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FIN301 Exam 1
| Question | Answer |
|---|---|
| What are the three broad decisions that every company makes? | 1. The investment decision 2. The financing decision 3. The payout policy |
| A firm can be thought of as a ________ of ________ | Collection, projects |
| The business decision that asks "What projects should the firm invest in?" and "How does firm management decide which projects to invest in?" | The investment decision |
| The investment decision is concerned with _______ _______ | Capital budgeting |
| The business decision that asks "How do corporations raise capital?" and "What type of financing should the firm use to finance its projects?" | The financing decision |
| The financing decision is concerned with _______ _______ | Capital structure |
| The business decision that asks "How much of the firm's profits should be returned to its owners each year?" and "What are the differences between paying dividends and repurchasing shares?" | The payout decision |
| The payout decision is concerned with _______ _______ | Payout policy |
| What are the two ways corporations can raise capital? | 1. Issue debt (liabilities) 2. Sell ownership shares (equity) |
| What are the five primary forms of business organizations? | 1. Sole proprietorship 2. General partnership 3. Limited partnership 4. Corporation 5. Limited liability corporation |
| Sole proprietorship: Owned by a ______ ______ The owner bears _______ liability Tax: _______ _______ | Single person, unlimited, single taxation |
| Partnerships: Owned by ______ ______ General partners bear _______ liability. Limited partners bear _______ liability General partners make all _______ Limited partners are "silent" ______ _____ Tax: _______ _______ | Multiple persons, unlimited, limited, decisions, capital providers, single taxation |
| In a general partnership, if one partner is unable to pay their share of business debts, other partners are ______ ______ | Fully liable |
| In a typical limited partnership, limited partners provide _____% of the capital, but general partners get about _____% of the profits because general partners make the _______ and bear _______ liability. | 99, 25, decisions, unlimited |
| A corporation is a ______ ______ and it is _______ from its owners | Legal entity, distinct |
| Corporations: Owned by ______ ______ The owners bear _______ liability Tax: _______ _______ | Many shareholders, limited, double taxation |
| A limited liability corporation (LLC) is a hybrid combination of a _______ and a _______. The main differences from a standard corporation is that LLCs face ______ taxation and limitations on _____ _____ | Partnership, corporation, single, firm size |
| Transfering ownership is difficult in a _______, but not in a _______ | Partnership, corporation |
| What are the two goals of the management of a corporation? | 1. Act in the best interest of shareholders 2. Maximize shareholders' equity value (while acting ethically) |
| Describe the five steps of a basic corporation structure | 1. Shareholders hire a board of directors (BOD) 2. BOD hires senior management, including CEO 3. CEO plays a huge role in hiring other senior management 4. CEO and BOD have ownership stakes while also making decisions 5. Agency problems because of 4 |
| A conflict of interests can occur when the best interest of ______ ______ is not the same best interest of _______ | Senior management, shareholders |
| The less ownership a CEO has, the more likely he is to make _____-_____ decisions on projects without making better _____-_____ investments on projects | Short-sighted, long-term |
| The financial statement accounting for the profit or loss of a firm over a period of time | Income statement |
| This is the reason that in the income statement, profit generated by the firm does NOT equal cash flow generated by the firm over the period of time | Accrual-based accounting |
| What are the three key metrics used to evaluate a company's profitability from the income statement? | 1. Gross margin 2. Operating margin 3. Net margin |
| Gross margin = ( ______ - ______ ) / ______ | (revenue - cost of goods sold) / revenue |
| Operating margin = ______ / ______ | EBIT / revenue |
| Net margin = ______ / ______ | Net income / revenue |
| A metric showing the profit the firm makes from manufacturing something | Gross margin |
| A metric that acts as the profitability performance measure of any business. This is the key measure that analysts and investors pay the most attention to! | Operating margin |
| A measure showing the "bottom line" revenue percentage after interest expense and taxes | Net margin |
| Companies decide how much debt they carry. This means that _____ _____ is a discretionary expense! | Interest expense |
| The three places money in operating profit (EBIT) can go | 1. Bondholders 2. Government 3. Shareholders |
| If a company wants to pay less in taxes, they should have a higher proportion of _______ come from _______ | Funding, debt |
| The two places money in net income can go | 1. Dividends 2. Retained earnings |
| Things that the company OWNS | Assets |
| Things that the company OWES | Liabilities |
| A financial statement showing the relationship between assets and capital structure at a single point in time | Balance sheet |
| Assets in the balance sheet are listed from _____ to _____ liquid | Most, least |
| Liabilities in the balance sheet are listed from _____ to _____ maturing | Fastest, slowest |
| A financial statement showing the net cash generated by the firm over a period of time | Statement of cash flows |
| The three categories of cash flows on the statement of cash flows | 1. Cash flows from operating activities 2. Cash flows from investing activities 3. Cash flows from financing activities |
| A financial metric that asks "Can the firm pay its debts due in the next year?" | Net working capital |
| Net working capital = _______ - _______ | Current assets - current liabilities |
| What are the four ways a company can use their free cash flow? | 1. Pay dividends 2. Buy back stock 3. Repay debt 4. Add cash to balance sheet |
| If net working capital is positive, it is a cash _______. The firm _____ pay its debts due next year | Outflow, can |
| If net working capital is negative, it is a cash _______. The firm _____ pay its debts due next year | Inflow, can't |
| This is the change in PPE assets which appears on the cash flows from investing activities section of the statement of cash flows | Capital expenditures |
| Change in capital expenditures = _______ - ( _______ - _______ ) | PPE this year - (PPE last year - depreciation) |
| If a current asset increases, this is a cash ______. If a current asset decreases, this is a cash ______ | Outflow, inflow |
| If a current liability increases, this is a cash ______. If a current liability decreases, this is a cash ______ | Inflow, outflow |
| If a fixed asset increases, this is a cash ______. If a fixed asset decreases, this is a cash ______ | Outflow, inflow |
| If a long-term liability increases, this is a cash ______. If a long-term liability decreases, this is a cash ______ | Inflow, outflow |
| If an equity account increases, this is a cash ______. If an equity account decreases, this is a cash ______ | Inflow, outflow |
| Net income does not reflect money placed on the ______ ______ to maintain the business! | Balance sheet |
| What are the two things that start every statement of cash flows? | 1. Net income 2. + Depreciation |
| This section of the statement of cash flows essentially tells us where our free cash flow goes | Cash flows from financing activities |
| Free cash flow = ______ - ______ | Net cash from operating - capital expenditures |
| What is the only account from the income statement that appears on the statement of cash flows? | Dividends |
| What are typically the three entries in the cash flows from financing activities section of the statement of cash flows? | 1. Change in long-term debt 2. Change in equity 3. Dividends |
Created by:
Liechtensteiner