity costs
cost-benefit analysis
+ benefits with new
- benefits with old
Marginal (added) benefit
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Term
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Definition
cash flows:
ACCRUAL basis: recognizes revenue at the time of sale and recognizes expenses when they are incurred (accounting)
CASH basis: recogn only in respects to actual inflows and outflows of cash (finance) |
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Term
| principal-agent relationship |
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Definition
| shareholders (principals) elect management (agents) on their behalf. |
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Term
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Definition
an intermediary that channels the savings of individuals, businesses, and gov't into loans or investments.
individuals--net suppliers.
firms/gov't--net borrowers.
Examples: commercial banks, savings and loans, credit unions, savings banks, insurance companies, mutual funds, and pension funds. |
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Definition
| institutions that provide savers with a secure place to invest their funds and that offer loans to individual and business borrowers. |
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Definition
institutions that assist companies in raising capital, advise firms on major transactions such as mergers or financial restructurings, and engage in trading and market making activities. |
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Definition
| An act of congress in 1933 that created the federal deposit insurance program and separated the activities of commercial and investment banks |
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Definition
| a group of institutions that engage in lending activities, like traditional banks, but do not accept deposits and therefore are not subject to the same regulation as traditional banks. |
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Term
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Definition
forums in which suppliers of funds and demanders of funds can transact business directly.
MONEY MARKET: short-term funds/seasonal/temporary.
CAPITAL MARKET: long-term funds. Formed by the broker and the dealer:
---Broker market: the securities exchanges on which the two sides of a transaction, the buyer and seller, are brought together to trade securities. Securities exchanges: organizations that provide the marketplace in which firms can raise funds through the sale of new securities and purchasers can resell securities.
---dealer market: the market in which the buyer and seller are not brought together directly but instead have their orders executed by securities dealers that "make markets" in the given security. market makers: securities dealers who "make markets" by offering to buy or sell certain securities at stated prices. |
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private placement
public offering |
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Definition
the sale of a new security directly to an investor or group of investors.
the sale of either bonds or stocks to the general public |
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Term
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Definition
| financial market in which securities are initially issued; the only market in which the issuer is directly involved in the transaction. |
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Definition
| financial market in which preowned securities are traded. |
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Definition
| Short-term debt instruments, such as U.S. Treasury bills, commercial paper, and negotiable certificated of deposit issued by government, business, and financial institutions, respectively. |
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Definition
| long-term debt instrument used by business and government to raise large sums of money, generally from a diverse group of lenders |
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Definition
| a special form of ownership having a fixed periodic dividend that must be paid prior to payment of any dividends to common stockholders. |
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Term
Nasdaq market
Over-the-counter market (OTC) |
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Definition
all-electronic trading platform used to execute securities trades.
market where smaller, unlisted securities are traded. |
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Term
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Definition
highest price offered to purchase a security
lowest price at which a security is offered for sale |
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Term
securitization
mortgage-based securities |
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Definition
the process of pooling mortgages or other types of loans and then selling claims or securities against that pool in the secondary market
securities that represent claims on the cash flows generated by a pool of mortgages. |
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Term
| Federal deposit insurance corporation (FDIC) |
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Definition
| an agency created by the Glass-Seagall Act that provides insurance for deposits at banks and monitors banks to ensure their safety and soundness. |
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Term
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Definition
| An act that allows business combinations between commercial banks, investment banks, and insurance companies, and thus permits these institutions to compete in markets that prior regulations prohibited them from entering. |
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Term
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Definition
| an act that regulates the sale of securities to the public via the primary market. |
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Term
| securities exchange act of 1934 |
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Definition
| An act that regulates the trading of securities such as stocks and bonds in the secondary market. |
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Term
| Securities and Exchange Commission (SEC) |
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Definition
| the primary gov't agency responsible for enforcing federal security laws. |
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Term
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Definition
| the rate at which additional income is taxed. |
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Term
| Liquidity Ratios--to satisfy short term obligations as they come due |
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Definition
1. Current Ratio= CA/CL
(Higher ratio=greater degree of liquidity)
2. Quick Ratio = (CA-Inventory)/CL
(higher ratio=greater degree liquidity)
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Term
| Activity Ratios--measures the speed w which various accounts are converted to sales or cash. inflows or outflows. Inventory management, disburstment, collections. |
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Definition
1. inventory TO: COGS/Inventory
(valuable when comparing to other firms. 20 good for grocery store whose goods are perishable, 4 for aircraft.)
