Finance Final
Dutch Auction Underwriting
The offer price is set based on competitive bidding by investors; Uniform price auction
Aftermarket
The period after a new issue is initially sold to the public; Members of underwriting syndicate usually don't sell securities for less than the offering price around this time
Synergy
The positive incremental net gain associated with the combination of two firms through a merger or acquisition
Face Value
The principle amount that will be paid at the end of the period/loan
Collection Policy
The procedure followed by a firm in collecting accounts recievable
Aggregation
The process by which smaller investment proposals of each of a firm's operational units are added up and treated as one big project
Compounding
The process of accumulating interest on an investment overtime to earn more interest
Credit Analysis
The process of determining the probability that customers will not pay
Capital Budgeting
The process of planning and managing a firm's long-term investments
Yield to Maturity
The rate required in the market on a bond
The Fisher Effect
The relationship between nominal returns, real returns, and inflation
Capital Structure
The specific mixture of long-term debt and equity a firm uses to finance their operations
Coupon Rate
The stated interest payment made on a bond
Cash Cycle
The time between cash disbursement and cash collection; Companies want short cash cycles
Yield-to-Maturity
The total rate of return that will have been earned by a bond when it makes all interest payments and repays the original principle
Firm Commitment Underwriting
The underwriter buys the entire issue, assuming full financial responsibility for any unsold shares
Indenture
The written agreement between the corporation and the lender detailing the terms of the debt issue
Pecking-Order Theory
Theory stating that firms prefer to issue debt rather than equity if internal financing is insufficient
Dividend Policy
Time pattern of dividend payout
Cash Discount Period
Time which discount is available
Joint Venture
Typically an agreement between firms to create a separate co-owned entity established to pursue a joint goal
Poison Put
Variation of the poison pill
Reorganization
When a company is unable to meet its financial obligations, creditors can force it into using legal proceedings to restructure itself so that it could continue to be a viable business
Disadvantages of Sole P's
- Limited life of the business - Unlimited liability - Harder to raise capital - Difficult to transfer company ownership
Disadvantages of Corperations
- Must pay taxes - Taxed at the personal and corporate level - Must pay taxes on dividends - Lots of paperwork and fillings to get started - Slow decision making
Advantages of Sole P's
- Simpler and quicker to start - Less regulated - Less taxes - Not taxed at the corporate level or on company dividends - Easier to make decisions - Keep all the profit
Advantages of Corperations
- Unlimited business lifetime - Easier to raise capital - Easier to transfer over company ownership - Limited liabiltiy
Current Yield
A bond's annual coupon divided by its price
What-If Analyses: Simulation Analysis
A combination of scenario and sensitivity analysis wherein we allow all iten to vary at the same time
The Agency Problem
A conflict of interest between the principle and agent
Accelerated Cost Recovery System (ARCS)
A depreciation method under U.S tax law allowing for the accelerated write-off of property
Trade Discount
A discount routinely given to some buyer
Poison Pill
A financial device designed to make unfriendly takeover attemps unappealing
Targeted Repurchases
A firm buys a certain amount of its own stock from an individual investor, usually a large premium; Payments are made to potential bidders to eliminate unfriendly takeovers
White Knight
A firm facing an unfriendly merger often might arrange to be acquired by a different firm
Pro-Forma Statements
A forecasted balance sheet, income statement, and statement of cash flows (financial statements)
Proxy
A grant of authority by a shareholder allowing another individual to vote his/her shares
Syndicate
A group of underwriters formed to share the risk and help sell an issue
Annuity
A level stream of cash flows for a fixed period of time; When solving for annuities, N and I/Y should be entered as negative amounts
Stock Dividend
A payment made by a firm to its owners in the form of stock, diluting the value of each share outstanding
Material Requirement Planning (MRP)
A set of procedures used to determine inventory levels for demand-dependent inventory types
Just-in-Time Inventory
A system for managing demand dependent inventories that minimizes inventory holdings
3 Types of Acquisitions: Horizontal
