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A compilation of questions and answers related to busi 7110 test 1, covering key concepts in finance. It includes definitions and explanations of financial terms such as balance sheets, income statements, depreciation, liquidity, book value, and market value. Additionally, it addresses topics like interest, dividends, tax rates, simple and compound interest, and the impact of time and interest rates on present and future values. The material also covers corporate governance, market transactions, working capital, profitability metrics, and bond valuation, offering a concise review of essential financial principles and calculations.
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Balance Sheet - ANSWER snapshot of the company's financials at one point in time Income Statement - ANSWER Shows revenues/losses of a company, but is not a cash flow Depreciation, net income - ANSWER These are listed on the income statement but are not cash flows liquidity - ANSWER how quickly we can turn assets into cash without a significant loss of value Book value - ANSWER historical cost- depreciation Market value - ANSWER the price you can buy or sell an asset at today Interest - ANSWER This is tax deductible Dividends - ANSWER This is not tax deductible Decreases - ANSWER When an asset increases, cash Increases - ANSWER When an asset decreases, cash Increases - ANSWER When liabilities/equity increases, cash
Decreases - ANSWER When liabilities/equity decreases, cash Average tax rate - ANSWER taxes owed/taxable income Marginal tax rate - ANSWER amount of taxes paid on the next dollar earned Simple interest - ANSWER interest earned only on the original principle Compound interest - ANSWER Interest earned on both initial principle and interest earned from prior periods down - ANSWER As time increases, PV goes up - ANSWER As time increases, FV goes down - ANSWER As interest increases, PV goes up - ANSWER As interest increases, FV goes down corporation - ANSWER legal entity separate from its owners and managers double taxation - ANSWER biggest disadvantage of a corporation unlimited liability - ANSWER biggest disadvantage of a sole proprietorship or partnership Agency problem - ANSWER Managers act in self-interest instead of doing what is best for the corporation corporate governance - ANSWER different tools to align incentives of managers and shareholders
derivatives - ANSWER stock options also known as this Net operating working capital + Operating long term assets - ANSWER Total net net operating captial EBIT x (1-t) - ANSWER NOPAT NOPAT - ANSWER It ignores interest expense and can help compare companies with different capital structures. It also gives profits from operations free cash flow - ANSWER Cash flows available to investors after necessary investment in fixed assets and working capital NOPAT - Net Investment in Total operating capital - ANSWER Free cash flow Net investment in operating capital - ANSWER change in operating capital from 1 year to the next ROIC>WACC - ANSWER Goal of a project (PPS x shares outstanding) - equity - ANSWER MVA liquidity - TYPE of ratio that measures ability to pay short term obligations asset management - TYPE ratio of how efficiently we are managing our assets debt management - TYPE ratio of ability to pay long term debt 1 + D/E ratio - EQUITY MULTIPLIER shortcut total liabilities + market value of equity - MARKET value of assets
PV of future cash flows - ANSWER The value of anything is the perpetuity - ANSWER level stream of cash flows that continue forever annuity - ANSWER level stream of cash flows for a fixed period of time APR - ANSWER Rate of return which should be changed to fit the number of compounding periods per year Annuity due - an annuity for which cash flows occur at the beginning of the period PV of annuity x (1+r) - PV of annuity due formula EAR - Effective Annual Rate of rate of return that takes in the account compounding interest coupon - The stated interest payment on a bond face value - the principle amount of bond aka par value coupon rate - annual coupon divided by the face value maturity - ANSWER specific date on which the principle amount of the bond is repiad YTM - ANSWER rate required in the market on the bond. quoted as an APR premium - ANSWER When the coupon rate is > YTM
Lottery redemption, purchase in market - 2 types of sinking fund provisions convertible bonds - bonds that can be converted into cash income bonds - type of bond where interest payments are made based on availability to pay inflation indexed bonds - government bonds adjusted for inflation Yield to Call - ANSWER rate of return up until when the bond can be called coupon payment/price of bond - ANSWER formula of yield to call indenture - ANSWER bond contract with a physical document or contract restrictive covenants - ANSWER restrictions on actions managers can take mortgage bonds - ANSWER bonds that have collateral pledged against them debentures - ANSWER bonds that do not have collateral pledged against them