Finance Final.txt

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Finance Final.txt
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  1. The process of planning and evaluating expenditures on assets whose cash flows are expected to extend beyond one year - analysis of potential additions to fixed assets - long term decisions involving large expenditures - very important to a firms future
    Capital Budgeting
  2. A firms growth and its ability to remain competitive depend on a constant flow of _____ for new products, ways to make existing products better, and ways to produce output at a lower cost.
    ideas
  3. Procedures must be established for evaluating the _____ of capital procedures
    worth
  4. Project Classification - Whether to purchase capital assets to take the place of existing assets to maintain or improve profitable operations using existing production levels.
    Replacement Decisions
  5. Project Classification - Whether to purchase capital projects and add them to existing assets to increase production levels.
    Expansion Decisions
  6. Project Classification - Projects whose cash flows are not affected by decisions made about other projects; acceptance of one project does not affect the acceptance of the other projects.
    Independent Projects
  7. Project Classification - A set of projects where the acceptance of one project means the others cannont be accepted.
    Mutually Exclusive Projects
  8. The length of time before the original cost of an investment is recovered from the expected cash flow or how long it takes to get our money back. Provides an indication of a project's risk and liquidity and it is easy to calculate and understand. But it ignores TVM and cash flows occuring after.
    Payback Period
  9. The length of time it takes for a project's discounted cash flows to repay the cost of the investment. Uses discounted cash flows at a specified time. If DPB < Projects Life, Accept the project
    Discounted Payback Period
  10. Sum of the PVs of Inflows and Outflows - shows by how much a firms value and thus stockholders' wealth will increase if a capital budgeting project is purchased
    Net Present Value - for Capital Budgeting Decisions
  11. the discount rate that forces PVinflows to equal the cost. Same as forcing NPV to equal 0.
    Internal Rate of Return (IRR)
  12. How is a projects IRR related to a Bond's YTM?
    they are the same
  13. If IRR> the firm's requrired rate of return, r, then _____ _____ is left over to boost stockholders' returns
    some return
  14. A curve showing the relationship between a projects NPV and various discount rates (required rates of return)
    NPV profile
  15. Smaller project frees up funds at t = 0 for investment. The higher the opportunity cost, the more valuable these funds, so high r favors these projects.
    Size (Scale) Differences
  16. A project with faster payback provides more CF in early years for reinvestment. If r is high, early CFs are especially good.
    Timing Differences
  17. NVP assumes reinvestment at
    r
  18. IRR assumes reinvestment at
    IRR
  19. Reinvestment at the opportunity cost, r, is more realistic, so the ____ method is best. ___should be used to choose between mutually exclusive projects.
    NVP
  20. Firms use decision making methods that are based on ____ _____ concepts
    fundamental valuation
  21. Which capital budgeting methods do firms actually use
    NPV and IRR
  22. The actual cash, as opposed to accounting net income, that a firm receives or pays during some specified period. Financial Staffs roles - 1) Coordinating other department's forecasting efforts 2) Ensuring that everyone uses the same set of economic assumptions 3) Making sure that no biases are inherent in forecasts
    Cash Flow
  23. The specific cash flows that should be considered in a capital budgeting decision - include investment outlays - based on cash flows after taxes, not accounting income - only incremental cash flows are important
    Relevant Cash Flows
  24. The change in a firms net cash flow attributable to an investment project - Cash flows that change if the project is purchased- are relevant to the accept/reject decision
    Incremental Cash Flows
  25. A cash outlay that already has been incurred and cannot be recovered - Problem in determining incremental cash flows
    Sunk Cost
  26. The return on the best alternative use of an asset - problem in determining incremental cash flows
    Opportunity Cost
  27. The effect of acepting a project on the cash flows in other parts of the firm - Problem in determining incremental cash flows
    Externalities
  28. The incremental cash flows associated with a project that will occur only at the start of a projects life - includes change in net working capital
    Initial Investment Outlay
  29. The changes in day-to-day cash flows that result from the purchase of a capital project and continue until the firm disposes of the asset
    Incremental Operating Cash Flow
  30. The net cash flows that occur only at the end of a projects life - includes final disposal of the project and returning the firm's operations to where they were before the project was accepted.
