Finance
Average Collection Period (ACP)
= 365 / AR Turnover The ACP simply converts the AR turnover into a day count measure.
Days on Hand (DOH)
= 365 / inventory turnover
Inventory Turnover
= COGS / Average Inventory ...is the number of times the firm turns (or sells) its inventory annually.
Accounts Receivable (AR) Turnover
= Credit Sales/AR Describes the number of times a firm's AR account "turns over" in a year.
The Times Interest Earned Ratio (TIE)
= EBIT / Interest Expense: Literally, this ratio tells us how many times a company covers (or can pay) interest expense given operating profit.
Operating Margin
= EBIT/Sales: _________ ______ is the percent of sales remaining after covering the cost of the goods sold AND operating expenses. Since operating margin is pre-interest, we frequently use it to compare firms with different capital structures (i.e., different amounts of debt).
Operating Income Return on Investment (OIROI)
= EBIT/TotalAssets; _____ describes the relationship between operating profit (aka EBIT) and the company's asset base. _____ tells us how much pre-tax, pre-financing profit the company generates per dollar of assets. When we calculate the return on a portfolio, we measure the increase or "profit" generated during a period as a percentage of the assets invested. Conceptually, _____ does the same thing for a firm. If we generate $100 in operating profit on an asset investment of $1,000, we have earned a 10%return.
Gross Margin
= Gross Profit / Sales: _____ ______ measures the percent of revenue remaining after the cost of the goods sold. High gross margins are usually associated with an efficient production process.
Interest-Bearing Debt to Total Capital (IBDTC)
= Interest-Bearing Debt / (Interest-Bearing Debt + Owners' Equity): IBDTC is a more precise measure of a firm's financial structure. Interest-bearing debt carries explicit interest costs. In a simple case, interest-bearing debt can be calculated as total liabilities minus accounts payable and accruals. Since accounts payable and accruals do not have explicit interest costs, omitting them from the calculation allows us to focus more directly on management's formal financing decisions.
Return on Assets (ROA)
= Net Income /Total Assets: The intuition behind the ___ calculation is straightforward: bottom-line earnings as a percent of all the capital invested.
Return on Equity (ROE)
= Net Income/Owners' Equity: ___ speaks to the very heart of the free enterprise system by answering the question: " As an owner of this business, how much did I earn as a percentage of each dollar invested?" Given the question answered, there is little surprise that ___ is one of the most important metrics by which managers are evaluated. Notice the similarity between ___ and ROE. The numerators are the same and the denominators are related by the balance sheet equation. The difference in ___ and ROE speaks to the effectiveness of the firm's financing policy. A firm that is effectively using debt will have an ROE that exceeds ___. Managers that consistently deliver high ROE will find many lucrative opportunities in the business world.
Net Margin
= Net Income/Sales: ___ ______ measures the percent of revenue that drops to the bottom line. That is, a 5% net margin indicates that for every dollar of revenue, 5 cents remains for the equity holders after all other costs are covered.
Increased assets
= Outflow of Cash
Fixed Asset Turnover (FAT)
= Sales/FixedAssets; ___ calculates sales generated per dollar of fixed assets. _____ ______ include all non-current assets, or total assets minus current assets. To some extent, current assets volume is a reflection of management's risk preferences. Managers with low risk tolerance will maintain higher current asset levels. In contrast, a company's _____ _____ holdings are largely determined by the industry in which it operates. Hence, ___ removes the management-influenced current assets from the denominator and compares sales solely to the long-term assets used to produce the company's product.
Total Asset Turnover (TAT)
= Sales/Total Assets; Literally, this ratio measures how many dollars in sales the firm generates per dollar of assets. A TAT of three indicates that for every $1 of assets,the firm is generating $3 in sales. All else equal, more efficient asset utilizers generate more sales per dollar of assets they have high _____ _____ ________ ratios.
Financial Leverage Ratio (FLR)
= Total Assets / Equity: The ___ is similar to the debt ratio. In a very simplistic firm, 40% debt implies the other 60% must be financed with equity. Thus,60% equity financing (or equity/assets) implies an ___ of 1.67 (assets/equity).
