Definitions 22 Flashcards

Terms Definitions
le recu
what you own
Financial Institutions
Investment Banks.Commercial Banks.Insurance Companies.Investment Companies.Risk management. - Make sure they don't blow up.
Perpetual Stream of Unchanging Dividends
Own stock of a company
separate property
-property acquired prior to marriage-gifts/inheritance received during marriage
Sometimes terminated when the servient estate is sold to a person who has no knowledge of the easement's existence
Damon Enterprises' stock is currently sells for $25 per share. The stock’s dividend is projected to increase at a constant rate of 7% per year. The required rate of return on the stock, rs, is 10%. What is Damon's expected price 4 years from today?
Debt of owners' equity
total liabilities/owners' equity
able to pay all just debts.
stock's e(r) beyond what's induced by the market; tells out/under performance relative to the CAPM; avg firm- specific return; + alpha= underpriced & outperforms market (above the line); - alpha= overpriced & underperforms market (below line); represents the intercept
Secondary markets
already existing securities are bought and sold on the exchanges or in the OTC market
A linear representation of the timing of (potential) cash flows.
Deferred-coupon bond
A deferred coupon bond commences paying interest after a specified deferment period of one or several years
Reactive defenses
1. Litigation2. Regulatory and or legislative protection3. Counter tender offer4. Financial restructuring5. Asset Restructuring6. Alternative buyers7. Going private transactions/LBOs/MBOs8. Greenmail
profitibility ratio
measure how effectively a firms' management
an option has intrinsic value determined by the degree to which it is in-the-money
Intrinsic value
Preferred stock dividends belong in the...
income statement
to expend funds before they are legitimately available for use or to discharge an obligation before it is due
a transaction in securities or futures in which options to buy and sell the same security or commodity are both purchased in order to hedge risk
smart growth
1. mixed land uses2. compact building design3. housing opportunities & choices for a range of household types, fam size, & INC4. walkable neighborhoods5. distinctive, attractive communities w/a strong sense of place6. preservation of open space, farmland, natural beauty, & critical enviro areas7. Reinvestment in & strengthening of existing communities, & balanced regional development8. provision for a variety of transportation choices9. predictable, fair, & cost-effective development decisions10. citizen & stakeholder participation in development decisions
Semiannual Compounding
The process of determining the future (present) value of a cash flow or series of cash flows when interest is added twice a year
Secured transaction
a transaction in which the parties agree that personal property or fixtures will secure a loan or the pruchase of an item on credit
initial public offering
IPO-a privately held company issuing shares for the first time
The tendency of two variables to move together.
currency that is deposited in a bank located outside the country of origin, international and marketplace
Inventory turnover ratio
cost of goods sold/average inventory; low = poor purchasing, high = lack of inventory
Equivalent Annuities
Comparison of unequal cash flows to the equivalent amount of equal payments over the same period of time
Financial Manager.
1. Decide if business is profitable.2. How to pay for business.3. Manage everyday activities of the firm. - Working capital management.
Indicates the loan was obtained by pledging assets as collateral
Secured Debt(F)
a monopolizing or a monopoly of the available supply of a stock or commodity to a point permitting control of price
economic order quantity
EOQ, approach to determine the balance between ordering costs and carrying costs
Liquidity management can be practiced on either side of the balance sheet. How are asset and liability management similar and how do they differ? Why do smaller banks have limited access to liability management?
Liability management supplements assets management but does not replace it as a source of bank liquidity. Asset management still remains the primary source of liquidity for banks, particularly smaller banks. If used properly, liabilities management allows banks to reduce their secondary reserve holdings and invest these funds in higher-yield assets, such as loans or long-term municipal bonds.
Smaller banks have limited access to liability management because they do not have direct access to the wholesale money markets where liability management is practiced.
FV (annuity) = C/r ((1+r)n-1)
Nominal rate
also called the quoted or stated rate. An annual rate that ignores compounding effects. Is stated in contracts and periods mus also be given
annuity due
An annuity whose payments occur at the beginning of each period.
Long term leverage ratio
=long term debt/ ending total assets
risk order of investments
t-bills, govt bonds, corporate bonds, large comp stock, small comp stock
List Profitability Ratios
1) Profit margin of sales

