finance final Flashcards

Terms Definitions
Debt-to-Equity =
D/E
Equity multiplier
total assets
----------------------
common equity
an unsecured (junior) bond
debenture
Radon
radioactive gas; uranium, granite, shale, phosphate
the right to sell
Put option
fundamental analysis
uses earnings, expected interest rates, and risk evaluation to determine stock prices
a typical broker salesperson employment contract should include all of the following except
employment status
Beta
A standardized measure of systematic risk based on an asset’s covariance with the market portfolio
An _____ occurs when the “offeree” accepts the expressed terms of the offeror without change.
Acceptance
Corporate debt has
increased rapidly since WW2(A)
companies with low betas < 1
defensive assets
(Not Constant) Growth Model
 
when dividends change over time
D1/(1+r)^1 + D2/(1+r)^2 +...+(D/r-g)(1/1+r)^n
Net Present Value
The difference between an investment’s market value and its cost
Proxy
a document giving one person the authority to act for another, typicall the power to vote shares of common stock
M&A MotivesDiversificationQuestion: Can firms accomplish diversification more effectively than individual investors?
Investors diversify their portfolios with minimal trading costs; firms incur significant transaction costs through diversifying acquisitionsException: Asian family owned firms
financial analysis
assits in identifying the major strengths and weaknesses of a business enterprise, enough cash to pay obligations, reasonable a/r collection period, efficient inventory management policy, sufficient plant, property adn equipment, and adequate capital structure
an agreement to exchange interest rate payments on a notional value for a period of time, usually with one party paying a fixed rate and the other party paying a floating rate
Swap
Relationship between expected reurn and beta.
Security Market Line
the interest rate that equates a future value of an annuity to a given present value
yield
shelter
to invest money in a tax shelter
improvements on the land
includes fixed structures: buildings, fences, walls & decks
Bundling, unbundling
creation of new securities either by combining primitive and derivative securities into one composite hybrid or by separating returns on an asset into classes
Percolating waters
water that passes through the ground, not flowing ain a clearly defined underground stream or supplied by streams slowing on the surface
-Ownership isn't easy to tranfer
-Unlimited liability for business debt
Disadvantage of sole proprietorship?
preemptive right
A provision in the corporate charter or bylaws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock (or convertible securities).
Fradualent Conveyance
cant have asset purchase that looks like stock purchase but gets rid of liabilities
bond yield calculation
=Risk-free security + spread to treasuries + bond specific spread
If the offeree makes any changes, it would be considered a _____.
Counteroffer
an investment company that invests its shareholders' money in a diversified portfolio of securities.
Mutual Fund
growing-equity mortgage
a home loan agreement that provides for payment increases to allow the amount owed to be paid off more quickly.
which of the following is not a primary source of capital to the firm?
Assets(A)
construction loan
a short-term loan to finance the building phase of a real-estate project
recovery rating systems
the recovery ratings were for secured debt.
the deed most commonly used to correct a title defect or cloud on title
quitclaim deed
OPPORTUNITY COST OF CAPITAL
The best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted; the return the investor forgoes on an alternative investment of equivalent risk and term when the investor takes on a new investment.
Small Claims Court
A court that settles legal differences involving amounts below a set limit and employs a process in which the litigants usually do not use a lawyer
amortization schedule
A table showing precisely how a loan will be repaid. It gives the required payment on each payment date and a breakdown of the payment, showing how much is interest and how much is repayment of principal.
M&A MotivesOperating synergy
Economies of scale allow combined firm to be more cost efficient and profitable; horizontal integrationgreater pricing power from reduced competition; horizontal integrationCombine different functional strengths; ie vertical integration along value chainFaster growth in new or existing product markets
weak form efficiency
implies that stock prices reflect the information contained in the history of past stock prices and trading volume, implies that daily stock price changes are independent and thus it is useless for investors to try to detect and exploit trends in stock prices, random walk hypothesis
Allows a non-owner the right to use the property in some manner.
Positive Easement
asset allocation plan in which a fixed percentage of the portfolio is allocated to each asset category
fixed-weightings approach
In what statement do Inventories belong?
Balance sheet (Current assets)
a financial executive devotes most time to
working capital management (d)
yield to maturity
a percentage that accounts for the difference in the interest on a bond based on current market value and that earned if the bond is held to maturity
Pro Forma Income Statement
is a Projected (Before the Fact) Income Statement
STATEMENT OF CASH FLOWS
An accounting statement that shows how a firm has used the cash it earned during a set period.
 