Debt Ratio
= Total Liabilities / Total Assets: The ____ _____ measures the proportion of the firm's assets financed with debt.
Increase in liabilities
= increased cash
Mortgage Bonds
A ________ ____ is a ____ that has specific collateral, such as a piece of real estate, behind it. They are issued with a specific asset as collateral. In the event that the corporation defaults on its debt payments, mortgage bondholders receive that asset.
Eurobonds
A _________ is payable in a currency not native to the country in which it is issued. Therefore, an American bond, issued in Europe, that is payable in dollars, is a specific type of ________ called a Eurodollar bond.
Perpetuities
A __________ is a "perpetual annuity" or an unending series of equal payments. ____________ are frequently associated with charitable giving. For example, if you want to "endow" a hospital with funds of $100,000 per year forever, you must create a perpetuity.
Fixed (or Pegged)
A country's monetary authority intervenes to maintain a constant value of the country's currency. Tat is, if the value of the country's currency states to fall, the monetary authority will buy its own currency in the open market to maintain a steady exchange rate.
Financial Risk
A risk that a firm faces when it becomes unable to meet its debt obligations.
dealer market
A type of secondary market, it does not require a physical location. Instead, securities are bought and sold through a network of dealers that trade for themselves. For example, a dealer might hold inventory in a particular stock and be willing to sell to those that demand the stock and buy from those that will supply the stock. NASDAQ, which is the second largest secondary market in the world, is an example of a ________________ ____________________
Auction Market
A type of secondary market. An auction financial market has a physical location and prices are determined by the highest price an investor is willing to pay.The New York Stock Exchange (NYSE), the world's largest secondary financial market, is an example of an ____________ ______________
Bond Ratings
AAA, AA, A, BBB, BB, B, CCC, etc. Anything with a rating of BB or below is known as a junk bond. These bonds are too risky to be considered investment grade.
Accounting issues
Accounting data is the biggest potential menace in ratio analysis. The goal of ratio analysis is to understand the true economic character of the firm. However, the rules of accrual accounting allow for significant variation in reported results.
Banking or Financial Institution
Almost everyone taking this course will have already visited a bank and will understand that banks make money by paying depositors a smaller interest rate than the interest rate they charge to borrowers.
Zeros
Alternatively known as ____ coupon bonds, _____ pay no coupon payments - their coupon rate is 0%. They typically sell at deep discounts.
Leveraged buyouts
Are effectively _________ _________________ from an outside party. An example of an ___ is when a company raises capital through the debt markets to acquire another company. Said differently ___s are almost entirely debt-financed acquisitions.
Net PP&E
Book valueis defined as original purchase price (historical cost) minus accumulated depreciation. It can be calculated for the firm's entire capital stock, in which case, we take Gross PP&E minus accumulated depreciation to get ___ ____. Book value can also be calculated for an individual asset. Unfortunately, the accounting rules for calculating depreciation rarely mirror economic depreciation so book value can be very different from the fair value of the asset.
CFI Equations
CFI = Gross PP&E_(end) - Gross PP&E_(begin) CFI = Change in Net PPE + depreciation expense
Operating Balance
Can be defined as the amount of cash the firm needs to pay its immediate bills.
Working Capital Management
Can be defined as the cash resources that are required to run the firm's day-to-day. Examples might include the process that firms use to pay their bills. It might also consider the length of time it takes in the production process or the time between when the firm pays for raw materials to the time when the firm receives payment on the sales of a finished product.
Capital Structure
Can be defined as the mixture between a firm's level of debt and a firm's level of equity.
Recapitalization
Can be defined as the reorganization of the firm's capital structure. Suppose a firm is an industry with an increasing number of bankruptcies and the company wants to reduce its exposure to financial risk by decreasing its debt-to-equity ratio. The company may ____________ by using some of its equity capital to pay off its existing debt, thus reducing the debt-to-equity ratio.
Terminal Cash Flow
Cash flow associated with "unwinding" the project at the end of its useful life. It does NOT include the differential cash flow from the final year of operations. In the standard case, it includes the cash from the disposal of the asset (including taxes) and the recapture of working capital.
