Finance Vocabulary Test_1 Flashcards

Terms Definitions
DR =
North/south lines
Principal Meridians
Basic earning power
Total assets
prohibition from further development unless adequate infrastructure, schools, police & fire protection, & social services are in place when development commences
Profit margin of sales
Net income
sustainable growth rate- the only growth rate which allows the firm to maintain its present financial ratios and avoid the sale of new equity
SGR = ROE (1-b) = NI/S x S/E x A/E x (1-b)
How fast can the firm grow in a steady state the four ratios stay constant
the fastest steady rate that the firm can grow
tendency toward a worldwide investment environment, and the integration of national capital markets
Multifactor model
A risk-return framework that considers multiple sources of both macroecon and microecon risk in deriving the expected (required) rates of return for a risky-asset portfolio
_____ can lead to “adverse possession” issues if left unattended
Cumulative Voting
Allows minority shareholders a stronger voice in the process. If you own one share and are voting on 10 items, you can combine all 10 of your votes for one item and not vote on the rest.
lower correlation means?
greater diversification and lower risk
Your employer uses a career average formula to determine retirement payments to its employees. The annual retirement payout is 5% of the employees' career average salary times the number of years of service. Calculate your annual benefit payment under the
Actual Notice
Title information that is acquired personally by the interest holder
Earnings Per ShareEPS
Net Income / # shares
If liquidation value of firm's assets exceeds value of firm as an ongoing concern, then file for chapter 7 bankruptcy (some firms start out in chapter 11, then move to chapter 7)-sell oiff all assets pay creditors according to their priority status-If anything left over, pay to equity holders (usually $0)
thrift institutions
savings and loan associations, mutual savings banks, credit unions accept demand and time deposits
is the process of comparing a particular company with a group of “---” companies
Earnings not paid out as dividends.
Retained Earnings
If EBIT equals $160,000 and interest equals $30,000, woth a rate of 31%, what is the degree of financial leverage?
a sum charged for borrowing money, expressed as a percentage of money borrowed to be paid over a given period, usually one year
efficient markets hypothesis
hypothesis that prices of securities fully reflect available info about securities
Expected return
mean value of the distribution of holding period returns
Real Estate Securities
any arrangement whereby a person invests money in a common enterprise involving real estate with the expectation of attaining profits from the efforts of a promoter or some other third party
depreciation can be applied to land on financial statements
annual compounding
The process of determining the final value of a cash flow or series of cash flows when interest is added once a year.
M&A MotivesUndervaluation
Acquirer has the capacity to identify mispricing- better information than public, or better analytical tools to digest informationAcquirer not only can identify opportunity but can access funds to capitalize- internal funds, access to capital marketsskill in execution- control premium cannot exceed market mispricingPublic markets are fairly efficient so odds of succes are better in private markets or less efficient foreign markets
random walk hypothesis
share prices react immediately to news so that there is no predictable trend implied by a more gradual share price adjustment, also the next news event leading to the next immediate adjustment cannot be predicted, in efficient market, share price changes are random
1. Suppose a lender is providing a mortgage loan of $150,000 at 6% annual interest to a buyer in a transactio that will close on October 13th. The first mortgage payment will be due from the borrower on December 1st. This first payment will include the i
senior bonds backed by securities owned by the issuer but held in trust by a third party
collateral trust bonds
In what statement does Sales revenue belong?
Income statement
A firm has forecasted sales of $4,000 in January, $6,000 in February, and $5,500 in March. All sales are on credit. 40% is collected the month of sle and the remainder the following month. How much is collected from accounts recieveable in February?
to deal, swap, or trade with petty bargaining; bargain; haggle.
cumulative preferred stock.
the divdend payment can accrue until it is fully paid
in regard to a promissory note, a marker is
the obligor
A list of a firm's revenues and expenses over a period of time.
Rate Cap
a limit on the increases and decreases in the interest rate charged on an adjustable-rate mortgage
multiple IRRs
The situation where a project has two or more IRRs.
