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| Term | Definition |
|---|---|
| types of risks | unsystematic and systematic |
| unsystematic risk impact | entire markets or segments |
| unsystematic risk nature | cannot be controlled, minimised or avoided by a business |
| unsystematic risk factors | external, macroeconomic, including geopolitical, economic, enviromental and sociological factors |
| unsystematic risk types | purchasing power, risk, interest rate, market risk |
| systematic risk impact | restricted to a specific industry, segment company or security |
| systematic risk nature | can be controlled, minimised or avoided by the business |
| systematic risk factors | internal or microeconomical factors |
| systematic risk types | Business-specific and financial risk |
| Types of financial risk | market, credit, liquidity, operational |
| risk management process | 1. risk identification 2. risk assessment 3. risk mitigation 4. risk monitoring |
| If there is higher ... , it means a higher potential ..... will be ..... | risk, reward, demanded |
| is it correct? high risk=high reward | no because higher risk DEMANDS higher return |
| how can u finance your assets? | though liabilities and owner's equity |
| cost of debt | what creditors demand in return |
| cost of equity | what shareholders demand in return |
| who is first and last in line when a company goes bankrupt? | creditors are first and shareholders are last |
| what is interest? | it is what creditors are compensated with, it is paid before net income and dividends |
| what kind of compensations do shareholders get? | monetary(Ke)-increase of share value or dividend payments non-monetary-voting rights |
| if a company is too risky what will shareholders do? | vote for change, sell shares, demand higher return |
| which is cheaper? debt or equity | equity! because it is riskier so shareholders will demand higher return |
| what does it mean when you have more debt than equity? | high-financial leverage, higher chances for bankruptcy, higher ROE, banks will ask for higher interest rates or deny capital, preferred by shareholders |
| what does it mean when you have more equity than debt? | low financial leverage, lower chances of bankruptcy, lower ROE, preferred by banks, both creditors and shareholders will ask for lower demanded return |
| what is a short term debt | a loan from the bank which is for less than a year, it the cheapest form of financing, terms ca be renegotiated after the loan expires, which also can make it more risky depending on market conditions, and it can be difficult to obtain if highly levered |
| what is a long term-debt | for more than a year, it is more expensive, than short-term because it is riskier to the creditor but offers more stability to the firm(fixed interest rates), and also difficult to obtain if already highly levered |
| What is equity | the most expensive financing method, there is no immediate obligation to pay back the shareholders, but it is difficult to find investors if company/market is not attractive |
| what are the three major types of financial statements? | balance sheet, income statement, cashflow statement |
| what is the income statement? | shows revenue, expenses and profit or loss |
| what is the balance sheet? | assets, capital(liabilities and equity) --> stock items |
| What is the cashflow statement? | shows actual movement of cash ---> flow items |
| what are the 3 parts of a cashflow statement | operations, investing, financing |
| what are operating cash flows? | net income + non-cash expenses =/- loss or gain on sale of =/- changes in Net Working Capital(Acc R. Acc P and inventory) |
| what are investing cash flows? | sale or purchase of PPE, buy/selling Marketable Securities, Investments, loans to other entities |
| what are financing cash flows? | Issuing or buy-back of stock, new loans or repaid loan, dividends paid |
| what is the main purpose of a cashflow statement | tells you the movement of cash( cash in or cash out) and the difference beginning and ending balance of cash on the balance sheet |
| what is the importance of the cash flow statements to investors? | to asses whether the company generates enough cash to pay divindends |
| what is the importance of the cash flow statements to creditors | use it to evaluate repayment capability |
| what is the importance of the cash flow statements to management | use it for budgeting and operational decisions |
| what doe the operational CF relate to and how? | the income statement, when paying emplooyees it turn up as cash out and in the IS as an expense |
| what doe the investing CF relate to and how? | Balance sheet, when buying/selling equipment, etc. is shows as cash in or cash out and on the BS in the non-current assets |
| what doe the financial CF relate to and how? | balance sheet, when attracting or give back capital as cash in or cash out and on the BS as either debt or equity |
| types of financial ratio | liquidity, solvency, profitability, activity, operating |
| what does liquidity ratio mean | does the company enough cash to meet short term obligations |
| what does solvency ratio mean | does the company have enough assets to meet all obligations |
| what does activity ratio mean | how effective is management in utilising the comapny's resources |
| what does profitability ratio mean | how well is the company able to generate profit from its revenues |
| what does operating ratio mean | how well does the company perform in its specific industry |
| what do managers do with financial ratios | track performance, benchmark for budget, identify areas of improvement |
| what do creditors do with financial ratios | analyse financial health and determine size and terms of laons |
| what do shareholders do with financial ratios | analyse management performance, asses profitability of investment |
| what are the key components of the Dupont Analysis | net profit margin, financial leverage, asset turnover |
| what are the methods used to compare ratios | horizontal, vertical, base-year |
| why is benchmarking key | identifying strengths and weaknesses, setting realistic goals, improving performance and efficiency, improved decision-making |
Created by:
kittymate