2. Avg age of inventory: 356/inventory TO
(how many days of inventory the firm has on hand)
3. Avg collection period: AR
Annual sales/365
(evaluating credit and collection policy)
4. Avg Payment Period: Acct Payable
Annual Purchases/365
5. Total Asset TO: Sales/total assets
(indicates the efficiency with which the firm uses its assets to generate sales. Higher the ratio= the more efficient its assets have been used) |
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Term
Debt Ratios:
the more debt in relation to total assets, the greater the financial leverage: the magnification of risk and return through the use of fixed-cost financing, such as debt and preferred stock...comes greater risks as well as higher potential returns. Two types...degree of indebtness and ability to service debts. |
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Definition
1. Debt Ratio: TL/TA
(higher the ratio=more indebtness and financial
leverage..the greater the amnt of other ppls money
being used to generate profits)
2. Times interest earned ratio:TEBIT/Interest
(measures firms ability to make contractual interests payments. The higher=the better able to fulfill its interests obligations)
3. Fixed-payment coverage Ratio:
Earnings before interest + lease payments
Int+lease+{[principal + preferred stock div]x[1/(1-T)}
(measures risk. Lower=the greater the risk. Higher=lower the risk)
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Term
Profitablility Ratios:
evaluate firms profits with respect to given levels of sales, a certain level of assets, or the owners' investments. |
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Definition
1. Gross profit margin: Sales-COGS/sales
(measures the percenage of each sales dollar remaining
after the firm paid for its goods. The higher (the lower
the relative cost of merchandise sold), =better.
2. Operating profit margin: operating profits/sales
(measures the percentage of each sales dollar
remaining
after all costs and expenses other than taxes,
interest, and preferred stock dividends are deducted.
"pure profits earned on each sale dollar
Higher=better)
3. NetProfit margin:
Earnings avail for commonstock holders
Sales
(measures %of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends have been deducted. Higher=better)
4. EPS: Earnings avail for common stockholders
# of shares of common stock outstanding
5. ROA: Earnings avail for common stockholders
Total assets
(higher=better. measure overall effectiveness of management in generating profits with its avail assets)
6. ROE: Earnings avail for common stockholders
Common stock equity
higher=better. measures the return earned on the common stockholders investment in the firm |
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Term
| Market Ratios: relate a firms market value, as measured by its current share price, to certain acct values. |
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Definition
1. P/E Ratio: Market$ per share common stock
Earnings per share
(measures the amnt that investors are willing to pay for each dollar of a firm's earnings. Level of this ratio indicates the degree of confidence that investors have in the firms future performance.)
2. M/B Ratio:
Book value: Common stock equity
# of shares of common stock
outstanding
M/B : market$ per share of common stock
Book value per share of common stock
(relates market value of the firms shares to their book value. |
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Term
| DuPont Formula: multiplies the firm's net profit margin by total asset turnover to calculate the firm's ROA. |
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Definition
ROE= NI = NI x Sales x Assets
Equity Sales Equity Assets
= NI x Sales x Assets
Sales Assets Equity
= Profit margin x Asset TO x Equity multip |
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Term
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Definition
| allocation of historical cost over time. a portion of the costs of fixed assets charged against annual revenues over time; reduces the income reported on income statement and therefore reduces taxes; *Net effect= increase firm's cash flow because they reduce a firm's tax bill. |
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Term
Modified accelerated cost recovery system
(MACRS) |
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Definition
| system used to determine the depreciation of assets for tax purposes; all depreciation methods require you to know an asset's depreciable value (its full initial cost) and its depreciable life (the time period over which an asset is depreciated. The shorter the depreciable life, the larger the annual depreciation deductions will be, and the larger will be the tax savings associated with those deductions). |
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Term
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Definition
The appropriate depreciable life of a particular asset as determined by MACRS. There are six MACRS recovery periods- 3, 5, 7, 10, 15, and 20 years-
the first four classes routinely used by businesses. |
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Term
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Definition
for financial reporting purposes, companies can use a variety of depreciation methods: straight-line, double-declining balance method, and sum-of-the-years' -digits.
MACRS first four property classes are depreciated by the double-declining balance method, using a half-year convention (meaning that a half-year's depreciation is taken in the year the asset is purchased) |
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Term
| A firm's cash flows fall into 3 categories |
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Definition
1. Operating flows-- cash inflows and outflows directly related to the sale and production of the firm's products and services.
2. Investment flows-- cash flows associated with the purchase and sale of both fixed assets and equity investments in other firms. purchase transactions=outflows, sales transactions=inflows.
3. Financing flows-- result from debt and equity transactions. Including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends. |
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Term
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Definition
| an expense that is deducted on the income statement but does not involve the actual outlay of cash during the period; includes depreciation, amortization, and depletion. Therefore, when measuring the amnt of cash flows generated by a firm, have to add depreciation back to NI or will understate the cash that the firm has truly generated. |
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Term
| interpreting the statement of cash flows |
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Definition
-analyze the firms cash flow
-to assess whether any developments have occurred that are contrary to the company's financial policies.
-used to evaluate progress toward projected goals or to isolate inefficiencies
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Term
Operating cash flow
(OCF) |
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Definition
the cash flow a firm generates from its normal operations; calculated as net operating profits after taxes (NOPAT) plus depreciation.
NOPAT= EBIT x (1-T)
*To convert NOPAT to OCF, add back in depreciation...
OCF= NOPAT + Depreciation |
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Term
new operating profits after taxes
(NOPAT) |
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Definition
a firm's earnings before interest and after taxes.
EBIT x (1-T) |
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Term
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Definition
the amount of cash flow avail to investors after the firm has met all operating needs and paid for investments in net fixed assets and net current assets.