    Terminal Cash Flow
  31. A project that is intended to increase sales; provides growth to the firm
    Expansion Project
  32. An analysis invloving the decision of whether to prepalce an existing, still productive asset with a new asset
    Replacement Analysis
  33. The risk an asset would have if it were a firm's only risk - measured by the variability of the asset's expected returns
    Stand Alone Risk
  34. Risk not considering the effects of stockholder's diversification - measured by a projects effect on the firm's earnings variability
    Corporate (within-firm) risk
  35. Part of a project's risk that cannot be eliminated by diversification - measured by the project's beta coefficient
    Beta (Market) Risk
  36. Technicque for measuring stand alone risk - Key variables are changed and the resulting changes in the NPV and the IRR are observed
    Sensitivity Analysis
  37. Technique for measuring stand alone risk - "bad"and "good" sets of financial circumstances are compared with the most likely situation
    Scenario Analysis
  38. Technique for measuring stand alone risk - probable future events are simulated on a computer - reflects probability of each input - but it is difficult to specify probabilty distributions and correlation - garbage in garbage out
    Monte Carlo Simulation
  39. The risk adjusted required rate of return for an individual project =rRF+(rM-rRF)Bproj
    rproj
  40. for measuring beta risk for a project -1. idetntify companies whose only business is the project in question 2. Determine the beta for each company 3. Average te betas to find an approximation of proposed project's beta
    Pure Play Method
  41. Discount rate that applies to particularly risk stream of income - it is equal to the risk free rate of interest plus a risk premium - most firms use this
    risk adjusted discount rate
  42. A situation in which a constraint is placed on the total size of the firm's capital investment.
    Capital Rationing
  43. The process of sending cash flows from a foreign subsidiary bank back to the parent company
    Repatriation of Earnings
  44. The uncertainty associated with the price at which the currency from one country can be converted into the currency of another country
    Exchnange Rate Risk
  45. The risk of seizure of a foreign subsidiary's assets by the host country or unanticipated restrictions on cash flows to the parent company
    Political Risk
  46. The management of short term assets(investments) and short term liabilities(financing sources)
    Working Capital Management
  47. A firms investment in short term assets such as: cash, marketable securities, inventory, accounts receivable
    Working Capital
  48. The amount of current assets financed by long term liabilities
    Net Working Capital
  49. Decisions regarding target levels for each current asset account and how current assets will be financed
    Working capital policy
  50. Working capital does not include _______ _______ that might be due in the current period if they are due from long-term capital decisions, even though these must be considered when assessing the firm's ability to meet its current obligations
    current liabilities
  51. Current maturies of long term debt - financing associated with a constructions program that will be funded with the proceeds of a long term security issue after the project is completed - use of short term debt to finance fixed assets
    non working capital
  52. A decision affecting one ____ ____ _____ will impact other working capital accounts
    working capital account
  53. The length of time from payment for purchases of raw materials used to manufacture a product until the collection of accounts receivable associated with the sale of the product - average length of time a dollar is tied up in current assets
    Cash Conversion Cycle
  54. The amount of time a product remains in inventories in various stages of completion - length of time required to convert materials into finished goods and then to sell those goods
    The Inventory Conversion Period
  55. The time it takes to collect cash following a sale - average length of time required to convert the firm's receivables into cash - A.K.A Days sales outstanding
    The Receivables Collection Period
  56. The average length of time between the purchase of raw materials and labor and the payment of cash for them
    The payables deferral period
  57. Relatively large amounts of cahs and marketable securities and inventories are carried and sales are stimulated by a liberal credit policy that results in a high level of receivables - customers can wait a while before paying - need high current assests
    Relaxed current asset investment policy
  58. Holdings of cash and marketable securities and inventories are minimized - require customers pay quickly
    restricted current asset investment policy
  59. A policy that is between relaxed and restricted policies