Differential Cash Flow
Cash flow associated with using the asset each year during the life of the project. All cash flows occurring during a year are attributable to the end of the year.
Current Ratio
Current Ratio = Current Assets / Current Liabilities Current Liabilities are obligations that will require cash within the next year. Current Assets are items that will generate cash within the next year.
Stock options
Derive their value from the _____ of the company. Understanding _____ valuation will help in calculating the real value of the total compensation package.
The National Bank Act of 1863
Designed to create a national banking system, float federal war loans, and establish a national currency. Congress passed the act to help resolve the financial crisis that emerged during the early days of the American Civil War (1861 - 1865).
Dividends Equation
Dividends = (Old RE + Net Income) - New RE
Entrepreneurial Finance
Early stage companies frequently need to attract capital to develop products and markets. The providers of this capital, known as venture capitalists, require compensation for investing in these risky ventures. Venture capitalists use TVM extensively to evaluate the benefits and related costs of investing.
Incremental earnings
Essentially this is the project's net income. A common mistake is to treat this like cash flow. Net income is an accounting concept.
Realizable salvage value (RSV)
Estimated sale proceeds for the new asset at the end of its life. Do not confuse RSV with "salvage value" from the depreciation calculation. For depreciation, _______ _____ is an accounting decision. RSV is an economic forecast. The two can be the same, but they can also be very different.
Sarbanes-Oxley Act
First, it was designed to ensure that public company boards of directors actually represented the shareholders in good faith. Second, it was designed to monitor company executives and ensure they were truthful in their SEC reporting. Third, ___ was designed to ensure that public accounting firms were being honest in their audits of public companies. Company controls must meet multiple key provisions of ___. Firms must be concerned with information transparency, proper audits, disclosures of off-balance sheet items, internal assessment of corporate controls, non-retaliation against whistleblowers, and independence from U.S. enforcement agencies.
Hedging
Generally, the process of eliminating risk is referred to as _______. The two primary methods used to _____ FX risk are financial derivatives and direct investment.
Staged investment
Given a base case NPV analysis, it is possible to invest in ______.
Floating (or Free Floating)
If a country follows a ________ exchange rate policy, the value of the currency is determined strictly by supply and demand in the open market.
Future Value (FV)
If you invest $100 today in an account that pays 10% interest, how much will you have one year from now? It is probably obvious that you would have $110 in one year. The equation that describes this relationship is: FV = PV (1 + r)n = 100 (1.1)1 = 110 If we invested for two years, the value will be: =100 (1.1)2 = 121 Notice that in the first year, we earned $10 in interest, but in the second, we earned $11. The difference is attributable to compound interest. During the first period, we had $100 earning interest. However, in the second year, we had $110 earning interest.
Managed (or "Dirty" Floating)
In this regime, currencies are generally allowed to float but the fluctuations are managed. A managed float is essentially a policy of allowing a currency to float within a minimum and maximum value. If the country's value approaches either the minimum or maximum the monetary authority will intervene to reverse the trend. In the end, it is rare for a stable country to tolerate wild gyrations in the value of its currency. So, most currencies are probably subject to a _____ _____ ______.
Cash Cycle
Is the length of time between when the inventory is paid for and the time when the company is paid for the finished product. It is directly related to the level of working capital in a firm. It is also directly related to the amount of cash that a firm will need to meet its day-to-day operations.
Real options
It is likely a single NPV has not accounted for value-adding options such as 1) the option to expand production if things go well or 2) the option to abandon the project early if things go poorly.
Partnering
It may be that the risk of a value-adding project is simply too great for the firm.
Corporate Bonds
Just as the U.S. government might need to borrow money to cover costs or investments in new projects, firms also borrow from the public.
Standardization
Knowing that one company has $1 million in outstanding debt while another has $100,000 tells us nothing about the relative debt load of the firms.However, once we standardize each firm's debt by an economically meaningful variable such as assets to discover that one firm has 90% of assets financed with debt and the other only 20%, we gain much greater insight into the relative debt load of the firms
Subordinated Debentures
Like normal __________, ____________ __________ are bonds that are not backed by any specific collateral. In addition, ____________ __________ are __________ that have a lower claim to the assets of the firm in the event of firm liquidation than normal __________.
