Financial Management Theory Questions PDF

0. What are the 4 main differences between debt and equity? Differences Equity Debt Voice in management Yes No Claims on income and assets Subordinate to debt...

0. What are the 4 main differences between debt and equity? Differences Equity Debt Voice in management Yes No Claims on income and assets Subordinate to debt Superior to equity Maturity No Yes Tax treatment No deduction Interest deductible 1. Define Money Market vs. Capital Markets Money Market: The money market is a part of the financial system where short-term financial instruments, such as Treasury bills, commercial paper, and certificates of deposit, are traded. Capital Markets: The capital markets refer to the markets for long-term financial instruments such as stocks, bonds, and other securities. The primary function of the capital markets is to facilitate the raising of long-term capital for companies, governments, and other entities. 2. The income statement is…? The income statement, also known as the profit and loss statement, is a financial statement that reports a company's revenues, expenses, and net income or loss over a specific period, usually a quarter or a year. 3. The balance sheets. 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, and how they are financed. 4. The statement of cash flows? 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. 5. The current ratio? The current ratio is a financial ratio that measures a company's ability to pay its short-term obligations with its current assets. 6. The quick ratio? The quick ratio, also known as the acid-test ratio, is a financial ratio that measures a company's ability to pay its short-term obligations with its most liquid assets, excluding inventory. 7. The debt ratio? The debt ratio is a financial ratio that measures the proportion of a company's total assets that are financed by debt. 8. The times interest earned ratio. The times interest earned (TIE) ratio, also known as the interest coverage ratio, is a financial ratio that measures a company's ability to meet its interest payments on outstanding debt. 9. Operating profit margin? 10. The operating profit margin is a financial ratio that measures a company's operating income as a percentage of its net sales revenue. 11. Net profit margin?  The net profit margin is 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. 12. Earnings per share? Earnings per share (EPS) is 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. 13. The return on total assets? The return on total assets (ROTA) is 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. 14. The return on equity? The return on equity (ROE) is 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. 15. The price/earnings (P/E) ratio? The price/earnings (P/E) ratio is 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. 16. The market/book (M/B) ratio? The market/book (M/B) ratio is 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. 17. Depreciation? Depreciation is 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. 18. The statement of cash flows summarizes the firm’s cash flow over a given period: Operating flows: (+formula) Operating Flows: Operating cash flows represent the cash inflows and outflows related to a company's core business operations. This includes cash received from customers, payments to suppliers and employees, and other operating expenses. Operating Cash Flows = Net Income + Depreciation and Amortization +/- Changes in Working Capital Investment flows: Investment cash flows represent the cash inflows and outflows related to a company's investments in long-term assets, such as property, plant, and equipment, and other investments. Financing flows? Financing cash flows represent the cash inflows and outflows related to a company's financing activities, such as raising capital, repaying debt, and paying dividends. 19. Free cash flow (FCF)? Free cash flow (FCF) is a financial metric that measures the amount of cash a company generates after accounting for its capital expenditures (CAPEX) necessary to maintain and expand its business. 20. An annuity: An annuity is a financial product that provides a series of payments over a specified period in exchange for a lump sum payment or a series of payments made over time. 21. A perpetuity: A perpetuity is an annuity that has no end, or a stream of cash payments that continues forever.. 22. Present value is … of a future amount? The Present Value (PV) is an estimation of how much a future cash flow (or stream of cash flows) is worth right now. 23. Discounting cash flows is? Discounted cash flow (DCF) valuation is a type of financial model that determines whether an investment is worthwhile based on future cash flows. 24. The discount rate “r” is? Discounted cash flow (DCF) valuation is a type of financial model that determines whether an investment is worthwhile based on future cash flows. 25. The yield curves. Depict the relationship between bonds yield and bond maturity. The yield curve is a graph that shows the relationship between the yield or interest rate of bonds with different maturities. 26. The yield to maturity is. Yield to maturity (YTM) is the total expected return from a bond when it is held until maturity. 27. BONDS: Basic Valuation Model? The basic valuation model for bonds involves calculating the present value of the bond's future cash flows, which consist of periodic interest payments and the principal repayment at maturity. 28. BONDS: Interest rate risk is? Interest rate risk in bonds refers to the risk that changes in interest rates will affect the bond's value. 29. BONDS: what is a bond? A bond is a debt security that represents a loan made by an investor to a borrower, typically a corporation or government entity. When the bond value differs from par, the yield to maturity is…? When the bond value differs from par, the yield to maturity will be different from the coupon rate, as the bond's cash flows are discounted based on the market price rather than the par value. 30. BONDS: What is a semiannual coupon? A semiannual coupon is a type of coupon payment that is paid twice per year on a bond. Most bonds pay interest to their investors in the form of coupon payments, which are typically made on an annual or semi- annual basis. 