    moderate current asset investment policy
  60. Current asset balances that do not hcnage due to seasonal or economic conditions - even at the trough of a firm's business cycle
    permanent current asset
  61. current assets that fluctuate with seasonal or economic variations in a firm's business
    temporary current asset
  62. A financing policy that matches asset and liability maturities - considered a moderate current asset financing policy
    maturity matching or self liquidating approach
  63. a policy in which all of the fixed assets of a firm are financed with long term capital but some of the frim's permanent current assets are financed with short term nonspontaneous sources of funds
    aggressive approach
  64. a policy in which all of the fixed assets, all of the permanent current assets, and some of the temporary assets of a firm are financed with long term capital
    Conservative approach
  65. speed and flexibility - can be obtained much faster than long term credit and avoids long term debt (cost, penalties, and restrictive covenants)
    Advantage of Short Term Financing
  66. short term debt subjects the firm to more risk than long term debt does- short term interest expenses fluctuate and firms may not be able to repay short term debt and be forced into bankruptcy
    disadvantage of short term financing
  67. Average ____ ____ ____ of european firms is more than twice that of u.s. firms - partly because u.s. firms follow more conservative working capital policies than european firms do
    cash conversion cycle
  68. The goal of ___ ___ is to minimize the amount of cahs the firm must hold for use in conducting its normal business activities, but keep enough sufficient to pay creditors, mantain its credit rating, or meet unexpected cash needs
    cash management
  69. A cash balance necessary for day to day operations - the balance associated with routine payments and collections
    transaction balance
  70. a minimum checking account balance that a firm must maintain with a bank to help offset the costs of services such as check clearing and cash management advice
    compensating balance
  71. a cash balance held i nreserve for unforseen fluctuations in cash flows - access to line of credit can reduce need for this
    precautionary balances
  72. a cash balance that is held to enable the firm to take advantage of any bargain purchases that might arise
    speculative balance
  73. A schedule showing cash receipts, cash disbursements, and cash balances for a firm over a specified time period
    the cash budget
  74. The minimum cash balance a firm desires to maintain in order to conduct business
    target cash balance
  75. the net cash flow is determined by estimating the cash disbursements and the cash receipts expected to be generated each period
    disbursements and receipt method
  76. Cash inflows coincide with cash otflows, thereby permitting a firm to hold low transactions balances
    synchronized cash flows
  77. the process of converting into cash a check that has been written and mailed, into the payee's(receiver's) account
    check clearing
  78. the difference between the balance shown in a checkbook and the balance on the bank's records
    float
  79. the value of checks that have been written and disbursed but have not fully cleared through the banking system and thus have not been deducted from the account upon which they have been written
    disbursement float
  80. the total amount of money from checks that have been received and deposited but that have not yet been credited to the account into which they were deposited
    collections float
  81. reduces float by having payments sent to post office boxes located near customers - faster mail delievery - faster check clearing within the same federal reserve district - acceleration of receipts
    lockbox arrangement
  82. allows a customer's bank to periodically transfer funds from that customer's account to a selling firm's bank account for the payment of bills -acceleration of receipts
    preauthorized dubit system
  83. a technique used to move funds from many bank accounts to a more central cash pool to more effectively manage cash- -acceleration of receipts
    concentration banking
  84. centralzizing the processing of payables permits the financial manager to evaluate the payments coming due for the entire firm and to schedule the availability of funds to meet these needs on a companywide basis, and it also permits more efficient monitoring of payables and the effects of float - more control but can delay payments - disbursement control
    payables concentration
  85. a special checking account used for disbursements that has a balance equal to zero when there is no activity - disbursement control
    zero balance account
  86. a checking account in which funds are not deposited until checks are presented for payment, usually on a daily basis - disbursement control
