Financial Management Exam # 1

goal of financial management - correct answer maximize stock price, maximize shareholder wealth agency problems - correct answer managers are supposed to act as agents on behalf of shareholders but own 100% of the outstanding common stock what makes managers act in shareholders best interest? - correct answer possibility of promotion threat of being fired threat of hostile takeover SEC rule change - correct answer exec. pay reporting must be clearer and more comprehensive corporate responsibility relation to value maximization - correct answer socially responsible actions can be costly but still enhance firm value financial market - correct answer mechanism for bringing borrowers and lenders together money market - correct answer short term debt securities capital market - correct answer equity (stock) and longer term debt securities primary market - correct answer original sale of securities by govt and corp. secondary market - correct answer sales of securities after initial issue balance sheet - correct answer assets: liabilities+owners equity liquidity - correct answer ability of asset to be quickly converted to cash with little or no loss of value liquidity trade off - correct answer liquid assets reduce probability of financial distress but yield smaller returns financial decision of fixed assets - correct answer capital budgeting decision financial decision of current assets and current liabilities - correct answer working capital decision financial decision of debt and equity - correct answer capital structure decision, dividend policy/pay out decision do we want to look at market or book value? - correct answer market Dividend payout ratio - correct answer dividends paid/ net income retention ratio/ plowback ratio - correct answer 1-DPR, % of net income that is retained earnings per share - correct answer net income/ shares outstanding dividends per share - correct answer dividends paid/ shares outstanding EBIT - correct answer earnings before interest and taxes, equals operating income EBITDA - correct answer earnings before interest and taxes and depreciation expense EBT - correct answer earnings before interest and taxes - interest expense NOPAT - correct answer EBIT-taxes : EBIAT why will accounting income and cash flow differ? - correct answer the recording of rev and exp might not match timing of cash flows non cash items like dep. exp. have no affect on cash flow sources of cash on balance sheet - correct answer decreases in assets, increases in equity and liabilities uses of cash on balance sheet - correct answer increases in assets decreases in equity and liabilities cash flow from assets - correct answer cash flow to creditors + cash flow to stockholders net working capital - correct answer current assets - current liab. change in NWC - correct answer end NWC- beg. NWC net capital spending - correct answer end net fixed assets- beg. net fixed assets + dep. expense Sarbanes- Oxley Act of 2002 - correct answer ceos/ cfos must certify financial statements no personal loans to company execs independent audit committee on board rotate lead audit firm internal control measures is SOX act working? - correct answer boards more independent, assertive reporting more transparent and reliable