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28 Cards in this Set
- Front
- Back
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Four basic areas of finance |
Corporate Investments Financial institutions |
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Three major forms of business organisations |
Sole proprietorship Partnership (general, limited) Corporation |
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Advantages of sole proprietorship |
Easy to start Least regulated Single owner; keep profits Taxes once as personal income |
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Disadvantages of sole proprietorship |
Limited to life of owner Equity capital is limited to owners personal wealth Unlimited liability Difficult to sell ownership interest |
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Advantages of partnership |
Multiple owners More capital Easy to start Taxes once as personal income |
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Disadvantages of partnership |
Unlimited liability Partnership dissolves when one dies or wants to sell Hard to transfer ownership |
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Advantages of corporation |
Limited liability Unlimited life Separation of ownership and management Easy transfer of ownership Easy to raise capital |
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Disadvantages of corporation |
Separation of ownership Company profits are taxed multiple times |
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Agency relationship |
Principal hires agents to run company |
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Agency problem |
Conflict of interest between principal and agent |
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Primary market |
Where firms float new stocks/bonds to the public for the first time to gain investors |
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Secondary market |
Where investors trade amongst themselves |
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The direction of cashflows between firms and financial markets |
1. Firm issues securities to raise cash 2. Firm invests in assets 3. The assets generate cash flow 4. Firm uses cash to pay tax and shareholders 5. Reinvested cash is taken back into firm 6. Cash is paid to investors as interest and dividends |
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Assets equation |
Liabilities + shareholders equity |
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NWC equation |
Current assets - current liabilities |
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Liquidity |
The ease of conversion to cash without loss of value |
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Shareholder equity equation |
Assets - liabilities |
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Market value |
The price assets liabilities and equity can be bought or sold Obtained by trading an asset on market |
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Book value |
Original purchase cost |
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Net income equation |
Revenue - expenses |
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Non cash items |
Expenses charged against revenue that don't affect cash flow I.e. depreciation |
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Profit margin equation |
Net income / sales |
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Return on assets equation |
Net income / total assets |
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Return on equity equation |
Net income / total equity |
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Earnings per share equation |
Net income / shares outstanding |
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Marginal income tax |
Percentage paid on next dollar earned |
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Average income tax equation |
Tax bill / taxable income |
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Difference between balance sheets and income statement |
Balance sheets report assets, liabilities and equity; show firms financial status at a specific point in time; generated after the income statement Income statement reports revenues and expenses Net to profit/loss; shows firms financial status over a period of time |
