Investment Terms
What is the maturity range of a T-Note?
2 to 10 years
bond purchase equations
98:20 = $98 and 20/32 of a dollar per $100
Define conglomerate merger?
A merger of companies in totally different industries.
Equity
Amount of owners' or shareholders' portion of a business.
Invoice
An itemized statement of money owed for goods shipped or services rendered.
Is the Dow Jones Industrial Average considered broad or narrow?
Broad
Static Budget Variance
Budget - actual
CML
Capital Market Line
Marginal Costing
Contribution - fixed overheads - fixed non-manf costs
____________ stock is resistant to recession.
Defensive stock is resistant to recession (utility companies).
Identify the acronym: ETF
Exchange-Traded Fund
expense ratio
For a mutual fund, an annual percentage the fund takes as payment. Expense ratios of different funds can be compared to find the best value.
Recession
GDP is in decline for 2 quarters
How often do GNMA pass-throughs make payments?
GNMA pass-throughs make payments monthly.
How to calculate NET PROFIT
GROSS PROFIT - EXPENSES
Liquidity, illiquidity
Liquidity: Quickly trade the stock without affecting the price Illiquidity: Trade the stock make stock price higher, and unable to trade it further
External Liabilities
Loan Capital + Current liabilities
The Income Statement In General:
Sales Revenue - Cost of Goods Sold Gross Profit - Operating Expenses EBIT (Net Operating Profit) - Interest expenses EBT (Taxable Income) - Taxes Net Profit after Taxes
Capital
The buildings, equipment, tools, and other goods needed to produce a product or the money used to buy these items.
Number of sigma
The likelihood of certain bad events happening Sigma ↑ Bad events ↓ e.g. one sigma: twice a week Two sigma: every three weeks Three sigma: every year
Due Diligence is:
The process of evaluating a target firm for acquisition
WACC
WdRd (1-t) + WpRp + WeRe
greenmail or targeted repurchase
buy back shares of own company for premium from bidder
bonds are what
debt
Analysis of preferred stock uses
earnings after taxes
The portfolios of international funds
exclude U. S. securities
payment frequency of stock
generally quarterly
writing a call
is a bearish strategy
risk bonds
low
money markets
markets for securities with maturities of less than one year
2013 normal yield curve (upward sloping)
no change is expected in inflation. The requirement for a higher rate to compensate for tying up cash for a longer term shows through -rely on cheaper, short-term financing -short term interest rates are lower than long-term interest rate
dividends
periodic distribution of cash to the stockholder of a firm.
Option premium
purchase price of the option
quick asset ratio
quick assets (cash and debtors) /current liabilities (share premium account)
income bonds
secure
preferred stock
stock that has a permanent dividend
An index fund limits its portfolio to
stocks included in an aggregate measure of stock prices
risk
the chance that actual outcome may differ from those expected
interest
the money paid by a borrower for the use of borrowed money
the demand for loanable funds increase when interest rates
when interest rates fall (cheaper rent on the money)
the supply of loanable funds increase when interest rates
when interest rates rise (more savings)
at the money
when the exercise price and asset price are equal.
in the money
when the option is exercise it would produce a positive cash flow.
Maxim #2 - Good deals
will go to the investor who is able to recognize them first and react first.
Maxim #1 - Investors
will not delay consumption unless they expect to get something extra in return, nor will they incur risk without being compensated for that risk.
the goal of a proxy fight
win representation in the BOD and remove some directors due to poor performance, change the firm's by laws in order to force management to take some particular actions, or to gain voting power to vote against management proposals on restructuring
Forward rate
"Implied future interest rate" that can be computed for periods defined by two adjacent bonds (expected, may happen, may not happen)
inflation
"too many dollars chasing too few goods"
bonds: N
# of periods N= years *2
What is the method to calculate the number of shares that can be purchased through a rights offering?
# of rights received ÷ # of rights needed to buy each additional share
conversion ratio
# of shares that can be obtained through conversion; par value of convertible security/conversion price (cost of each share of stock obtained through the conversion)
T-bill
$100 increments, $100 min. taxed at ordinary federal income tax rates, not taxed until maturity, not subject to state income tax; sales gain is taxed as ordinary income (short term capital gain or loss)
$______ is normally the par value for preferred stock.
$100 is normally the par value for preferred stock.
$1000 bond quoted at 120:17
$120 & 17/32 = $120.531 per $100 => 1000/100 = 10 => 10 * 120.531 = 1205.31
Clicker ? If dividends are to remain constant at $3 and the required rate of return is 10%, using the dividend growth model, what is the stock's intrinsic value? a. $20 b. $30 c. Only the market can determine price d. Not enough information given
$3/10% = 30 B.
Relevant merger situation criteria
(1) 2 or more enterprises cease to be distinct (common ownership or control) (2) turnover test (70M) or share of supply (increase from 25%+) (3) anticipated merger or not more than 4 months from completion
ETF VS. mutual fund
(1) ETF trade through out the day, but mutual fund trade at the end of day at net asset value. so ETF more liquidity (2) MF follow active strategy, ETF follows index strategy(passive). so ETF has lower operation fees (3) ETF has no minimum investment requirement and sales load. i.e. easy accessible, and low fee (4) Creating and Redeeming shares in ETF is transaction in kind, which dont create tax events i.e. low tax
Treynor, Sharp ratio
(1) T: risk premium/beta T higher, then lower systematic risk (2) S: risk premium/SD S higher, then lower total risk
Origin of Anomalies: Investors' behavior
(1) Underinvestment: hold less than 10 stocks, so specific risk cannot be diversified away (2) Home bias: Investors like to invest in companies they are familiar with (3) Excessive trading: investors hold risk-free assets with relatively passive portfolio of risky securities (only transaction cost) (4) Overconfidence: lead to excessive trading
Gross Profit Margin
(Gross Profit ÷ Sales Turnover) × 100%
publication of orders
- As required under section 91 of the Act, the CMA will publish the details of all merger undertakings and orders that have been agreed and accepted or imposed under the Act in a Public Register of Undertakings and Orders, - The CMA has a statutory duty to keep undertakings and orders under the Act under review.
Traditional Method
- Calculate total direct labour hours - Work out OAR by Total Production overheads/ no. of direct labour hours - No. of units X OAR
divestiture risks
- Composition risks—these are risks that the scope of the divestiture package may be too constrained or not appropriately configured to attract a suitable purchaser or may not allow a purchaser to operate as an effective competitor in the market - Purchaser risks—these are risks that a suitable purchaser is not available or that the merger parties will dispose to a weak or otherwise inappropriate purchaser - Asset risks—these are risks that the competitive capability of a divestiture package will deteriorate before completion of divestiture, for example through loss of customers or key members of staff
reasons for preference of behavioral remedies
- Divestiture and/or prohibition is not feasible or the relevant costs26 of any feasible structural remedy far exceed the scale of the adverse effects of the SLC. - The SLC is expected to have a relatively short duration (eg two to three years) due, for example, to the limited remaining term of a patent or exclusive contract - RCBs are likely to be substantial compared with the adverse effects of the merger and these benefits would be largely preserved by behavioural remedies but not by structural remedies
primary and secondary markets
- If customers predominantly buy the primary and secondary product from the same supplier, the Authorities may sometimes define a single system market in which suppliers of systems of primary and secondary products compete - If each primary product is associated with a range of secondary products which are compatible with it—but not with other primary products—the Authorities may define one market for the primary products and multiple secondary markets - If most secondary products are generally compatible with a range of different primary products, the Authorities may define two markets
effectiveness of merger remedies - factors
- Impact on SLC and resulting adverse effects. - Appropriate duration and timing. Remedies need to address the SLC effectively throughout its expected duration. - Practicality. A practical remedy should be capable of effective implementation, monitoring and enforcement. - Acceptable risk profile. The effect of any remedy is always likely to be uncertain to some degree
Relevant customer benefits
- Relevant customer benefits are limited by the Act to benefits to relevant customers in the form of: (a) 'lower prices, higher quality or greater choice of goods or services in any market in the United Kingdom...or (b) greater innovation in relation to such goods or services'
cancellation
- Section 37(1) of the Act requires the CMA to cancel a Phase 2 reference if it considers that the proposal to make arrangements of the kind mentioned in the reference has been abandoned
Multi-stage Appointment
- Share each production overhead in various overheads - Take the 'non-productive' costs and split them amount 'productive' departments
behavioural remedy risks
- Specification risks—These risks arise if the form of conduct required to address the SLC or its adverse effects cannot be specified with sufficient clarity to provide an effective basis for monitoring and compliance - Circumvention risks - Distortion risks—These are risks that behavioural remedies may create market distortions that reduce the effectiveness of these measures and/or increase their effective costs - Monitoring and enforcement risks
how RCBs considered
- The CC will normally take relevant customer benefits into account, as permitted by the Act, once it has decided on the existence of an SLC by considering the extent to which alternative remedies may preserve such benefits - The CC may modify a remedy to ensure retention of a relevant customer benefit or it may change its remedy selection, for instance it may decide to implement a remedy other than prohibition or, in rare cases, it may decide that no remedy is appropriate
MIR factors
- Whether it would be more appropriate for it, or the sectoral regulators, to deal with the issues in another way, eg under CA98. - Whether UIL may be a suitable way of addressing the identified problems. - Whether the scale of the problem in terms of its adverse effect on competition and its detrimental effect on customers justifies a reference. - Whether there is a reasonable chance that appropriate remedies would be available to address any problem identified by the CMA
Relevant market
- a horizontal merger --> the overlapping products of the merging businesses - a vertical merger --> those for the products in the same chain - a conglomerate merger --> those for the products sold to those customers - As well as containing the products supplied by the merging businesses, the relevant markets may also contain the most significant competing products available to their customers
importance of WACC
- a weighted average cost of capital is the rate of return expected by all stakeholders -the shareholders (owners) of the firm are in last position, so they receive any residual return
Phase 2 inquiry group
- appointed by CMA chair - at least 3 and no more than 5 panel members
demand-side factors relevant to SSNIP
- closeness of competition - variability of profits - price sensitivity of customers
countervailing factors
- efficiencies (need compelling ev from parties) - entry and expansion (must be timely and sufficient) - countervailing buyer power
suitable purchaser criteria
- independence - capability - commitment to the relevant market - absence of competitive or regulatory concern
risks of not notifying
- interim orders - termination of completed transaction - not enough time to conduct full phase 1 - go to phase 2 unnecessarily
control
- material influence - eg ability to block special resolutions (in exception circ, may look even at under 15%) - focus on substance not legal form - de facto control - a controlling interest (50%+ share)
Unilateral effects more likely if
- merging businesses' products are close substitutes - customers have little choice of alternative supplier - it is difficult for rival businesses to respond to price increases - the merger eliminates an important competitive force in the market - there are already few significant businesses in the market
reasons for preference of structural remedies
- structural remedies are likely to deal with an SLC and its resulting adverse effects directly and comprehensively at source by restoring rivalry - behavioural remedies may not have an effective impact on the SLC and its resulting adverse effects, and may create significant costly distortions in market outcomes -structural remedies do not normally require monitoring and enforcement once implemented
enterprise
- the activities, or part of the activities, of a business - should be carried out for gain or reward - may comprise any number of components, most commonly including the assets and records needed to carry on the business and the employees working in the business, together with the benefit of existing contracts and/or goodwill - based on the totality of all relevant considerations.
where counterfactual dif to prevailing comp
- the exiting firm scenario - the loss of potential entrant scenario - where there are competing bids and parallel transactions
offences
- to knowingly or recklessly to supply false or misleading information - to intentionally alter, suppress, or destroy any information that the CMA has required to be produced under an information request notice under section 109 of the Act
Phase 2 decision
- whether a relevant merger situation has been or will be created - if so, whether the creation of that situation has resulted, or may be expected to result, in a SLC within any market or markets in the UK for goods or services --> made on balance of probabilities (more likely than not)
4 Business models
-For-Profit Corp - not for profit Corp -Partnerships -Sole Proprieter
Basic assumptions
-People make rational choices in the face of uncertainty, -People have preferences that underline their economic decisions. -People's choices and preferences take the form of transactions in the market pace. - some mechanism of exchange is required
why do firms acquire other firms?
-to gain access to new markets and distribution channels -to gain access to a new capability or competency -to preempt rivals
Differences Between Debt and Equity: Maturity
-unlike debt, equity capital is a permanent form of financing -equity has no maturity date and never has to be repaid by the firm
For behavioral biases to affect market prices and efficiency, we need 2 conditions:
1. Behavioral biases don't cancel out 2. Arbitrage is not successful to correct mispricing
3 Risk of ETF
1. Counterpart risk: ETF is based on AP, AP could fail to deliver underlying assets and default 2. Liquidity risk: the liquidity of stocks and underlying assets dont match 3. Bankruptcy cost: not all index ETF follow is well diversified.
Bond price related to coupon rate and discount rate
1. Coupon rate < discount rate: price< face value 2. Coupon rate> discount rate: price> face value 3. Coupon rate=discount rate: price=face value
Momentum
1. Investors simply follow the trend and keep buying outperform stocks 2. Investors underact to news a. consistent with LT reversal 3. Investors underact with stock should be greater than 52 week high a. not consistent with reversals
Improvements for VaR measurement
1. Keep long term perspective 2. Use stress tests and extreme scenario 3. Realize that observation is not independet 4. clearly check
Int rate sensitivity is greater for bonds with
1. Longer time to maturity 2. Lower coupon rates 3. Lower yield to maturity
Market order VS. Limit order
1. Market order: sell/buy an order at market price 2. Limited order: Sell/buy an order at a specified price or better
What are 5 ways investment bankers play a role in mergers?
1. They help to arrange mergers, 2. They help target companies develop and implement defensive tactics, 3 they help value target companies, 4 they help finance mergers, and 5 they invest in the stocks of potential merger candidates.
Under one risk free and two risky assets problem
1. we need to compute two risky assets in mean-variance space 2. Add capital allocation line to determine the optimal risky portfolio 3. On capital allocation line, we need to determine the distribution between risk-free and optimal risky portfolio by using indifference line
Rules for duration
1. when YTM is same, coupon is higher, duration is lower. becuz u can collect your payment earlier 2. When Coupon rate is same, YTM is lower, duration is higher. YTM is lower, then price need to pay is higher, if the weight of price value if higher, then duration is higher
Immunization
1.For horizon equal to duration will cancel out price risk and reinvestment risk 2. A technique to reduce sensitivity of a bond portfolio to interest rate changes to zero 3. Immunization only account durtion(not convexity), which means although immunized portfolio has a duration of 0, but doesn't mean it has 0 interest rate risk
par of preferred stock
100
$______ is the par value for bonds.
