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