31. SHARES: Equity consists of? Equity is the amount of money that a company's owner has put into it or owns. 32. SHARES: The payment of dividends to the firm’s shareholders is at the discretion of? Dividends may be paid in.  Cash: This is the most common form of dividend payment, where the company distributes cash to its shareholders. Stock: Some companies may pay dividends in the form of additional shares of stock, also known as a stock dividend. This means that shareholders receive additional shares of the company's stock instead of cash. Property: In some cases, companies may distribute assets or property to their shareholders as dividends. This is less common than cash or stock dividends. Scrip: A scrip dividend is a type of dividend where the company issues certificates that can be redeemed for shares or cash later. 33. Venture capital is. Venture capital (VC) is money invested in startups or small businesses with high-growth potential. 34. Venture capitalists (VCs) are? A venture capitalist (VC) is a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake. 35. Business Angels are? Business angels are private individuals who invest in businesses from a purely business-related perspective. They're often referred to as private or informal investors. 36. SHARES: IPOs (initial public offering) are? An Initial Public Offering (IPO) is the first sale of a company's stock to the public. In an IPO, a company raises capital by selling shares of its stock to investors on a public exchange. 37. SHAREs: The constant-growth model is? The constant-growth model is a method used to value a company's stock based on its expected future dividends. The model assumes that the company's dividend payments will grow at a constant rate indefinitely. 38. The cost of capital represents. The cost of capital represents the minimum return that investors expect to earn from an investment in a company. 39. The weighted average cost of capital (WACC), reflects? 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. 40. The payback method is. The payback method is a simple capital budgeting technique that calculates the time it takes for a project to recover its initial investment. It is calculated by dividing the initial investment by the expected annual cash inflows. 41. NPV =? NPV stands for net present value, which 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. 42. Incremental cash flows are? incremental cash flow refers to cash flow that a company acquires when it takes on a new project. 0. The initial investment, operating cash inflows, and terminal cash flow together represent a project’s relevant cash flows. Before or after tax? The relevant cash flows of a project can be calculated before or after tax, depending on the context and purpose of the analysis. In some cases, analysts may calculate cash flows before taxes to focus on the cash flows generated by the project itself, while in other cases, they may calculate after-tax cash flows to account for the impact of taxes on the project's profitability. Ultimately, the choice of whether to use before-tax or after-tax cash flows will depend on the specific requirements of the analysis and the preferences of the analyst. 43. The Internal Rate of Return (IRR) is? The Internal Rate of Return (IRR) is a measure used to estimate the potential profitability of an investment. 44. Sunk costs are? Sunk costs are costs that have already been incurred and cannot be recovered or undone, regardless of the decision made. 45. Opportunity costs are. Opportunity costs are the benefits or opportunities that are forgone or sacrificed because of choosing one alternative over another. 46. LEVERAGE: Operating leverage is? it is the point where a company starts to generate profits after covering all its fixed and variable costs. 47. The operating breakeven point is. Financial leverage refers to 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 as opposed to equity financing. 48. LEVERAGE: Financial leverage is? Financial leverage refers to the use of debt to finance a company's operations or investments, with the goal of increasing returns to shareholders. 49. Total leverage is? Total leverage combines the effects of both operating leverage and financial leverage on a company's earnings per share (EPS) and return on equity (ROE). 50. The term payout policy refers to? Payout policy refers to the way a company uses its profits to pay dividends to shareholders and/or repurchase its own shares. 51. A stock dividend is. A stock dividend is a dividend payment made to shareholders in the form of additional shares of stock, rather than cash. 52. Current assets include?  Current assets include cash and other assets that are expected to be converted to cash within one year, such as accounts receivable, inventory, and short-term investments. 53. Current liabilities include? Current liabilities include any obligations that a company is expected to pay off within the next 12 months, such as accounts payable, wages payable, and taxes payable. 54. Net working capital is? Net working capital is the difference between a company's current assets and its current liabilities. It represents the amount of cash a company has available to fund its daily operations. 55. The cash conversion cycle (CCC) is? The cash conversion cycle (CCC) is a metric that measures the time it takes a company to convert its investments in inventory and other resources into cash flows from sales. A permanent funding requirement is. A permanent funding requirement is a constant investment in operating assets resulting from constant sales over time. 56. A seasonal funding requirement is. An investment in operating assets that varies over time as a result of cyclical sales.. 57. Current liabilities: PAYABLES: The cost of giving up a cash discount is? The cost of giving up a cash discount on payables is the amount of money a company would have to pay in additional interest or fees if it chooses to delay paying its bills to take advantage of a cash discount offered by its suppliers.