1000
par of bond
1000 typically
No load mutual funds may increase fees through
12b‑1 plans
Merger
2 Firms agree to integrate their ops on a relatively co-equal basis
asset allocation aggressive
20% bonds, 50% large cap, 20% international, 10% small cap
number of proprietorship firms and %
23.1 million 61%
number of partnership firms and %
3.1 million 8%
Bankers rule
360 days
asset allocation conservative
40% bonds, 40% money market, 15% large cap, 5% int
asset allocation moderate
40% bonds, 5% money market, 35% large cap, 15% int, 5% small cap
number of corporation firms and %
7.7 20%
Quick Ratio (or acid test) =
= (Current Assets - Inventory) / Current Liabilities
Gross Profit Margin =
= (Sales - Cost of goods solds)/Sales
DuPont Analysis =
= (essentially) Income / Equity
Average Collection Period =
= 365 Days / Receivables Turnover
Average Payment Period =
= Accounts Payable / (Average Purchases Per Day)
Inventory Turnover =
= Cost of Goods Sold / Inventory
Net Working Capital =
= Current Assets - Current Liabilities
Current Ratio =
= Current Assets / Current Liabilities
Net Present Value =
= Discounted Cash Flows During the Life of the investment - cost of the initial investment
Economic Value Added =
= EBIT*(1-Tax Rate) - (WACC * Invested Capital)
Balance Sheet Identity:
A = L + NW
What is a step-up, long-term CD?
A CD that offers an interest rate that is lower than current rates, with subsequent interest rates paid being higher
Budget
A Financial Plan
Mortgage backed Securities
A debt security vehicle where consumer Mortgage debt provides the backing.
Asset backed securities (ABS)
A debt security vehicle where consumer debt on things like loans, leases, and credit cards provides the backing.
Budget
A detailed plan of income and expenses expected over a certain period of time
Define Spin-off?
A divestiture in which the stock of a subsidiary is given to the parent companies stockholders.
Depreciation
A lessening in value; a belittling
Liquidity premium
A liquidity premium is a premium demanded by investors for any given securities cannot convert into cash for its fair market value
Chart of Accounts
A list of all accounts used by a business
Gearing
A ratio that focuses on the long-term financial stability and capital structure of a business. The gearing ratio measures the proportion of assets in a business that are financed by borrowing
Balance sheet
A report of the final balance of all assets, liabilities, and owner's capital at the end of an accounting period.
Flexible Budget
A report showing estimates of what revenues and costs should have been, given the actual level of activity for the period.
balance sheet
A report that summarizes all of an entity's assets, liabilities, and equity as of a given point in time.
what is a leveraged buyout?
A restructuring strategy where a party buys all of a firms assets in order to take the firm private
Keogh plan
A retirement savings plan for self-employed professionals or owners of small businesses; it affords the same tax benefits as a 401(k).
savings account
A safe, low-return investment available from banks. There is generally no minimum deposit for this type of account, making it perfect for kids and teens just starting out.
employer-sponsored retirement plan
A savings plan for retirement that is offered through a company's benefits package; contributions are usually matched by the company.
Market model
A security return depends on market risk premium, beta, and its specific firm risk Run a time series regression over five years of monthly data SD of stock= beta^2*SD of market+SD of specific risk
Define Leveraged Buyout (LBO)?
A situation in which a small group of investors borrows heavily to buy all shares of a company.
subsidy/subsidise
A subsidy is a benefit given by the government to groups or individuals, usually in the form of a cash payment or a tax reduction. The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public.
interest
A sum paid or charged for the use of money or for borrowing money
Stock Market
A system for buying and selling shares of companies
Real Assets
A tangilbe or intangible asset, owned by the firm
corporation tax
A tax on company profits.
Variance Analysis
A technique for determining the cause and degree of difference between the baseline and actual performance.
current liabilities
A/P, sales tax collected, credit cards payable
How to calculate the accounting equation
ASSETS = LIABILITIES + OWNERS' EQUITY
Liquidity
Ability to convert assets quickly into cash without a significant loss in value The ability to meet current debt obligations coming due
What is the quickest and easiest way to change a firm's portfolio and diversify?
Acquisitions
ARM Loans
Adjustable Rate Mortgages
Private synergy Adv and disadv
Advantage: it is difficult for competitors to understand and imitate. Disadvantage: it is also difficult to create.
Main Assumption behind Liquidity preference hypothesis
Agents are risk averse, and they do require a risk premium for taking up risk Hence, investors prefer short horizon investment(riskless), cuz they are flat of inflation and risk and think long horizon investment is risky ST investors dominate the market
Main assumption behind Expectation hypothesis
Agents are risk neutral, and they don't require a risk premium for taking up risk Hence, it's indifferent to take a two-year bond, or two one year bonds.
Define a class of options.
All options with the same underlying interest and the same type (e.g. STC calls or STC puts)
Define a series of options.
All options with the same underlying interest, expiration month, strike price and type (e.g. ABC May 60 Call)
Income / revenue / turnover
All the money received by a person or company during a given period.
Fixed income securities
All types of securities generate payout can be perfectly predicted according to a specified formula
Shelf Registration
Allows firms to register securities and gradually sell them to the public for two years
What instruments are used to facilitate trading of foreign securities in the U.S.?
American Depositary Receipts (ADRs)
Liabilities
Amounts owed to creditors in the form of debts and other obligations.
Takeover
An acquisition where the target firm did not solicit the acquiring firm's bid for outright ownership
overhead(s)
An indirect cost for general administration, or for light, heat etc.
Define White Squire?
An individual or company who is friendly to current management and will buy enough of the target firm's shares to block a hostile takeover.
financial planner
An investment advisor who can help you define and reach your financial goals
annuity
An investment contract made with an issuer (for example, an insurance company). Types include immediate, deferred, fixed, and variable.
asset allocation
An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.
Maximax
An optimistic decision-making criterion. This selects the alternative with the highest possible return.
Bankers' Acceptances
An order to a bank by a bank's customer to pay a sum of money on a future date
Discount rate
Asset pricing is about the discount rate, which depends on: (1) Time value of money (2) Riskiness of cash flow (3) Risk aversion of investors (↑ risk aversion, ↑ risk premium)
Liablilties (equation)
Assets - Equity
Equity (equation)
Assets - Liabilities
Accounting Equation
Assets = Liabilities + Equity
tangible asset
Assets having a physical existence, such as cash, equipment, and real estate; accounts receivable are also usually considered tangible assets for accounting purposes.
Initial Outlay
At the beginning of a project (CF0) -capital expenditures -projects consist of the purchase of assets - machinery, buildings, companies -NWC outlay -an increase in sales causes an increase in Accounts Receivable, Inventory, and Accounts Payable. This is almost always a net use of cash
expenditure
Ausgaben
3 Financial statements
Balance sheet- assets + liabilities Income statement- Income ad Expenses Cash Flow Report- tells you if you have money or not
Certificates of Deposit
Bank time deposit Commercial Paper: Short-term, unsecured debt of a company
Limitation of CAPM
Beta is multidimensional, in contrast to what CAPM measured
Hostile takeover
Bids by predators that are resisted or contested by the BOD and management of the firm
Bondholders are also referred to as ____________.
Bondholders are also referred to as creditors.
Bonds rated BB (Ba) or lower are considered _______________________ bonds.
Bonds rated BB (Ba) or lower are considered speculative or junk bonds.
Bonds rated ___________ and higher are considered investment grade.
Bonds rated BBB (for S&P and Fitch) or Baa (for Moody's) and higher are considered investment grade.
2. Value effect of equity returns
Book to market ratio is positively related to equity return
Business Taxes
Both individuals and businesses must pay taxes on income. The income of sole proprietorships and partnerships is taxed as the income of the individual owners, whereas corporate income is subject to corporate taxes.
ETF
Bundle security in order to mimic index and give investors diversified portfolio. However, ETF act like stock on exchange
How do financial economies add synergies to a company?
By providing lower transaction costs and better coverage by security analysts.
Cash Flow Identity: CFFA
CFFA = CF to creditors + CF to stockholders
Current ratio
CURRENT ASSETS ÷ CURRENT LIABILITIES
The Concept of Cash Flow
Cash flow is one of the most important pieces of information that a financial manager can derive from financial statements. • As a business owner or a firm, you want to know how much cash flow is coming in and how much is going out from your business in a given year. • At end of the year, you want to know if the net cash flow is positive or negative. • Cash Inflow is generated from investing in assets and Cash Outflow is paid back to investors (creditors and stockholders) that provide the capital financing.
Liquid Asset
Cash or other property that are easily converted to cash
Current assets
Cash.A/R, inventory
Primary source of risk for bond
Changes in interest rate(yield)
Bankruptcy
Chapter 7- Liquidation, chapter 11- Reorganization A legal process to get out of debt when you can no longer make all your required payments
Professional Certifications
Chartered Financial Analyst (CFA) - Offered by the CFA Institute, the CFA program is a graduate-level course of study focused primarily on the investments side of finance. Certified Financial Planner (CFP) - To obtain CFP status, students must pass a ten-hour exam covering a wide range of topics related to personal financial planning. Certified Treasury Professional (CTP) - The CTP program requires students to pass a single exam that is focused on the knowledge and skills needed for those working in a corporate treasury department.
Absorption Costing
Closing stock = opening stock + production units- sales units
Into what does a growth fund invest?
Common stock
Define Corporate or Strategic alliances?
Cooperative deals that stop short of a merger.
Risk vs. portfolio correlation
Correlation ↑ risk ↑ it's better to have negative correlation so that can cancel out the unique risk
Cost of Capital
Cost of capital represents the overall cost of financing to the firm.
Product Cost
Costs assigned to the manufacture of products and recognized for financial reporting when sold
Duration and convexity
Coupon rate : inverse; maturity: direct; YTM: inverse
Creation/redemption of ETF
Creation: Demand increase, (market price lower than price in ETF) AP buy assets from constituents of index and use this assets to exchange stocks in ETF, and sell to market. AP make the profit from this. and price will be corrected later. Redemption: Demand decrease (market price higher than price in ETF), AP buy stocks from market and exchange to ETF, then receive underlying assets.
Nominal Dollars
Current $ not adjusted for inflation
Quick Ratio (Liquidity)
Current Assets- Inventory / Current liabilities
Liquidity Ratios are (list)
Current Ratio, Quick Ratio (acid test), Net Working Capital
Current Ratio (Liquidity)
Current assets/Current liabilities
The Market Value of Wealth
Current share price x Outstanding shares. Prices are established by 'the market' and published.
What is the current trend in mergers?
Currently mergers are highly strategic in order to help firms compete better in a global economy.
Separation of duties
Custody of assets from the person recording the transaction; the right to authorize transactions from the person who dispenses them; duties within the accounting function.
___________ stock fluctuates with the business cycle.
Cyclical stock fluctuates with the business cycle (auto companies).
Clicker ? Which of the following should financial managers consider when making decisions? A. Expected dividends B. Expected dividend growth C. Risk D. All of the above
D. all of the above
if dividend has been paid then ____________; if it will be paid ______________
D0, D1
Federal Agency Debt
Debt of mortgage-related agencies
Financing Ratios are (list)
Debt ratio, debt-equity ratio, times interest earned (TIE)
(to) deposit
Definition: A transaction involving a transfer of funds to another party (bank, etc. ) for safekeeping. Example: Usually people deposit their money in bank accounts.
loan capital
Definition: Capital received by borrowing from a bank or other financial institution. Example: UniCredit lends $ 40.000 to the sole proprietor Baker paid back until two years.
Dividend yield
Dividend income ÷ price of stock
Dividens Payout Ratio
Dividends paid to common shareholders / Net Income available to common shares
Dividens per share
Dividends paid to shareholders / No. of ordinary shares outstanding
What are Eurodollar bonds?
Dollar-denominated bonds issued outside the U.S.
Interest rates (global financial management)
Domestic and international businesses will source funds internationally and will therefore need to consider these rates offered on borrowings. The repayment of this debt must also allow for fluctuations in currency.
Expected Values
EV= Outcome X Probability
Return on equity
Earnings ÷ equity= ROE. The higher The percentage the better but anything over 10% is acceptable. Earnings can be found on an income sheet while equity can be found on a balance sheet.
Individual Taxes
Eg. Using the tax rates Married couple - filing jointly Taxable Income = $50,000 Marginal tax rate = 10,15%
Defined Contribution
Employees and employer pay a specific amount into the plan for each participant. Employer contribution often are based upon a percentage of salary or a percentage of profits.
Social Security Tax
Employer Portion: 6.2% employee portion 6.2%, up to a max of $117,000.
__________________________ expenses are not subject to the Gift Rule.
Entertainment/business expenses are not subject to the Gift Rule.
Differences between Debt and Equity: Voice in Management
Equity -stockholders are owners of the firm -stockholders have voting rights that permit them to express an opinion about the firm's directors and occasionally vote on very special issues, such as new share issuance Debt -debtholders do not have general voting rights in the firm -debtholders rely on the firm's contractual obligations in the bond covenants to be their voice
Marketing
Everything a company does to get consumers to buy their product
What funds are similar to an index fund, but trade in the secondary market like stock?
Exchange-Traded Funds (ETFs)
Existing stockholders receive ______ right for every one share owned.
Existing stockholders receive one right for every one share owned.
expected return equation
Expected return = Earnings per share/investment
non-operating expense
Expense incurred in performance of activities not directly related to the main business of a company, such as for insurance or maintenance of the assets.
accrued expenses
Expense that is not yet paid and noted as a payable.
Marginal Cost
Extra cost of producing one additional unit of production.
Break-Even(equation)
FC/Contribution per Unit
Glass-Steagall Act established
FDIC insurance & Separated commercial banking from investment banking
Money market deposit account
FDIC insured, limited withdrawals, interested taxed at ordinary income tax rates (federal and state)
T/F: Acquisitions may encourage innovation
False
True or False: Convertible preferred stock may be converted into a bond.
False. Convertible securities are convertible into common stock.
True or False: Receiving shares of a new entity created from a publicly traded company is done through stock dividends.
False. Receiving shares of a newly created entity is done through a spin-off.
front-end-load
Fees paid to the mutual fund company as an entry requirement into certain mutual funds
back-end-load
Fees paid to the mutual fund company when selling a mutual fund
Financial management objectives
Financial management has the short-term goals of ensuring that a business is sufficiently liquid and solvent, while also aiming to boost long-term profitability, growth and efficiency.
Global financial management
Financial management strategies needed to manage the the concerns associated with the growth of global business.
Bull Market
Financial market in which prices are, or expecting to rise.
The Balance Sheet Definition
Financial statement that shows the assets, liabilities and net worth (Equity) of the firm at a point in time A Stock Concept
The Income Statement Definition
Financial statement that shows the sales revenues, expenses, and net income of a firm over a period of time A Flow Concept
Private placements
Firm uses underwriter to sell securities to a small group of institutional or wealthy investors Cheaper than public offerings Private placements not traded in secondary markets
Calculating P/E
For example, suppose that a company is currently trading at $43 a share and its earnings over the last 12 months were $1.95 per share. The P/E ratio for the stock could then be calculated as 43/1.95, or 22.05.
