Complete List of Terms and Definitions for Fin 320F

Terms Definitions
luan uan
ACF accounting cash flows
N.Income+Depreciation
Protective put Long stock, long put
Perfect Hedge Eliminate all price fluctuations
Strap Two long calls, one long put
Advantages of conglomerates  Diversification across industries stabilizes earnings and reduces risk• Not compelling, because shareholders can diversify much more efficiently on their own Can operate an internal capital market• Cash cows that generate free cash flows can be funneled within the company to divisions with plenty of profitable growth opportunities• No need for outside financing• Some good arguments for this, but attempts to allocate capital investment across unrelated industries was more likely to subtract than add value
Anticipatory Hedge Temporary substitute for anticipated position in cash market
Convertible bonds bondholder could exchange its bonds into stocks at any time at a set amount, such as 30 shares for 1 bond
Financial Leverage Is a fundamental finacial variable affecting return on equity and sustainable growth
Involves the substitution of fixed cost debt financing for variable cost equity
Like operating leverage increases breakeven but increases the rate of earnings per share growth once breakeven is achieved
Increases expected return and risk to owners
Increases expected ROE and EPS as well as their variability
Creates a wide array of risk-return combinations out a single risky investment
Lease - Lessee (user) promises to make a series of payments to the owner (lessor)
Best efforts basis distribution of registered securities in which the investment banker acts only as the company’s agent and receives a commission for placing the securities with investors. The investment bank does not guarantee a price or that the issue will be sold.
Options Purchaser has right to buy/sell an asset at strike price during or at a time. not an obligation.Potential for unlimited gains.
convert to exchange voluntarily a bond or preferred stock into another security, usually common stock, because of the greater value of the latter
Trading Scandals with mutual funds Late trading, market timing
Prospect Theory The value investors place on a particular outcome is determined by the gains or losses that they ahve made since the asset was acquired or since the holding was last reviewedInvestors are particularly averse to the possibility of even a very small loss and need a high return to compensate for it
Economic Consequences Depends on elasticity of goods and services provided. More elastic = greater price fluctuations.
district banks - clear checks- replace old currency- provide loans to member banks
alienable 2 a property owners right to transfer interests owned in a property during his or her lifetime
european style can be exercied only at expiration date
Expectations Hypothesis Futures price is equal to the expected future spot price
Pro Forma Statements Are the principal means by which operating managers can predict the financial implications of their decisions
Are predictions of what a company's financial statements will look like atht the end of the forecast period
Are used to estimate a company's future need for external funding and a great way to test the feasibility of current operating plans
Are often based on percent-of-sales forecasts that assume many balnace sheet and income statement entries
Generate forecasts that are strictly applicable only on the forecast date and thus require care when dealing with seasonal businesses
Involve four steps:Review of past financial statementsto identify quantities that have varied in proportion to sales history
Careful project of future sales
Preperation of independent projections of quantities, such as fixed plant and equipment that have not varied in proportion to sales historically.
Testing the sensitivity of forecast results to variations in projected sales
Evidence of Bankruptcy cost o Average costs of bankruptcy were about 3% of total book assets and 20% of the market value of equity in the year prior to bankruptcyo Bankruptcy eats up a larger fraction of asset value for small companies than for large ones Significant economies of scale in going bankrupt
Currency Options: Definition Contract from a writer (Seller) that gives the buyer the RIGHT to buy or sell a standard amount of an available currency at a fixed exchange rate for a standard fixed time period.
price-weighted indexes - worse way to measure markets than value-weighted indexes- created in 1896, only knew the price each stock traded at
graduated rent lease 7 a lease contract that stipulates scheduled rent increases over the period of the lease.
redraft a draft on the drawer or endorsers of a protested bill of exchange for the amount of the bill plus the costs and charges
Front-End Load pay up front, might be paid up front might be taken from amount you want to invest
Additional Paid in Capital Difference between price of shares to the public and par value
Equity derivative securities derive all, or part, of their value from the equity of a company
supply of loanable funds - households are largest supplier, but some supplied by government units- more supply at higher interest rates- supply by buying securities- effects of the fed - by affecting the supply of loanable funds, Fed's monetary policy affects interest rates- aggregate supply of funds
tenancy at sufferance 2 a leasehold estate that defines a tenant’s rights to occupy the property against the wishes of the lessor.
common stock advantages from the firms side -no fixed charges-no maturity -increase credit standin/ borrowing power-reduce cost of late debt
Estimate the project's incremental cash flows - that is, the difference between the cash flows with the project and those without the project Include all indirect effects of the project, such as its impct on the sales of the firms other products
Forget sunk costs
include opportunity costs, such as the value of land that you would otherwise sell
Factors affecting debt ratio  Size – large firms tend to have higher debt ratios Tangible assets – hi fixed asset to total asset ratios have higher debt ratios Profitability – more profitable firms have lower debt ratios Market to Book – firms with higher ratios of market to book have lower debt ratios
Insurance agencies & Stockholders/debt holders as Police (pp485-486) The FDIC must “police” the banks b/c depositors of $250,000 or less have no incentive to do so due to the FDIC insuring their deposits.Stock/debt holders act as “police” for the banks in that they have a vested interest in the banks making good decisions and have the ability to sell their stock if they think the bank is being mismanaged (thereby depressing the value of the stock and alerting the regulators that something is wrong)
Profit on Positions at Maturity (futures trading) Long = spot minus original futures priceShort = original futures price minus spot
What gets the most attention in the market for corporate control? Fusion - mergers and acquisition
yield differentials of capital market securities - municipal (munis) bonds have lowest before-tax yield- treasury bonds may have higher before-tax yield than munis but have lowest after-tax yield- corporate bonds may have highest yields
Hedge funds vs. mutual funds: Fees Mutual Funds: Fixed percentage of assets, typically .5 to 2%Hedge Funds: Fixed percentage of assets, typically 1 to 2% plus incentive fee = 20% of gains above threshold return
Why do financial managers use APV? Gives them an explicit view of the factors that are adding or subtracting value.- Can prompt the manager to ask the right follow up questions
How are the costs of financing calculated?  Often use stock market data to get an estimate for expected rate of return No easy way of estimating the expected rate of return on most junk debt issues Industry WACCs are sometimes more useful than company WACCs
Sensitivity of ROE and levels of debt o The more debt a firm has, the less sensitive return on equity is to further borrowing