Finance Exam

Proprietorship An unincorporated business owned by one individual.
Partnership An unincorporated business owned by two or more persons.
Corporation A legal entity created by a state, separated and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability.
Earnings per share Net income / Shares
Corporate character A document filed with the secretary of the state in which a business is incorporated that provides information about the company, including its name, address, directors, and amount of capital stock.
bylaws A set of rules drawn up by the founders of the corporation that indicates how the company is to be governed; includes procedures for electing directors, rights of stockholders, and how to change the bylaws when necessary.
limited liability partnership (LLP) A partnership wherein at least one partner is designated as a general partner with unlimited personal financial liability, and the other partners are limited partners whose liability is limited to amounts they invest in the firm.
limited liability company (LLC) Offers the limited personal liability associated with a corporation; however the company’s income is taxed like that of a partnership.
S corporation A corporation with no more than 100 stockholders that elects to be taxed in the same way as proprietorships and partnerships, so that business income is only taxed once.
stockholder wealth maximization The appropriate goal for management decisions; considers the risk and timing associated with expected cash flows to maximize the price of the firm’s common stock.
Value The present, or current, value of the cash flows that an asset is expected to generate in the future.
agency problem A potential conflict of interest between outside shareholders (owners) and managers who make decisions about how to operate the firm.
hostile takeover The acquisition of a company over the opposition of its management.
Business ethics A company’s attitude and conduct toward its stakeholders (employees, customers, stockholders, and community). Ethical behavior requires fair and honest treatment of all parties.
corporate governance Deals with the set of rules that a firm follows when conducting business; these rules identify who is accountable for major financial decisions.
stakeholders Those who are associated with a business, including managers, employees, customers, suppliers, creditors, stockholders, and other parties with an interest in the firm’s well-being.
proxy votes Voting power that is assigned to another party, such as another stockholder or institution.
industrial group Organizations of companies in different industries with common ownership interests, which include firms necessary to manufacture and sell products; network of manufacturers, suppliers, marketing organizations, distributors, retailers, and creditors.
multinational companies Firms that operate in two or more countries.
exchange rates The prices at which the currency of one country can be converted into the currencies of other countries.
annual report A report issued by a corporation to its stockholders that contains basic financial statements, as well as the opinions of management about the past year’s operations and the firm’s future prospects.
balance sheet A statement that shows the firm’s financial position—assets and liabilities and equity—at a specific point in time.
common size balance sheet Dollar amounts on the balance sheet are stated as a percent of total assets.
common stockholders’ equity (net worth) The funds provided by common stockholders—common stock, paid-in capital, and retained earnings.
common stock at par total shares issued * per share par value
retained earnings The portion of the firm’s earnings that have been reinvested in the firm rather than paid out as dividends.
book values Amounts reported in financial statements—accounting numbers.
market values Values of items—asset, liability, and equity—in the marketplace outside the firm.
income statement A statement summarizing the firm’s revenues and expenses over an accounting period, generally a quarter or a year.
dividends per share common dividend / shares
net cash flow net income + depreciation and amortization
operating cash flows Those cash flows that arise from normal operations; the difference between cash collections and cash expenses associated with the manufacture and sale of inventory.
accounting profits A firm’s net income as reported on its income statement.
statement of cash flows A statement that reports the effects of a firm’s operating, investing, and financing activities on cash flows over an accounting period.
Increase in a liability or equity account Borrowing funds or selling stock provides cash
decrease in a liability or equity account paying off a loan or buying back stock uses cash
decrease in an asset account selling inventory or collecting receivables provides cash
increase in an asset account buying fixed assets or buying more inventory uses cash
statement of retained earnings A statement reporting the change in the firm’s retained earnings as a result of the income generated and retained during the year. The balance sheet figure for retained earnings is the sum of the earnings retained for each year that the firm has been in business.
liquid assets An asset that can be easily converted into cash without significant loss of the amount originally invested.
liquidity ratios Ratios that show the relationship of a firm’s cash and other current assets to its current liabilities; they provide an indication of the firm’s ability to meet its current obligations.
Current ratio current assets / current liabilities
quick ratio current assets – inventory / current liabilities
market value ratios Companies with high research and development (R&D) expenses tend to have high P/E ratios.
Book Value per share Common equity / shares outstanding
managing underwriter The investment bank that sets up the deal and organizes and manages an issue’s underwriting syndicate
industrial group organizations comprised of companies in different industries with common ownership interests, which include firms necessary to sell and manufacture products.
primary goal of a financial manager is to maximize the market value of the firm’s stock
Compared to corporations, what is the primary disadvantage of partnerships as forms of business organizations? The owners of a partnership, that is, the partners, have unlimited liability when it comes to business obligations whereas the owners of a corporation have limited liability.
The degree to which the managers of a firm attempt to magnify the returns to owners’ capital through the use of financial leverage is captured in debt management ratios True
An increase in a firm’s debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales. What can lower profit margin on sales?
ratio analysis 1.General conclusions about a firm should not be made by examining one or a few ratios, ratio analysis should be comprehensive. 2.Classifying a large, well-diversified firm into a single industry often is difficult because many of the firm’s divisions are involved with different products from different industries. 3.Computing the values of the ratios is fairly simple; the toughest and most important part of ratio analysis is interpretation of the values derived from the computations.4.Sometimes firms attempt to use “window dressing” techniques to make their financial statements look better than they actually are in the current period.
Real risk-free (r*) rate on short term US treasury security (no inflation)
Liquidity risk premium (LP) premium added to the equilibrium interest rate on a security that cannot be bought or sold quickly enough to prevent or minimize loss
Inflation premium (IP) premium added to the real risk-free rate to compensate for a decrease in purchasing power over time
Maturity risk premium (MRP) premium that reflects the risk associated with changes in the interest rates for a long-term security
nominal risk-free (rrf) adding the inflation premium to r*
default risk premium (DRP) difference between the interest rate on a US treasury bond and a corporate bond of the same profile-that is, the same maturity and marketability.

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