Acquisition of firm in the same industry
Brokers
Agents who arrange security transactions among investors
Sinking Fund
An account managed by the bond trustee for an early bond redemption
Line of Credit
An account that lets you borrow money when you need it up to a present borrowing limit
Dealers
An agent who buys and sells securities from investors
Strategic Alliance
An agreement between firms to cooperate in pursuit of a joint goal
Call Provision
An agreement giving the corporation the option to repurchase a bond at a specific price prior to maturity
Perpetuity
An annuity in which the cash flows just continue forever because the cash flows are perpetual (Ex. preferred stock)
Proxy-Contest
An attempt to gain control of a firm by soliciting enough votes to replace the existing management
Stock Split
An increase in a firm's shares outstanding without any change in owner's equity
Payback Rule
An investment is acceptable if it's calculated payback period is less than some prescribed number of years
IRR Rule
An investment is acceptable if the IRR exceeds the required return; If not, it should be rejected
NPV Rule
An investment should be accepted if the NPV is positive, but rejected if the NPV is negative
Lockup
An option granted to a friendly suitor giving it the right to purchase stock or some of the assets of a target firm at a fixed price in the event of an unfriendly takeover
Bear Hug
An unfriendly takeover designed to be so attractive that the target firm's management has little choice but to accept it
Shark Repellent
Any tactic to discourage mergers
Collateral
Assets pledged on debt
Leveraged Buyouts (LBO's)
Because a large percentage of the money needed to buy up the stock is usually borrowed
The Bottom-Up Approach
Begin with the accountants bottom line (Net income) and add back non cash deductions
Discounting
Calculating the present value of a FV cash flow to determine it's value today
Optimal Capital Structure
Capital structure resulting in the lowest WACC
Restructuring
Changing the debt-to-equity breakdown
The 5 C's of Credit
Character: Willingness to meet credit obligations Capacity: Ability to meet credit obligations out of operating cash flows Capital: Customers' financial reserves Collateral: An asset pledged in case of a default Conditions: General economic conditions in the customer's line of business
Modified ARCS Depreciation (MARCS)
Characterized by every asset being assigned to a specific class; Once an assets tax life is determined, depreciation for each year is calculated by multiplying cost times a fixed percentage
Seasoned Offering
Companies that are already public releasing new shares of stock to buyers
Liquidity Management
Concerns the optimal quantity of liquid assets a firm should have on hand
Terms of Sale
Conditions under which a firm sells its goods and services for cash/credit
Special Dividends
Considered to be one-time events and most-likely will not be repeated again
Float Management
Controlling the collection and disbursement of cash in a company
Floating-Rate Bonds
Coupon payments that are adjustable
Consumer Credit
Credit granted to consumers
Trade Credit
Credit granted to other firms
Gross Spread
Difference between underwriters buying price and offering price; Represents compensation
Cryptocurrency
Digital asset are designed to work like currency but doesn't have centralized monetary authority (Ex. Bitcoin)
Private Equity
Equity financing for nonpublic companies
Business Risk
Equity risk that comes from the nature of the firm's operating activities; Depends on firms assets and operations
Should WACC be big or small?
Financial managers want to create the smallest WACC possible
Venture Capital (VC)
Financing for new, often higher risk business ventures
Green Shoe Provision
Gives members of the underwriting group the option to purchase additional shares from the issuer at the offering price; Intended to cover excess demand and oversubscriptions
3 Types of Acquisitions
Horizonal, Vertical, and Conglomerate
ABC Approach
Inventory divided into 3 groups - Group 1: Items kept low/items closely monitored - Group 2: Inbetween items - Group 3: Basic inventory items; Kept on hand in mass
Underwriters
Investment firms that act as intermediaries between a company selling securities and the investing public
3 Types of Acquisitions: Vertical
Involved firms at different steps of the production process
Secondary Markets
Involves one owner/creditor selling to another
Net Credit Period
Length of time the consumer must pay back their credit charge
Blockchain
List of records to record transactions; Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data; Blockchain is resistant to alteration/accurate records
Goals of financial management...