    controlled disbursement account
  87. securities that can be sold on short notice without loss of principal or original investment - substitutes for cash balances and temporary investment
    marketable securities
  88. primarily because their competitiors offer credit, financially selling goods for credit is not to the benefit of the firm, but most firms have competition and must conform to customer's expectations in order to keep/attract customers
    why firms sell for credit
  89. a set of decisions that include a firm's credit standards, credit terms, methods used to collect credit accounts, and credit monitoring procedures
    credit policy
  90. standards that indicate the minimum financial strength a customer must have to be credit worty
    credit standards
  91. the payment conditions offered to credit customers - includes the length of the credit period and any cash discounts offered
    terms of credit
  92. the length of time for which credit is granted- after that time the credit account is considered delinquent
    credit period
  93. a reduction in the invoice price of goods offered by the seller to encourage early payment
    cash discount
  94. the procedures followed by a firm to collect its accounts receivable
    collection policy
  95. the process of evaluating the credit policy and payment patterns to determine whether a shift in the customer's payment pattern occurs or whether the credit policy needs modifications
    receivables monitoring
  96. the average length of time required to collect accounts receivable- also called the average collection period or receivables collection period
    days sales outstanding
  97. report showing how long accounts receivable have been outstanding - the report divides receivables into specified periods, which provides information about the proportion of receivables that are current and proportion that are past due for given lenghts of time
    aging schedule
  98. any liability originally scheduled for repayment within one year -such as accruals, accounts payable, short term bank loans, commercial paper
    short term credit
  99. continually recurring short term liabilities - liabilities, such as wages and taxes, that increase spontaneously with operations
    accurals
  100. The creid created when one firm bus on credit from another firm
    trade credit
  101. credit received during the discount period
    free trade credit
  102. credit taken in excess of free trade credit whose cost is equal to the discount lost
    costly trade credit
  103. a document specifying terms and conditions of a loan includes amount, interest rate, repayment schedule, collateral, and any toehr agreements
    promissory notes
  104. a minimum checking account balance that a firm must maintain with a bank to borrow funds - generally 10 to 20 percent of the amount of loans outstanding
    compensating balance
  105. an arrangement in which a bank agrees to lend up to a specified maximum amount offunds during a designated period
    line of credit
  106. a formal, committed line of credit extended by a bank or other lending institution
    revolving line of credit agreement
  107. a fee charged on the unused balance of a revolving credit agreement to compensate for bank for guaranteeing that the funds will be availabe when needed by the borrower; the fee normally is about 25% of the unused balance
    commitment fee
  108. a published rate of interest charged by banks to short-term borrowers (usually large, financially secure corporations) with the best credit - rates on short term loans generally are pegged to this
    prime rate
  109. some bank loan officers are active in providing counsel and in stimulating dvelopment loans to firms in their early and formative years
    advice and counsel
  110. banks differ in the extent to which they will support the activites of borrowers in bad times
    loyalty to customers
  111. larger banks have separate departments that specialize in different kinds of loans
    specialization
  112. the maximum loan a bank can make to any one customer is limited to 15% of the banks capital accounts
    maxiumum loan size
  113. banks that not only loan their depositors' money but also provide services such as providing customers with equity capital and financial advice
    merchant banking
  114. unsecured short term promissory notes issued by large financially sound firms to raise funds - restricted to a comparatively small number of firms that are exceptionally good credit risks- permits a corp to tap a wider range of credit sources - less persoalized relationship than bank relationships
    commercial paper
  115. vary from 1 to 9 months with an average of about 5 months
    maturities
  116. dollar cost of borrowing includes the interest paid on the loan, application fees, charges for commitment fees, and so forth - amount of usable funds includes the amount of the loan that actually can be used (spent) by the borrower
