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82 Cards in this Set
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financial management
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manage the finances of a firm. Analyze, forecast, and plan a firm's finances; assess risk; evaluate and select investments; decide where and when to find money sources, and how much money to raise; and determine how much money to return to investors in the business.
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financial markets and institutions.
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handle the flow of money in financial markets and institutions, and focus on the impact of interest rates on the flow of that money.
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investments
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locate, select, and manage money producing assets for individuals and groups.
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chief financial officer
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directs and controls the financial activities of a firm...supervises the treasurer and controller.
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treasurer
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generally is responsible for cash management, credit management, and financial planning activities.
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controller
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responsible for cost accounting, financial accounting, and information system activities.
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agent
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a person who has the implied or actual authority to act on behalf of another.
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principals
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the owners who the agents represent.
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agency costs
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the outlays of time and money.
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stakeholders
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people who have a stake in the business...nonmanager workers, creditors, suppliers, customers, and members of the community where the business is located.
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securities
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documents that represent the right to recieve funds in the future
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bearer
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person or persons that hold the securities.
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3 types of financial intermediaries
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investment bankers, brokers, and dealers.
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investment banking firms
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exist to help businesses and state and local governments sell their securities to the public.
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underwriting
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the process by which an investment banker purchases all the new securities from the issuing company and then resells them to the public.
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best efforts basis
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the investment banker will try their best to sell the securities at the desired price, but there are no guarantees.
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brokers
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agents who work on behalf of the investors.
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dealers
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make their living buying securities and reselling them to others.
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primary market
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when a security is created and traded for the first time in the financial market place.
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the secondary market
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where previously issued securities "used securities" are traded among investors.
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money market
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short-term securities are traded here and networks of dealers operate in this market. (treasury bills, negotiable certificates of deposit, commercial paper, and short-term debt instruments)
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capital market
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long-term securities are traded here. Federal, state, and local governments, as well as large corporations raise long term funds in the capital market. (bonds and stocks)
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security exchanges
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organizations that facilitate trading of stocks and bonds among investors
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The Over the Counter Market (OTC)
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has no fixed location (it is everywhere) (NASDAQ)
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market efficiency
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refers to the ease, speed, and cost of trading securities.
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treasury bills
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money market securities issued to finance the federal budget deficit and to refinance the billions of dollars of previously issued government securities that come due each week.
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negotiable CD's
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large denomination CD's($100,000 to $1 million or more) with maturities of two weeks to a year
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commercial paper
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a type of short-term promissory note--similar to IOU's. Issued by large corporations with strong credit ratings. Commercial paper is unsecured.
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banker's acceptance
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a short-term debt instrument where the bank accepts the responsibility to pay. Often used when firms are doing business internationally.
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bonds
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essentially IOU's that promise to pay their owner's a certain amount of money on some specified date in the future and in most cases interest payments at regular intervals until maturity.
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face value
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the amount that a bond promises to pay its owner at some date in the future. (face value, par value, or principal)
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maturity date
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the date at which the issuer is obligated to pay the bondholder the bond's face value.
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coupon interest
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interest payments made to the bond owner during the life of the bond.
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zero coupon bonds
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bonds that don't pay any interest at all.
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municipal bonds
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bonds issued by state and local governments.
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liquidity risk premium
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extra compensation that lenders demand to compensate for the lack of liquidity.
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default risk premium
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extra compensation that lenders demand for assuming the risk of default (not being paid on time)
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risk premiums
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compensates lenders for taking risks (default risk, illiquidity risk, and maturity risk)
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inflation premium
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compensates lenders for the anticipation of inflation.
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maturity risk premium
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the up and down adjustments that lenders make to their current interest rates to compensate for the uncertainty about future changes in rates.
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nominal rate of interest
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the total of the real rate of interest, the inflation premium, and the risk premiums
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intermediation
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when funds flow from a surplus economic unit to a financial institution to a deficit economic unit.
