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Limited liability is faced by the owners of:
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The primary goal of a publicly�owned firm interested in serving its stockholders should be to:
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Manigerial
finance
| Question | Answer |
|---|---|
| Limited liability is faced by the owners of: | corporations. |
| The primary goal of a publicly�owned firm interested in serving its stockholders should be to: | maximize share price. |
| Which one of the following actions is the best example of an agency problem? | Paying management bonuses based on the number of store locations opened during the year. |
| The Board of Directors of Giant Towers, Inc. have decided to base the salary of its CEO entirely on the market share of the firm. Accordingly, | the manager may not act to maximize the current value of the firm's stock, resulting in agency costs for the firm's shareholders. |
| GM has decided to issue new stock to fund a new project. When the stock is issued it will be sold on the: | primary market. |
| High Towers, Inc., has $52,000 total obligation to its creditors . cells blank. If there is no value, you must If If the assets have a market value of $69,000, the shareholders' equity has a market value of $ ______. | 17,000 |
| Green Grass, Inc., has sales of $498,000, costs of $267,000, depreciation expense of $35,000, interest expense of $18,000, and a tax rate of 32 percent. If the firm paid out $58,000 in cash dividends, the addition to retained earnings is $ _____ . | 63,040 |
| High Towers, Inc., has sales of $631,000, costs of $322,000, depreciation expense of $29,000, and interest expense of $13,000. If the tax rate is 33 percent, the operating cash flow, or OCF, is $ ______ . | 220,890 |
| For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase. | depreciation |
| Select all that will happen when depreciation expense increases. | Increase the cash flow from assets Decrease in taxes Decrease net income |
| Total Greens, Inc. has a profit margin of 9.5 percent, total asset turnover of 1.2, and ROE of 24.9 percent. The firm's debt−equity ratio is ______ times. (Round your answer to 2 decimal places. (e.g., 32.16)) | 1.18 |
| Select all the ratios that may indicate a trouble in the firm's short-term solvency. | Quick ratio of 0.7 when the industry benchmark is 1.2 Current ratio of 1.2 when the industry benchmark is 1.6 |
| A common-size income statement is created by dividing all the income statement items by ______; while a common-size balanace sheet is generated by dividing all the balance sheet items by ______. | Sales; Total assets |
| The DuPont identity of return of equity (ROE) indicates that the ROE is a product of these following three aspects of financial management; ____, _____, and ______. | profitability; asset management; financial leverag |
| Basic Areas Of Finance | Corporate finance = Business Finance Investments Financial institutions International finance |
| Investments | Work with financial assets such as stocks and bonds Value of financial assets, risk versus return, and asset allocation |
| Companies that specialize in financial matters | Banks – commercial and investment, credit unions, savings and loans Insurance companies Brokerage firms |
| Basic Areas Of Finance | corporate Finance Financial institutions Investments |
| What long-term investments or projects should the business take on? | Capital budgeting |
| How should we pay for our assets? Should we use debt or equity? | Capital structure |
| How do we manage the day-to-day finances of the firm? | Working capital management |
| Three major forms in the United States | Sole proprietorship Partnership General Limited Corporation S-Corp Limited liability company |
| What are some Advantages of Sole Proprietorship | Easiest to start Least regulated Single owner keeps all of the profits Taxed once as personal income |
| What are some disadvantages of a sole proprietorship | Limited to life of owner Equity capital limited to owner’s personal wealth Unlimited liability Difficult to sell ownership interest |
| Partnership | Business owned by two or more persons |
| What are some Advantages of have a Partnership | Two or more owners More capital available Relatively easy to start Income taxed once as personal income |
| What are some disadvantages of have a Partnership | Unlimited liability General partnership Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership |
| Corporation | A legal “person” distinct from owners and a resident of a state |
| What are some advantages of having a Corporation | Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital |
| What are some disadvantages of having a corporation | Separation of ownership and management (agency problem) Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate, while dividends paid are not tax deductible |
| What should be the goal of a corporation? | Maximize the current value per share of the company’s existing stock Maximize the market value of the existing owners’ equity |
| Sarbanes-Oxley Act | An acted in 2002. Sarbox is intended to strengthen protection against corporate accounting fraud and financial malpractice. |
| Principal hires an agent to represent its interests Stockholders (principals) hire managers (agents) to run the company | Agency relationship |
| The conflict of interest between the principal and the agent is called. (Management goals and agency costs) | Agency problem |
| What can help Managers Act in the Shareholders’ Interests? | Managerial compensation Incentives can be used to align management and stockholder interests Incentives need to be carefully structured to insure that they achieve their goal |
| what is example of Corporate control | Threat of a takeover may result in better management |
| Cash Flows Between the Firm and the Financial Markets steps | 1.Firm issues securities to raise cash. 2.Firm invests in assets. 3.Firm's operations generate cash flow 4.cash is paid to government other stack-holder may revive cash 5.Reinvested cash flows are plowed back into firm. 6.Cash ispaid out to inv I D |
| The mechanism by which unhappy stockholders can act to replace existing management | Proxy fight |
| The term__________ ________ refers to the original sale of securities by governments and corporations. | Primary markets |