2) Return on total assets

3) Return on common equity

4) Basic earning power
the stated price per share at which common stock will be delivered to the investor in exchange for a convertible issue
conversion price
Capital Budgeting
Will and idea make money? Will it increase the firms value? Corporate Finance.
an adjustment to the real rate of return to compensate the investor for potential loss of purchasing power
inflation premium
short interest
the total amount by which a single seller or all sellers are short in a particular stock or commodity or in the market as a whole
Disadvantages of a Corporation
• —Setting up and filing state and federal reports is complex• —corporate charter is filed with the state providing information about the company and directors• —bylaws are for internal management and procedures• —Earnings are subject to double taxation•
PV (Growing Perpetuity) = C/(r-g)
Capital Gains Yield
The capital gain during a given year divided by the beginning price
Purchase accounting after 2001
One company is Buyer and purchase price is assigned to identifiable assets and liabilities of target. excess of price paid is allocated to the following categories: Tangible depreciable assets, identifiable assets with definite lives like patents and copyrights, intangible assets with indefinite lives like trademarks and gov granted licenses, and goodwill= purchase price-targets net asset valueIntangibles with definite lives are amortized while intangibles with indefinite lives and goodwill are not
asset management ratio
indicate how much a firm has ivnested in a particular type of asset relative to the revenue the asset is producing
Ordinary (deferred) annuity...
is an annuity whose payments occur at the end of each period
default risk
the risk that the bond will not pay interest or principal when due
Pass through securities
pools of loans sold in one package. Owners of pass-throughs receive all of the principal and interest payments made by the borrowers
What does Section 10(b) and Rule 10(b)-5 of the 1934 Act pertain to?
Securities Fraud
  - Insider trading
  - Mistatement of Corporation - Any report, release, or financial statement released by an officer, director, or employee of a corporation in connection with a security sale showing intent to mislead shareholders or potential investors.
  - Corporate mismanagement - Any transaction involving the purchase or sale of a security in which there is fraud based on an action of management.
Payment priorities in liquidation
Cash from sale of assets (not pledged as security/ collaterall for any debt)-fees and expenses of bankruptcy proceedings-Wages due to workers-Taxes dueCash from assets secured as collateral-Pay secured debt eg. mortgage claimsRemaining cash-Apply to claims of general creditors (x% to each)-Subordinated debt gives x% to senior debt first-Residual claimants: equity holders
Uneven cash flows...
is a series of cash flows where the amount varies from one period to the next
small but established company =
Bond yield + equity risk premium + micro-cap risk premium = micro-cap equity rate
-Tax like individual
-Easy and inexpensive to form
What is an advantage to a sole proprietors?
Steps for Percent-of-sales forecasting method

(step 1)
1) take the last balence sheet and divde each balance sheet item that will change proportionately with sales by the sales figure for the last period
• Periodic rate = rPER = rSIMPLE
m, where m is number of compounding periods per year. m = 4 for quarterly, 12 for monthly, and 360 or 365 for daily compounding.
required rate of return, rs
The minimum rate of return on a common stock that a stockholder considers acceptable. (rs)
What are the three sources of underwriting risk in the P&C industry?
15. The three sources of underwriting risk in the PC industry are: (a) unexpected increases in loss rates, (b) unexpected increases in expenses, and (c) unexpected decreases in investment yields. Loss rates are influenced by whether the product lines are property or liability (with the latter being less predictable), whether they are low-severity high- frequency lines or high-severity low-frequency lines (with the latter being more difficult to estimate), and whether they are long-tail or short-tail lines (with the former being more difficult to estimate). Loss rates also are affected by product inflation and social inflation. Unexpected increases in expenses are a result of increases in commission costs to brokers, general expenses, taxes and other expenses related to acquisitions. Finally, investment yields depend on the stock and bond markets as well as on the asset allocations of the portfolios.
What does the WACC take into account (3)?
taxes, component costs of capital and the firm's capital structure
What are the three types of formulas used to determine pension benefits for defined benefit pension funds? Describe each.
4. The three types of formulas used to determine pension benefits for defined benefit pension funds are flat-benefit formula, career-average formula, and final-pay formula. A flat benefit formula pays a flat amount for every year of employment. Two variations of career-average formulas exist; both base retirement benefits on the average salary over the entire period of employment. Under one formula retirees earn benefits based on a percentage of their average salary during the entire period they belonged to the pension plan. Under the alternate formula, the retirement benefit is equal to a percentage of the average salary times the number of years employed. A final-pay formula pays a retirement benefit based on a percentage of the average salary during a specified number of years at the end of the employee’s career times the number of years of service.
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