Timing issues
Mixing data from the income statement and balance sheet causes problems. This is particularly problematic for seasonal firms.
Convertible bonds
More than being a type of _____, _____________ is a feature that may be added to any type of bond. ______________ refers to the ability to convert a bond into equity securities, usually common stock. It gives the investor the right to trade each bond for a set number of shares of common stock whenever the investor chooses.
Net Income Equation
Net Income = Dividends + Change in RE
New RE Equations
New RE = Old RE + Change in RE New RE = Old RE + Net Income - Dividends
The Securities and Exchange Commission (SEC)
Operationalizes its mission in two primary ways. First, it requires public disclosure of firm data for firms desiring to sell public equity or debt (or to non-accredited investors). There are several key filings that public companies make during their life cycles. When a firm desires to conduct an initial public offering, it files an original offering prospectus, known as ___ Form S-1 as well as the "red herring." This form allows the firm to begin the process of going public, but the firm is not allowed to take any official offers to purchase shares until the actual IPO date.
dollar returns
P_(t) -- P_(t-1) + CF_(t) P_(t) = Sold Price P_(t-1) = Bought Price CF_(t) = cash flow (coupons; dividends for stocks)
Quick Ratio
Quick Ratio = (Current Assets - Inventory) / Current Liabilities The Quick Ratio applies a more stringent test as to what is considered a liquid asset.
Flexibility
Ratio analysis is not governed by a set of rules such as Generally Accepted Accounting Principles (GAAP). Rather, the process of calculating and evaluating ratios is economic analysis governed only by the prowess of the analyst. Which ratios are relevant? How many years of data should be used? What about the impact of accounting differences? Ratio analysis is a Darwinian process where the best analysts achieve the greatest benefit.
Focus
Ratios allow us to quickly discover areas in need of investigation. One common misconception is that ratios tell you what is happening in a company. This is not the case. Ratios don't answer questions about the company; ratios tell you what questions to ask. A ratio that changes through time or deviates from industry norms is essentially a red flag saying," FOCUS HERE."The fact that the ratio is changing does not tell us much, but the reason behind the change could make a huge difference in our analysis and subsequent actions.
Internal Goal Monitoring
Ratios can measure progress relative to specific goals set within the company. For instance, if management sets a specific goal for ROE, assessment of progress will involve ratio analysis.
Securities Act of 1933
Requires firms to fully register with the SEC before selling securities to the public. The primary document a firm files to go to public is the prospectus, SEC Form S-1. This form is designed to provide any public U.S. citizen interested in investing in a firm sufficient information to make an informed decision. It is designed to mitigate fraud in the securities industry.
Differential Cash Flows
Result from the use/operation of the capital asset and must be estimated for each year of a project's life. To enhance value, ______ needs to be large enough to justify project cost. The calculation of ______ involves creating a pro forma cash flow statement for each year of the project.
fixed-income securities
Securities such as bonds, notes, and preferred stocks that offer purchasers fixed periodic income.
Equity
Since Asset= Liabilities + ______, misstatements found in the assets and/or liabilities sections must be offset somewhere; "somewhere" is frequently in the ______ section. Because of this effect, the book value of ______ usually bears little resemblance to the market value of the company's ______. Typical ______ accounts include common stock (CS), additional paid-in capital (APIC), and retained earnings (RE):
Initial Outlay
Start up or acquisition cost of the project. Assumed to arrive at time zero (today).
Residual Claim
Stockholders have a ________ _____ on the earnings and the assets of the company. This means that, each year, after the company pays for its operations and pays its creditors, any ________ or remaining earnings belong to the shareholders. Shareholders have claim to those earnings in proportion to the percentage of shares they own. The same is true if the firm fails and is liquidated. After all of the assets of the firm have been sold and its debts paid, the ________ cash belongs to the shareholders and is distributed based on the proportion of shares each shareholder owns.
