Midterm Study 2 Flashcards

Terms Definitions
Accrual Accounting
Matching Principle
pre-tax cost of debt
Kd
Net income from operations
+
Cooperative
A nonprofit organization whose member-owners may save money on certain products or services 
Total Liabilities
Current Liabilities
Long Term Liabilities
________________
Quick Assets
Total Current Assets - Inventory
Buyout
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

 
Simulations
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
What is constant with stockholders expected Rate of Return common stockholders?
Dividend
immunization
a method of protection against fluctuating bond interest rates by investing in securities having different yields and terms
property tax lien
-local gov services benefiting properties to assure payment-automatically superior to any other lien
Discounting
The process of finding the present value of a future cash flow or series of future cash flows; it is the reverse of compounding
agent
CEO works a____________ on behalf of the shareholders
sensitivity analysis
Percentage change in NPV resulting from a given percentage change in an input variable, other things held constant.
Computer-Based Forecasting
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
Physical Real Estate Characteristics
1. Immobility2. Indestructibility (aka, durability)3. Nonhomogeneity (aka, uniqueness or heterogeneity)
senior bonds secured by real estate
mortgage bonds
Manufactured home
made in a factory and delivered
freeze
to render impossible of liquidation or collection
what accounts for the greatest portion of the finance charge?
interest
fallen angels
issues that have been downgraded for other reasons other than a leveraged buyout or a recapitalization
a judgement, when properly recorded, becomes
an involuntary lien
CONVERTIBLE BONDS
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.
Collateral
A valuable asset that is pledged to ensure loan payments
Risk free asset
An asset with uncertain future returns
The Income Statement
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
2 kinds of partnerships
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
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
Short sale
If projects are this then accept all projects with NPV>0?
Independent
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
credit scoring
extend
to postpone the payment of a debt beyond the time originally agreed upon
Liquidity Ratios
CR = CA/CL
QR (or Acid test) = (CA-Inventory)/CL
ACP= AR/ DCS
AR Turnover= DCS/AR
Inventory Turnover= COGS/Inventory
Liquidity Premium
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
Home Warranty Plan
Where various private companies, for a fee, will contract to repair major systems and appliances for a period of time, normally one year
what's a defined contribution plan?
a plan--profit sharing, money purchase, Keogh, or 401(k)--that provides an individual account for each participant
Market Risk
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
Efficient capital markets
a market in which security prices rapidly reflect all information about securities.
Discounted Payback
the lenght of time required for an investment's cash flows, discounted at the investment's cost of capital, to cover its cost
statement of cash flows
indicates how firm generated cash flows from its operations, how it used casdh in investing activities, and how it obtained cash from financing acts
the lowest price at which anyone has expressed a willingness to sell a security
Ask price
The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk.
Market Risk Premium. RPm
Personal & dependent exemptions
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.
maturity
the time when a note or bill of exchange becomes due
Gross Income
Refers to all income in the form of money, goods, services, and/or property.
M
par or face value of the bond to be paid off at maturity
Agency Expectations and SEO
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.
beta coefficient, b
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.
Governance structure in takeovers
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
1) Intent of Properties2) Test of Attachment3) Test of Adaptability
Tests for Fixture Status
How do you find expected inflation rate?
1 + inflation rate
An item which may be converted to cash within one year or one operating cycle of the firm is classified as a
Current Asset(C)
all of the following terminate an offer Except
an offer from a third party
Why is it important to consider effective rates of return
Investments with different compounding intervals provide diffeent effective returnsTo compare investments with different compounding intervals, you must look at the effectve returns
The Sustainable Growth Rate
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
Collateralized mortgage obligations (CMO's)
a generic term for security backed by real estate mortgages...think about picture and mortgage crisis.
Accounting Break Even Point
FC + (COST OF EQUIPMENT / n) / CM
Why is monitoring the principal-agent problem costly for both VCs and entreprenuers?
Monitoring is costly because it gives up development time by creating reports/review
What are the disadvantages of IRR?
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.
which of the following is permissible under the federal fair housing act
denying housing based on a prior violent criminal conviction of the applicant
what does the income statement really tell us?
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.
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
selling real property as an executor of an estate
What if the discount rate changed to 7% instead of 10%? The calculations change to
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.
What are the two types of bankruptcy proceedings?
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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