Incremental Budget
Form of budgeting in which the prior budget is the basis for allocation of funds.
Debt Financing
Funds provided banks or bond holders, who receive loan contacts and publicly traded bonds in return for their money
Securities
Fungible investment vehicles like stocks, bonds, etc.
Gross profit ratio
GROSS PROFIT ÷ SALES
Two types of partnerships
General Limited
Fiscal Policy
Government policy that attempts to manage the economy by controlling taxing and spending.
Monetary Policy
Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.
Uncertainty
Has several possible outcomes. There is not enough past experience to predict outcomes
High Price/Earnings Ratio -->
High P/E ratio may mean that the market is projecting future earnings will increase.
HFT
High-frequency trade: based on computer program, to make decisions in a tiny fraction of a second
What are the four types of mergers?
Horizontal mergers, vertical mergers, con-generic mergers, and conglomerate mergers.
Modern portfolio theory (MPT)
How a risk-averse investor construct an optimal portfolio to maximize their expected return based on a given market risk *Assumption: stock return is normal
interest rate risk
How bond price sensitive to yield change
3. Closeness
How close do you need to be to your external resource partner?
Margin of Saftey
How much output can fall before a company reaches its breakeven point.
1. Relevancy
How relevant are the firm's existing internal resources to solving the resource gap?
Why would a firm use excess cash to do a merger instead of paying a cash dividend or doing a stock repurchase?
If a firm pays a dividend stockholders have to pay a tax on that income, and if a firm purchases stock, this counts as a capital gain for shareholders. Purchasing another company does not necessarily add a direct tax expense to shareholders.
Describe the motives behind acquiring a firm for its breakup value?
If analysts determine the individual parts of a firm are worth more than the firm as a whole, they may acquire the firm to then sell off the individual pieces.
freehold land
If you own the freehold, it means that you own the building and the land it stands on outright, in perpetuity. It is your name in the land registry as "freeholder", owning the "title absolute".
Portfolio theory VS. equilibrium model
In MPT, investors are affected by expected return and variance In equilibrium model, aggregate investors are affected by expected return
How are the post merger cash flows analyzed for a pure financial merger?
In a pure financial merger, in which no synergies are expected, the incremental post merger cash flows are the expected cash flows of the target firm.
Immunization on bond
In many firms, the value of liability and asset is unmatched, which exposes them to the severe interest rate risk. Immunization ensure the value of assets and liability is same i.e. duration of liability must equal to duration of asset
turnover for turnover test
In principle, the turnover test applies to the turnover of the acquired enterprise that was generated in relation to customers within the UK68 in the business year preceding the date of completion of the merger or, if the merger has not yet taken place, the date of the reference for a Phase 2 investigation
Time series pattern
In real life, stock returns are 1. Short-term reversal(daily/weekly frequency) 2. Mid-term continuation(momentum)-6-12month 3. Long-term reversal (3-5years)-mean reversals All of above indicate that stocks can be somewhat predictable
Accounts Receivable
Income due on sales that are collected on a future date.
_________ stock pays higher than average dividends.
Income stock pays higher than average dividends (e.g., stocks of utility companies).
Types of Taxation
Individual Personal Income tax Sole proprietorships/partnership income tax Corporate tax
What bond would be issued to build a facility for a private company?
Industrial Development Revenue (IDR) bond
Real $$
Inflation adjusted dollars
Fidelity Bonds
Insurance that covers losses from dishonest acts committed by employees
life insurance
Insurance that pays a sum of money to a beneficiary when the insured individual dies
Auto Insurance
Insurance to protect a car owner in the event of an accident or damage to a vehicle.
A REIT could derive income from what different sources?
Interest (mortgage REIT), rent from both residential and commercial property, and capital gains (equity REIT)
Compound Interest
Interest earned on both the principal amount and any interest already earned.
Spot rate
Interest rate today for a period of time e.g. Y0,t
bonds
Interest-earning loans to the government, corporations, or municipalities. Different types of bonds can be more or less risky, and bonds can have high yields or low yields (interest rates).
Time to maturity
Key to interest risk, but not enough, cuz it failed to account for timing of promised CF and the current yield
decreases in the cost of funds or in risk will do what to the required return?
LOWER
Long-Term Assets
Land, Building, accumulated depreciation
Define Golden Parachutes?
Large payments made to the managers of a target firm if it is acquired.
strategies that prevent the hold-up problem
Letter of intent, no shop agreements, break-up or termination fees, stock lock-ups, and crown-jewels lock-ups
Assets (equation)
Liabilities + Equity
Long Term Liabilities
Loans Payable, Bonds, Mortgage
What are Auction Rate Securities (ARS)?
Long-term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction
Capital Loss
Loss from the sale of an asset. (Capital loss can result when stock is sold for a lower price than was paid for it).
What inflated the 08 Financial Crisis
Low Interest Rate Securitization Systemic reliance on faulty credit and mortgage derivative valuation models
Betting against beta (BAB)
Low beta stock tend to have positive alpha, undervalued High beta stock tend to have negative alpha, overvalued The basic bet against beta strategy is to find assets with higher betas and take a short position in them. At the same time, a leveraged long position is taken in assets with lower betas.
M2 =
M1 savings deposits small time deposits money market mutual funds (retail)
Are market efficient
Magnitude: market fluctuate small scale of money could not be detected Selection Bias: good remain private Lucky Event: Good released Bad private
Financial Management
Managing the organisations finances. Concerned with investments, financing and distribution decisions.
Diversification
Many assets are held in the portfolio so that the exposure to any particular asset is limited.
Marginal Costing
Marginal costing is a costing method which charges products with variable costs alone. The fixed costs are treated as period costs and are written off in total against the contribution of the period.
Bear Market
Market condition in which prices are falling
1. Size effect of equity returns
Market equity( company size) is negatively related to equity return
Define correspondence.
Material that a member firm makes available to 25 or fewer retail investors within any 30-calendar-day period.
What do investors want?
Maximize expected and minimize risk cuz investors are risk averse
Duration
Measure "average life" of a bond as a weight average of times to cash flow, including the repayment of principal
Gearing (financial ratio analysis)
Measured by debt to equity ratio
Efficiency (financial ratio analysis)
Measured by the accounts receivable turnover ratio
Liquidity (financial ratio analysis)
Measured by the current ratio
Efficiency (financial ratio analysis)
Measured by the expense ratio
Profitability (financial ratio analysis)
Measured by the gross profit ratio
Profitability (financial ratio analysis)
Measured by the net profit ratio
Define defensive mergers?
Mergers designed to make a company less vulnerable to a takeover.
Why anomalies persist?
Momentum: In an efficient market, price needs to corrected avoid risk illiquidity (limited to arbitrage): short selling illiquidity loses are expensive BAB: agency-need to follow index, benchmark, simply cannot do arbitrage
return
Monetary increase in an investment. If an investment loses value, it is called a negative return.
venture capital
Money invested in a new business and thus open to a large risk of loss.
Accounts payable
Money owed to creditors, paid in less than a year
dividend
Money paid by a corporation to each shareholder. Typically paid four times a year, these distributions of company profits can be used to reinvest in more shares of the company.
interest
Money paid to a lender for the use of borrowed money.
What is the maturity range of a T-Bond?
More than 10 years
Which of the following is true?
Mutual funds report returns before adjusting for taxes.
the Fisher equation
N = r + INF
Interest rate equation
N = r + INF + LP + DRP + MRP N = nominal rate or published rate r = the real rate of interest INF = expected rate of inflation LP = the liquidity premium DRP = the default risk premium MRP = the maturity risk premium
Net profit ratio
NET PROFIT ÷ SALES
Return on equity ratio
NET PROFIT ÷ TOTAL EQUITY
why is NPV a better methodology for capital budget assessments than the payback method?
NPV accounts for time value of money
When is NPV used?
NPV is used in capital budgeting to analyze the profitability of a projected investment or project.
Return on Equity
Net Income / Shareholders Equity
Return on Assets
Net Income / Total Assets
EPS
Net Income available to ordinary shareholders / No. of ordinary shares outstanding
NPV
Net Present Value Calculations the difference between present value cash flows and the present value cash outflows.
Net Working Capital and Liquidity
Net Working Capital (NWC)= Current Assets - Current Liabilities
Equity
Net assets
Define Liquidation?
Occurs when the assets of a division are sold off piecemeal, rather than as an operating entity.
systematic factor
On a slope graph, the portfolio is on the CML line
Under the TCPA, how is an established customer defined?
One that has made an unsolicited inquiry or effected a transaction with the firm
economic incentive
Online sales or discounts
"Risk Averse"
Only take risk when the compensation is worthy via a risk premium
ROCE
Operating income / capital employed
Options-related retail communication must be filed with a regulator at least _____ calendar days prior to use.
Options-related retail communication must be filed with a regulator at least 10 calendar days prior to use.
Name two priorities that preferred stock has over common stock.
Order of liquidation and dividends
diversification
Owning a collection of investments (such as stocks from different industries, stocks from both small and large companies, bonds, and money market funds) in order to spread risk and have a safer overall investment
profit before/after tax
PBT (also called EBT) is the sum of all revenues (operating, financing etc.) reduced by the totaled amount of all expenses except tax expenses. EBT after taxes is equal to total earnings.
Does academic research destroy stock return predictability?
Partially, two reasons to reduce the validity of predictability. but the predictability will persist if it reflect risk
Momentum effect
Past 6-12 outperformed stocks still can be winner
Payables Payment Period
Payables / Cost of Sales X 365
Cash Flow Statement
Presents the movement in cash and bank balances over a period of time
Random Walk
Price is unpredictable and random
Free-Market (Milton-Freedman)
Price of goods and services set by vendors/consumers. Should be allowed to regulate business activity, this idea was proposed by Adam Smith. https://www.youtube.com/watch?v=RWsx1X8PV_A
Price-to-Earnings Ratio
Price per Share/EPS
Non-Accounting Style
Prime objective is not financial, money still needs to be considered as cash is what needed to stay in the business.
When must a research report be approved?
Prior to first use by a Supervisory Analyst
Mangement Accounting
Produces Reports for a company's internal shareholders as opposed to external. Managers uses it to make ST decisions.
Operating Cash Flow
Profit + Depreciation
Short selling
Profit from decline price by selling securities that is borrowed from broker
Equity Financing
Provided by shareholders
Revenue
Quantity of goods sold multiplied by the selling price. TR = P x Q
Regression: know SD of stock(y), know market SD and beta(X) what is R square
R square: what proportion of market risk explain stock risk
increases in the basic cost of long-term funds or in risk will do what to the required return?
RAISE
single-factor model
R_i = E(R_i)+B_iF+e_
Efficient portfolio
Reach highest return on a given risk ( and those efficient portfolios can construct efficient frontier)
What is a REIT?
Real Estate Investment Trust
Receivables Collection Period
Receivables/ Revenues X 365
factor loading
Refers to strength of the relationship between the item and the factor with which it is connect
Gross Profit
Revenue - Cost of Sales
Regulators of corporate governance
SEC, FTC, and DoJ
Cash inflows (examples)
Sales, cash payment for accounts receivable, commissions received, sales of assets, proceeds from issue of shares, interest received (investments/loans) and dividends received.
SML
Security market line An equilibrium of any assets with function of asset's beta Y: E(r) X: Beta
Duration
See how sensitivity of bond price change based on change of yield
Regret
Selecting the alternative which will minimise the worst possible feelings of regret
Contribution
Selling price per unit - Variable Costs
asset class
Separate types of investments, such as stocks/stock mutual funds, bonds/bond funds, money market accounts, and international stocks/international stock funds. Each asset class has typical risks and returns, and a certain investment within that class may perform better or worse than its peers.
Owner's Capital
Share Capital + Reserves
Short rate
Short term rate of interest; defined single rate of period e.g. Rt,t+1 (already happened)
Sole Proprietor and Partnership Taxes
Sole Proprietors - Report income and are taxed as individual/ married personal income tax Partners - Report and taxed as individual/married personal income tax
Three major forms of legal business organization in the US is
Sole proprietorship Partnership Corporation
intangible asset
Something of value that cannot be physically touched, such as a brand, franchise, trademark, or patent.
Two steps of fama and french estimation
Step 1: Run time series regression estimate beta a. use portfolio instead of individual stock to eliminate measurement error b. Five years monthly data Step 2: Run a cross-section regression with stock return and (multiple) characteristics to see the relation(gamma, risk premium) between X and Y
Who must approve a research report?
Supervisory analyst
Define operating economies in terms of synergies?
Synergies that result from economies of scale in management, marketing, production, or distribution.
Name some of the rationale for mergers?
Synergy, Taxes considerations, Purchase of assets below replacement costs, diversification, manager's personal incentives, and breakup value.
T-Bills are issued in maturities of: ____ week, ____ week, ____ week, and ____ week
T-Bills are issued in maturities of: 4 week, 13 week, 26 week, and 52 week
Name some of the different types of money-market instruments.
T-Bills, Bankers' Acceptances (BAs), Commercial Paper, Negotiable CDs
Expense ratio
TOTAL EXPENSES ÷ SALES
Debt to equity ratio
TOTAL LIABILITIES ÷ TOTAL EQUITY
NPV (equation)
Takes the overall value of Asset - Initial Investments. Overall Value is the cash flow X PV factor
Income Statement
The American name for the financial statement which shows the profit or loss made by a company during the accounting period.
Internal factors of the firm that affect corporate governance
The BOD and management, internal controls and incentive systems, anti-takeover defenses, and corporate culture and values
info gathering powers
The CMA has the power under section 109 of the Act to issue a notice requiring a person to provide information or documents, or to give evidence as a witness (a section 109 notice).
risk
The chance that an investment may lose value. Less-risky investments have a lower rate of return
Market value
The current value of a company's stock on the market/market cap
Equilibrium model
The demand and supply determine stock price
Yield to maturity
The discount rate if you hold the bond at the end of maturity Mainly depends on 1. The risk-free rate 2. The maturity time 3. The default risk
Finance
The efficient allocation of resources
Describe a typical index fund's expenses and management style.
The expenses are generally low and it is passively managed.
What must be checked before a BD makes telephone solicitations?
The firm's Do Not Call List
What is the value of indicator industries? Name 2 examples of indicator industries.
The housing and auto industries are a great indicator of the state of the economy. People buy houses and cars when the economy is doing well.
beneficiary
The individual or group of individuals named to receive the benefit of a life insurance policy
Globalization
The interaction between the various countries of the world
What does differential efficiencies mean in terms of synergies?
The management of one firm is more efficient and that the weaker firm's assets will be more productive after the merger.
Commodities Market
The market for the purchase and sale of commodity (a basic product, usually, but not always, agricultural or mineral) futures, contracts for the sale and delivery of commodities at some future time.
equity / owners capital
The net amount of funds invested in a business by its owners, plus any retained earnings. It is also calculated as the difference between the total of all recorded assets and liabilities on an entity's balance sheet.
"Margin"?