Gross Profit
Subtracting COGS from revenue gives us the company's ___________________ ___________________
Net Income
Subtracting both interest and taxes from EBIT leaves us with ___ ______. However, every line item involved in calculating ___ ______ is subject to accounting assumptions, timing differences, subjectivity, and even purposeful deceit.
EBIT
Subtracting operating expenses from gross profit yields ________ (aka operating profit).
Retention Ratio/Plowback Ratio
Subtracting the payout ratio from 1 yields the firm's _________ _____ or ________ _____, which is the portion of earnings the firm retains.
Present Value (PV)
Suppose you anticipate receiving $150 in eight years. What is the _______ _____ if we discount at 7%? _______ _____ calculations for single sums use the same formula as future values (solved for __): PV = FV / (1 + r)n = 150 / (1.07)8 = 150 / (1.07)8 = $87.30
Tax
The ___ implications of incremental EBT. Usually assessed at the margin statutory rate.
Intrinsic Value
The _________ _____ of any asset is the present value of the stream of expected future cash flows discounted at an appropriate required rate of return.
Depreciable asset
The ___________ _____ is also known as the ___________ base. This is also known as the "cost" of the asset.
Corporate Governance
The control issues involved in running a company collectively are known as _________ __________.
Purchase Price
The cost of the machine from the manufacturer
bid-ask spread
The difference between the bid price and the ask price.
After-tax proceeds from sale of old assets
The disposal of an old asset usually includes inflows in the form of sale proceeds and the creation of a tax liability/tax shield. Less commonly, the sale of an asset can also involve net outflows from demolition costs. Generally, the proceeds from the sale of the old asset are associated with replacement projects. That is, the firm has a functioning asset in place and is replacing it with a new asset. Projects where no old asset exists are referred to as expansion projects.
idiosyncratic risk
The portion of risk that is diversifiable is considered _____________ ____. An example of _____________ ____ might be the rising cost of jet fuel that is paid by airlines or the variability of currency values for a large multinational corporation.
Depreciation Reversal
The primary reason incremental earnings are not a cash flow is depreciation (a non-cash expense), we subtracted ___________ to accurately estimate the tax liability. Since ____________ is non-cash, we must add it back.
Financial Industry Regulatory Authority (FINRA)
The primary substituents of ____ are brokerage firms and exchange markets. ____ is the largest independent regulating service for all securities firms operating within the United states. Its overall mission is to protect investors by ensuring the securities industry acts fairly and honestly with all investors.
Dodd Frank Act
The purpose was to monitor capital markets through analysis of systematic risk, increased scrutiny of the hedge fund industry, monitoring of the insurance industry, and limitations of investible assets of banks.
interest rate/discount rate.
The rate at which a dollar changes in value due to the passage of time. You can think of the ________ ____, r, as a function of several parts: r = Real Risk - Free Rate + Inflation + Risk Premium where r = Nominal ________ ____ (nominal means inflation included) Real Risk - Free Rate = The rate earned on riskless investments with 0% inflation. Inflation = The annual decay of purchasing power of money. Risk Premium = Compensation for bearing the risk of a particular investment.
Maturity
The remaining Life until the bond issuer pays the face value and the bond expires.
Business Risk
The risk that firms face because of variability in operating income. Sometimes also referred to as operating risk and depends largely on the industry the firm is in.
Credit standards
The standard level of credit worthiness of customers and/or suppliers.
Credit Terms
The terms of the credit offered to customers and/or suppliers. These terms include the interest rates, early payment discounts, length of credit period, etc.
Irrelevance Hypothesis
The value of the firm does not depend on the leverage of the firm. After deriving a mathematical model, they were able to conclude that the value of a firm is independent of the firm's capital structure. 1) Firms do not pay taxes. 2) Firms do not face transaction costs 3) Firms do not face bankruptcy costs
Expected Return
The weighted average of security returns across different economic states, where the weights are the probabilities of the different economic states.
Weighted-average Cost of Capital
The weighted average of the various costs of equity and costs of debt.
Foreign bonds
There are _____ that are issued in a domestic market by a foreign firm, but in the domestic currency. Therefore, if a chinese firm floats debt in the US and the debt is payable in dollars, then China has floated a _______ ____.
