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Quick Ratio =
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CA/CL
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DFN/EFN
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descretionary financing needed/ external financing needed
DFN is based on percent of sales forecast method
how much we need to sustain future growth
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increas in prepaid expenses
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-
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EBIT
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Earnings before interest and taxes
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Total Current Assets
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Cash
Market Securities
Accounts Receivable
Inventory
______________
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Total Asset Turnover
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Total Operating Revenues
Average Total Assets
Note: A larger number is more appealing.
Bigger is better because this number identifies how
many times you turn an asset into a sales dollar.
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Motives for Takeover
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Failure of target management
bust-up
hubris
industry shocks
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Sensitivity Analysis
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Sensitivity analysis simply involves changing the assumptions underlying the forecast to evaluate how the outcomes varyThis exercise provides information about the range of possible outcomesFor example, under reasonable variations in sales growth, external financing needs might vary between $1 million and $2 millionThis would inform management to have a backup plan to borrow up to an additional $1 million if neededThis exercise also reveals which assumptions are most critical to the forecast, and managers can concentrate their data gathering, forecasting, and managerial efforts on those factors
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What does Dividend Yield equal?
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Dividend/Closing Price
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scrip
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a certificate representing a fraction of a share of stock
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impact fee
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fee paid if development imposes externality costs on the community @ LG
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a buyer's agent is usually considered to be in what relationship to the seller
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customer
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prefered stock holders have...
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first rights to dividends
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post-audit
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A comparison of actual versus expected results for a given capital project.
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Collection Period
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The collection period highlights the firm’s management of accounts receivable:Collection Period = Accounts Receivable / Credit Sales per DayThe collection period is measured as a number of days; it measures the average time lag between the sale and the receipt of cashIt is important to work with credit sales and not total sales because only credit sales generate accounts receivable
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A pledge of real property as collateral for a debt or obligation.
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Mortgage
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a type of unregulated investment vehicle that invests money for a very select group of institutional and high-net-worth individual investors; the investment objectives usually are to not only preserve capital, but also deliver positive returns in all mark
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hedge fund
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Benefits to a Single Family home?
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privacy, ownership
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anticipate
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to expend funds before they are legitimately available for use or to discharge an obligation before it is due
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chargeback
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amount of the transaction is charged back to the business where the transaction originated in the case of a dispute or challenge by the cardholder
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corporate governance risk
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the eagerness of corporate management to present favorable results to shareholders and the market has been a major factor in several of the corporate scandals in recent years and is what is referred to as corporate governance risk.
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all of the following may be considered in calculating the cost basis of a property in a capital gain tax computation except
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repairs
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OPERATING INCOME
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A firm's gross profit less its operating expenses.
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Credit Insurance
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Any type of insurance that ensures repayment of a loan in the even the borrower is unable to repay it
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Systematic risk
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The variability of returns that is due to macroecon factors that affect all risky assets. Because it affects all risky assets; it cannot be eliminated by diversification.
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Research and Marketing
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Current R&D and marketing outlays provide benefits over several future periodsThis suggests that the outlays should be spread over several future periods in the form of a non-cash charge like depreciationHowever, because the magnitude and duration of the prospective payoffs from R&D and marketing are difficult to estimate, accountants record the entire outlay as an expense (an operating cost just like paying for labor)
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corporations
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a legal person composed of one or more actual individuals or legal entities, serparate and distinct from those individuals or entities
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an option in which the striking price and the price of the underlying asset are approximately equal
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Near-the-money
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What is when an asset's value is expensed over its useful life for federal tax purposes?
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Depreciation
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one who generally carries an upaid balance from month to month
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convenience user
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refund
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to meet a matured debt structure by new borrowing, especially through issuance of bonds, or to replace an old issue with a new one
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Increase in NWC
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Net Working Capital = Is the difference of (assets - liabilities) from one year to the next.
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• General rules for investing
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Be disciplined with your investment approachKnow the company in which you investChoose firms that are in strong financial positionsStay with the investment until it no longer satisfies your investment goals
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Breach of Contract
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The unexcused failure to perform an obligation under a contract
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Rationale behind Event Study
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Based on semi-strong efficiency. As new info about a firm arrvies, the market price of the firm's stock should immediately and unbiasedly change to reflect this information. By studying the market's reactions to management's announcements, shareholders can judge the efficacy of management's decisions and performance and managers can better understand how the market determines prices, and thus will be in a better position to make decisions that maximize market price.
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Liquidity Premium (LP)
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A premium added to the equilibrium interest rate on a security if that security cannot be converted to cash on short notice and at close to its "fair market value"
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Semi strong MEH
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the belief that security prices fully reflect all publicly available information, including information from security transactions and company, economic, and political news.