The part of purchase price contributed by investor, the remainder is borrowed from broker Margin is the collateral of your borrowing
Amortization
The paying of of debt in regular installments over a period of time.
profit margin
The percentage that a seller adds on to their cost price when selling a good.
Time frame dummies
The performance differ related to time frame in the paper that initially investigated a particular determinant -Post sample period -Post-publication period
Limit order book
The record of unexecuted limited order a. Limite bid orders: the price that the specialist is willing to buy b. Limit ask orders: the price that the specialist is willing to sell
required rate of return
The required rate of return (RRR) is the minimum annual percentage earned by an investment that will induce others to put money into a particular security or project. The RRR is used in both equity valuation and in corporate finance.
reinvestment risk
The risk that future coupon will be not be reinvested at the prevailing int rate when the bond is initiated
Define Divestiture?
The sale of some of a company's operating assets.
Define Arbitrage?
The simultaneous buying and selling of the same commodity or security in two different markets at different prices and pocketing a risk-free return.
Which tranche has the most unpredictable cash flow and maturity?
The support or companion tranche
Value at risk (VaR)
The technique to measure the level of financial risk within a firm over a period of time (corresponding to a very low percentile of the entire return distribution
coverage
The things that are protected—or "covered"—in an insurance policy
The tranche that is the last to receive cash flow is the ____________.
The tranche that is the last to receive cash flow is the Z tranche.
goodwill
The value to an established firm of its loyal customers, skilled staff and management; the value of a firm above its net value.
Financial Book
The wealth of Nations, Adam Smith, 1776
Cost centres (cost controls)
These can be used to help control costs in an effort to boost profitability. They are departments or sections within business that generate costs that can calculated and monitored.
Unit trusts
These financial institutions are also known as mutual funds and are funds that fund managers run on behalf of investors for a fee. Fund managers use the money that investors have contributed and make these funds available for business financing with the aim of growing the original amount within the unit trust for their investors.
What are two uses of index options?
To speculate on market movement or to hedge a portfolio
to borrow
To take something for a short time and give it back later
What is the goal of merger evaluation?
To value the equity of a firm. This is because a firm is acquired from its owners, not its creditors.
Debt Ratio
Total Debts/ Total Assets
Profit
Total Revenue - Total Costs
Simple Apportionment Method
Total production overheads / total no. of units
"Utility"
Total satisfactions received from goods or service
Cost of goods sold
Tracks the money spent in order to sell.
What are TIPS?
Treasury Inflation-Protected Securities
standing order
Type of preauthorized-payment under which an account holder instructs a bank to pay a specified amount, directly from his or her account balance, to a named party on a regular basis
rebate
Type of sales promotion whereby a customer can be reimbursed some money because they have bought a large amount of something.
5 primary capital market securities are:
US government notes and bonds Municipal Bonds Corporate Bonds Common Stock Mortgage Backed Securities
4 major participants in the money markets
US treasury Federal Reserve Commercial Banks Money Market Funds
Controls
Unauthorized use of an asset; inaccurate reporting of a transaction; loss or theft of key documents; false entries into the accounting system to disguise theft fraud or embezzlements.
Optimal tangency portfolio
Under one risk-free and two risky assets problem, the point intercept by capital allocation line and mean-variance portfolio i.e. when sharp ratio is highest
Optimal risky portfolio
Under two risky assets problem, the point intercepted by indifferent curve
Are debentures considered secured or unsecured?
Unsecured. They are backed only by the issuer's full faith and credit.
Treasury Notes and Treasury Bonds
Up to 10 years Par Value - $1,000 Interest paid semi-annually, Quote based on percentage of par
Arbitrage pricing model (APT)
Use multiple macroeconomic factors to explain return; multiple sources of systematic risk Compared with CAPM, CAPM is unrealistic
Payback (equation)
Use the year that cumulative cashflow turns positive/ Will turn positive. Cashflow+ Cumulative cashflow/ The year in which payback occurs
Factor model
Used to operate portfolio theory, and try to compute financial assets return by one or multiple factors(parameter) PS: they simplify the portfolio selective problem by only estimating number of parameters
Managerial Accounting
Using financial reports for internal uses.
Equity
Value of Business
Warrants are a ______-term right to buy stock at a preset price.
Warrants are a long-term right to buy stock at a preset price.
Investment Apprasial
Ways to evaluate future cash flows than profits due to profits being subjective and cant be spent.
Strong/Semi strong/weak version of EMH
Weak: the price reflects historical inform. Semi-strong: the price reflects historical inform. and all public information. Strong: the price reflects historical/public/private inform.
Balance Sheet of Wealth
Wealth = Assets - Liablilities
Liabilities
What the business owes to others (debts) (Current liabilities must be put within a year, are short term debt financing)
Fianncial Asset
What the investor in the firm owns e.g a share or a debenture.
Negative risk premium
When LT investors dominate the market
Define synergy?
When additional benefits are created by two companies coming together that could not exist separate if they were apart.
liquidation
When company is insolvent, its operations are brought to an end and its assets are divided up among creditors an shareholders.
private synergy
When the combination and integration of the acquiring and acquired firms' assets yields capabilities and core competencies that could not be developed by combining and integrating either firm's assets with another firm.
Give an example of a joint venture?
Whirlpool announced a joint venture with the Dutch electronics giant Phillips to produce appliances under Philips's brand names in five European countries.
When must retail communication concerning CMOs be filed with FINRA?
Within 10 business days of first use
Define research reports.
Written or electronic communication about equities, including information for a client to make an investment decision.
CAL ( capital allocation line)
Y: E(r) X: SD A line created a graph showing all possible combination of risk-free and risky assets
bonds: rate
YTM, or rate of return semi-annual rate= YTM*2
What bonds are dollar-denominated, U.S. registered, and issued by multinational companies and foreign governments?
Yankee Bonds
Can both related AND unrelated diversification strategies be implemented through acquisitions?
Yes
May a warrant be detached and traded separately?
Yes
Is convexity a good thing?
Yes, bonds with greater convexity gain more in price when yields decrease than loss when yields increase
Which of the following is not an investment company?
a commercial bank
Uncertainty in asset returns has two sources
a common factor (macroeconomic) and firm-specific events.
Fixed expense
a consistent and regular cost of doing business such as rent or insurance.
Dividend reinvestment plans offer which advantages?
a convenient means to accumulate shares, dollar cost averaging
yield curve
a graphic depiction of the term structure of interest rates
Coverage ratios measure a firm's
ability to meet fixed payments such as interest
non depository institutions are intermediaries that
accept funds for investment, but do not allow check writing privaleges.
core business of banks
accepting deposits making loans
horizontal acquisitions are when you
acquire firms in the same industry
veritcal acquisitions are when you
acquire suppliers or distributers of the acquiring firm
Which of the following is a cash outflow?
acquiring inventory
hostile takeover
acquisition in which the target company does not wish to be acquired
standstill agreement
agree not to buy more shares in exchange for cash payment share price decreases because no longer an active bidder, money taken from company for cash payment
white knight
agree to be taken over by someone else, hope they are friendlier and keep their jobs
which is a separate accounting entity
all
General Partnership
all general partners have unlimited liability.
semistrong-form hypothesis
all publicly available information regarding the prospects of a firm must be reflected already in the stock price.
Governing Strategic Alliances
alliances can be governed by the following mechanisms: -non-equity alliances -equity alliances -joint ventures (see page 205 chart)
Debt
an amount of money that you owe to a person, bank or business
Premium
an amount to be paid for an insurance policy.
pure expectations theory suggests that long-term interest rates are
an average of the expected short-term interest rates between now and when the loan matures
limited liability partnership
are liable for their own acts of malpractice but not for those other partners
share of profit partnership
as agreed
Why is depreciation added back to after-tax profits when calculating cash flow?
because it was never a cash expense
MACRS depreciation is subtracted _________ taxes, then added back
before -MACRS is the fastest depreciation the IRS will allow -faster depreciation reduces profits, reducing taxes, increasing csh flow -MACRS is a double-declining balance with a mid-year convention but just use the tables
Liquidity
being in cash or easily convertible to cash, the ease with which an asset can be converted into the economy's medium of exchange
fund raising corp
better access to financing, greatest potential for growth
Macroeconomics
branch of economics that deals with the economy as a whole
asset allocation
broad asset classes
Firms should acquire other firms with different but related and complementary capabilities in order to
build their own knowledge base
partnership
business owned by 2 or more people and opprated for profit.
way to calculate before-tax
calculating the cost: find the before-tax of debt by calculating the YTM generated by the bond cash flows FV = -1000 PMT = -(coupon rate *1000) N = # of years PV = price of bond - flotation (if % then = % * 1000) Rate (YTM) = ???
finance expense
cash paid
Cumulative voting permits a stockholder to
cast the total number of votes for one individual
money multiplier equation =
change in demand = change in amount of reserves/the reserve requirement Change in D = Change in R / RR
what are the 5 c's
character(credit history), capacity( ability to make payments), conditions( what perpose), capitol( other assets), collateral( pledging on assets)
asset allocation
choice among these broad asset classes
security selection
choice of which particular securities to hold within each asset class
Maximin
choose the alternative with the best of the worst possible payoffs. 'Least worst outcome'
Which of the following is a cash inflow?
collecting an account receivable
Portfolio
collection of investment assets.
FDIC insures deposits for
commercial banks
Money market mutual funds invest in
commercial paper repurchase agreements
managerial finance
concerns the duties of the financial manager in a business.
Equity
consists of funds provided by the firm's owners (investors or stockholders) that are repaid subject to the firm's performance
Limited Partnership
consists of one or more general partners, who have unlimited liability, one of more limited partners whose liability is limited to the amount of their investment in the business
co-opetition
cooperation by competitors to achieve a strategic objective
what business entity pays taxes
corp
Which of the following is not a short‑term, liquid asset?
corporate stock
which is a separate legal entity
corporation
horizontal acquisitions bring
cost based synergies and revenue based synergies
Interest
cost of borrowing money
Reverse repos
dealer buys gov. securities and then sells them back at a higher price
bonds
debt issued by: companies (finance projects or general financing), federal government (finance deficit spending), state and local government (finance schools, roads, prisons, etc) -fixed promise-to-pay -first position for cash flows in case of liquidiaton -lower relative risk to the bondholder, therefore lower relative rate of return, since they are safer most bonds pay interest semiannually at a stated coupon interest rate, have an initial maturity of 10 to 30 years, and have a par value of $1,000 that must be repaid at maturity
rate of common stock
decided annually
as market interest rates increase, prices of bonds
decrease
Eurodollars
dollar-denominated time deposits in banks outside the U.S
corporation taxes
double taxation
Rule of 72,114,144
double,triple,quadruple
When rates go up, bonds go
down (inverse relationship)
inflation premium
driven by investors' expectations about inflation the MORE inflation they expect, the HIGHER will be the inflation premium and the HIGHER will be the nominal interest rate
market segmentation theory
each lender and each borrower has a preferred maturity; the yield curve is a compilation of a number of separate maturity segments, each with its own supply and demand characteristics
EBIT
earnings before interest and taxes
stock is what
eqity
nominal rate of interest for a security is
equal to the risk-free rate (consisting of the real rate of interest plus the inflation expectation premium) plus the risk premium
bonds: FV
face value (terminal, maturity, par) always 1000
when interest rates rise, stock prices
fall. it becomes more expensive for companies to borrow money to invest in growth opportunities
T/F interest expense is included in a project cash flow forecast
false : not included in project cash flow forecast. The cash flows will ultimately be discounted by the WACC, which includes cost of debt
T/F the longer amount of time until a bond's maturity, the less responsive is its market value to a given change in the required return
false: the shorter amount of time
Fair Credit Reporting Act
federal law giving constumers right to veiw and correct their credit information
Empirical studies of returns earned by investment companies indicate that
few funds outperform the market consistently
review and analysis
financial managers perform formal review and analysis to asses the merits of investment proposals
markets increase liquidity and reduce transaction costs by
financial markets are aided in achieving liquidity through the use of: -market makers -specialists
public offering
firm offers its shares for sale to the general public
decision making
firms typically delegate capital expenditure decision making on the basis of dollar limits
fee
fixed amount or a percentage paid to an agent/professional for performing particular services.
rate of preferred stock and bonds
fixed rate of return Predetermined
Maxim #4 - cash
flows determines value
behavior finance
focus on systematic irrationalities that characterize investor decision making. These behavioral shortcomings may be consistent with several efficient market anomalies.
implementation
following approval, expenditures are made and projects implemented. Expenditures for a large project often occur in phases
open end mutual funds offer shares
for purchase at the net asset value (NAV) of the fund
currency forwards
foreign exchange future options that provide payoffs that depend on the difference between the exercise price and the exchange rate futures price at expiration.
financial markets
forms in which suppliers of funds and demanders of funds and transact business directly
call option
give its holder the right to purchase an asset for a specified price on or before the expiration price.
poison pill
give shareholders option for new common stock for 1/2 price puts more voting power in friendly hands
put option
gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.
limited liability company
gives owner limited liability and taxation as a partnership.
buy back stock
goes on open market and buys back shares, puts in hands of management team
markets are able to reduce transaction costs by providing traders:
high volume rules standardization reduced search costs
markets help establish security prices by:
high volume standardized securities concentration of traders
upward sloping yield curve reflects
higher reflected rates of interest
The net asset value of a closed-end investment company increases with
higher stock prices
The net asset value of a mutual fund increases with
higher stock prices
Activity ratios measure
how rapidly assets flow through the firm
distinguishing characteristics of thrifts
include: savings and loans mutual savings banks credit unions -much smaller, role more limited than commercial banks
consul
infinite bond
Preferred stock and long‑term bonds are similar because
interest and dividend payments are fixed
Operating income is not affected by
interest earned
compound interest
interest earned on both the principal amount and any interest already earned
taxation of munis
interest income federal tax free; state income tax free for residents
As times‑interest‑earned increases,
interest payments become more assured
to plough/plow back
keep profit inside the company instead of spending it
explicit knowledge
knowledge that can be codified; concerns knowing about a process or product
tacit knowledge
knowledge that cannot be codified; concerns knowing how to do a certain task can be acquired only through active participation in that task
life span sole p
lacks continuity when owner dies
cashless collar
long stock, long put, short call; protect a gain with no cash outlay
Capital market
long term transactions
Bond
long-term debt instrument used by business and government to raise large sums of money generally from a diverse group of lenders
Capital market
long-term securities such as treasury bonds, as well as bonds issued by federal agencies, state, and local municipalities, and corp.