Shipping/Installation
These are capital expenses and are added to the purchase price as part of the depreciable asset. Hence, ___ expenses are capitalized on the balance sheet as part of the initial investment and are depreciated over time.
Investments
This area is devoted to understanding the various types of financial instruments—such as stocks, bonds, etc.—and how to value these instruments.
WCInv
This is the INCREASE in net working capital. IN a simple case, net working capital is defined as current assets minus current liabilities (i.e., CA - CL). _____ is the change in working capital and is usually attributable to increased levels of inventory and/or receivables associated with the project (minus any increase in current liabilities such as accounts payable). If working capital is $100 without the project and $120 if the project is accepted, _____ = $20.
Net initial outlay
This is the all-in cost of accepting the project.
Differential depreciation
This is the change in ____________ expense. For replacement projects, this is the difference between the ____________ on the new and old asset.
Incremental EBT
This is the change in taxable income for the year. There is no recognition of interest expense in capital budgeting. As discussed with cost of capital, we adjust for the tax benefits of debt in the discount rate.
Sensitivity analysis
This process involves repeating the full capital budgeting analysis many times while changing only one variable.
Competitive Sale
Those wishing to underwrite the bond issue will submit bids (on the bond's prices and interest rate) to the issuing firm. The firm will then select the underwriter that offered the highest price and lowest interest rate.
Non-quantifiables
We have calculated NPV/IRR assuming all of the cash flows were known. In the real world, there are many variables that defy quantification.
Inverse price-yield relationship
When market yields go up, bond prices go down (and vice-versa)
Tax effects
When the new asset is sold, a taxable gain or loss will result unless the asset is sold for exactly its book value. If the sale proceeds exceed the book value, the resulting gain will be taxed as ordinary income. Conversely, if the sale proceeds are less than the book value, the resulting loss will create a tax shield.
Trend Analysis
With _____ ________, we examine a firm's ratios over time, essentially comparing the current year to previous years.
Percentage Returns
[(P_(t) -- P_(t-1))/P_(t-1) + (CF_(t)/P_(t-1))] Calculated by dividing dollar returns by the bought price or the price of the security at the time.
Muni-bonds
_____, short for ________ _____, are floated by local governments (states, cities, and counties) to usually fund infrastructure improvements, such as new roads or government buildings. _____ are almost always exempt from federal taxation, so they are attractive investments for investors in high tax brackets.
Cross-sectional analysis
_____-_________ ________ involves comparing a firm's ratios to a peer group. Peer groups can include competitors, the industry, or even the market.
Capital budgeting
_______ _________ is the process of selecting long-lived projects that will enhance firm value. The end result is a "thumbs up" to projects that increase value or "thumbs down" to projects that decrease value. The process involves two BIG steps: 1) estimate the amount and timing of the cash flows and 2) evaluate the cash flows to make the accept/reject decision.
Terminal Cash Flow (TCF)
________ ____ ____is the result of the project's conclusion and is assumed to arrive at the end of the final year. Machines wear out and are sold, and working capital is recaptured. TCF does NOT include the final years DiffCF.
Flotation costs
_________ _____ are incurred by a publicly traded company when it issues new securities, and includes expenses such as underwriting fees, legal fees, and registration fees.
Treasury bonds
__________ are _____ issued by the US federal government to support deficit spending. __________ range from short-term, 3-month T-bills to long-term, 30-year T-bonds. Because __________ are backed by the full faith/allegiance, and more importantly, taxing power of the US federal government, __________ are often used as risk-free investment vehicles in financial models.
Incremental expenses
___________ is the key word. Accounting "expenses" such as overhead allocation are usually NOT ___________ and should be excluded.
Diversification
_______________ is essentially spreading one's wealth across many assets to offset the possibility that a large negative return in one asset will destroy a large portion of an investor's wealth.
The 1913 Federal Reserve Act
a US legislation that created the current _______ _______ System. The _______ _______ ___ intended to establish a form of economic stability in the United States through the introduction of the Central Bank.
Dividends
a distribution of a corporation's profits.
Bonds
a form of long-term debt in which the issuing corporation promises to pay the principal amount at a specific date.
syndicate
a group that is temporarily formed to handle a bond or stock issue. generally made up of large investment banks or other types of institutional investors.
