What is the term for evaluating the firm's return on investment by comparing its income to its assets?
Return on Assets
100
What is known as the practice of buying and selling equivalent goods to take advantage of a price difference?
Arbitrage
100
What is a Discount Factor?
The value today of a dollar received in the future, expressed as 1/1+r
200
What is the right to buy a certain number of shares by a specific date at a specific prices known as?
Stock options issued to employees
200
What is the goal of a Financial Statement Analysis?
To understand the firm's PROFITABILITY, EFFICIENCY and RISKINESS to tell if the firm is over or under valued.
200
What is the importance of quantifying costs and benefits?
Because any decision in which the value of the benefits exceeds the costs will increase the value of the firm
200
What is any situation in which it is possible to make a profit without taking any risk or making any investment?
Arbitrage Opportunity
200
What is Rule #1 of Evaluating Cash Flows?
It is only possible to compare or combine values at the same point in time
300
What are corporate bonds with a provision that gives the bondholder an option to convert each bond into a fixed number of shares of common stock?
Convertible Bonds
300
What does the Interest Coverage Ratio (TIE) do?
Assesses how easily a firm is able to cover its interest
300
What are 3 roles of a competitive market?
1) one in which a good can be bought and sold at the same price 2) The price will determine the value of the good 3) Personal opinion of "fair price" is irrelevant
300
When we DEPOSIT money, what are we doing?
Converting money today into money in the future
300
What is Rule #2 of Evaluating Cash Flows?
To calculate a cash flow FUTURE VALUE, you must COMPOUND it! (n x (1+r))
400
What is EBITDA?
A firm's earnings before interest, taxes, depreciation and amortization. This subtotal reflects the cash a firm has earned from operations
400
What is the most important valuation ratio that is used to assess whether a stock is over or undervalued based on the idea that the value of a stock should be proportional to the earnings it can generate?
P/E Ratio
400
What is the Valuation Principle?
The value of a commodity or an asset to the firm or its investors is determine by its competitive market price
400
When we BORROW money, what are we doing?
We exchange money today for money in the future
400
What is Rule #3 of Evaluating Cash Flows?
To calculate the value of a future cash flow at an EARLIER POINT in time, we must DISCOUNT it (n / (1+r))
500
What does the Statement of Cash Flows determine?
How much cash the firm has generated and how that cash has been allocated during a set period
500
What is the term for evaluating the firm's return on investment by comparing its income to its investment?
Return on Equity
500
Which law states that in competitive markets, securities with the same cash flows must have the same price?
Law of One Price
500
What is a Discount Rate?
The appropriate rate to discount a cash flow to determine its value at an earlier time