Financial Management
The functional area of business that is concerned with finding the best sources and uses of financial capital.
finance
Financial ratios that measure the ability of a firm to obtain the cash it needs to pay its short-term debt obligations as they come due.
Liquidity ratios
A company that provides short term financing to firms by purchasing their accounts receivables at a discount.
factor
The part of a firm’s net income it reinvests
Retained earnings
Safe and highly liquid assets that many firms list with their cash holdings on their balance sheet
Cash equivalents
The degree of uncertainty regarding the outcome of a decision.
Risk
Financial ratios that measure how effectively a firm is using its assets to generate revenues or cash.
Asset management ratios
Spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment
Trade credit
Funds provided by the owners of a company.
Equity financing
The amount of money that, if invested today at a given rate of interest (called the discount rate), would grow to become some future amount in a specified number of time periods.
Present value
The funds a firm uses to acquire its assets and finance its operations.
Financial capital
Ratios that measure the extent to which a firm relies on debt financ ing in its capital structure
Leverage ratios
A financial arrangement between a firm and a bank in which the bank preapproves credit up to a specified limit, provided that the firm maintains an acceptable credit rating
line of credit
Funds provided by lenders (creditors)
debt financing
The process a firm uses to evaluate long-term investment proposals
Capital budgeting
The observation that financial opportunities that offer high rates of return are generally riskier than opportunities that offer lower rates of return.
Risk-return trade off
Ratios that measure the rate of return a firm is earning on vari ous measures of investment.
Profitability Ratios
Short-term (and usu ally unsecured) promissory notes issued by large corporations.
commercial paper
The mix of equity and debt financing a firm uses to meet its permanent financing needs.
Capital structure
The principle that a dollar received today is worth more than a dollar received in the future
Time value of money
An asset that can quickly be converted into cash with little risk of loss.
Liquid asset
A projection showing how a firm’s budgeted sales and costs will affect expected net income. (Also called a pro forma income statement.)
Budgeted income statement
A restriction lenders impose on borrowers as a condition of providing long term debt financing
Covenant
Short-term marketable IOUs issued by the U.S. federal government.
U.S. Treasury Bills (T-Bills)
An interest-earning deposit that requires the funds to remain deposited for a fixed term. Withdrawal of the funds before the term expires results in a financial penalty.
Certificate of Deposit (CD)
The use of debt in a firm’s capital structure
Financial leverage
A projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets. (Also called a pro forma balance sheet.)
Budgeted balance sheet
Financing that arises during the natural course of business with out the need for special arrangements
Spontaneous financing
A mutual fund that pools funds from many investors and uses these funds to purchase very safe, highly liquid securities
Money market mutual funds
The sum of the present values of expected future cash flows from an investment, minus the cost of that investment
Net Present Value (NPV)
Computing ratios that compare values of key accounts listed on a firm’s financial statements.
Financial ratio analysis
A detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experi ence temporary shortages or surpluses of cash.
Cash budget
A guaran teed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement.
Revolving credit agreement
A law enacted in the aftermath of the financial crisis of 2008–2009 that strengthened government oversight of financial markets and placed limitations on risky financial strategies such as heavy reliance on leverage
Dodd-Frank Act
If you won the lottery, which payment option leaves you with the most amount of money after tax:
- Lump sum (present value of the money today)
- Annuity payments
Annuity payments