What does finance study regarding monetary resources?
How individuals, businesses, and organizations raise, allocate, and use scarce monetary resources over time.
Why is uncertainty considered the enemy of investors?
Because uncertain future outcomes make expected earnings and investment values difficult to assess.
How does investment analysis handle uncertainty?
Through expected-return estimation, investment valuation, and asset allocation.
What is the first golden rule of diversification in investing?
Never put all your eggs in one basket.
How does diversification reduce investment risk?
By reducing reliance on a single investment.
Why are risk and opportunity linked?
Because accepting risk can provide access to uncertain gains.
Does accepting risk guarantee a positive outcome?
No, risk does not guarantee a positive outcome.
What rights and benefits does an equity holder receive?
Voting rights, potential dividends, share-price appreciation, liquidity, and an exit option.
What risks does an equity holder face regarding revenues and liquidation?
Uncertain revenues and being paid last in liquidation.
What income and priority does a debt holder receive?
Predetermined fixed income and seniority in liquidation.
What risk does a debt holder generally bear?
Default risk without participating in the venture’s other risks.
What is the opportunity cost of capital?
The return forgone on an alternative investment with equivalent risk and term.
How is the opportunity cost of capital estimated?
By the best available expected market return for a comparable investment.
What formula equates opportunity cost of capital and required return?
.
What distinguishes required return from realized return?
Required return is a risk-compensation estimate made today; realized return is the actual return achieved later.
What does the principle 'high risk, high return' mean for investors?
Investors should require higher compensation when accepting more risk.
Does higher risk guarantee a higher realized return?
No, higher risk does not guarantee higher realized return.
What does historical evidence show about the relationship between risk and return?
There is a statistical correlation between high risk and high return.
Does past performance guarantee future investment results?
Past performance does not guarantee future results.
Why does correlation not establish causality?
Because two variables can move together without one causing the other.
Name some value drivers identified by the course.
Attracting and satisfying clients, after-sale services, user experience, reputation, people, knowledge, trust, high-quality goods and services, innovation, adaptability, and human-resources expertise.
What do shareholders own in a company?
Part of the company’s equity.
Who decides on dividend payments in a company?
The company decides at its discretion.
What is the cost of capital?
The return required by capital providers representing a cost to the company.
If shareholders require a 10% return, what equity cost must the company consider?
A 10% equity cost of capital.
Why is treating dividends as the only shareholder payment a simplification?
Because it is an explicit pedagogical simplification.
What should a financial analysis assess before conclusions?
Growth, profitability, and risk.
What must a company do to survive long term?
Create shareholder value, meet stakeholder commitments, generate wealth, invest, finance investments, generate sufficient return, and manage illiquidity risk.
What do financial statements present about a firm?
Past performance and a snapshot of assets and their financing.
Which are the four principal financial statements?
Balance sheet, income statement, statement of cash flows, and statement of changes in shareholders’ equity.
What three components does the balance sheet list?
Assets, liabilities, and shareholders’ equity.
What is the balance-sheet identity formula?
.
Why can a balance sheet be distorted by seasonality?
Because it is a snapshot at one point and sales may be unevenly distributed.
What does the income statement report and how is earnings calculated?
It reports revenues and expenses over a period; earnings equal revenues minus charges.
How do operating expenses differ from capital expenditures?
Operating expenses are consumed during the cycle and reduce wealth; capital expenditures acquire fixed assets used over time.
What does accrual accounting recognize and match independently of cash?
It recognizes sales when they occur and matches costs with revenues regardless of cash flows.
How does buying an apartment with cash affect wealth?
Wealth remains unchanged when cash is exchanged for an asset.
What happens to wealth when buying an apartment on credit?
Wealth remains unchanged as asset and liability increase equally.
When does accrual accounting record revenue?
Revenue is recorded when the sale is made, not when cash is received.
How does accrual accounting match costs and revenues?
Costs are matched with the period when related revenue is recognized.
Why does net income differ from cash earned?
Non-cash items, accruals, and unreported cash uses cause differences.
What does a statement of cash flows reconcile?
The beginning and ending cash balances.
Which three activities does a cash flow statement include?
Operations, investments, and financing.
What does the statement of cash flows assess about a company?
Its ability to generate and allocate cash during a period.
What was JIT's cash from operating activities in Year 2?
€1.3 million.
What was the change in cash for JIT in Year 2?
€2.7 million.
How much was JIT's cash from investing activities in Year 2?
−€39.8 million.
What does JIT's €39.8 million capital expenditure in Year 2 show?
Substantial investment can require financing despite positive operating cash flow.
How are working capital needs calculated?
WCN = Inventory + Accounts receivable - Accounts payable.
What do working capital needs represent?
The short-term cash required to run the business.
What do working capital needs reflect in business operations?
The time lag between operating cash outflows and inflows.
How much did JIT's working capital needs increase from Year 1 to Year 2?
By €0.7 million, from €2.6 million to €3.3 million.
What effect does reducing working capital needs have on cash flow?
It generates positive cash flow if the firm's functioning is not impaired.
How is net financial debt calculated?
Net financial debt equals long-term plus short-term financial debt minus cash and short-term investments.
What was JIT's net financial debt in Year 1?
€52.3 million
What was JIT's net financial debt in Year 2?
€91.8 million
How is capital employed calculated?
Capital employed equals fixed assets plus working capital or shareholders' equity plus net financial debt.
What was JIT's capital employed in Year 1?
€83.5 million
What was JIT's capital employed in Year 2?
€124.0 million
What does book value of equity reflect compared to market capitalization?
Book value reflects historical asset costs, market capitalization reflects future expectations.
How is market capitalization calculated?
Market price per share multiplied by number of shares outstanding.
What was JIT's market capitalization with 3.6 million shares at €14 each?
€50.4 million.
How is enterprise value calculated?
Equity value plus debt minus cash.
Why does positive net income not guarantee good future performance?
Because earnings quality is affected by non-cash items, accruals, and extraordinary items.
What is the formula for free cash flow (FCF)?
Cash from operating activities plus cash from investing activities.
What does positive free cash flow indicate about a company's cash generation?
Operating cash covers operating and investment needs.
What was JIT's free cash flow in Year 2 and how was it calculated?
−€38.5 million, from €1.3 million cash from operations minus €39.8 million capital expenditures.
What is free cash flow composed of?
Cash from operating activities plus cash from investing activities including investment outflows.
What does positive free cash flow indicate about cash coverage?
Cash generated covers operating and investment needs.
What can positive free cash flow be used for?
To pay dividends or reduce debt.
How is free cash flow calculated for JIT in the example?
€1.3 million from operating activities minus €39.8 million from investing activities.
What does a margin measure relative to net revenue?
Profit relative to net revenue.
What is the formula for the margin ratio?
Margin ratio = Profit divided by Net revenue.
What do margin ratios help assess and compare?
Cost structure and operating performance across firms.
What does margin analysis compare realized performance with?
Past performance, competitors or industry peers, and company targets.
How did JIT's EBITDA margin change from Year 1 to Year 2?
It increased from 4.8% to 6.2%.
How did JIT's EBIT margin change from Year 1 to Year 2?
It increased from 4.2% to 5.6%.
What are the operating margins of Hermès, LVMH, and Carrefour?
32%, 21%, and 5%, respectively.
What does the difference in operating margins among Hermès, LVMH, and Carrefour show?
Corporate strategy can produce large differences in operating performance.
Test your knowledge with 57 questions on Financial Intelligence Foundations.
1. What does finance primarily study?
2. Why is uncertainty considered harmful to investors?
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