FCF= OCF-Net fixed asset investment -Net current asset
investment
FCF=OCF-NFAI-NCAI |
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Term
| financial planning process |
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Definition
begins with long-term, strategic plans. These in turn guide the formulation of short term, operating plans and budgets.
1.Cash planning:prep of firm's cash budget
2.profit planning: prep of pro forma statements |
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Term
long term strategic
financial plans |
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Definition
| plans that lay out a company's planned financial action and the anticipated impact of those actions over the period of 2-10yrs. |
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Term
short term operating financial
planning |
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Definition
| sales forecasts, various forms of operating and financial data. key outputs include number of opating budgets, the cash budget, and pro forma. |
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Term
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Definition
| begins the short term planning process. the prediction of the firms sales over a given period, basted on external and internal data; obtaining good data is the most difficult aspect. |
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Term
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Definition
| a sales forecast based on the relationship observed between the firms sales and certain key external economic indicators such as GDP, new housing starts, consumer confidence, and disposable personal income. |
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Term
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Definition
| based on consensus of sales forecasts through the firms own channels |
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Term
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Definition
| all of a firm's inflows of cash during a given financial period; including cash sales, collections of AR |
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Term
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Definition
all outlays of cash y the firm during a given period..
cash purchases/AP/Rent&Lease/wages and salaries/Tax payments/Fixed-asset outlays/ interest payments/dividends/ principle payments/repurchases
**depreciation and other noncash charges NOT included in the cash budget. |
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Term
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Definition
| the difference bt the firms cash receipts and its cash disbursements. |
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Term
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Definition
| the sum of the firm's beg cash and its net cash flow. |
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Term
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Definition
| amount of funds needed by the firm if the ending cash for the period is less that the desired minimum cash balance; typically represented by notes payable. |
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Term
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Definition
| the excess amount available for investment by the firm if the period's ending cash is greater than the desired minimum cash balance; invested in marketable securities. |
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Term
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Definition
projected or forecast income statement and balance sheet. Need:
1. financial statement for the preceding year.
2.the sales forcast for coming year. |
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Term
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Definition
a simple method for developing pro forma statement; it forecasts sales and then expresses the various income statement items as percentages of projected sales.
COGS/Sales
Operating Exp/sales
interest exp/sales |
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Term
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Definition
| a simplified approach for preparing the pro forma balance sheet under which the firm estimates the values of certain balance sheet accounts and uses external financing as a balancing or plug figure. |
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Term
| external financing required |
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Definition
| under the judgmental approach for developing a pro forma, the amount of external financing needed to bring the statement into balance. pos or neg number. |
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Term
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Definition
| a horizontal line on which time zero appears at the leftmost end and future periods are marked from left to right; can be used to depict invest cash flows. |
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Term
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Definition
| the value at a given future date of an amount placed on deposit today and earning interest at a specified rate. Found by applying compound interest over a specified period of time. |
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Term
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Definition
| interest that is earned on a given deposit and has become part of the principal at the end of a specified period |
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Term
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Definition
| the amount of money on which interest is paid. |
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Term
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Definition
| the current dollar value of a future amount--the amount of money that would have to be invested today at a given interest rate over specified period to equal the future amount. |
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Term
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Definition
the process of finding present values; the inverse of compounding interest.
*Annual rate of return is variously referred to as the discount rate, required return, cost of capital, and opportunity cost. |
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Term
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Definition
| a stream of equal periodic cash flows over a specified time period. these cash flows can in inflows of returns earned on investments or outflows of funds invested to earn future returns. |
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Term
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Definition
| an annuity for which the cash flow occurs at the end of each period |
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Term
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Definition
| an annuity for which the cash flow occurs at the beginning of each period. always greater than the value of ordinary annuity. |
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Term
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Definition
an annuity with an infinite life, providing continual annual cash flow
ex: scholarship |
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Term
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Definition
| a stream of unequal periodic cash flows that reflect no particular pattern. |
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Term
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Definition
| compounding interest over two periods within the year |
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Term
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Definition
| compounding of interest an infinite number of times per year at intervals of microseconds. |
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Term
| nominal (stated) annual rate |
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Definition
| contractual annual rate of interest charged by a lender or promised by a borrower. |
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Term
effective (true) annual rate
(EAR) |
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Definition
| the annual rate of interest actually paid or earned |
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Term
annual percentage rate
(APR)
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Definition
| the nominal annual rate of interest found by multiplying the periodic rate by the number of periods in one year, that must be disclosed to consumers on credit cards and loans as a result of "truth-in-lending laws" |
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Term
annual percentage yeild
(APY) |
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Definition
| the effective annual rate of interest that must be disclosed to consumers by banks on their savings products as a result of 'truth-in-savings laws' |
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Term
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Definition
| the determination of the equal periodic loan payments necessary to provide a lender with a specified interest return and to repay the loan principal over a specified period. |
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Term
| loan amortization schedule |
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Definition
| a schedule of equal payments to repay a loan. it shows the allocation of each loan payment to interest and principle. |
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