Clicker ? The ________________ the maturity of a bond and the ___________ the coupon rate, the more sensitive the bond is to interest rate fluctuations A. Longer, lower B. Longer, higher C. Shorter, lower D. Shorter, higher
longer; lower
bank holding companies can help
make bank expansion easier
Models of corporate governance
market model and the control model
share premium
market selling price - nominal value
three main areas of finance
markets and institutions investments corporate or managerial finance
capital markets
markets for securities with maturities of more than one year
what is the goal of management
maximization of share price
Ultimate goal of a firm
maximize stockholders wealth
Optimal long-run goal of a financial manager
maximize the firm's value, maximize stock price, and maximize stockholders wealth
series EE bonds
may be used for funding education; issued after 2005 earn a fixed interest rate; must be held for at least 12 months; three month interest penalty for bonds redeemed within five years of issue ; tax deferred interest until maturity or redemption; must be purchased in the parents name and MAGI below phaseout to be eligible for education savings; accrue interest rather than paid to the purchasers; max $10,000 in a single year; state tax exemtp
leasehold land
means that you just have a lease from the freeholder (sometimes called the landlord) to use the home for a number of years.
risk preferred stock
medium
working capital
money available to a company for day-to-day operations. Generally, a measure of both a company's efficiency and its short-term financial health. Working capital is calculated as: Working Capital = Current Assets - Current Liabilities
Currency
money in the form of cash or coins
describe a money market
money market is for securities of one year or less. participants in the money market tend to be very large institutions, like banks, corporations, and the federal government.
fed sells securities, money supply xxxxx, interest rates xxx
money supply decreases, interest rates increase
fed buys securities, money supply xxxx, interest rates xxx
money supply increases, interest rates fall
Bond-price yield curve
negative, convex
rights offering
new shares are sold to existing shareholders
tax return filed sole p
no
which of the following is an advantage for a firm to issue common stock over long-term debt?
no maturity date on which the par-value of the issue must be repaid
basic right of bond
non voting , right to recieve money in event of bankruptcy before stockholders
Preferred stock dividends are
not a legal obligation not exempt from federal income taxation
Derivative securities
options and futures contracts provide payoffs that are determined by the prices of other assets such as bond or stock prices. hedge risks or transfer them to other parties.
par value
or face value, is the amount borrowed by the company and the amount owed to the bond holder on the maturity date (always 1,000)
Both individuals and businesses can earn two types of income
ordinary income capital gains income. Under current law, tax treatment of ordinary income and capital gains income change frequently due to frequently changing tax laws.
taxation of dividends
ordinary income unless considered a qualified dividend (held for more than 60 days during the 121 day period that begins 60 days before the ex-dividend date) then taxed capital gains
who are the investors of stock
owners
ownership of corporation
owners are shareholders or stockholders
non-equity alliance
partnership based on contracts between firms
limited partnerships
partnerships where one ore more partners have limited liablity as long as one hasunlimited liablility, limited partnerships are passice investors that cant take an active role in firms managment.
1981 inverted yield curve (downward sloping)
people expected rates to decline in the future because they expected inflation to decline -indicated that short-term interest rates were above long-term interest rates at the time -managers should rely on cheaper more long-term financing -infrequently occur and sign of weakening economy
open market purchase (toehold bidding)
pre-tender offer tactic where potential bidder secretly buys the stocks of the target in the open market without driving up the price
Letter of intent (LOI)
preliminary agreement between bidder and target stipulating major areas of agreement, rights, and limitations
random walk
price changes should be random and unpredictable
bonds: PV
price of the bond
Dow Jones
price-weighted
no shop agreements
prohibits target from seeking other bids or going public with info not currently available
Fixed income or debt securities
promise either a fixed stream of income or a stream of income determined by a specified formula.
capital budgeting process (5 steps)
proposal generation review and analysis decision making implementation follow-up
real rate of return
r = N - INF
equation for nominal rate of interest
r1= r* + IP + RP1 (r* + IP = risk free rate, Rf) (RP1 = risk premium) nominal rate can be viewed as having 2 basic components 1. risk-free rate of return, Rf 2. risk premium, RP1 r1= Rf +RP1
capital injection
raising capital by for example issuing new shares or selling current assets, short term source of finance
Credit Rating
rating of the risk involved in lending to a specific person or business
Maxim #3 - A dollar
received today is worth more than a dollar received in the future
cash basis
recognized revenues and expenses only with respect to actual inflow and outflow of cash
what is downsizing?
reduction in number of employees and/or operating units
weak-form hypothesis
reflect all information that can be derived by examining market trading data Momentum
weighted average cost of capital (WACC) ra
reflects the expected average future cost of capital over the long run; found by weighting the cost of each specific type of capital by its proportion in the firm's capital structure ra = (wi * ri) + (wp * rp) + (ws * rr or n) wi = proportion of long-term debt in capital structure wp = proportion of preferred stock in capital structure ws = proportion of common stock equity in capital structure wi + wp + ws = 1
If you acquire a business to increase market power, you will be subject to
regulatory review and analysis by financial markets
Arbitrage Pricing Theory
relies on three key propositions: 1. security returns can be described by a factor model; 2. there are sufficient securities to diversify away idiosyncratic risk; 3. well-functioning security markets do not allow for the persistence of arbitrage opportunities.
If a firm has substantial excess cash, it may
repurchase some of its shares, increase its cash dividends
poison pill
right granted to target shareholders to buy additional shares of the firm at a heavily discounted price
mortgage backed security
securities that represent claims on the cash flows generated by a pool of mortgages
DRIP
shareholders can purchase the stock with a substantial reduction in commissions; plan is automatic and does not require additional action on the part of the shareholders; DRIPs provide goodwill for the corporation through the additional service that it provides for its shareholders; firms find that DRIPs are a source of new capital.
authorized shares
shares of common stock that a firm's corporate charter allows it to issue
U.S. Savings Bonds
small denomination bonds that are issued by the federal government at a discounted price and grow to full value over time.
dividend
sort of interest paid to the shareholders in relation to their amount of shares
strike price (exercise)
specified price on the call option
coefficient of variation
st.dev/exp. ret
business ethics
standards of conduct or moral judgment that apply to persons engage in commerce
coupon rate is also expressed as
stated rate of interest
strong-form
states that stock prices reflect all information relevant to the firm, even including information available only to company insiders.
income preferred stock
steady
relational view of competitive advantage
strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries
One reason for the growing popularity of EVA is its strong link to _____________________ .
strong link to OWNER WEALTH MAXIMIZATION.
primary responsibilities of the fed are:
supervising and regulating commercial banks servicing the banking industry holding the U.S. treasury checking account implementing monetary policy
loanable funds theory of interest rates -
supply of funds available for lending = the demand for funds by those who wish to borrow (interest rates will adjust to insure this is the case)
methods companies actually use
survey as CFOS resulting in 76% IRR 75% NPV
what is the advantage of NPV
takes into account the time value of investors' money
staggered board
terms of board of directors expire at different times can't bring in new members as quickly as they like
Dividend
that part of the earnings of a corporation that is distributed to its shareholders
Federal Reserve
the central bank of the United States
Risk
the greater the risk the higher the return and the lower the risk the lower return
merger
the joining of two independent companies to form a combined entity
real rate of interest
the rate that creates equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where suppliers and demanders of funds have no liquidity preferences and there is no risk -changes with changing economic conditions, tastes, and preferences
Maximization of shareholders wealth depends on
timing of cash flows, and risk
to lend
to give for a short time
Appropriate goal for financial managers is
to increase the wealth of shareholders.
to owe
to need to pay or repay money to a person, bank or business
Law of One Price
two assets with the same characteristics will, in equilibrium, have the same price
flip-in pill
type of poison pill that allows shareholders of the target to buy additional shares at a price below prevailing market price when a bidder acquires specific percentage of ownership in the target
what is the life span of stock
unlimited (permanent form of financing)
Strategic Alliances
voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services
basic rights of common stock
voting , sharein earning, residual owners
protective put
whatever happens to the stock price, you are guaranteed a payoff at least equal to the put's option's exercise because the put gives you the right to sell your shares for that price.
reasons not to refer
(1) the market concerned is not, or the markets concerned are not, of sufficient importance (2) any RCBs in relation to the creation of the RMS outweigh the SLC concerned and any adverse effects of that SLC (3) in the case of an anticipated merger, the arrangements concerned are not sufficiently far advanced, or are not sufficiently likely to proceed, to justify the making of a reference
Depreciation
(Investment-residual) / Life
Operating Profit Margin
(Operating profit ÷ Total revenue) X 100
duty to refer
- a RMS has been created or arrangements are in progress or contemplation that will result in the creation of a RMS AND - the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets for goods or services in the UK
Changes in risk
-any measure of return consists of 2 components: a risk-free rate and a risk premium -any action taken by the financial manager that increases the risk shareholders must will also increase the risk premium required by shareholders, and hence the required return -additionally, the required return can be affected by changes in the risk free rate - even if the risk premium remains constant
Decision Making and Common Stock Value: Changes in Expected Dividends
-assuming that economic conditions remain stable, any management action that would cause current and prospective stockholders to raise their dividend expectations should increase the firm's value -therefore, any action of the financial manager that will increase the level of expected dividends without changing risk (the required return) should be undertaken, because it will positively affect owners' wealth
common stock valuation
-common stockholders expect to rewarded through periodic cash dividends and an increasing share value -some of these investors decide which stocks to buy and sell based on a plan to maintain a broadly diversified portfolio -other investors have a more speculative motive for trading - they try to spot companies whose shares are undervalued meaning that the true value of the shares is greater than the current market price -these investors buy shares that they believe to be undervalued and sell shares they think are overvalued (the market price is greater than the true value)
issuing common stock
-initial financing for most firms typically comes from a firm's original founders in the form of a common stock investment -early stage debt or equity investors are unlikely to make an investment in a firm unless the founders also have a personal stake in the business -initial non-founder financing usually comes first from private equity investors -after establishing itself, a firm will often "go public" by issuing shares of stock to a much broader group
Differences Between Debt and Equity: Tax Treatment
-interest payments to debtholders are treated as tax-deductible expenses by the issuing firm -dividend payments to a firm's stockholders are not tax-deductible - the tax deductibility of interest lowers the corporation's cost of debt financing, further causing it to be lower than the cost of equity financing
WACC weighting schemes
-is for future cash flows, therefore, the prospective cost of capital is the correct weighting -equity: # of shares outstanding times market price per share -debt - during periods of stable interest rates, balance sheet debt approximates the market value
sources of long-term capital
-long-term debt -preferred stock -common stock equity -common stock -retained earnings
Comparing NPV and IRR Techniques: Which approach is better?
-on a purely theoretical basis, NPV is better because -NPV measures how much wealth a project creates (or destroys if the NPV is negative) for shareholders -certain mathematical properties may cause a project to have multiple IRRs - more than one IRR resulting from a capital budgeting project with a nonconventional cash flow pattern; the maximum number of IRRs, for a project is equal to the number of sign changes in its cash flows despite its theoretical superiority, however, financial managers prefer to use the IRR approach just as often as the NPV method because of the preference for rates of return
why do we see so many mergers?
-principle-agent problems -the desire to overcome competitive disadvantage -superior acquisition and integration capability
benefits to horizontal integration
-reduction in competitive intensity -lower costs -increased differentiation INDUSTRY WIDE HORIZONTAL INTEGRATION LEADS TO INDUSTRY CONSOLIDATION
cost of capital
-represents the firm's cost of financing, and is the minimum rate of return that a project must earn to increase firm value -financial managers are ethically bound to only invest in projects that they expect to exceed the cost of capital (rate of profit) -the cost of capital reflects the entirety of the firm's financing activites -most firms attempt to maintain an optimal mix of debt and equity financing -to capture all of the relevant financing costs, assuming some desired mix of financing, we need to look at the overall cost of capital rather than just the cost of any single source of financing
Differences between Debt and Equity: Claims on Income and Assets
-stockholders' claims on income and assets are secondary to the claims of bondholders - their claims on income cannot be paid until the claims of all creditors, including both interest and scheduled principal payments, have been satisfied -because stockholders are the last to receive distributions, they expect greater returns to compensate them for the additional risk they bear
Common Stock: Ownership
-the common stock of a firm can be privately owned by a private investors, closely owned by an individual investor or a small group of investors, or publicly owned by by a broad group of investors -the shares of privately owned firms, which are typically small corporations, are generally not traded; if the shares are traded, the transactions are among private investors and often require the firm's consent -large corporations are publicly owned, and their shares are generally actively traded in the broker or dealer markets
comments on capital structure
-the correct portions of debt vs equity are always uncertain. the following comments can, however, be made -higher tax rates give preference to debt -higher business volatility gives preference to equity -greater operational leverage (fixed costs) gives preference to equity -greater information asymmetry gives preference to debt -stupid people are only willing to pay a lower price per share, which is a higher rate of return, which is a higher risk
pros and cons of payback analysis
-the major weakness of payback period is that the appropriate payback period is merely a subjectively determined number -it cannot be specified in the light of the wealth maximization goal because it is not based on discounting cash flows to determine whether they add to the firm's value - a second weakness is that this approach fails to take fully into account the time factor in the value of money -a third weakness is its failure to recognize cash flows that occur after the payback period
dividends
-the payment of dividends to the firm's shareholders is at the discretion of the company's board of directors -dividends may be paid in cash, stock, or merchandise -common stockholders are not promised a dividend, but they come to expect certain payments on the basis of the historical dividend pattern of the firm -before dividends are paid to common stockholders any past due dividends owed to preferred stockholders must be paid
A mutual fund with a beta coefficient of 0.8
. has less systematic risk
Acquisition
1 Firm buys a controlling interest in the other firm with the intent of making the acquired firm a subsidiary business within its portfolio
effective acquisiton strategies include:
1) Complimentary Assets/Resources 2) Friendly Acquisitions 3) Careful selection process 4) maintained financial slack
What are three distinct advantages to investing in an open-end investment company?
1) Diversification 2) Professional Management 3) Liquidity
What are the three different types of investment companies?
1) Face Amount Certificate Companies 2) Unit Investment Trusts (UITs) 3) Management Companies
Problems with acquisitions include:
1) Integration difficulties 2) Inadequate target evaluation 3) Extraordinary debt 4) Inability to achieve synergy 5) Too much diversification 6) Managers overly focused on acquisitions 7) too large
Market power increases when:
1) able to sell goods above competitive levels 2) primary/support activities cost less than competitors 3) firms size/resources/capabilities give it superior ability to compete
restructuring strategies include:
1) downsizing 2) downscoping 3) leveraged buyouts
Reasons you would make an acquisition are:
1) increased market power 2) overcoming entry barriers 3) cost of new product development 4) increase speed to market 5) lower risk than developing new products 6) increased diversification 7) reshaping competitive scope 8) new capabilities
Attributes of effective aquisisions are:
1) low to moderate debt 2) continued emphasis on innovation 3) flexibilty
Integration can cause problems because it is hard to:
1) melding 2 distinct corporate cultures 2) linking different financial and control systems 3) build effective working relationships 4) resolve problems regarding the status of the newly acquired firm's execs 5) lose key personnel from acquired firm
savings and loan crisis
1) number of regulators reduced 2) many states lowered the criteria to own and manage a thrift 3) wide-spread fraud 4) deposits remained insured (depositors had no incentive to monitor the thrift's well-being)
An acquisition can:
1) reduce the negative affect of an intense rivalray on a firm's financial performace and 2) reduce a firm's dependence on one or more products/markets ... thereby reshaping comp. scope for the firm
Three problems with profit maximization goal is
1) short sighted management decisions 2) ignores risk (a long-term risk might be ignored by someone with a short-term time horizon) 3) ignores the timing of cash flows (near term but short lived cash flows vs long term cash flows)
How active is your mutual fund manager?
