Finance Ratios and Cash Flows Quiz

The money market is a financial market where short-term debt instruments, such as Treasury bills, commercial paper, and certificates of deposit, are traded. These instruments have maturities of less than a year.

The capital market is a financial market where long-term debt instruments, such as bonds, and equity instruments, such as stocks, are traded. These instruments have maturities of over a year.

The income statement, also known as the profit and loss statement, reports a company's revenue, expenses, and net income or loss over a specific period, usually a quarter or a year.

The balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It shows the company's assets, liabilities, and equity.

The statement of cash flows is a financial statement that shows the inflows and outflows of cash and cash equivalents of a company during a specific period, usually a quarter or a year.

The current ratio is a financial ratio that measures a company's ability to pay its short-term obligations with its current assets. It is calculated by dividing current assets by current liabilities.

The quick ratio, also known as the acid-test ratio, measures how well a company can pay its short-term obligations with its most liquid assets, excluding inventory. It is calculated by dividing quick assets by current liabilities.

The debt ratio is a financial ratio that measures the proportion of a company's total assets that are financed by debt. It is calculated by dividing total debt by total assets.

A financial ratio that measures a company's operating income as a percentage of its net sales revenue.

A financial ratio that measures a company's net income as a percentage of its net sales revenue. It indicates how much profit a company is generating from its total sales after deducting all expenses, including taxes and interest expenses.

A financial ratio that measures a company's profitability on a per-share basis. It represents the portion of a company's profit that is allocated to each outstanding share of its common stock.

A financial ratio that measures a company's profitability in relation to its total assets. It indicates how much profit a company generates for each dollar of assets it owns.

A financial ratio that measures a company's profitability in relation to its shareholders' equity. It indicates how much profit a company generates for each dollar of equity investment made by its shareholders.

A financial ratio that measures a company's stock price relative to its earnings per share. It indicates how much investors are willing to pay for each dollar of earnings generated by a company.

A financial ratio that measures a company's market value relative to its book value. It indicates how much investors are willing to pay for each dollar of book value owned by the company.

A non-cash expense that represents the reduction in the value of an asset over time due to wear and tear, obsolescence, or other factors. It is used to account for the cost of long-term assets, such as property, plant, and equipment, and is typically recorded on a company's income statement.

The total cash flow a company generates after accounting for capital expenditures (CAPEX) needed to maintain and grow the business.

A stream of equal payments made over a specific period of time. It's like getting a fixed amount of money on a regular schedule.

A type of annuity where the payments continue forever. It's like a perpetual stream of cash.

The present value is the current worth of a future cash flow. It tells you how much that future money is worth today.

A method of valuing investments by analyzing the future cash flows they will generate. It discounts these flows back to their present value.

The rate used to discount future cash flows back to their present value. Think of it as the opportunity cost of investing.

A graph that depicts the relationship between the interest rate (yield) of bonds and their maturity dates. It shows how bond yields change for different time frames.

The total expected return from a bond when it is held until maturity.

The weighted average cost of capital (WACC) reflects the average cost of all the capital a company has raised, considering the proportion of each type of capital and its associated cost.

The payback period is a simple capital budgeting technique that calculates the time it takes for a project to recover its initial investment. It's calculated by dividing the initial investment by the expected annual cash inflows.

Net Present Value (NPV) is a method used to evaluate the profitability of an investment by calculating the present value of all expected future cash flows associated with the investment, minus the initial investment. A positive NPV indicates that the investment is expected to generate returns more than the required rate of return, while a negative NPV indicates that the investment is not expected to generate sufficient returns.

Incremental cash flows refer to cash flow that a company acquires when it takes on a new project. The initial investment, operating cash inflows, and terminal cash flow together represent a project's relevant cash flows.

The Internal Rate of Return (IRR) is a measure used to estimate the potential profitability of an investment. It represents the discount rate at which the net present value (NPV) of an investment is zero.

Sunk costs are costs that have already been incurred and cannot be recovered or undone, regardless of the decision made. These costs are irrelevant in decision-making because they cannot be changed by the decision.

Opportunity costs are the benefits or opportunities that are forgone or sacrificed because of choosing one alternative over another. They represent the potential value of the next best alternative that is not chosen.

Operating leverage is the point where a company starts to generate profits after covering all its fixed and variable costs.

The use of borrowed funds or debt to finance a company's operations or investments. It measures the extent to which a company relies on debt financing instead of equity financing.

Total leverage considers both operating leverage (fixed costs) and financial leverage (debt) to impact a company's earnings per share and return on equity.

A company's strategy for distributing profits to shareholders through dividends and share buybacks.

A dividend paid to shareholders in the form of additional shares rather than cash.

Assets expected to be converted to cash within one year, such as cash, accounts receivable, inventory, and short-term investments.

Obligations a company expects to pay off within the next 12 months, like accounts payable, wages payable, and taxes payable.

The difference between a company's current assets and current liabilities. It represents the cash a company has available for daily operations.

A metric that measures the time it takes a company to convert investments in inventory and other resources into cash flows from sales.

When a bond's market price is different from its par value, the return an investor expects to earn (yield to maturity) will be different from the fixed interest rate (coupon rate) stated on the bond. This is because the bond's cash flows are discounted based on the market price, which reflects the current interest rates.

A semiannual coupon is a type of interest payment on a bond that is paid twice a year. Many bonds make these regular payments to their investors, making them more frequent than annual coupon payments.

Equity represents the ownership stake in a company, indicating the amount of money invested by the owners. This includes both initial investments and accumulated profits.

The decision to pay dividends to shareholders is at the discretion of the company's board of directors. They can choose to pay dividends in cash, stock, property, or scrip.

Venture capital (VC) is a form of private equity investment specifically targeting companies with high growth potential. These companies are often startups or small businesses with innovative ideas.

Venture capitalists (VCs) are professional investors who provide financial support to companies with high growth potential in exchange for a share of the business's ownership and profits.

Business angels are individuals who invest their personal funds in startups or small businesses. They are often experienced entrepreneurs or professionals with relevant industry knowledge, providing both capital and valuable guidance.

An Initial Public Offering (IPO) is the first time a company sells its shares to the public through a stock exchange. This event allows the company to raise significant capital from a wider pool of investors.

The constant-growth model is a method used to estimate a company's stock value based on its expected future dividend payments, assuming dividends will increase at a constant rate indefinitely. It's a simplified approach to valuing stocks.

The minimum return that investors expect to earn from investing in a company is its cost of capital. This represents the compensation for taking on the risk of investing in the company.