    percentage cost per period
  117. APR we annualize the cost to make it easier to compare short term credit insturments with different ...
    maturities
  118. both the amount borrowed and the interest charged on that amount are paid at the maturity of the loan - there are no payments made before maturity
    simple interest loan
  119. the amoutn of the loan or the amount borrowed
    face value or principal amount
  120. the APR that is used to compute the interest rate per period rper
    quoted simple interest rate
  121. a loan in which the interest, which is calculated on the amount borrowed(principal) is paid at the beginning of the loan period - interest is paid in advance
    discount interest loan
  122. interest that is calculated and then added to the amount borrowed to obtain the total dolalr amount to be paid back in equal installments
    add on interest
  123. compensating balances can raise the _____ rate on the loan
    effective
  124. a loan backed by collateral - for short term loans it is usually inventory recievables or both
    secured loan
  125. a system of standards that simplifies procedures for establishing loan security
    uniform commercial code
  126. using accounts receivable as collateral for a loan
    pledging receivables
  127. the lender can seek payment from the borrowing firm when receivables accounts used to secure a loan are uncollectible
    recourse
  128. the outright slae of receivables
    factoring
  129. gives the lending institution a lien against all of the borrower's inventories - generally is used when the inventory put up as collateral is relatively low period, fast movine, and difficult to identify individually
    blanket liens
  130. an instrument acknowledgin that the goods are held in trust for the lender - automobile dealer financing is one of the best examples
    trust receipts
  131. similar concept to trust receipts, but requires the inventory in quesiton be stored in a warehouse under custody of a thrid party
    warehouse receipts
  132. field warehouse loans are cuitable for nonperishable items such as canned goods, etc
    acceptable products
  133. fixed costs of a field warehousing arrangement are relativley high - not suitable for a very small firm - an efficient field warehousing operation requires an inventory of at least $1 million
    cost of financing
  134. the amount to which a cash flow or series of cash flows will grow over a period of time when compounded at a given interest rate
    future value
  135. the value today of a future cash flow or series of cash flows
    present calue
  136. the process of finding the present value of a future cash flow or series of future cash flows, it is the reverse of compounding
    discounting
  137. a series of payments of equal amounts at fixed intervals for a specified number of periods
    annuity
  138. an annuity whose payments occur at the end of each period- this is the more more common form of an annuity will take
    ordinary (deferred) annuity
  139. an annuity whose payments occur at the beggining of each period
    annuity due
  140. annuities that go on indefinitely pmt/r
    perpetuity
  141. a series of casthe process of determining the future value of a cash flow or series of cash flows when interest is added once a year
    annual compounding
  142. is the process of determining the future value of a cahs flow or series of cash flows when interest is added twice a year
    semiannual compounding
  143. will the FV of a lump sum be larger or smaller if we compound more often, holding the stated r constant?
    larger
  144. the nominal or face value of a stock or bond - establishes the amount due to the preferred stockholders in the event of liquidation - the preferred dividend generally is stated as a percentage of this
    par value
  145. any preferred dividends not paid in previous periods must be paid before common dividends can be distributed dividends in arrears
    cumulative dividends
  146. dividends must be paid on preferred stock before they can be paid on common stock and i nthe event of bankruptcy the claims of preferred stockholders must be satisfied before the common stockholders receive anything
    priority to assets and earnings
  147. gives the issuing corporation the right to call in the preferred stock for redemption
    call provision
  148. the amount in excess of par value that a company must pay when it calls a security
    call premium
  149. call for the repurchase and retirement of a given percentage of the stock each year
    sinking fund
  150. stocks of firms that tradidionally pay large relatively constand dividends each year
    income stocks
  151. stocks that gnerally pay little or no dividends so as to retain earnings to help fund growth opportunities
    growth stocks
  152. a document giving one person the authority to act for anohter, typically the power to vote shares of common sotkc
    proxy
  153. an attempt by a person or group of people to gain control of a firm by getting its stockholders to grant that person or group the authority to vote their shares so as to change the management team
    proxy fight
  154. an action whereby a person or group succeeds in ousting a firms management and taking control of the company
    takeover
  155. a provision in the corporate charter or bylaws that gives existing common stockholders the right to purchase on a pro rata basis any addiotnal shares of stock sold by the firm
    preemptive right
  156. common stock that is given a special dsicnation such as class a b etc to meet special needs of the company
    classified stock
  157. a class of stock owned by the firm's founders who have sold voting rights
    founders shares
  158. certificates created by banks that represent ownership in stocks of foreign countries
    american depository receipts
  159. stock issued by foreign companies and traded in the u.s.
    yankee stock
  160. stock traded in countries other than the home country of the company not including the u.s.
    euro stock
  161. the change in price during a givne year divided y its price at the beginning of the year
    capital gains yield
  162. a common stock whose future dividends are not expected to grow at all
    zero growth stock
  163. growth that is expected to continue into the foreseeable future at about the same rate as that of the economy as a whole
    normal(constant) growth
  164. the part of the life cycle the calue of assets that are owned minus the amount of debt that is owed
    equity

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