1. 1/3 are closed indexers 2. Average underperformed due to higher cost (you pay expensive fee for index fund) 3. Active MF can benefit from due to closed indexers
Assumptions of CAPM
1. Agents are price taker 2. Agents are rational; maximize profit minimize risk 3. Agents have same planning, decision horizon, same inputs, and equal access to information 4. No transaction/information cost
Use of CAPM
1. Beta as an important risk measure 2. CAPM is used as a benchmark to see if stock under perform or over perform 3. Use CAPM for hurdle rate (cost of equity capital) for internal investment decisions
Problems with testing CAPM
1. Beta is estimated with error 2. Beta changed over time 3. True market portfolio cannot be measured 4. We can only observe realized return instead of expected return
Agency market(Auction market)
1. Buyer/seller trade with each other directly 2. All traders converge at one place e.g. stock exchange 3. The specialist: handle much of the order flow of stocks assigned to them, and have obligation to make the market orderly
List off some ways that firms can defend themselves against mergers?
1. Changing the bylaws so that only one-third of the directors are elected each year. 2. Requiring a super majority (75%) to approve a merger instead of a simple majority. 3. Trying to convince that target firm's stockholders target firm's stockholders that the price offered is too low. 4. Raising antitrust issues in the hope that the justice department will intervene. 5. Getting a white knight who is acceptable to the target firm's management to compete with the potential acquirer. 6. Repurchasing Stock in the open market to push the stock price above what the acquirer is offering. 7. Getting a "white squire" to purchase enough shares to stop the acquisition. 8 Taking a poison pill.
Limited of arbitrage
1. Constraints on short selling 2. Limited of capital (required margin) 3. Transaction cost 4. "Noise trader risk": 股价波动越大的股票，越riskier，如果有good news，那所有人都会来买股票，股价持续mispricing，或增加，如果噪音交易者持续存在。
Two major types of market
1. Dealer market: the dealer post ask and bid price for a specific security instrument 2. Agency(auction) market: In agency markets, order flow meets at central place
What are two common methods used to value target firms?
1. Discounted cash flow approach, and 2. The market multiple method.
Once an acquiring firm has identified a possible target company, what must it do?
1. Establish a suitable price or range of prices, 2. Tentatively set the terms of payment
Two hypothesis for forward rate
1. Expectation hypothesis: forward rates represent the market expectation of future short rates 2. Liquidity preference hypothesis: forward rate not fully reflect expected return, there is a liquidity premium
Optimal portfolio
1. Expected return of portfolio 2. Standard deviation of portfolio a. individual stock SD b. Covariance of each stock
Daniel&Titman challenge FF's model (1993)
1. FF's model (1993) only time serial model, not cross-section model 2. Size, BE/ME (characteristics) are more matter than beta(SMB), beta(HML) (risk measure)
New data base technology (DLTs)
1. Famous bitcoin (digital currency) 2. Smart contract 3. digital wallet 4. crowdfunding 筹资 （through internet)
Cost of dealer in dealer market
1. Fixed cost(admin, operation, tech) 2. Invento1ry risk( the decreasing value of assets, unable to sell the asset) 3. Cost of trading against better informed (不知情交易成本）
Drawback of portfolio sorts
1. Hard to control other risk loadings (characteristics) 2. Only use extreme portfolio instead of all stocks 3. Number of portfolio arbitrary
Two basic ways to implement VaR
1. History data Method 2. Simulation Method
What determined YTM?
1. How attractive of bond to investors 2. risk-free rate (reference rate)+ risk premium Risk premium: 1. term yield (yield curve depends on the remaining time to maturity) 2. the Credit spread (depends on credit rating) 3. Possibly liquidity premium
Dealer market
1. In dealer market, buyer/seller do transaction through brokers (not directly) 2. Brokers earn from bid-ask spread 3. Buyer buy from broker's ask, seller sell from broker's bid 4. Bid-ask spread is low due to high competition of different dealers
Why do we care how financial market organized?
1. In different market, the way of trading is different 2. Trading is important in portfolio management and asset pricing
3 factors influencing the equilibrium interest rate
1. Inflation, which is a rising trend in the prices of most goods and services -if the dollars you get back buy less stuff, you need to get more dollars 2. Risk, which leads investors to expect a higher return on their investment -if there is a chance you may not get your money back, you need more dollars to hedge your risk 3. Liquidity preference, which refers to the general tendency of investors to prefer short-term securities - if you have to tie up your money for more time, you need more dollars
Margin trading
1. Investor borrow money from broker to purchase securities 2. The US initial margin requirement is 50% 3. Below maintenance threshold (long:25%, short:30%) the broker will issue a margin call
Prominent anomalies
1. Momentum 2. Betting against Beta
Mutual funds VS. Hedge Funds
1. Mutual funds not flexible, no derivatives, only long. Hedge funds flexible, derivatives, long and short 2. Mutual funds liquidity daily, and investors can quit any time. Hedge funds liquidity periodically. 3. Mutual funds aim relative return with benchmark(index), Hedge funds aim absolute return (no matter how market does) 4. Mutual funds and mutual funds charge differently
2 types of ETF
1. Physical ETFs mimic a benchmark by buying all assets in index, afterwards, investors can invest in stocks in stock issued by ETFs 2. Synthetic ETF's invest in derivatives such as swaps to ensure the return on a commodity index is reached
Two basic types of cross section tests
1. Portfolio sort 2. Fama and French cross-section regression Both use realized return
Issues of test of EMH
1. Researcher can only test the EMH with combination of one assumption and correct asset pricing model 2. Selection bias (time period, data sample) 3. outperformance skiller or luck?
Risk Factor investing VS. Characteristics-based investing
1. Risk investing: An investor decide a valid asset pricing model, and then desire to gain a risk exposure to risks hence he wants to trade the factor portfolio 2. Characteristics-based investing: An investor doesn't take position on risk model, and exploit the information contained in characteristics to sell and buy
Assumptions of APT
1. Securities return can be described by factors 2. Specific risk can be eliminated (sufficient securities 3. No persistent arbitrage
Tests of CAPM
1. Simplest way: (portfolio sort) sort the portfolio based on risk loading over whole sample period between two extreme portfolio, such as beta to see if the risk loading can explain the variation of return 2. Common approach: Yearly formation portfolio, monthly return (yearly rebalancing) 3. Regression approach: compare the coefficient in regression analysis with beta
Types of factor models
1. Single factor model CAPM 2. Multiple factors model a. Macroecon factor models (int rate, inflation rate) Arbitrage pricing model b. Statistics factors model (historical data from time series/cross-sectional) Factor analysis c. Fundamental factors model (Firm-level characteristics, M/B, market equity) Farma French model
Stock return go down out of sample for two reasons
1. Statistical bias: the authors didnt properly address potential statistical problem leading to false result 2. Stock return predictability can reflect mispricing, and large investors can correct this mispricing.
Three ways to beat the market
1. Technical analysis: use stock's record/pattern/graph to predict the future movement 2. Fundamental analysis: use company's operation to assess it's economic perspectives (can be used in weak EMH) 3. Quant strategy: find undervalue stock by factor/characteristics-based analysis
What is the consensus about whether mergers create value based on researchers analysis?
1. That acquisitions do create value but (2) that shareholders of target firms reap virtually all the benefits.
How liquidity risk affect price?
1. The degree of illiquidity, higher price 2. Liquidity risk is uncertain, so cannot be diversified across stocks 3. Liquidity risk should be priced as a risk factor
cost of debt (2 components)
1. after-tax (must find before tax to find after unless after tax is given) 2. flotation costs ri= after tax rd=before tax ri = rd * (1 - T) riskier companies have higher rate or debt
How to measure mutual fund manager's skill?
1. alpha net of fees is a poor measure, cuz skilled manager charges more 2. Fund's Value-added is a better measure and found a persistent performance
order of payments
1. bondholders (debt holders) because maturity date 2. preferred stock because fixed dividends
Origins of BAB
1. constraints of leverage a. Many investors face leverage constraints, which make the portfolio away from CAPM's optimal portfolios b. Investors have the high required return, then need to take a risk on high beta assets, which become overpriced. c. Money left to investors who want to leverage up and invest in low beta assets
Why do we need financial market?
1. consumption timing 2. Allocation of risk 3. Allocation of capital 4. Provision of liquidity 5. Information aggregation 6. Separation of ownership and manager
Investment planning process
1. determine whether client has the means and commitment to invest 2. determine the time horizon for investment based on the client's financial objectives 3. determine the appropriate level of risk and return for the portfolio based on the investor's risk tolerance and required return 4. select investments suitable to the investor's time horizon, return requirements, and risk tolerance 5. compare the actual realized returns against the expected returns 6. adjust and rebalance
3 sanity checks
1. did I make 3 adjustments for semiannual? (PMT, N, Rate) 2. did the price / interest relationship hold? (inverse) 3. Is the price (PV) between $700 and $1300
Limitation of APT
1. doesnt show what factors should be included 2. doesnt show if excess market return should be a factor 3. doesnt show a optimal number of factor
required return is likely to differ from the coupon interest rate because either (2 reasons)
1. economic conditions have changed, causing a shift in the basic cost of long-term funds 2. the firm's risk has changed
three major players in the financial markets
1. firms are net demanders of capital. they raise capital now to pay for investments in plant and equipment. the income generated by those real asserts provides the returns to investors who purchase the securities issued by the firm. 2. household are net suppliers of capital. they purchase the securities issued by firms that need to raise funds. 3. government can be borrowers or lenders, depending on the relationship between tax revenue and government expenditures.
Mutual fund
1. fixed income: provide fixed rate of return i.e. generate a lot of interest income, then pass to shareholders e.g. government bond, corporate bond, other debt instruments 2. Index fund: idea-its very hard/expensive to beat the market Index fund manager only follow the large market index such as s&p 500. this strategy is designed for risk averse investor
Two scenario of post sample/publication period
1. if in-sample findings are fully caused by statistically bias, then the beta for both period will equal to negative in-sample return 2. if in-sample findings are fully caused by mispricing, then the beta for post-publication equal to negative in-sample return, but post sample beta close to 0
Active bonds strategies
1. int rate forecasting 2. picking up underpriced/overpriced bond
1st, 2nd, 3rd, 4th moments of distribution
1. mean: Average value 2. Variance: SD, or risk (+-1SD-68%,+-2SD-95%) 3. Skewness: left or right a. left(negative) skewness: have a long left tail b. right(positive) skewness: have a long right tail 4.Kurtosis: fat tail (L,M,P) i.e. thin, normal, fat
Holding market portfolio
1. only have market risk, which cannot be diversified (no unique risk) 2. The stock return depends on stock exposure to market risk, which is measured by beta
Behavioral preference
1. prospect theory: only care about changes in wealth instead of wealth level 2. Loss Aversion: more weight on loss than gain 3. Mental accounting: value your own wealth more Lead to: (1) Disposition effect: sell winners early, hold losers too long (2) Endowment effect: Prefer your own stuff (3) Status Quo effect: prefer status quo than change position
three elements of liquidity
1. transaction costs(fixed, variable) 2. market depth(the market's ability to sustain the large quantities of transaction without affecting price) 3. price impact
Fed members are appointed for xxxxx year terms
14
Market Ratios are (list) =
= Earnings per share, market-to-book ratio, price/earnings ratio
Taxable Income (EBT)
= Gross Income (Revenue) - Allowable exemptions (deductions)
Gross Profit Margin =
= Gross Profit / Sales
Debt Equity =
= Long-term debt / stockholders' equity
Price/Earnings Ratio =
= Market Price of Common Stock / Earnings Per Share
Market to Book Ratio =
= Market Value per share / book value per share
Return on Equity =
= Net Income After Tax / Common Equity
Net Profit Margin =
= Net Income After Tax / Sales
DuPont Analysis =
= Net Profit Margin X Total Asset Turnover X Equity Multiplier
Operating Profit Margin =
= Operating profits / Sales
Accounts Receivable Turnover =
= Sales / Accounts Receivable
Fixed Asset Turnover =
= Sales / Fixed Assets
Total Asset Turnover =
= Sales / Total Assets
Times Interest Earned =
= TIE ratio = EBIT/Interest Expense
Debt Ratio =
= Total Liabilities / Total Assets
Common Equity
= Total Stockholder Equity - Preferred Stock
Return on assets (or return on investments) =
= net income after tax / total assets
cost of common stock equity
= rs is the rate at which investors discount the expected dividends of the firm to determine its share value aka required rate of return rs = Rf + b * (rm -Rf) rs = D1/P0 + g
Earnings per share=
=Net Income / Number of Shares Outstanding
Net Profits =
=Net Sales - COGS - OPEX - Interest - Tax
What is a step-down, long-term CD?
A CD that offers an interest rate that's higher than current rates, with subsequent interest rates paid being lower
Cost Plus Pricing
A Method used to determine how goods and services are priced. Priceing an item you are seeling based on the wholesale price you paid for it.
social security
A United States government program established in 1935 that includes a retirement benefit for citizens; it is funded by payroll taxes.
mortgage
A bank loan secured by property
Commodities
A basic good used in commerce that is interchangeable with other goods of the same type. Examples are oil, gold, grains, beef, natural gas, electronics.
Debit
A bookkeeping entry on the left side of an account. It records the increase to an asset or an expense, OR the decrease of a liability or item of equity or revenue.
A _______-based index measures the market as a whole.
A broad-based index measures the market as a whole.
Zero-based Budget
A budgetary approach that assumes the base for projecting next year's budget is zero; managers are required to justify all activities and every proposed expenditure.
turnover
A business's total sales revenue.
Distribution of payments
A cash flow management strategy that involves distributing payments throughout the month, year or other period so that large expenses do not occur at the same time and cash shortfalls do not occur. Distributing payments throughout the year means there is a more equal cash outflow each month rather than large outflows in particular months.
Discounts for early payment
A cash flow management strategy that involves offering creditors a discount for early payments. This strategy is most effective when targeted at those creditors who owe the largest amounts over the financial year period. This is not only beneficial for the creditors who are able to save money and therefore improve their cash flow, but it also positively affects the business's cash flow status.
Factoring (cash flow management strategy)
A cash flow management strategy that involves the selling of accounts receivable for a discounted price to a finance or specialist factoring company. The business saves on the costs involved in following up on unpaid accounts and debt collection. This strategy is growing in popularity as a strategy to improve working capital.
A client's name and number must be kept on the Do Not Call List ____________.
A client's name and number must be kept on the Do Not Call List indefinitely.
