Final Bmos Exam
1. What is finance The study of how and under what terms savings (mon-
ey) are allocated between lenders and borrowers.
2. The goal of the firm •The goal of the firm is to create value for the firm's
shareholders.
•How? Maximizing the price of the existing common
stock.
•Good financial decisions will help increase stock price
and poor financial decisions will lead to a decline in
stock price.
3. What role does Management serves as an arbitrator and moderator
management serve between conflicting interest groups or stakeholders and
as? objectives.
4. Who holds con- Creditors, managers, employees, and customers hold
tractual claims contractual claims against the company.
against the compa-
ny? (MECC)
5. Who has residual Shareholders have residual claims against the compa-
claims against the ny.
company?
6. The role of finance Three basic issues addressed by the study of finance:
in business (BSO) 1.What long-term investments should the firm under-
take? (Capital budgeting decision)
2.How should the firm raise money to fund these invest-
ments? (Capital structure decision)
3.How to manage cash flows arising from day-to-day
operations? (Operating decision)
7. Principles of fi- 1. Cash flow is what matters:
nance (CMR) •Accounting profits are not equal to cash flows.
•It is possible for a firm to generate accounting profits
but not have cash or to generate cash flows but not
report accounting profits in the books.
•Cash flow, and not profits, drive the value of a busi-
ness.
, Final Bmos Exam
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•We must determine additional cash flows when mak-
ing financial decisions.
2. Money has a time value:
•A dollar received today is worth more than a dollar
received in the future.
•Since we can earn interest on money received today,
it is better to receive money sooner rather than later.
3. Risk Requires a Reward:
•Risk is the uncertainty about the outcome or payoff of
an investment in the future.
•Rational investors would choose a riskier investment
only if they feel the expected return is high enough to
justify the greater risk.
8. Computation of An investment can be viewed in two ways—its future
present value value or its present value.
9. Theory of interest - Assume a bank pays 8% interest on a $100 deposit
future value made today. How much will the $100 be worth in one
year?
How much will the $100 be worth in two years?
How much will the $100 be worth in three years?
10. Present Value - An If a bond will pay $100 in two years, what is the present
Example value of the $100 if an investor can earn a return of 12%
on investments?
11. Present Value - An This process is called discounting. We have discounted
Example (cont'd) the $100 to its present value of $79.72. The interest
, Final Bmos Exam
Study online at https://quizlet.com/_evqd1a
rate of 12% used to find the present value is called the
discount rate.
12. Present Value - An Let's verity that if we put $79.72 in the bank today at
Example (cont'd) 2 12% interest that it would grow to $100 at the end of
two years.
If $79.72 is put in the bank today and earns 12%, it will
be worth $100 in two years.
13. The Net Present To determine net present value (NPV) we . . .
Value Method
1. Calculate the present value of cash inflows,
2. Calculate the present value of cash outflows,
3. Subtract the present value of the outflows from the
present value of the inflows.
14. The Net Present
Value Method -
General decision
rule
15. Typical Cash Out- •Initial Investment (cash need to purchase asset)
flows (RIIA) •Incremental operating costs
•Repairs and Maintenance of new equipment
•Additional investment in inventory
16. Typical Cash In- •Incremental revenues
flows (SIR) •Reduction of operating costs
•Salvage value
17. Choosing a Dis- •The firm's cost of capital is usually regarded as the
count Rate minimum required rate of return. (also the minimum
, Final Bmos Exam
Study online at https://quizlet.com/_evqd1a
amount to pursue a project)
•The cost of capital is the average rate of return the
company must pay to its long-term creditors and stock-
holders for the use of their funds.
18. Net Present Value - Carver Tech is considering the purchase of an attach-
Carver Tech Exam- ment for its X-ray machine.
ple
No investments are to be made unless they have an
annual return of at least 10%.
19. Net Present Value - No investments are to be made unless they have an
Carver Tech Exam- annual return of at least 10%.
ple 2
20. Diversification of •All investment risk is not the same.
Investments •Some risk can be removed or diversified by investing
in several different securities.
•Firm specific risk vs. market risk
21. Real Assets Real assets are tangible things owned by persons and
businesses
- Residential structures and property
- Major appliances and automobiles
- Office towers, factories, mines
- Machinery and equipment
22. Financial Assets Financial assets are what one individual has lent to
another
- Consumer credit
- Loans
- Mortgages
23. The Functions of
Money (SMS)
1. What is finance The study of how and under what terms savings (mon-
ey) are allocated between lenders and borrowers.