Divided into three sections:

Operating activities


Investment activities


Financing activities
Reinvestment Rate Risk
The risk that a decline in interest rates will lead to a decline in income from a bond portfolio
what is a security?
any investment product that can be exchanged for a value and involves risk. Also, the investment must be readily transferable between 2 parties, and the owner must be subject to loss of some or all of his investment principlevery
avg collection period
avg # of days an acounts receivable remains outstanding a/r/(annual credit sales / 365)
Income Bond
A bond that pays interest only if the interest is earned.
money taken out from a credit card. interest is charged immediately
emergency fund
value of a bond
Value is based on present value of: stream of interest payments principal repayment at maturity
Empirical Features of Dollar Amount Dividends and Share Repurchases Over Time

Evidence is consistant with pecking order theory, when financing > internal cash flow - debt increases.  Equity financing is very low.  Dividends form the most stable series but grow slowly (4.5% annually).  Stock repurchases are much more volatile and exhibit a much higher growth rate (17.7%).
define the term equity or stock?
equity or stock is:the original capital paid into or invested in the business by its founders.
a mutual fund that does all or most of its investing in foreign securities
international fund
it is based on the number of periods anf the interset rate and whether or not there is more than one cash flow
interest factor (IF)
whats a 403(b) tax sheltered annuity?
A tax advantaged savings plan for employees of nonprofit institutions.
Each county in the US keeps one of these on each property (see next slide).
Grantor and Grantee Indexes
Internal Rate of Return is
is a variation on the NPV method. With the Internal Rate of Return, we are calculating the discount rate that makes the Present Value of the Net Cash Flows equal the Initial Investment. Put another way, we are calculating the discount rate that makes the NPV of the project equal 0. Once we have the IRR calculated, we compare it to the cost of capital and make a decision to accept or reject.
How are prices set for corporate bonds?
- The underwriter estimates the coupon rate required to render the bond's market price equal to par or face value
- The required coupon rate depends on issuer characteristics, contract terms, and market factors
- The most important market factor is the yield on a US Treasury bond with the same maturity
- On the issue date, the underwriter fixes the coupon rate on the new issue equal to the Treasury yield plus a yield premium required to render the market price of the bond equal to par value 
You bought a share of Coca-Cola stock for $40.00. You sold it for $50.00. Before you sold it, you received a dividend for $5.00. A. What is your dollar return?
Dollar Return = Capital Gains + IncomeDollar Return = (Ending Value – Beginning Value) + IncomeDollar Return = ($50.00 – $40.00) + $5.00Dollar Return = ($10.00) + $5.00Dollar Return = $15.00
What is a current assets?
Has a life less than one year and it will normally convert to cash within 12 months
How sources of finance change in regard to preferred stock
The changes are the same as for debt. As more money is raised through preferred stock, the cost to a firm rises, causing that firm's MCC to rise as well
σ
standard devation
CFO
Cash Flow of Operations
total current liabiliites
accounts payable
accruals
________________
historic bubbles are
tulipsroaring 20'shousingdot com
Pay bills on time
Credit Score
growth moratorium
prohibition of development; under rationale that growth can impose broad externalities on a community
MANAGING WORKING CAPITAL
Managing day-to-day cash obligations.
Reincorporation
Some states have stronger anti takeover laws on the books so one defense is becoming incorporated in those states.Announcement of these types of moves are met with mildly negative share price reaction since they have the potential to entrench managers.Limitation- state laws can be in direct conflict with federal regulations
Lump Sum
A single payment, deposit, etc.
readjustment
a rearrangement in the financial structure of a corporation, usually less drastic than a reorganization
mechanics' liens
construction & other improvements to real estate
Third market
trading of exchange listed securities on the OTC market
Acquisition

The shareholders of the defunct firm receive shares of the surviving firm and/or cash, while the surviving firm acquires the assets (and liabilities) of the defunct firm.  The surviving firm is the acquiring firm or bidder, and the defunct firm is the acruired firm or target.  Deal accepted in the same way as in merger.
cannibalization
The situation when a new project reduces cash flows that the firm would otherwise have had.
net working capital
current assets - current liabilitieswhen assets are higher it is positive and when liabiltities is higher it is negativenegative-higher the risk-more the profit
Things that can be owned or possessed.
Property
securities similar to mortgage-backed securities that are backed by a pool of bank loans, leases, and other assets
asset-backed securities (ABS)
Depreciation
Not actually cash spent during the period. - Cash allocated for the period when the asset was purchased.Lowers taxable income for the period.
impecunious
having little or no money; penniless; poor.
transaction fee
charge levied against cardholders per use of the card and are not included in the apr advertised
Bullet Bonds
Most corporate bonds are term bonds; they run for a term of years then cbecome due and payable.
 
