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Accrual Accounting
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Matching Principle
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pre-tax cost of debt
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Kd
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Net income from operations
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+
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Cooperative
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A nonprofit organization whose member-owners may save money on certain products or services
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Total Liabilities
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Current Liabilities
Long Term Liabilities
________________
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Quick Assets
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Total Current Assets - Inventory
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Buyout
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Different from acquisition because a group of individuals purchase target and a buyout often converts a public firm into a private one
Motives: increasing management's incentives, averting a takeover, tax benefits
Types: LBO - financed by debt (private, unfavorable investment opportunities and high cash flow), MBO/EBO - involve management or employee
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Simulations
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Software is available (for purchase) to go beyond simple sensitivity or scenario analysesIt is possible to specify probability distributions for every financial variable (shape, mean, variance, higher moments)Then generate a large number of random draws from each distribution to generate a large number of possible scenariosIn each case, compute the external funds required; the result will be a probability distribution of the external funds requiredThe principal advantage is added realism; the principal disadvantage is that the results can be difficult to interpret and base decisions on
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What is constant with stockholders expected Rate of Return common stockholders?
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Dividend
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immunization
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a method of protection against fluctuating bond interest rates by investing in securities having different yields and terms
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property tax lien
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-local gov services benefiting properties to assure payment-automatically superior to any other lien
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Discounting
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The process of finding the present value of a future cash flow or series of future cash flows; it is the reverse of compounding
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agent
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CEO works a____________ on behalf of the shareholders
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sensitivity analysis
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Percentage change in NPV resulting from a given percentage change in an input variable, other things held constant.
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Computer-Based Forecasting
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Spreadsheets make it relatively easy to construct a variety of alternative pro forma forecastsThis makes it easy to examine how different assumptions affect forecasted financial performance and external financing requirementsAssumptions can be specified in one part of the spreadsheet and the formulas that compute the implications can be specified in another
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Physical Real Estate Characteristics
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1. Immobility2. Indestructibility (aka, durability)3. Nonhomogeneity (aka, uniqueness or heterogeneity)
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senior bonds secured by real estate
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mortgage bonds
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Manufactured home
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made in a factory and delivered
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freeze
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to render impossible of liquidation or collection
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what accounts for the greatest portion of the finance charge?
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interest
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fallen angels
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issues that have been downgraded for other reasons other than a leveraged buyout or a recapitalization
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a judgement, when properly recorded, becomes
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an involuntary lien
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CONVERTIBLE BONDS
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Corporate bonds with a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock.
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Collateral
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A valuable asset that is pledged to ensure loan payments
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Risk free asset
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An asset with uncertain future returns
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The Income Statement
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Indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line")The income statement addresses this by partitioning observed changes in stockholders’ equity into revenues and expensesRevenues are sales (price per unit multiplied by the amount of output sold); they increase stockholders’ equityExpenses are costs; they decrease stockholders’ equity; the difference between revenue and expenses is net income
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2 kinds of partnerships
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general-ea partner has unlimited liability for all obligaiton of the business.limited-one or more general partners and one or more limited partners liabilities are set out in partnership agreement
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short sellers borrow stock from their broker, sell it, and hope to buy similar shares in the future at a lower price to replace those borrowed
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Short sale
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If projects are this then accept all projects with NPV>0?
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Independent
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a company that gathers information on consumers' financial history, including how quickly they have paid bills and whether they have been delinquent on bills in the past. The company summarizes this information and sells it to customers
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credit scoring
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extend
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to postpone the payment of a debt beyond the time originally agreed upon
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Liquidity Ratios
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CR = CA/CL
QR (or Acid test) = (CA-Inventory)/CL
ACP= AR/ DCS
AR Turnover= DCS/AR
Inventory Turnover= COGS/Inventory
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Liquidity Premium
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Premium added to the rate on a security if the security cannot be converted to cash on short notice and at close to the original cost
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Home Warranty Plan
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Where various private companies, for a fee, will contract to repair major systems and appliances for a period of time, normally one year
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what's a defined contribution plan?
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a plan--profit sharing, money purchase, Keogh, or 401(k)--that provides an individual account for each participant
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Market Risk
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the risk that remains in a portfolio after diversification has eliminated all company-specific risk. This risk is also known as nondiversifiable or systematic or beta risk
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Efficient capital markets
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a market in which security prices rapidly reflect all information about securities.