Define horizontal merger?
A combination of two firms that produce the same type of good or service.
Define White Knight?
A company that is acceptable to the management of a firm under threat of hostile takeover and that will compete with the potential acquirer.
Give an example of synergy?
A company with talented researchers is acquired by a company who has the necessary capital to explore their projects.
Define Joint Venture?
A corporate alliance which two or more independent companies combine their resources to acheive a specific, limited objective.
Bond stripping
A coupon bond can be stripped into several zero coupon bonds. E.G. 2 year 10% 1k bond = 1 year 100 bond+ 2 year 1100 bond
Liability
A debt owed by a business.
Bonds
A debt security where investors lend money to a public or private institution ( public=govt vs private=corporation) and the debtor must pay the lender (me) interest on the borrowed money. This debt security also matures at a certain date and the debtor must pay the face value of the debt security. The ability of the debtor to repay the debt ( bond rating) provides the backing and determines the interest rate of the bond.
what is downscoping?
A divestiture, spin-off or other means of eliminating businesses unrelated to a firm's core businesses.
Finance Charge
A fee for borrowing money, added to a monthly credit card bill.
What is a derivative?
A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages
Income statement
A financial report of the revenue, expenses, and net profit/loss for an accounting period. Also know as the P&L statement for "profit and loss".
bond
A financial security that represents a promise to repay a fixed amount of funds
Profit & Loss Account (P&L)
A financial statement showing a company's net profit or loss in a given period.
Income Statement
A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date. A snapshot of a moment in time
Comparative ratio analysis
A firm's performance is best assessed when judgements are made by comparing a firm's analysis against other figures, percentages and ratios.
debenture / corporate bond
A fixed interest loan issued by a company secured by its assets.
pension
A fixed sum paid regularly by an employer to an employee after retirement
Budget
A formal, written statement of expected revenue and expected revenue and expenses for a future period.
A fund whose portfolio is created to mirror the composition of a particular index is referred to as an ________ fund.
A fund whose portfolio is created to mirror the composition of a particular index is referred to as an Index fund.
Demand Curve
A graph of the relationship between the price of a good and the quantity demanded.
Give an example of some tax reasons a firm may want to do a merger?
A highly profitable firm could buy a firm will large accumulated losses in order to offset its own taxes. Cross border mergers have arisen to take advantage of varying tax rates. Mergers have also arisen as a way to minimize taxes when disposing of excess cash.
General Ledger
A ledger that contains all asset, liability, stockholders' equity, revenue, and expense accounts.
What is a LEAP?
A long-term equity option (maturity of up to 39 months)
bull market
A market with generally rising stock prices
bear market
A market with generally stagnant or falling stock prices
Gross Domestic Product (GDP)
A measurement of the total goods and services produced within a country.
Define vertical merger?
A merger between a firm and one of its suppliers or customers.
Define operating merger?
A merger in which the operations of the firms involved are integrated in hope of achieving synergistic benefits.
Define congeneric merger?
A merger of firms in the same general industry, but for which no customer or supplier relationship exists.
Define friendly merger?
A merger whose terms are approved by the managements of both companies.
Depreciation
A method of allocating the cost of a tangible asset over its useful life; a decrease in an asset's value caused by unfavorable market conditions.
Define Market Multiple Analysis
A method of valuing a target company that applies a market determined multiple to net income, earnings per share, sales, book value, and so forth.
Define Equity residual method?
A method use to value a target firm using cash flows that are residuals and belong solely to the acquiring firms shareholders.
Absorption Costing
A method used to charge an apporopriate amounts of overheads to cost units. Uses both Variable and Fixed costs.
Define Carve-Off?
A minority interest in a corporate subsidiary is sold to new shareholders, so the parent gains new equity financing yet retains control.
mutual fund
A mutual fund is a pool of stocks, bonds, and other securities managed by an investment company. Individuals can buy shares of the fund and profit from its investment gains.
money market
A mutual fund or account that invests in short-term, liquid investments. These funds generally pay better than a savings account with a bank but less than a typical stock mutual fund. These funds are considered very low risk.
no-load fund
A mutual fund that charges no front-end or back-end load fees.
A _______-based index measures the movement of a particular sector or industry.
A narrow-based index measures the movement of a particular sector or industry.
A new company created from an existing division of a publicly traded parent company is known as a _________.
A new company created from an existing division of a publicly traded parent company is known as a spin-off.
dividend
A payout of profits by a company to all shareholders.
Consumer
A person who purchases goods and services for personal use
bankruptcy
A person, organization or business legally declared insolvent because of inability to pay debts.
Budget
A plan for making and spending money
Credit Card
A plastic card used to make purchases now and pay for them later.
redeemable preference shares
A preferred stock issued by a company with a fixed repurchases price at a specific date. Example: The company sold one preference share for $ 10 and promises the buyer to buy it back at 4th of December for $ 8 (if the share price is higher, the buyer can sell it elsewhere).
cumulative preference shares
A preferred stock which allows holders to claim for omitted dividends even after years. Example: A natural disaster led to a production loss and no dividends were paid 3 years long. After three years the company is able to pay new dividends, but before paying dividends to common shareholders, they have to pay cumulative dividends to the holders of cps.
Odd/even pricing
A pricing technique in which odd-numbered prices are used to suggest bargains, such as $19.99.
debt factoring
A process whereby a company can 'sell off' open customer accounts (unpaid invoices) to a third part in order to bring in the money sooner.
Income inequality (Richard Wilkinson)
A ratio of the earnings of the richest to the earnings of the poorest. http://www.ted.com/talks/richard_wilkinson?language=en
Bundle pricing
A technique in which several complimentary products are sold for a single price, which is lower than the price would have been if each item was bought separately.
Discount pricing
A technique that offers a percentage-off discount such as 25% off
Roth IRA
A type of IRA that is not tax deductible but may not be subject to income tax upon withdrawal
401(k) plan
A type of employer-sponsored retirement plan in which money is contributed on a pre-tax basis and all earnings are tax deferred.
automobile insurance
A type of insurance that covers property damage or legal liabilities in the event of an auto accident or property damage in the event of theft.
health insurance
A type of insurance that covers the cost of both planned and unexpected health services
renters insurance
A type of insurance that replaces personal property in a rental residence if it is stolen or damaged due to fire, smoke, or vandalism. It also covers legal liabilities of injuries suffered by other individuals in the insured person's residence. It does not cover earthquake or flood damage.
disability insurance
A type of insurance that replaces the income of the insured individual if he or she cannot work due to injury or illness.
home owners insurance
A type of insurance that safeguards the insured's home and personal property against theft and damage from fire, smoke, and storms. It also covers legal liabilities of injuries suffered by other individuals in the insured person's residence. It does not cover earthquake or flood damage.
whole life insurance
A type of life insurance that pays a benefit no matter when the person dies
term life insurance
A type of life insurance that pays a benefit only when a person dies during the term—or time period—of the policy.
defined-contribution plan
A type of retirement plan in which the amount invested in the plan is controlled by the employee, with no guarantee of benefits.
defined-benefit plan
A type of retirement plan, usually a pension, in which the payment amount is guaranteed
IRA (individual retirement account
A type of retirement savings plan that is not usually done through an employer; traditional IRAs are tax deductible and earnings are tax deferred.
A factor portfolio (Factor mimicking portfolio)
A well-diversified portfolio constructed by securities affected by only one factor
withdrawal/withdraw
A withdrawal involves removing funds from a bank account, trust, pension or savings plan.
Control of current assets
A working capital management strategy that seeks to control current assets by ensuring that current assets like cash, receivables and inventories are converted into cash on a timely basis.
Control of current liabilities
A working capital management strategy where the focus is on minimising the costs related to a firm's current liabilities. This involves being able to convert current assets into cash to ensure that the business's creditors (accounts payable, bank loans or overdrafts) are paid.
Clicker ? Which of the following is true regarding a bond? A. The face value and coupon payments of a bond NEVER change B. Only the face value of a bond can change C. Only the coupon payments of a bond can change D. Both the face value and coupon payments of a bond can change
A. The face value and coupon payments of a bond NEVER change
Define "Poison Pill"?
An action that will seriously hurt a company if it acquired by another.
insurance
An agreement in which an individual pays a company to protect him or her from property loss or damage or financial loss.
Annual Fee
An amount that credit card companies can charge for the use of a credit card.
Credit
An arrangement to receive cash, goods, or services now and pay for them in the future.
current asset
An asset listed on the balance sheet with less than a 12-month life, or that is readily convertible into cash to be used to satisfy current liabilities. Examples of current assets are cash on hand, short-term investments, accounts receivable, and inventory.
fixed / non current asset
An asset that is not consumed or sold during the normal course of business, such as land, buildings, equipment, machinery, vehicles, leasehold improvements, and other such items.
command economy
An economic system in which the government makes all economic decisions.
Defined Benefit
An employer promises to pay an employee a certain amount per month after retirement based upon an employee's salary and length of service
operating expense
An expense incurred in carrying out an organization's day-to-day activities, but not directly associated with production. Operating expenses include such things as payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortization and depreciation, rent, repairs, and taxes.
What does ownership of a GNMA pass-through certificate represent?
An undivided interest in a pool of residential mortgages
APR and DPR
Annual and Daily periodic rate on credit cards DPR=APR/365
Anomalies
Anomalies are strategies to show EMH is wrong, becuz in EMH, E(r) is determined by systematic risk, which can be measured by CAPM, FF's model. However anomalies strategies obtain alpha existed.
What are T-STRIPS?
Any T-Note/T-Bond where a BD has stripped the interest and principal payments to sell separately as zero-coupons
asset
Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property.
Asset
Anything of value that a business owns, such as cash, equipment, or a building.
Assets
Anything of value that is owned by the firm e.g cash, inventory, machines ( current asset: likely to be used up or converted into cash within one business cycle)
End-of-Life Cash Flows
At the end of a project (CFn) -Reclamation Expenditures -projects may involve the sale of assets or the incursion of expenses (plus or minus is always NET of taxes -NWC recovery -a cessation of sales causes a decrease in A/R, Inventory, & A/P. This is always a net source of cash
ARR (equation)
Average annual profit/average investment X100
Informal advice
CMA can provide advice in relation to future mergers where genuine issue as to whether there are competition concerns
where appropriate to accept UILs
CMA must be confident that the competition concerns identified will be resolved by means of the UILs offered without the need for further investigation. UILs are therefore appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut, and those remedies are effective and capable of ready implementation.
Name two requirements that must be followed with CMO-related retail communication.
CMOs may not be compared to other investments (like CDs), and educational material must be offered
cost of preferred stock (1 component)
COPS (rp) is the ratio of the preferred stock dividend to the firm's net proceeds from the sale of preferred stock 1. flotation costs Dp= dividend Np= market price - flotation cost rp = Dp / Np -preferred stock gives preferred stockholders the right to receive their stated dividends before the firm can distribute any earnings to common stockholders -dividends may be stated as a dollar amount -sometimes preferred stock dividends are stated as an annual percentage rate, which represents the percentage of the stock's par, or face, value that equals the annual dividend
ARR
Calculates an average percentage return on investment using financial accounting principles
Options
Call: Right to buy Put:Right to sell premium: price for option itself
factor portfolio
Can also be called a tracking portfolio. A well diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of zero on any other factor.
CAPM
Capital Asset pricing model Explain why the price of financial assets are different
CAL VS. CML
Capital allocation line: the combination of rf and risky assets Capital market line: the special case of CAL; the combination of rf and optimal portfolio(market portflio) ( tangency point)
Cash Flow From Assets (CFFA) consists of
Cash Flow From Assets (CFFA) = Operating Cash Flow - Net Capital Spending - Changes in NWC
ordinary shares / common stock
Company shares that usually pay a dividend and have voting rights.
Comparative ratio analysis (against standards)
Comparing business performance against standard industry benchmarks gives financial managers of what the industry regards as best practice.
Comparative ratio analysis (over different time periods)
Comparing business performance to a business's past performance at similar times to identify trends.
Comparative ratio analysis (with similar businesses)
Comparing business performance to a similar business or against competitors' performance gives financial managers of how the business is performing in the context of the market.
EMH Information:
Competition assures that prices reflect information. Information-gathering is motivated by desire for higher investment returns.
"Indifference curve"
Connect all points have same utility on based on a mean-variance space
Name some of the advantages of buying convertible bonds.
Consistent interest payments, appreciation if stock rises, downside protection if stock falls (since it's still a bond).
Inventories (control of current assets)
Control of this current asset generally seeks to minimise levels because inventory ties up cash and incurs costs such as storage costs and the potential for theft.
Cash (control of current assets)
Control of this current asset is critical for business success as it ensures that the business can pay its debts, repay loans and pay accounts in the short term, and that the business survives in the long term.
Receivables (control of current assets)
Control of this current asset is important as it requires collecting sums of money due to a business from customers to whom it has supplied goods or services. This means converting them to cash at the time that they fall due.
Loans (control of current liabilities)
Control of this current liability can be undertaken by investigating and monitoring costs for establishment of loans, interest rates and ongoing charges. Control of loans involves investigating alternative sources of funds from different banks and financial institutions in an effort to minimise these costs.
Overdrafts (control of current liabilities)
Control of this current liability can be undertaken by monitoring and reviewing bank charges as charges vary depending on the type of overdraft.
Payables (control of current liabilities)
Control of this current liability is possible by trying to manipulate the timing of payments by delaying payments as late as possible to avoid having to borrow money.
Financial Manager
Decided what investements the firm should make and how they should be paid for.
reserves
Definition: Funds or material set aside or saved for future use. Example: VW needs to have a high amount of reserves because of the Dieselgate
crowd sourcing/funding
Definition: The amount and value of products or material a company has available for sale or use at the beginning (opening stock) or at the end (closing stock) of an accounting period. Example: This year's opening stock was last year's closing stock.
pre-paid expenses
Definition: The amount and value of products or material a company has available for sale or use at the beginning (opening stock) or at the end (closing stock) of an accounting period. Example: This year's opening stock was last year's closing stock.
share capital
Definition: The amount and value of products or material a company has available for sale or use at the beginning (opening stock) or at the end (closing stock) of an accounting period. Example: This year's opening stock was last year's closing stock.
stock (inventory)
Definition: The amount and value of products or material a company has available for sale or use at the beginning (opening stock) or at the end (closing stock) of an accounting period. Example: This year's opening stock was last year's closing stock.
revenue reserves
Definition: The portion of a business' profits retained by the company for investment in future growth, and are not redistributed to the shareholders through regular or special dividends. Example: P&G retained 70% of their profit in the company, to have enough money for R&D.
external liabilities
Definition: The total amount of debts owed to external investors (no shareholders), e.g., banks. Example: After delivery, the company signed a note payable, which is an external liability, to the supplier.
current liabilities
Definition: All liabilities which have to paid due the next year, for example unpaid taxes or dividends. Example: The current liabilities of Vodafone are 20 million $, which is 30% of the total liabilities.
