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The document discusses key concepts in business and corporate finance including the roles of CFO, SEC, and types of business organizations. It also defines terms like intrinsic value, market value, and dividend policy. Financial statements and their components are explained as well as concepts like free cash flow, market value added, and economic value added.
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0% found this document useful (0 votes)
61 views7 pages

Fin Reviewer - 1

The document discusses key concepts in business and corporate finance including the roles of CFO, SEC, and types of business organizations. It also defines terms like intrinsic value, market value, and dividend policy. Financial statements and their components are explained as well as concepts like free cash flow, market value added, and economic value added.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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TRUE 1.

In most corporation, the CFO ranks under the CEO


FALSE 2. A disadvantage of the corporation
TRUE 3. One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes
bankrupt. This problem would be avoided if you formed a corporation to operate the business.
TRUE 4.In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in
the long run, or the stock's "intrinsic value."
FALSE 5. There are many types of unethical business behavior. One example is where executives provide information
that they know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but
it is not illegal to provide it to stockholders because they are the owners of the firm, not outsiders.
FALSE 6.For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value
FALSE 7.Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values.
This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible
TRUE 8.One of the disadvantage of the corporate form of organization is double taxation.
TRUE 9.Profit maximization does not consider risk or uncertainty, whereas wealth maximization does.
FALSE 10.The finance manager is responsible for maximizing the value of the utility owned by Board of Directors.

TRUE 11.The Securities and Exchange Commission (SEC) requires partnership to submit Articles of Partnership.
TRUE 12.The agency theory is known to pose a potential conflict of interest between the stockholders and the
managers
FALSE 13.A corporation has an initial life of 60 years and renewable for another 60 years.
TRUE 14.Social responsibility has to be mandatory rather than voluntary to ensure that a burden of additional cost on
social responsibility will be distributed uniformly among businesses.
TRUE 15. A company may employ threats of a takeover or shutdown to force the manage to act competently in
accordance with the interest of stockholders. However, it seems that it is more likely a punishment to the
stockholders and not to the manager.
BUSINESS ETHICS - A company's attitude and conduct toward its employees, customers, community, and
stockholders.

CORPORATE GOVERNANCE - The way top managers operate and interface with stockholders.

MARKET VALUE - The stock value based on the perceived but possibly incorrect information as seen by the marginal
investor.

SINGLE PROPRIETORSHIP - An unincorporated business owned by one individual.

SARBANES - OXLEY ACT - A law passed by Congress that requires the CEO and CFO to certify that the firm's
financial statements are accurate.

FINANCIAL MANAGEMENT - Focuses on decisions relating to how much and what types of assets to acquire, how
to raise the capital needed to buy assets, and how to run the firm so as to maximize its
value.

INVESTMENT - It relates to decisions concerning stocks and bonds and includes activities such as security analysis,
portfolio theory, and market analysis.

CAPITAL MARKETS - Markets for securities which have a life of more than one year.

EQUILIBRIUM - Stock's actual market price is equal to its intrinsic value.

INVESTMENT DECISION - The decision to purchase a new plant or property for an expansion program of the
company.

STOCK INTRINSIC VALUE - The estimate of the stock's true value as calculated by a competent analyst.

KENNETH LAY - He was the CEO and Chairman of Enron from 1985 to 2002.

ARTHUR ANDERSEN - Owner of the auditing firm which audit ENRON

DIVIDEND POLICY - It is the process of determining how much money should be declared as dividends to be given to
the stockholders.

JEFFREY SKILLING - Chairman and CEO of Enron Finance Corp


FINANCIAL MANAGEMENT - more concerned with raising, allocating, and controlling a companies fund
DIVIDEND POLICY DECISION - can be used to attract investors ; determines the kind of investors the company will
have, as well as the kind of company it will be in the future
➢ The generally accepted goal of a company is to maximize the wealth of its common stockholders through the
value of its common stock.

INTRINSIC VALUE - refers to estimated true value of a stock. It differs from person to person
MARKET VALUE - is the estimate resulting from a security analysis by a marginal investors
➢ A stock is considered as overvalued when the actual market price is higher than the intrinsic value and
undervalued when the actual market price is lower than the intrinsic value

Arguments raised about profit maximization not being the main objectives in financial managements :
1. A change in profit is also a change in risk
2. It fails to determine the timing of benefits
➢ Higher cash inflows in the early years would mean better benefits to a company because of its possibility
of generating income from other potential sources
3. Measurements of accounting profits can be inaccurate

The Role of Financial Managers


1. Investments Decisions - the most important of the three types of decision when it comes to value creation.
Becomes a companies life support in continuing its existence
2. Financing Decisions - to look for sources that will give a company the lowest weighted average cost of capital
(WACC ) . WACC refers to minimum required rate of return on an investments
3. Dividend Policy Decision - determines the kind of stockholders a company has.
➢ Aggressiveness is achieve if most of the net income are reinvested back to the company

Treasurer - is responsible for managing corporate assets and liabilities


Controller - in charge of internal matters , most of which involve finance and cost accounting. taxes , budgeting, and
control functions
CFO - oversees the entire financial activity of a company and serves as the adviser in financial matters to the board of
directors

TYPES OF BUSINESS ORGANIZATION


1. Sole Proprietorship - owned by a single person. The simplest form in terms of legal aspects because formal
procedures are not needed to establish the business. Two principal disadvantage of sole proprietorship are limited
life and the unlimited liability

Advantage
1. Ease of formation
2. Control over operations
3. No sharing of profits
4. Simplicity
5. No taxation
Disadvantages
1. Limited Life
2. Unlimited life
3. Difficulty in raising capital
4. Limitation of Skills

2. Partnership -
Chapter 2

FINANCIAL STATEMENTS - objective is to provide useful information about the financial position, result of the
operation and cash flow of a company for the decision making of a wide range of users