Term bonds are often referred to as bullet-maturity or Bullet Bonds.
a seller netted $275, 500 after paying a 6.5% commission and $5,000 in other closing costs. what was the sale price
$300,000
MARKET CAPITALIZATION
The total market value of equity; equals the market price per share times the number of shares
 
Compensatory damages
monetary damages awarded for a breach of contract that results in higher costs or lost profits for the injured party; to put the plaintiff in the position he or she would have been in had the tort never occurred
Expected rate of return
the return that analysts’ calculations suggest a security should provide, based on the market’s rate of return during the period and the security’s relationship to the market.
Underleverage
if they moved more capital sourcing to debt they would lower the cost of capital
agents
officers are agents of corp and are authorized to act on behalf
an ambiguous term that usually refers to a fiduciary put. Also sometimes used to refer to a combination of a short put and a short stock position
Covered put
What is value impacted by?
Asset characteristics, Investor attributes, these two areas determine the investor's required rate of return
Down Payment
~20% of purchase priceif less, must buy mortgage insurance
corner
a monopolizing or a monopoly of the available supply of a stock or commodity to a point permitting control of price
title insurance
protects lender's interest if title is later found faulty
Beta = 1
The stock reacts proportionally. It moves to the same degree than the market
Judgment Lien
A lien that attaches to real property of a defendant when a plaintiff wins a judgment in the jurisdiction in which the property is located
What's an administrator/administratrix?
The courts appointed manager of the death estate or will.
Simple Interest
Occurs when interest is not earned on interest
Liquidity risk
uncertainty due to the ability to buy or sell and asset in the secondary market.
Capital Rationing
the situation in which a firm can raise only a specified, limited amount of capital regardless of how many good projects it has
total asset turnover ratio
=sales/total assets how efficiently a firm uses resources to generate sales is a summary measure influenced by ea of the asset management ratios
there is an agreement (a promise) to exchange good in the future, but with no marking to market along the way; it is not marketable. This means you cannot sell your part of a forward contract to someone else.
Forward contract
Term Loan
is a loan with a non-changing periodic payment.
one number summarizing and grading credit-worthiness
Most common credit score?
home buying steps
get finances in order, prequalify for mortgage, search for home, agree to terms with seller, obtain a mortgage loan, prepare for closing, attend closing
Ordinary (deferred) Annuity
An annuity whose payments occur at the end of each period
what's the unit benefit method?
Pension benefits depend directly upon units of credited service.
relevant risk
The risk that remains once a stock is in a diversified portfolio is its contribution to the portfolio's market risk. It is measured by the extent to which the stock moves up or down with the market.
M&A MotivesManagerial self interest
Empire building- ceo want to be kingego- in a control contest with multiple bids, nobody wants to back down- must win attitude, no matter at what costcompensation or other side benefits- new ceo compensation may be based directly on size of new firmRichard Roll (1986) "hubris hypothesis" of managerial overconfidence may explain much of the bidding process of acquirers
State Statutes Affecting Landlord-Tenant Relationship
Each state has enacted laws that regulate the behavior and relationship between landlords and tenants.
What indicates market premium for given common stock?
Price to Earnings Ratio (PE)
Which of the following is not an advantage of private placement?
Lower interest rates(B)
a licensed real estate broker
must disclose all material facts to the principal
Personal Taxes
Rates begin at 10% and rise to 35% for individuals with income over 319,100May be subject to state tax
Cost of Retained Earnings, rs
the rate of return required by stockholders on a firm's common stock
CAPM formula
required rate of return = Rf + ( E [Xmkt] - Rf) (ß)
• Comparative ratio analysis (benchmarking)
an analysis based on a comparison of a firm’s ratios with those of other firms in the same industry
Original Issue Discount (OID) Bond
any bond originally offered at a price below its par value
The line on the graph that shows the relationship between risk as measured by beta and the required rate of return for individual securities.
Security Market Line (SML)
Why are finance companies less regulated than commercial banks?
10. Because they do not accept deposits the way commercial banks do.
The Three Determinants of ROE
ROE can be expressed as a product of three componentsROE = (Net Income/Sales) (Sales/Assets) (Assets/Stockholders’ Equity)In words,ROE = Profit Margin * Asset Turnover * Financial LeverageThus, the three levers managers can use to control ROE areThe earnings obtained from each dollar of salesThe sales generated from assets employedThe amount of equity used to finance the assets (which can be rewritten as (L+SE)/SE = L/SE + 1 to show the dependence on the debt-equity ratio)
what do the terms offer and acceptance, mutual assent, and meeting of the minds have in common
the terms mean there is an unqualified acceptance of an offer, which is an essential element of a contract
babe ruth jr. has agreed to play for the clevand indians for $3 million per year for the next 10 years. what table would you use to calculate the value of his contract in today's dollars?
present value of an annuity (a)
Discuss the uses of standby letters of credit (SLCs). What benefits do SLCs offer to a bank’s commercial customers?
An SLC is where the bank promises to pay a third party in the event the bank’s customer fails to perform according to a contract the customer has with the third party. The major benefit of an SLC for commercial customers is that it allows as backup lines of credit to support commercial paper offerings, municipal bond offerings, and direct loans such as construction lending. They often used for mergers and acquisitions for large commercial customers.
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