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Discounted Payback
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the lenght of time required for an investment's cash flows, discounted at the investment's cost of capital, to cover its cost
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statement of cash flows
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indicates how firm generated cash flows from its operations, how it used casdh in investing activities, and how it obtained cash from financing acts
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the lowest price at which anyone has expressed a willingness to sell a security
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Ask price
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The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk.
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Market Risk Premium. RPm
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Personal & dependent exemptions
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An IRS-allowed reduction in your income before you compute your taxes. You are given one for yourself, one for spouse, and one for each dependent.
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maturity
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the time when a note or bill of exchange becomes due
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Gross Income
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Refers to all income in the form of money, goods, services, and/or property.
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M
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par or face value of the bond to be paid off at maturity
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Agency Expectations and SEO
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Leverage: managers may use SEO to lower leverage and decrease risk of bankruptcy and losing compensation.
Overinvestment: raise money for empire building, managers receive proceeds from primary shares so underperform benchmarks compared to secondary shares.
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beta coefficient, b
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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. Beta thus measures market risk.
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Governance structure in takeovers
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Whether the defense tactics create or destroy value or the seller depends largely on the target firms governance structure.Firms with strong governance structures and well aligned managerial incentives use defense tactics to secure a better offer or put in place a higher valued strategy for their shareholdersFirms with weak governance structures often use defense tactics to entrench poorly performing managers
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1) Intent of Properties2) Test of Attachment3) Test of Adaptability
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Tests for Fixture Status
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How do you find expected inflation rate?
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1 + inflation rate
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An item which may be converted to cash within one year or one operating cycle of the firm is classified as a
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Current Asset(C)
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all of the following terminate an offer Except
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an offer from a third party
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Why is it important to consider effective rates of return
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Investments with different compounding intervals provide diffeent effective returnsTo compare investments with different compounding intervals, you must look at the effectve returns
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The Sustainable Growth Rate
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the maximum rate at which sales can increase without requiring additional external equityTo determine the sustainable growth rate, make the following assumptions:The firm has a target capital structure (debt/equity ratio) and a target dividend policy it wishes to maintainThe firm is unable or unwilling to issue new equity
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Collateralized mortgage obligations (CMO's)
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a generic term for security backed by real estate mortgages...think about picture and mortgage crisis.
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Accounting Break Even Point
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FC + (COST OF EQUIPMENT / n) / CM
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Why is monitoring the principal-agent problem costly for both VCs and entreprenuers?
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Monitoring is costly because it gives up development time by creating reports/review
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What are the disadvantages of IRR?
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When there occur both positive and negative CF's during the project's life, there may exist more than one IRR. In fact, there can be as many IRRs as there are sign changes in the cash flows, the best solution to this problem is to use NPV, IRR and NPV can give conflicting signals for mutually exclusive decisions. The two models are based on different assumptions regarding the reinvestment rate.
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which of the following is permissible under the federal fair housing act
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denying housing based on a prior violent criminal conviction of the applicant
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what does the income statement really tell us?
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Records revenues and expenses over a period of time. Their difference represents an increase or decrease in the book value of equity. This is the profit or loss for the period.
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in most states, a person is exempt from licensure as a real estate agent when performing which of the following activities, even if receiving a fee
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selling real property as an executor of an estate
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What if the discount rate changed to 7% instead of 10%? The calculations change to
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NPV = PVNCF’s – Initial CostNPV = [PVAN = PMT * (Magic # Appendix D i%, n periods)] – Initial CostNPV = [PVAN = $10,000 * (Magic # Appendix D 7%, 5 periods)] – $40,000NPV = [PVAN = $10,000 * (4.100)] – $40,000NPV = $41,000 – $40,000NPV = $1,000In this case we accept the project because the NPV > 0. In other words, the Net Present Value is a positive number.
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What are the two types of bankruptcy proceedings?
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Chapter 11 - the goal is to determine whether and how the firm can be reorganized, with respect to both operations and financial structure, and reemerge as a going concern
Chapter 7 - the court supervises the liquidation of the firm's assets and the distribution of proceeds to claimants after which the firm ceases to exist. Relatively rare
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