Cash flow from assets
Cash flow from assets=Operating cash flow
-net capital spending
-change in net working capital (NWC)
-Operating cash flow=earnings before interest and taxes (EBIT) + Depreciation - Taxes.
-Net Capital spending=Ending net fixed assets - Beginning net fixed assets + Depreciation.
Change in NWC=Ending NWC - Beginning NWC
Acts as though he or she "owns the place;" the usage is "visible, open, and notorious," ie, it would be easy for the owner to learn of the adverse use.
put and call options written on fixed-income (debt) securities
interest rate options
In what statement will you see Gross fixed assets?
Balance sheet
an issure of preferred stock s paying an annual dividend of $5. the growth rate for the firms common stock is 14%. what is the preferred stock price is teh required rate of return is 11%>
$45.45 (a)
cash account
an account in which purchases are paid for in full, as distinguished from purchasing on credit or margin
Complementary Effect
When you choose a project or a path, your choice opens up related opportunities
The price at which a market maker or specialist is willing to buy a security.
Price we get if we are selling.
Interest Rate Risk
The risk of capital losses to which investors are exposed because of changing interest rates
Holding period return (HPR)
the total return from an investment for a given period of time, stated as a percentage
liquidity preference hypothesis
in order to induce investors to hold bond swith longer maturities, the issuer must pay a higher interest rate as a liquidity premium
a bond with a market value in excess of par; occurs when interest rates drop below the coupon rate
premium bond
a credit card issued in conjunction with a specific charity or organization
travel & entertainment cards
. Collection of Data
If we find or create an investment opportunity, we need data regarding the opportunity. We collect existing data about many things: market for the good or service, competition, operating costs, potential sales volume, initial investment, lifespan of the project, cost of capita, and so forth
Reasons for Takeover Defense
Target-firm CEOs are more likely to be replaced if a takeover succeeds than if it fails so self-interest to resist.
Bidder may have to increase bid so resistance can be in best interest of shareholders, but it also reduces the chance of a successful takeover.
Takeover defenses do no more than keep entrenched managers in power - (1) a high bid premium tends to lower management resistance because no longer an excuse (2) resistance is associated with both an icnrease in the likelihood of a competing offer arising and a larger increase in target shareholder wealth
Capital asset pricing model (CAPM)
A theory concerned with deriving the expected(required) rates of return on risky assets based on the assets’ systematic risk levels.
the price at which the common stock would have to sell in order to make the convertible security worth its present market price
conversion equivalent (conversion parity)
In the development of the pro forma financial statements, the last step in the process is the development of the
Pro forma balance sheet(B)
whats a revocable trust?
a trust that can be changed or revoked by the one who established the trust (grantor).
internal rate of return
rate of return that is expected to be earned on a project, discounting rate tha tmakes the npv of an investment equal to zero
high yield bonds or junk bonds
these are issues that carry a rating below the top four categories.
What are the advantages of going public?
- Pre-IPO shareholders can reap the benefits of diversification by selling at least a portion of their shares and using the proceeds to invest in other securites
- Diversification among public investors results in a lower cost of capital for the firm
- By issuing new shares in the IPO: the firm can retire debt to reduce leverage, which in turn reduces the risk of the entrepreneurs' private portfolios even if they do not sell their shares in the IPO; the firm's entreprenuers can dilute to voting power, and thus influence, of other pre-IPO shareholders
- After the firm's shares are seasoned in the listing market, the firm can: establish stock/stock option plans for executives/employees; more readily issue shares to finance an acquisition 
alternatives to finding cost of (equity) capital
1. CAPM; 2. industry avg cost of cap; 3. implied from DDM; 4. survey investors/CFO's; 5. multiple risk factors
after-tax cost of debt, rd(1 - T)
The relevant cost of new debt, taking into account the tax deductibility of interest; used to calculate the WACC. (rd(1 – T))
What does the Bal sheet really tell us?
Records assets and liab at date of bal sht.Their difference is the book value of equity at that date
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