2. The goal of the firm •The goal of the firm is to create value for the firm's
shareholders.
•How? Maximizing the price of the existing common
stock.
•Good financial decisions will help increase stock price
and poor financial decisions will lead to a decline in
stock price.
3. What role does Management serves as an arbitrator and moderator
management serve between conflicting interest groups or stakeholders and
as? objectives.
4. Who holds con- Creditors, managers, employees, and customers hold
tractual claims contractual claims against the company.
against the compa-
ny? (MECC)
5. Who has residual Shareholders have residual claims against the compa-
claims against the ny.
company?
6. The role of finance Three basic issues addressed by the study of finance:
in business (BSO) 1.What long-term investments should the firm under-
take? (Capital budgeting decision)
2.How should the firm raise money to fund these invest-
ments? (Capital structure decision)
3.How to manage cash flows arising from day-to-day
operations? (Operating decision)
7. Principles of fi- 1. Cash flow is what matters:
nance (CMR) •Accounting profits are not equal to cash flows.
•It is possible for a firm to generate accounting profits
but not have cash or to generate cash flows but not
report accounting profits in the books.
•Cash flow, and not profits, drive the value of a busi-
ness.
, Final Bmos Exam
Study online at https://quizlet.com/_evqd1a
•We must determine additional cash flows when mak-
ing financial decisions.
2. Money has a time value:
•A dollar received today is worth more than a dollar
received in the future.
•Since we can earn interest on money received today,
it is better to receive money sooner rather than later.
3. Risk Requires a Reward:
•Risk is the uncertainty about the outcome or payoff of
an investment in the future.
•Rational investors would choose a riskier investment
only if they feel the expected return is high enough to
justify the greater risk.
8. Computation of An investment can be viewed in two ways—its future
present value value or its present value.
9. Theory of interest - Assume a bank pays 8% interest on a $100 deposit
future value made today. How much will the $100 be worth in one
year?
How much will the $100 be worth in two years?
How much will the $100 be worth in three years?
10. Present Value - An If a bond will pay $100 in two years, what is the present
Example value of the $100 if an investor can earn a return of 12%
on investments?
11. Present Value - An This process is called discounting. We have discounted
Example (cont'd) the $100 to its present value of $79.72. The interest
, Final Bmos Exam
Study online at https://quizlet.com/_evqd1a
rate of 12% used to find the present value is called the
discount rate.
12. Present Value - An Let's verity that if we put $79.72 in the bank today at
Example (cont'd) 2 12% interest that it would grow to $100 at the end of
two years.
If $79.72 is put in the bank today and earns 12%, it will
be worth $100 in two years.
13. The Net Present To determine net present value (NPV) we . . .
Value Method
1. Calculate the present value of cash inflows,
2. Calculate the present value of cash outflows,
3. Subtract the present value of the outflows from the
present value of the inflows.
14. The Net Present
Value Method -
General decision
rule
15. Typical Cash Out- •Initial Investment (cash need to purchase asset)
flows (RIIA) •Incremental operating costs
•Repairs and Maintenance of new equipment
•Additional investment in inventory
16. Typical Cash In- •Incremental revenues
flows (SIR) •Reduction of operating costs
•Salvage value
17. Choosing a Dis- •The firm's cost of capital is usually regarded as the
count Rate minimum required rate of return. (also the minimum
, Final Bmos Exam
Study online at https://quizlet.com/_evqd1a
amount to pursue a project)
•The cost of capital is the average rate of return the
company must pay to its long-term creditors and stock-
holders for the use of their funds.
18. Net Present Value - Carver Tech is considering the purchase of an attach-
Carver Tech Exam- ment for its X-ray machine.
ple
No investments are to be made unless they have an
annual return of at least 10%.
19. Net Present Value - No investments are to be made unless they have an
Carver Tech Exam- annual return of at least 10%.
ple 2
20. Diversification of •All investment risk is not the same.
Investments •Some risk can be removed or diversified by investing
in several different securities.
•Firm specific risk vs. market risk
21. Real Assets Real assets are tangible things owned by persons and
businesses
- Residential structures and property
- Major appliances and automobiles
- Office towers, factories, mines
- Machinery and equipment
22. Financial Assets Financial assets are what one individual has lent to
another
- Consumer credit
- Loans
- Mortgages
23. The Functions of
Money (SMS)