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required reserve ratio
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the exact percentage of deposits a bank must hold in reserve.
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primary reserves
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non interest earning assets held in bank vaults.
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interest rate spread
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the rate charged to borrowers minus the rate paid to depositors.
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savings and loan associations
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in business to take in deposits and lend money, primarily in the form of mortgage loans.
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credit unions
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member owned financial institutions. They pay interest on shares bought by and collect interest on loans made to the members. The members are individuals rather than business or government units.
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finance companies
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nonbank firms that make short term and medium term loans to consumers and businesses. 3 types: consumer, commercial, and sales.
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insurance companies
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firms that assume risks for their customers, for a fee. 2 main types: life insurance companies and property and casualty insurance companies
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10-k reports
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contain audited financial statements submitted annually to the SEC for distribution to the public
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10-Q reports
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contain unaudited financial statements, submitted quarterly, and also for pulic distribution.
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capital
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sum of the liabilities and equity.
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balance sheet
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shows firms assets, liabilities, and equity at a given point in time.
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current assets
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cash and near cash assets
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current liabilities
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liabilities that are due the earliest.
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profitability ratios
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measure how much company revenue is eaten up by expenses, how much a company earns relative to sales generated, and the amount earned relative to the value of the firm's assets and equity
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liquidity ratios
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indicate how quickly and easily a company can obtain cash for its needs.
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debt ratios
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measures how much a company owes to others.
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asset activity ratios
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measures how efficiently a company uses its assets.
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market value ratios
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measure how the market value of a company's stock compares with its accounting values.
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gross profit margin
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measures how much profit remains out of each sales dollar after the cost of goods sold is subtracted.
Gross Profit/sales the higher the ratio, the better the cost controls compared with the sales revenue. |
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operating profit margin
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measures how much profit remains out of each sales dollar after all the operating expenses are subtracted.
EBIT/sales revenue |
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net profit margin
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measure how much profit out of each sales dollar is left after all expenses are subtracted.
Net income/sales revenue |
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return on assets ratio
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indicates how much income each dollar of assets produces on average.
net income/total assets |
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return on equity ratio
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measures the average return on the firm's capital contributions from its owners. (how many dollars of income produced for each dollar invested by common stockholders.)
Net income/common stockholder's equity. |
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current ratio
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compares all the current assets of a firm with all the current liabilities.
current assets/current liabilities |
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quick ratio
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similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
(current assets-inventory)/current liabilities |
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debt to total assets
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measures the percentage of the firm's assets that is financed with debt.
total debt/total assets |
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times interest earned ratio
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often used to assess a company's ability to service the interest on its debt with operating income from the current period.
EBIT/Interest expense |
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average collection period
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measures on average how many days the company's credit customers take to pay their accounts.
accounts recievable/(average daily credit sales/365) |
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inventory turnover
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tells how efficiently the firm turns inventory into sales.
sales/inventory |
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total asset turnover
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measures how efficiently a firm utilizes its assets.
sales/total assets |
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price to earnings ratio
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the higher the P/E ratio, the higher are investor's growth expectations.
Market price per share/earnings per share |
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going concern value
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the value of the firm's future earnings minus the liquidation value.
the higher the M/B ratio when it is greater than 1, the greater the going concern value. |
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economic value added (EVA)
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a measure of the amount of profit remaining after accounting for the return expected by the firm's investors.
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Du Pont equation
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net profit margin x total asset turnover = return on assets
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modified Du Pont equation
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net profit margin x total asset turnover x equity multiplier = return on equity
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Pro forma financial statments
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show what the firm will look like if the sales forecasts are indeed realized and management's plans carried out.
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cash budget
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shows the projected flow of cash in and out of the firm for specified time periods.
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risk aversion
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the tendency to avoid additional risk
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financial risk
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additional volatility of a firm's net income caused by the fixed interest expense.
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financial leverage
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where a given change in operating income causes net income to change by a larger percentage.
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