Main Goal: Maximize the current value per share of the existing stock Other goals may include... - Survive - Avoid financial distress/bankruptcy - Beat the competition - Maximize sales/market share - Maintain steady earnings growth
Restricted Stock Units (RSU's)
Managers are given the opportunity to buy these at a bargain price
Modified Rate of Internal Return (MIRR)
Modified version of MIRR that addresses some of the problems that can occur with IRR
Cash Management
Much more closely related to optimizing mechanisms for collecting/disbursing cash
3 Types of Acquisitions: Conglomerate
Occurs when the bidder and the target firm are in completely unrelated lines of business
Cash Concentration
Practice/procedures for moving cash from multiple banks into the firm's main accounts
Share Rights Plan
Provisions allowing existing SH to purchase stock at some fixed price should an outside takeover bid come up
Crowd Funding
Raising small amounts of money from a large group/wide range of people and sources
Takeover
Refers to the transfer of control of a firm from one group of shareholders to another
Fair Price Provision
Requirement that all selling SH receive the same price from a bidder
Disvestiture
Sale of assets, operations, divisions, and/or segments of a business to a third party
What-If Analyses: Scenario Analysis
Scenario analysis is the determination of what happens to NVP when we ask what-if questions; Several variables change but only take on a few values
Dealer Markets
Secondary markets that buy and sell for themselves at their own risk over the counter
Auction Markets
Secondary markets that match buyers to sellers; Has a physical location (Ex. NYSE)
What-If Analyses: Sensitivity Analysis
Sensitivity analysis is the determination of what happens to NVP if only one variable is changed; Only one variables changes but it holds many values
US Tax Structure
Seven tax brackets based on income "The more you make the more you take" Corporate taxes capped out at 21%
Crown Jewel
Some firms often sell or threaten to sell major assets (crown jewels) when faced with a takeover threat
Golden Parachute
Some target firms provide compensation to top-level managers if a takeover occurs
Lockboxes
Special post office boxes set up to intercept and speed up accounts receivable payments
SPAC
Special purpose acquisition company; A shell corporation listed on a stock exchange with the purpose of acquiring a private company thus making it public without going through the traditional IPO process
Lockup Agreements
Specify how long insiders must wait after an IPO before they can sell stock
3 Motives for Liquidity
Speculative, Precautionary, and Transaction
The Top-Down Approach
Start at the top of the income statement with sales and work our way down to net cash flow by subtracting out costs, taxes, and expenses
What is WACC
The "Hurdle Rate" for determining whether or not to do a project
Future Value
The amount an investment is worth after one or more periods; Refers to the amount an investment will grow
Ex-Rights Date
The beginning of a period when stock is sold without a recently declared right, normally two trading days before the holder-of-record date
Interest-Only Loan
The borrower will pay the interest every period but none of the principle will be repaid until the end of the loan
Primary Markets
The corporate is the seller and the transaction raises money for the corporation; Can be from private placement or an IPO
Agency Cost
The costs of the agency problem; Costs can be direct or indirect effects of the agency problem
Present Value
The current value or the value of x amount today
Date of Record
The date by which a holder must be on record to be designated to receive a dividend
Holder-of-Record Date
The date on which existing shareholders on company records are designated as the recipients of stock rights
Declaration Date
The date on which the board of directors passes a resolution to pay dividends
Date of Payment
The date on which the dividend checks are mailed out to stockholders
Ex-Dividend Date
The date one business day before the date of record, establishing those individuals entitled to earning a dividend
Operating Leverage
The degree to which a firm or project relies on a fixed cost
Net Working Capital
The difference between a firm's current assets and current liabilities
Float
The difference between book cash and bank cash, representing the net effect of checks in the process of clearing
Financial Risk
The equity risk that comes from the financial policy
The Clientele Effect
The fact that most shareholders have similar characteristics
Annual Percentage Rate (APR)
The interest rate charged per period multiplied by the # of periods per year
Effective Annual Rate (EAR)
The interest rate expressed if it were compounded once a year
Stated Interest Rate
The interest rate expressed in terms of the interest payment made each period
Internal Rate of Return (IRR)
The internal rate of return is the discount rate that makes the NVP pf an investment zero
Operating Cycle
The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory
Credit Period
The length of time for which credit is granted to a buyer; Varies across industries
Internal Growth Rate
The maximum growth rate a firm can achieve without any external financing (ROAxb/1-ROAxb)
Sustainable Growth Rate
The maximum growth rate a firm can achieve without external equity financing while maintaining a constant debt-equity ratio (ROExb/1-ROExb)
Required Rate of Return (RRR)
The minimum return an investor will accept for owning a company's stock
3 Motives for Liquidity: Precautionary
The need to hold cash as a safety margin to act as a financial reserve
3 Motives for Liquidity: Transaction
The need to hold cash to satisfy normal disbursement and collection activities associated with a firm's ongoing operations
3 Motives for Liquidity: Speculative
The need to hold cash to take advantage of additional investment opportunities such as bargaining purchases