COMPONENTS OF FS
1. BALANCE SHEET - statement that shows financial position of the company at a particular time. Compose of
assets, liabilities and stockholders equity.
2. INCOME STATEMENT - a formal statement that shows the result of the operation in a certain period of time .
Represents the companies generated revenue.
3. STATEMENT OF STOCKHOLDERS EQUITY - a required basic statements that shows the movement of the
components of equity :
❖ Issuance of Stock - the common or preferred stock issued during the year
❖ Retained Earning - the accumulated income or loss of the company covering the past year of operations
❖ Declaration of cash dividends - dividends declared for the year that deduction from retained earning
❖ Distribution of stock dividends - disclose that stock dividend rate and the amount of stock dividend
distributed to stockholders
❖ Purchase and sale of treasury stock - it includes a companies stock originally issued but were bought
back and not retired
❖ Accumulated other comprehensive income - includes the unrealized gains and losses on available for
sale investment and foreign currency translation adjustment
❖ Correction of Error - list the errors in the past that are corrected

4. STATEMENTS OF CASH FLOW - a financial statements that shows the company's cash receipts and cash
payments during specific period of time
5. ACCOUNTING POLICIES AND NOTES TO FINANCIAL POSITION - the guides used in the preparation
of financial statements . The detailed information that does not appear in the
financial statements is also appear in this part
FREE CASH FLOW - the available cash produced by a company from its operating activities after considering the
capital expenditures
- A good indicator of how efficient a company is in generating cash
MARKET VALUE ADDED - a performance indicator that shows the difference between the market value of the equity
and the total amount of Capital supplied by investments
ECONOMIC VALUE ADDED - measure of a company performance based on the difference between the net operating
profit and the total invested capital
- an important indicator of how profitable a company project are
FINANCIAL STATEMENT ANALYSIS - an evaluation of the past and current performance of a company and its
forecast in the future
TOOLS AND TECHNIQUES IN FINANCIAL ANALYSIS
1. HORIZONTAL ANALYSIS - used to evaluate the trend in the accounts over the year
a. Comparative Statements - financial data of a company for two specific year are compared to show the
increase or decrease in the account balances
b. Trend Ratio - present financial ratio of a company is compared with its past and expected future ratios to
determine
2. VERTICAL ANALYSIS - uses a significant item in the FS as a base value, and all other items in FS are
compared
a. Common - size statement - each account in the FS is expressed by dividing them to a common base
account
b. Financial Ratios - five groups
1. LIQUIDITY RATIO - determines the company ability to meet its maturing short term obligation
2. ACTIVITY OR ASSET MANAGEMENT RATION - used to determine how quickly various
accounts are converted into sales or cash
3. LEVERAGE RATION - determines the company ability to meet its long term obligation
4. PROFITABILITY RATIO - shows the profitability of the operations of a company
5. MARKET VALUE RATIO - relates the companies stock price to its earnings

TWO TYPES OF FINANCIAL RATIO COMPARISON


1. INDUSTRY COMPARISON - FR are computed and compared with the industry average. Through this
comparison a company may be able to compare its performance against its competitor.
2. TREND ANALYSIS - through this comparison the company will know if its financial performance is improving
or not over the years

LIQUIDITY RATION
1. WORKING CAPITAL -
2. CURRENT RATIO - computed by dividing CA to CL. This ratio is frequently used measure of liquidity .
It asses the ability of the company to meet its current liabilities paid by its current assets

3. QUICK RATIO - it reflects the company ability to pay its short-term obligation
4. CASH POSITION RATIO -

ACTIVITY OR ASSET RATIO MANAGEMENT \


1. ACCOUNTS RECEIVABLE TURNOVER - estimates how fast the accounts receivable is converted into cash
during the year
2. AVERAGE COLLECTION PERIOD - measures the efficiency of the company collection policy
3. INVENTORY TURNOVER - shows the efficiency of a company in handling its inventory. Measures how fast
the inventory is turned into sales
4. ACCOUNTS PAYABLE TURNOVER - measures efficiency of a company in meeting its trade payable. Also
shows how long a company, on average, is paying its short-term debts
5. AVERAGE AGE OF PAYABLE - measures how efficient a company is in handling its accounts receivable
6. CASH CONVERSION CYCLE - measures the time it takes a company to convert the investments made to
inventory to go back to cash net of accounts payable.
7. TOTAL ASSET TURNOVER - measures a companies ability to generate sales successfully
8. CAPITAL INTENSITY - determines the efficiency of a company is in generate sales for every peso invested in
assets
LEVERAGE RATIO
1. DEBT RATIO - indicate up to what extent a company has financed its investments by borrowing
2. DEBT - TO - EQUITY RATIO - measures the proportion of the total liabilities to the invested capital
3. TIME INTEREST EARNED RATION - reflects the number of times the earnings before tax and
interest expense cover the interest expense. Measure how
capable a company is in paying its interest obligation
4. FIXED PAYMENT COVERAGE RATIO - measures the coverage capability broader that the times
interest earned ratio by considering other fixed charges
such as rent and preferred stock

PROFITABILITY RATIO
1. GROSS PROFIT MARGIN - measures of the company manufacturing and distributing efficiency during the
production process
2. PROFIT MARGIN - another measurement of the management efficiency.
3. RETURN ON TOTAL ASSETS -
4. RETURN ON EQUITY
5. EQUITY MULTIPLIER

MARKET VALUE RATIO


1. EARNING PER SHARE
2. PRICE / EARNING RATIO
3. BOOK VALUE RATIO
4. MARKET TO BOOK RATIO

DIVIDEND RATIO
1. DIVIDEND YIELD
2. DIVIDEND PAYOUT RATIO

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