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FINAN - Exam 1

Exam 1

TermDefinition
Why do we care about finance? It's About gaining a broader understanding of a business
2 key questions of finance 1. What does a business do? 2. How does it make money?
Analogy used for competitive advnantage "The Moat"
Competitive advantage What a company does that others can't
TL + E is referred to as the __________ within a business Capital
Where do we go to get the capital? Financial markets
What do we use the capital for? To buy assets
What do assets generate Money
Money goes to 3 places after being made: 1. Reinvested in the firm 2. Goes to investors 3. Firm pays expenses, such as salaries
Why do most businesses fail? They don't have the liquidity to continue
Financial market transactions often occur through ___________ Interediaries
Intermediaries Help allocate money from those wanting to invest to those that need money (banks)
Sole Proprietorship One owner, easiest to start, taxed once as personal income, limited to life of owner, Difficult to sell (NOT SEPARATED FROM BUSINESS)
Partnership Two or more owners, more capital availible, Taxed once, Unlimited liability, Difficult to transfer ownershi
Corporation SEPARATES THE BUSINESS FROM THE OWNER Limited Liability, unlimited life, transfer is easy, double taxation
Why are most large corporations headquartered in delaware? 1. corporate legal structure 2. Corporate laws 3. taxes
Asymmetric Information Managers have better information than shareholders and shareholders know it. All managerial actions are going to be viewed by shareholders as asymmetric information
Example of Asymmetric info Managerial actions convey the true state of a company. If managers start selling all the shares that they own this may be a sign the company is in trouble.
Agency Relationship Exists whenever a principal (shareholder) hires an agent (manager) to act on their behalf.
how can the conflict be resolved between the principal and agent Effective corporate governance
Goal of all business forms Maximize company value
What is the language of business financial statements
Net working capital ca-cl Generally positive in healthy firm
Fixed Assets Tangible (book value and depreciates) or Intangible (market value and amoritizes)
Basic income stmt Sales - COGS - Depreciation = EBIT - Interest = EBT - Taxes = NI
Is income a reflection of cash flow NO
Is depreciation a cash expense NO
Operating cash flow Money derived by the firm from operations - eventually needs to be positive.
If you don't give people a fair return You will always run out of money
Why is the stmt of Cash flows important? Can give you an insight on the strength/weakness of the company's cash position
Categories of stmt of cash flows Operating Investment Financing
time trend analysis Used to see how the firm's performance is changing through time
Peer group analysis Compare to similar companies or within industries
Categories of ratios Liquidity, Leverage, Asset management, profitability
A firm with NO DEBT in their capital structure will have a ____________ profit margin than an firm WITH debt. HIGHER
A firm with NO DEBT in their capital structure will have a _______________ ROA than a firm WITH debt. HIGHER
A firm WITH DEBT in their capital structure will have a ___________ ROE than a firm without debt HIGHER
A firm with _______________ in their capital structure will have ROE = ROA NO DEBT
A firm WITH DEBT in their capital structure will have ______________ Operating cash flow Higher due to tax shield of debt
In the Du Pont system Expense control relates to Profit Margin
In the Du Pont system Asset utilization relates to TATO
In the Du Pont system Debt utilization relates to EM
What does the Du Pont system focus on Communicating to the whole firm how their individual actions contribute to shareholders
Created by: sekavecr
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