Secured Loan
a loan backed by collateral, something valuable such as property
unsecured loan
a loan not backed by any collateral
Duration
a measure of interest rate sensitivity of the bond.
lump sum
a single payment made at a particular time
Current Assets
are cash or assets that will be converted into cash within the next year. They are listed in order of liquidity. ______ _______ ______ include the following: Marketable Securities, Accounts Receivable (AR), Inventories, Fixed Assets.
Treasury Securities
are generally bonds that are issued by the U.S. government. The U.S. government is constantly investing in various projects that range from national defense to freeway improvements. These bonds are effectively loans provided by the public to the government and will vary in length. Some of these bonds are as short as 60-day loans, while other bonds are loans that are paid over a 30-year period.
Current Liabilities
are obligations that require cash in the next year and are usually listed in order of maturity (shortest first). At a minimum, the _______ _________ section includes accounts payable, accrued items, and notes payable:
limit orders
are price sensitive.
Market orders
are time sensitive
Capital
broadly defined, but for a working definition, we will assume that __________ is a financial asset or the value of an asset.
Profitability ratios
can be divided into two categories—those based on sales and those based on investment (i.e., assets or equity).
Gramm-Leach-Bliley Financial Services Modernization Act of 1999
continued to deregulate the banking industry.
Agency costs
costs that are incurred when management does not act in the best interests of shareholders.
Financing decisions
deal with the issuance of debt and equity, the repayment of debts or repurchase stock, and the payment of dividends. CFF measures the net cash impact of _________ _________.
Financing ratios
describe in what proportions the firm uses equity and/or debt to finance assets.
The Glass-Steagall Act
effectively separated commercial banking from investment banking and created the Federal Deposit Insurance Corporation, among other things. The _____-________ ___ was significant because it limited banks in a fairly dramatic way.
Market pressure
even if a manager's personal income is not impacted, there are other pressures to manipulate cash flow categorization in the market place. For instance, a firm that is in the process of raising capital does NOT want to show a decrease in CFO. Hence, managers may be willing to use their discretion over accounting choices to increase the reported level of CFO.
Corporate Finance
focuses on financial decision making by a firm's management.
underwriter
has the responsibility of determining the value of the security and then, in some cases, will purchase all of the securities from the issuer and then sell them to other investors.
specialist
holds an inventory of a particular stock and must be willing to buy from those that wish to sell and sell to those that wish to buy.
Operating Expenses
include costs incurred through the company's operations that are not directly associated with production. For example, this includes office expense, administrative expense, depreciation
Long-Term Liabilities
include debt obligations with maturity longer than one year.
Operational decisions
include what to produce, how to produce it, whom to sell it to, whom to use for suppliers, etc. CFO measures the net cash impact of _________ _________.
Investing activities
involve decisions concerning the purchase and sale of long-term assets, such as conveyor belts or the construction of new production facilities. CFI measures the net cash impact of _________ _________.
The Bank Holding Company Act of 1956
is a United States Act of Congress that regulates the actions of ____ _______ ________. The law was implemented, in part, to regulate and control banks that had formed ____ ______ _________ to own both banking and non-banking businesses.
Nationalization
is a process in which the nation in which the company operates purchases a controlling number of shares of the company.
annuity
is defined as an equally spaced series of cash flows all of the same magnitude. That is, payments of $100 at time 1,time 2, and time 3 would be a three-period, $100-per-payment _______. A series of $100 payments at time 17, time 18, and time 19 would also be a three-period, $100 _______
Cash management
is determining the operating balance.
FCFF
is the cash distributable to all the providers of capital (i.e., to both debt and equity holders) and is most commonly used in financial analysis. FCFF = EBIT(1 - tax rate) + Depreciation - CAPEX - Increases in NWC Where: - Tax rate = percent of earnings a firm pays in tax - Depreciation = Depreciation expense - EBIT = Earnings before interest and taxes - CAPEX = Capital expenditure on PP&E; frequently measured as CFI - NWC = Net Working Capital (current assets - current liabilities) changes
FCFE
is the cash distributable to the equity holders after satisfying all obligations to debt holders. Dividends are the cash actually distributed to stockholders; ____ is cash that is distributable to stockholders after funding required reinvestment. FCFE = NI + Depreciation - CAPEX - Increases in NWC + Increases in Debt where: - Increases in debt = new borrowings minus any repayment of old debt.