| The term _________ _________ are those in which these securities are bought and sold after the original sale. | Secondary markets |
| In what market transaction does the corporation is the seller, and the transaction raises money for the corporation. | Primary markets |
| what is it called when selling involves selling securities to the general public. | Public offering |
| What is it where as a private placement is a negotiated sale involving a specific buyer. | Private offering |
| What are to some market in the secondary markets | 1. auction markets 2. dealer markets 3. NasDaQ 4. NYSE |
| A snapshot of the firm’s assets and liabilities at a given point in time | The Balance Sheet |
| Left-hand side (or upper portion) In order of decreasing liquidity | Assets |
| Balance Sheet Identity | Assets = Liabilities + Stockholders’ Equity |
| Current Assets minus Current Liabilities Usually positive for a healthy firm | Net working capital |
| without significant loss of value Valuable in avoiding financial distress | Liquidity |
| Is positive when current assets exceeds current liabilities. | New working capital |
| Shareholders’ equity = Assets - Liabilities | Debt versus Equity |
| The use of debt in a firm's capital structure is called | Financial Leverage. |
| the balance sheet value of the assets, liabilities, and equity. | Book value |
| true value; the price at which the assets, liabilities, or equity can actually be bought or sold. | Market value |
| Market value and book value are often very different. Why? | Market value is what its actual cost on the market Book value is just what is worth on the books |
| Which is more important to the decision-making process Book value or market value. | the Market value |
| statement measures performance over a specified period of time (period, quarter, year). | income |
| GAAP Matching Principle | Recognize revenue when it is fully earned Match expenses required to generate revenue to the period of recognition |
| Noncash Items | Expenses charged against revenue that do not affect cash flow Depreciation = most important |
| What does GAAP stand for | Generally Accepted Accounting Principles |
| Time and Costs | Fixed or variable costs Not obvious on income statement |
| Earnings Management | Smoothing earnings GAAP leaves “wiggle room” Global standardization of accounting GAAP versus IFRS |
| traded companies must file regular reports with the Securities and Exchange Commission | Publicly |
| These reports are usually filed electronically and can be searched at the SEC public site called | EDGAR |
| % tax paid on the next dollar earned | Marginal |
| – total tax bill / taxable income | Average |
| The difference between the number of dollars that came in and the number that went out | Cash Flow |
| The total of cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, and change in net working capital. | Cash Flow from Assets (CFFA) |
| Cash generated from a firm's normal business activities. | Operating cash flow (OCF) |
| All accounts = percent of total assets (%TA) | Common-Size Balance Sheets |
| All line items = percent of sales or revenue (%SLS) | Common-Size Income Statements |
| Standardized statements are useful for: | Comparing financial information year-to-year Comparing companies of different sizes, particularly within the same industry |
| Relationship determined from a firm's financial information used for comparison purposes. | Financial Ratios |
| Short-term solvency, or liquid measures ratios are found on balance sheet | Current ratio Quick ratio acid test |
| Long-term solvency measures | Cash ratio Total debt ratio Times interest earned Cash coverage |
| The measure of short-term liquidity. the unit of measurement is eith dollars or times. | Current ratio |
| Inventory test of how many times inventory is turn over | Quick ratio or acid test |
| Cash divided by current liabilities is | Cash Ratio |
| takes into account all debts of all maturities to all creditors. | Total debt Ratio- equity Multiplier |
| This ratio measures how well a company has its interest obligations covered | Times interest Earned |
| the basic measure of the firm's ability to generate cash form operations. | Cash coverage ratio |
| measure days in inventory and times | Inventory turnover and days sales in inventory |
| how fast we can sell products Ratios | Receivables turnover and days sales in receivables |
| measurement in sales and total assets is | Total asset turnover |
| measurement of the companies net income | Profit margin |
| Is a measure of profit per dollar of assets. | Return on Assets |
| is a measure of how the stockholders fared during the year | Return on equity |
| measurement dividing net income and shares outstanding is | Earnings per share |
| measures how much investors are willing to pay per dollar of current earnings | Price-earning ratio |
| Price per share divided by sales per share usually used for new companies | price sales ratio |
| compares the market value of the firm's investments to their cost | Market to book ratio |
| an estimate of the market value of the company's operating assets | Enterprise value |
| relates all the value of the operating assests to a measure of the operating cash flow generated by those assets | EBITDA RATIO |
| s an expression that shows a company's return on equity (ROE) can be represented as a product of three other ratios: the profit margin, the total asset turnover and the equity multiplier. | the DuPont Identity |
| Internal and Sustainable Growth Payout and Retention Ratios | Dividend payout ratio Retention ratio |
| Cash dividends / Net income | Dividend payout ratio |
| Addition to Retained Earnings) / Net income | Retention ratio |
| How much the firm can grow assets using retained earnings as the only source of financing. | The Internal Growth Rate |
| How much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio. | The Sustainable Growth Rate |
| Determinants of Growth | Profit margin – operating efficiency Total asset turnover – asset use efficiency Financial leverage – choice of optimal debt ratio Dividend policy – choice of how much to pay to shareholders versus reinvesting in the firm |
| Problems with Financial Analysis | Conglomerates No readily available comparables Global competitors Different accounting procedures Different fiscal year ends Differences in capital structure Seasonal variations and one-time events |
Created by:
john.ovalles1