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FIN 3303: EXAM 1
a stream of equal periodic cash flows
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Annuity
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an annuity for which he payment occure at the beginning of each period
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Annuity Due
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Describes the process of calculating present values
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Discounting
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the annual rate of interest actually paid or earned, reflecting the impact of compounding frequency (true annual return)
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Effective Annual Rate (EAR)
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the value of an investment made today measured at a specific future date using compound interest
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Future Value
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an annuity for which the payments occur at the end of each period
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Ordinary Annuity
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a level or growing cash flow stream that continues forever
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Perpetuity
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the value today of a cash flow to be received at a specific date in the future assuming an opportunity to earn interest at a specified rate
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Present Value
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interest compounds four times per year
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Quarterly Compounding
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interest compounds twice a year
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Semiannual Compounding
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letter ratings assigned to bonds by specialized agencies that evaluate the capacity of bond issuers to repay their debs. Lower ratings signify higher default risk
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Bond Ratings
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the rate derived by dividing the bond's annual coupon payment by its par value
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Coupon Rate
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the risk that the corporation issuing a bond may not make all scheduled payments
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Default risk
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a bond sells at a discount when its market price is less than its par value
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Discount
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the date when a bond's life ends and the borrower must make the final interest payment and repay the principal
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Maturity Date
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the face value of a bond, which the borrower repays at maturity
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Par Value
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A bond that sells for more than its par value
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Premium |
bonds that pay no interest and sell below par value (also called zero-coupon bonds)
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Pure Discount Bond
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the rate of return that investors expect or require an investment to earn given its risk
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Required rate of return
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the discount rate that equates the present value of the bond's cash flows to its market price
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Yield to Maturity
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a measure of the speed with which a firm converts various accounts into sales or cash
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Activity ratios
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a measure of the proportion of total assets financed by a firm's equity (equity multiplier)
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Assets-to-equity (A/E) ratio
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a measure of inventory turnover, calculated by dividing the turnover figure into 365, the # of days in a year
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Average age of inventory
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the average amount of time that elapses from a sale on credit until the payment becomes usable funds for a firm. Calculated by dividing accounts receivable by average sales per day
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Average collection period
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the average length of time it takes a firm to pay its suppliers, calculated by dividing the firm's accounts payable balance by its average daily purchases
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Average payment period (APP)
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a measure of a firm's ability to meet its short-term obligations defined as current assets divided by current liabilities
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Current Ratio
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a measure of the proportion of total assets financed by a firm's creditors
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Debit ratio
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a measure of the firm's financial leverage, calculated by divided long-term debt b stockholders' equity
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Debit-to-equity ratio
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net income net of preferred stock dividents
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Earnings available to common stockholders
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earnings available for common stockholders divided by the number of shares of common stock outstanding
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Earnings per share (EPS)
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a measure of the proportion of total assets financed by a firm's equity
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Equity Multiplier
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a measure of the efficiency with which a firm uses its fixed assets, calculated by dividing sales by the number of dollars of net fixed asset investment
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Fixed asset turnover
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the net amount of cash flow remaining after the firm has met all operating needs and paid for investments, both long-term (fixed) and short-term (current). Represents the cash amount that a firm could distribute to investors after meeting all its other obligations
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Free cash flow (FCF)
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a measure of profitability that represents the percentage of each sales dollar remaining after a firm has paid for its goods
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Gross Profit margin
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a measure of how quickly a firm sells its goods
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Inventory turnover
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Calculating and interpreting financial ratios to assess a firm's performance and status
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Liquidity ratios
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a measure used to assess a firm's future performance by relating its market value per share to its book value per share
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Market/Book (M/B) Ratio
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a measure of profitability that represents the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted
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Net profit Margin
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amount of cash flow generated by a firm form its operations. Mathematically, earnings before interest and taxes (EBIT) minus taxes plus depreciation
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Operating Cash Flow (OCF)
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measure of profitability that represents the percentage of each sales dollar remaining after deducting all costs and expenses other than interest and taxes
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Operating profit margin
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measure of a firm's long term growth prospects that represents the amount investors are willing to pay for each dollar of a firm's earnings
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Price/Earnings (P/E) Ratio
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measure of a firm's liquidity that is similar to the current ratio except that it excludes inventory, which is usually the least-liquid current asset
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Quick (acid-test) ratio
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measure that captures the return earned on the common stockholders' (owners') investment in a firm
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Retur on common equity (ROE)
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measure of the overall effectiveness of management in generating returns to common stockholders with its available assets
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Return on total assets (ROA)
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measure of the firm's ability to make contractual interest payments, calculated by dividing earnings before interest and taxes by interest expense
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Times interest earned ratio
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a measure of the efficiency with which a firm uses all its assets to generate sales' calculated by dividing the dollars of sales a firm generates by the dollars of asset investment
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Total asset turnover
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the conflict between the goals of a firm's owners and its managers
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Agency Problems
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selecting the best projects in which to invest the resources of the firm, based on each project's perceived risk and expected return
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Capital budgeting function
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developing ownership and corporate governance structures for companies that ensure that managers behave ethically and make decisions that benefit shareholders
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Corporate Governance Functions
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in U.S. law, a separate legal entity with many of the same economic rights and responsibilities as those enjoyed by individuals
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Corporation
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raising capital to support companies' operations and investment programs
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External Financing Function
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managing firms' internal cash flows and its mix of debt and equity financing, both to maximize the value of the debt and equity claims on the firms' and to ensure that companies can pay off their obligations when they come due
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Financial Management Function
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one or more totally passive participants in a limited partner ship, who do not take any active role in the operation of the business and who do not face personal liability for the debts of the business
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Limited Partners
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sales of securities to investors by a corporation to raise capital for the firm
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Primary-Market Transactions
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managing firm's exposures to all types of risk, both insurable and uninsurable, in order to maintain optimum risk-return trade-offs and thereby maximize shareholder value
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Risk Management Function
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trades between investors that generate no new cash flow for the firm
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Secondary-market Transactions
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