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Payback Period
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the lenght of time required for an investment's net revenues to cover its cost
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Threat of Takeovers
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if managers act in their self interest than shared values will be depressed, providing incentive for someone to take over the company at a depressed level, acquirer can then benefit from instituting policies that are consistent with wealth maximization, reduces agency costs
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the highest price at which anyone has expressed a willingness to buy
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Bid price
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A metric that shows the extent to which a given stock's returns move up and down with the stock market.
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Beta Coefficient
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Money market deposit account -a bank account that provides a rate of interest that varies with the current market rate of interest
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Asset management account
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short seller
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a person, as a speculator, who sells short
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Federal Funds Rate
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The rate which banks charge each other for overnight loans.
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Discount Bond
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A bond that sells below its par value, which occurs whenever the going rate of interest rises abouve the coupon rate
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Market Expeectations and SEO
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Market values a firm by estimating earnings and assumes that the firm's earnings generally are sufficient to fund all investments. An SEO announcement reveals lower earnings than expected, and the market price falls. However, the market's reaction depends on pre-announcement expectations of optimal investment versus earnings. Higher M/B = higher average abnormal return. Price changes means market adjusts expectations. More investment opportunities means not as ad of reaction becasue there is a reason for SEO.
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subordinated debenture
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A bond having a claim on assets only after the senior debt has been paid off in the event of liquidation.
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Smith vs. Van Gorkum 1985
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Target directors should make best efforts to inform themselves of fairness of offers (eg. obtain a fairness opinion), decisions should not be tainted by self-interest and directors should treat all bidders fairly
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Title that is free and clear of all past, present, and future claims; no reasonable buyer would reject it.
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Marketable Title
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certificate of deposit
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(CD)- debt instrument issued by a bank that usually pays interest. Institutional CD's are issued in demonintions of $100,000 or more and individual CD's are as low as $100.
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mr. nailor invests $5000 in a CD at his bank. he receives annual interset of 8% for 7 years. How much interset will his investment earn at this time period?
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$3570 (b)
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all of the following appear in a promissory note except
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purchase price of property
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Free Cash FlowFCF
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OCF - Net Spending on Fixed Assets - Increase in NWC
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Forecasting Net Fixed Assets (Primarily Net Property, Plant and Equipment)
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To forecast next period’s net fixed assets, we need to reduce current net fixed assets by the amount of next period’s depreciation and then add next period’s investmentNet fixed assets next period = net fixed assets this period - depreciation adjustment + investment
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Index of the investment performance of a portfolio of 500 large stocks. Also called the S&P 500
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Standard & Poor's Composite Index
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Derivative asset or contingent claim
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a security with a payoff that depends on the prices of other securities
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What is the role of reputation for underwriters?
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Institutional investors are sensitive to past treatment from an underwriter
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What are 3 Cash Flows?
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Amount that is paid to purchase the bond (PV), Periodic Interest Payments made to the bondholders (PMT), Repayment of Par Value at end of Bond's Life (FV)
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a purchases a fee simple property for 70k by way of assuming a first mortgage of 50k, paying 10k in cash and having the seller take back a purchase money second mortgage for the balance. there is an existing 5k second mortgage on the property. at the clos
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the release of existing second mortgage, the deed, the purchase money second mortgage
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Two ways to raise equity and debt capital
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EXTERNAL FINANCING Short Term: Money mkt Long Term: Equity Mkt Corporate Bond mktINTERNAL EQUITY FINANCING Retained Earnings
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assume a mortgaged property is leased. because of default in payment, the mortgagee forecloses on the mortgage. which of the following statements is true regarding rights under the lease
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the lease may be terminated by the mortgagee but may not by the lessee
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. Payback Method. We compute the time required to recoup our initial investment in a project. To do this, we total the annual incremental positive cash flows from the project and determine how long it takes to recover the money we initially invested.
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For example, suppose that we are looking at a project with an initial cost of $10,000. We forecast that the project will generate an additional $2,500 per year positive cash flows. To calculate the Payback Period, we divide $10,000 by $2,500 per year to get a 4-year payback period. We look at a second project with an initial cost of $10,000. We forecast that this project will generate an additional $2,000 per year positive cash flows. To calculate the Payback Period, we divide $10,000 by $2,000 per year to get a 5-year payback period. What do we do? Choose the first? The second? Both? Neither? It looks like the first option is better, but this Payback Method has some problems in addition to its positive aspects.
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the cost of not taking the discount on trade credit of 3/10, net 30 is equal to
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(d) 55.67%
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