Finance Exam 1 study quide

cash is ___ - Correct Answer king Free cash flows - Correct Answer money that is available for distribution to all investors from the company's recurring core-business operations- amount of money leftover after firm spends money required for operations Are FCF the same as net income? - Correct Answer NO Types of investors - Correct Answer debt, common equity, preferred What does the income statement measure - Correct Answer profitability Net income equation - Correct Answer Revenues - Expenses Earnings Per share (EPS) equation - Correct Answer net income/# shares outstanding 2 complications to income statement - Correct Answer accrual accounting markets obsessed with EPS Accrual accounting - Correct Answer accounting method that records revenues and expenses when they occur, not necessarily when cash actually changes hands identify revenues for the period (may not have received cash)/match corresponding costs (may not have paid) Why are markets obsessed with EPS bad? - Correct Answer strong incentive to manipulate numbers to meet earnings forecasted Unlevered free cash flows (UFCF) - also referred to as free cash flow to the firm (FFCF) - Correct Answer not affected by the amount of leverage (debt) in the firm's capital structure When do we use UFCF - Correct Answer when valuing the entire firm How to compute equity value with UFCF - Correct Answer valuing the entire firm then determining the portion of the overall value owned by shareholders Levered cash flows - Correct Answer impacted by leverage (cash leftover after repaying financial obligations and therefore available for equity) Where do we find FCF - Correct Answer have to be derived from financial statements 3 financial statements - Correct Answer Income statement Balance sheet Cash Flow Income statement - Correct Answer performance over a PERIOD of time Balance sheet - Correct Answer snapshot of accounting on a particular date listed in order of liquidity liquidity - Correct Answer how easily it can be converted to cash shot term/current - Correct Answer under one year