Simulation analysis
is the use of multiple "cases" of variables.
Rule 144A
known as a "safe harbor" from the registration requirement of the Securities Act of 1933. ____ ____ permits sale of private capital to accredited investors. These are typically large financial institutions, or wealthy individuals.
Efficiency Ratio
measure how effectively a company/management team uses assets to generate sales or profits.
Leverage recapitalization
occurs when a firm issues new debt and takes the proceeds from the debt issuance to buy back some of the shares outstanding. Alternatively, the firm might use the proceeds from the debt issuance to pay a large cash dividend to shareholders. _________ _____, as it is sometimes called, increases the debt-to-equity ratio by increasing the level of debt relative to equity.
balance sheet
offers a "snapshot" of the firm's assets and financing at a particular point in time. It can be viewed as a still shot of what the firm has at one particular moment.
Stocks
represent an ownership interest in a corporation.
Cost of Goods Sold (COGS)
represents the direct costs (direct materials and direct labor) associated with production and suffers from the same recognition predicament as revenue. Think back to our discussion of the matching principle: regardless of when a company incurs cost, it is reported only when the associated revenue is recognized.
matching principle
requires that revenue recognized must be matched with the expenses incurred to generate the revenue.
income statement
shows the results of operations over time.
Cash flow management
some managers will "manage" (i.e., increase or decrease) reporting of cash flows. For instance, a manager whose bonus is impacted by CFO may be tempted to recategorize some items to make CFO appear larger. While most of the techniques to recategorize cash flows are beyond the scope of this course, it is relatively easy to do for a year or two without violating the rules of GAAP accounting.
Liquidity ratios
speak to a firm's ability to meet short-term obligations. While everybody is concerned about liquidity, short-term creditors such as banks and suppliers are particularly interested.
The McFadden Act
specifically prohibited interstate branching by allowing each national bank to branch only within the state in which it is situated.
float
the delay between the payment from customers and the actual receipt of payments.
Core activities
the firm's ____ __________ will impact the way cash flows are categorized. For instance, two firms can purchase similar lathes and categorize the cash outflow differently. For a machine shop, the lathe is likely a long-term asset and the cash flow will be part of CFI. For an equipment dealer, the lathe is likely inventory and will be included in CFO.
bond indenture
the legal contract between the issuer and the bondholders
Collection float
the most commonly termed type of ____. __________ _____ can be specifically defined as the time it takes for a firm to be able to use the payments from customers.
Gross PP&E
the original cost of all non-current assets held for use by the firm. However, fixed assets get used up. Hence, _____ ____ is offset by Accumulated Depreciation. Depreciation expense is an income statement item whereby the firm claims the expense of using up fixed assets (more on this later). Accumulated depreciation is the total of all depreciation claimed against _____ ____.
negotiated sale
the process of underwriters submitting proposals including bids.
disbursement float
the time it takes for a company's payment to become an actual outflow. For example, suppose another firm purchased some raw materials from a supplier 30 days ago on credit and is planning to pay for the materials today (day 0). After mailing the supplier a check, the check might not be deposited in the bank for four days after the payment has been made.
Incremental revenue
this is the revenue attributable to the project. Two caveats are 1) the importance of identifying truly ___________ cash flows attributable to the potential project and 2) ___________ ________ may be zero for projects targeting cost reduction.
goal of the firm
to maximize shareholder value. This is usually accomplished by profitable decision-making by management, investing capital into projects that will increase the firm's stock price, and avoiding those investments that cost more money than they bring in.
Debentures
unsecured bonds
historical cost principle
when an asset is purchased (or a liability incurred) it is recorded at cost.
Secondary financial markets
where securities are traded after the initial offering.
primary financial markets
where the issuers (the firms) and the buyers (the investors) will engage in an exchange.