Current Ratio
Demonstrates ability to pay back short-term liabilities.
Prospectus
Describes the issue and the prospects of the company.
Statement of Retained Earnings
Details the movement in owners equity over a period of time. Includes ; Net profit/loss, share capital, dividends and changes in accounting policy
Paypack Period
Determins how quickly the beenfits will repay tha inital investment.
IRR
Determins the rate of yeilded by a project
NPV
Difference between the present value of cash inflows and present values of cash outflows.
Production Costs
Direct labour + direct materials + overheads
EMH&Portfolio Man
Diversification Tax Risk level Capital gain and interest gain
Dominance argument and No arbitrage argument
Dominance argument(CAPM): All investors will gradually change a small amount in their portfolio to the underpriced assets until the assets is fairly priced No arbitrage argument(APT) A few investors will invest large amount right away so the asset is priced directly
Preferred stock
Fixed dividends and priority over common, Tax treatment(Tax lower)
Three types of financial assets
Fixed income Equity derivatives
Exchange rates (global financial management)
Fluctuations in these rates create risks for global business. Depreciation and appreciations will impact on both import and export levels and the payments made to overseas businesses or financial intermediaries.
yield
For a savings account, the percentage of interest earned annually. For a stock, the annual dividend divided by the share price.
General Obligation (GO) bonds are backed by the issuer's ________________________ and their ability to levy _______.
General Obligation (GO) bonds are backed by the issuer's full faith and credit and their ability to levy taxes.
Name some of the different types of Direct Participation Programs (DPPs).
General partnerships, limited partnerships, joint ventures, Subchapter S corporations
Net Present Value Rule
Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.
total sales
Gesamtumsatz
Gifts exceeding $_____ are considered excessive.
Gifts exceeding $100 are considered excessive.
2. Tradability
How tradable are the targeted resources that may be available externally?
4. Integration
How well can you integrate the targeted firm, should you determine you need to acquire the resource partner?
Macroeconomic factors (IP, EI, UI, CG, GB)
IP: industrial production EI: expected inflation UI: unexpected inflation CG: excess return corporate bond over government bond
Laissez-Faire
Idea that government should play as small a role as possible in economic affairs.
How can a company use a merger to acquire replacement assets more cheaply?
If a company owns those assets and is selling at a discount, buying the firm may present an opportunity to gain those assets below replacement cost.
share subscription
If a company raise new share capital, the public or investors are able to buy shares of the company.
EMH&Resource Allocate
If not, big more money small no money not good
Activity Ratios are (list)
Inventory Turnover, Fixed Asset Turnover, Total Asset Turnover, Accounts Receivable Turnover, Average Payment Period,
Operating Cycle
Inventory turnover + Recievables Collection period
Inventory Turnover Period
Inventory/ Cost of sales X 365
Firm commitment
Investment bank purchases securities from the company and resells them to the public
Underwriting
Investment banks help the firm issue and market new securities
Primary market
Investors buy securities directly from company issuing them
Secondary market
Investors trade securities among themselves, and company don't participate in the transaction
Common Errors
Invoices are paid twice, no payment of sale of product, loss of goods undetected.
Risk Takers
Is highly attracted to potentially high returns. Prepared to take risks to achieve them
Operating Risk
Is the risk associated with the mix of VC and FC. Indicated the sensitivity of operating earnings to change in unit sales
Captial Employeed
Is the sum of shareholders Equity and debt liabilities. Total Assets - Current Liabilities
Risk
Is the variability of possible returns. -several possible outcomes -Enough past experiences to predict the outcome: = probability x impacf
The Principle Budget Factor
Is what drives the whole Budget. e.g Sales or volune
Equity
Is what the business owes to its owners. It represents the amount of capital that remains in the business after its assets are used to pay off outstanding liabilities
Corporate Bonds
Issued by private firms Semi-annual interest payments Subject to larger default risk than government securities Callable , Convertible
A duration good thing?
It depends, if duration is greater, then more sensitive to the bond price will change to interest rate. Duration is just a statistics, and good or bad depends on your risk preferrence
Why is interest expense not subtracted when calculating project cash flow?
It is already accounted for in the discount rate (WACC)
Profitability (financial ratio analysis)
Measured by the return on equity ratio
liabilities
Money that a company will have to pay to someone else - bills, taxes, debts, interest and mortgage payments etc.
seed / start-up capital
Money used for the initial investment in a project or startup company.
If a client's goal is preservation of principal, what fund would be most appropriate?
Money-market fund
Money-market securities have a maturity of __________________.
Money-market securities have a maturity of one year or less.
multifactor model
Most commonly use macroeconomic factors such as GDP growth, inflation, or consumer confidence, along with fundamental factors such as earnings, earnings growth, firm size, and research expenditure.
How is a company valued used the market P/E mutliple approach?
Multiply its average net income from the pro forma statements by the company's P/E. This is the market value of the firm.
What is a Bond Anticipation Note (BAN)?
Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond
What is a Tax Anticipation Note (TAN)?
Municipal note issued in anticipation of future real estate taxes
What is a Grant Anticipation Note (GAN)?
Municipal note issued in anticipation of receiving government funding in the form of a grant
What is a Construction Loan Note (CLN)?
Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing
What is a Revenue Anticipation Note (RAN)?
Municipal note that will eventually be paid from future federal or state subsidies
What are some examples of tax-free money-market instruments?
Municipal notes and tax-exempt commercial paper
net income before/after tax
Net income (before tax) is a company's total earnings (or profit); net income is calculated by taking revenues and subtracting the costs of doing business such as depreciation, interest and other expenses. Net income after tax is net income minus taxes.
Net Profit Margin
Net profit / total revenue X100
Generally, if a ratio is called the profit margin, the reference is usually to the _______________.
Net profit margin
May an RR in the research area be supervised by the investment banking department?
No
Is correspondence subject to principal approval?
No, but it must be reviewed by the firm.
May firms allow for the free flow of information between their research department and investment banking department?
No, these two departments must be separated to avoid conflicts of interest.
Is an official statement or preliminary official statement considered retail communication?
No. However, a summary or abstract of an official statement is considered retail communication.
Do all outside activities of an RR require notification to an employer?
No. Notification is only required for employment activities, not hobbies.
Is a REIT a form of direct participation program (DPP)?
No. Unlike DPPs, REITs do not pass through losses.
Productivity
Number of inputs to make an output
How to calculate COGS
OPENING STOCK + PURCHASES - CLOSING STOCK
Profit Conscious
Object is for managers to maximising the extent to which the organisations achieves its long-term objective.
Budget Constrained
Objective is for managers to ensure that a budget is achieved.
Investment policy statement
Objectives: return requirements, risk tolerance; constraints: time horizon, liquidity, taxes, laws and regulations, unique circumstances and preferences
Inventory Flow
Opening Balance + Additions = Withdrawals - Closing balance
Cost of Sales
Opening stock + production costs - closing stock
Cash Cycle
Operating Profit - Payables Payments Period
What are the four sources synergies arise from?
Operating economies, financial economies, differential efficiency, and increased power due to reduced competition.
Cash outflows (examples)
Payments to suppliers (raw materials/finished goods), interest on loans, operating expenses (wages/salaries, raw materials/finished goods), drawings, purchase of assets and loan repayments.
retirement
Permanent withdrawal from the workforce
What is the longest duration for a warrant?
Perpetual
creditor / accounts payable
Person or organisation to whom money is owed (for goods or services supplied , or as repayment for a loan.
dependents
Persons who depend on someone else for their livelihood. Most often these are minor children and a spouse, but they can be adult siblings, adult children, and elderly parents.
Equity =
Preferred Stock + Common Stock + Paid in capital in excess of par on common stock + Retained Earnings
Passive bond strategies
Premise: Assume market prices are correct, market is efficient 1. Indexing: attempt to mimic market performance and market index 2. (Multiple period immunizations): prefer short-term investment, to minimize the interest impact to bond price
Common Sized Balance Sheet
Prepared by dividing each line item by total assets
Common Sized Income Statements
Prepared by dividing each line item by total sales
Risk Averters
Prepared to forego the possibility of high returns if this means the possibility of low returns are avoided
Discounted Rate
Present Value of 1 = (1+r)~n
undistributed profit
Profit which has not (yet) been distributed as dividends to shareholders. Example: The shareholders are very mad, because the company didn't distribute their profits as dividends.
retained profits
Profits generated by a company that are not distributed to stockholders (shareholders) as dividends but are either reinvested in the business or kept as a reserve for specific objectives (such as to pay off a debt or purchase a capital asset).
Local general obligation bonds are backed by what type of tax?
Property tax (e.g., school district bonds)
Leverage Ratio
Proportion of the firms liabilities that is financed by debt claims. A company that uses more equity than debt has a low leverage ratio
Mortgage-Backed Securities (pass-through)
Proportional ownership of mortgage pool or specified obligation secured by pool met specific standards of credit worthiness
Pros and Cons of HFT
Pros: 1. HFT can improve liquidity and price discovery 2. HFT can transfer wealth from retail investors to institutions(distributional effect) 3. Only played a minor role in flash crash Cons: 1. Increasing excess volatility to cause flash crash 2. Exploit retail investors and increasing fragmentation of financial market
Pros and Cons of DLTs
Pros: 1. Reduce cost of consumers/investors 2. Reduce back office cost then increase collateral squeezed margins Cons: Too many uncertain factors 1. Internet security 2. Lack of IT governance framework 3. The ability of technology to scale 4. The impact is unclear 5. Standardization across markets (cause new rules of game)
Pros and Cons for institutionalization of markets
Pros: Diversification, professional manager, Economics of scale(cost reduction), Better monitoring of firm because of block holding Cons: Agency problem, Herd behavior, additional cost(marketing)
Individual stock VS. portfolio stocks
Pros: Portfolio stocks can measure beta precisely Cons: throw away a lot of inform; Loss of stastical power
Inflation-Protected Treasury Bonds (TIPS)
Provide inflation protection
Fundamentals
Refers to the company's financial condition. Key factors are sales and earnings going up by around 10%, and total debt being < or = last year's total debt.
Net working capital
Refers to the difference between current assets and current liabilities. It represents those funds that are needed for the day-to-day operations of a business to produce profits and provide cash for short-term liquidity.
Working capital
Refers to the funds available for the short-term financial commitments of a business.
Cash flow
Refers to the movement of cash in and out of a business over a period of time.
Interdependence
Refers to the mutual dependence that the key functions have on one another. They key functions work best when they overlap and employees work towards common goals. Each function area depends on the support of the others if it is to perform at capacity.
instalments
Regular (usually monthly) part payments of debts.
What regulation protects the non-public personal information of customers?
Regulation S-P
Regulation S-P requires clients be provided with a ______________ detailing how BDs handle personal client information.
Regulation S-P requires clients be provided with a Privacy Notice detailing how BDs handle personal client information.
SEC, FTC, and Doj
Regulators that discipline firms with inappropriate corporate governance practices with formal and informal investigations, lawsuits and settlements
Required Reserves
Reserves that a bank is legally required to hold, based on its checking account deposits
Common stock
Residual claim with limited liability
Financial resources
Resources in a business that have a monetary or money value.
Retail communication generally requires __________ ____________.
Retail communication requires principal preapproval.
Profitability Ratios are (list)
Return on Equity, Return on Assets, Gross Profit Margin, Operating Profit Margin, Net Profit Margin
Operating Profit
Revenue - Cost of sales - general admin expenses
Profit
Revenue - cost of sales- non manufacturing costs
Assets Turnover(equation)
Revenue / Total Assets
Revenue bonds are backed by ___________________ generated by ________________________.
Revenue bonds are backed by specific revenue (user fees) generated by a project or facility.
Recurring Cash Flows
Revenues -less CoGS -less Op ex -less depreciation - revenue * MACRS % Equals Pre-tax profit -less taxes Equals after-tax profit - plus depreciation Equals Cash flow
gross profit
Revenues minus the cost of goods sold.
Sharp ratio of CAL
Reward to volatility ratio
Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.
Rights are a short-term instrument allowing holders to buy additional shares at a discounted price.
inflation
Rise in prices that effectively makes cash have less buying power over time.
Alt-A
Risk between prime and sub prime
How to calculate GROSS PROFIT
SALES - COGS
Accounts receivable turnover ratio
SALES ÷ ACCOUNTS RECEIVABLE
preference shares / preferred stock
Shares, often with no voting rights, which receive their dividend before all other shares and are repaid first at face value if the company goes into liquidation.
Treasury Bills
Short-term debt of the U.S. government
Repos and Reverses
Short-term loans backed by government securities
Fed Funds
Short-term loans between banks
Cost Volume Analysis
Shows how costs and revenues change in response to volume.
Annual Percentage Rate (APR)
Shows how much credit costs you on a yearly basis, expressed as a percentage.
History Data Method
Simply reorganize actual historical return from worst to best, then assume the return will repeat itself (based on the frequency of return bucket) Cons: 1. data mining bias 2. if historical data is more, distribution is fat
What role does ego play in mergers?
Since managers perceive more prestige in running a larger firm, they may seek to acquire firms in part because they like the idea of a status boost.
Another Example
Slide 15 class 28 figure it out
Flexible Budget (equation)
Standard price X actual units sold
Informationally efficient capital market
Stock price reflect all information
Describe cumulative preferred stock.
Stock that requires payment of any missing dividends before common stockholders are paid
small-cap stock
Stocks of largely unknown companies with smaller market capitalization, or dollar value of total stock ownership. Small-cap stocks generally have a market capitalization between $300 million and $2 billion
large-cap stock
Stocks of very large companies, such as Walmart, General Electric, and IBM, that have a market capitalization of between $10 billion and $200 billion.
Microeconomics
Studies and analyzes the market behavior of individual consumers and firms in an attempt to understand the decision making process of households and firms. Concerned with the interaction between buyers and sellers, and is focused on supply and demand.
Economics
Study of how societies decide what to produce, how to produce it, and how to distribute what they produce, Inexact
savings account balance
The FICO score doesn't measure it
Financial Statements and Cash Flows
The Income Statement The Balance Sheet Cash Flow from Assets
counterfactual
The OFT considers the effect of the merger compared with the most competitive counterfactual providing always that it considers that situation to be a realistic prospect. - Phase 1: In practice, the OFT generally adopts the prevailing conditions of competition (or the pre-merger situation in the case of completed mergers) as the counterfactual against which to assess the impact of the merger Phase 2: CC may examine several possible scenarios
Which tranche has the most predictable cash flow and maturity?
The PAC (Planned Amortization Class) tranche
The Telephone Consumer Protection Act (TCPA), allows calls from ________ to ________ local time of the called party.
The Telephone Consumer Protection Act (TCPA), allows calls from 8:00 a.m. to 9:00 p.m. local time of the called party
What is the advantage existing stockholders receive through rights offerings?
The ability to maintain their percentage of ownership and buy additional shares at a discount.
What happens in a hostile merger?
The acquiring company will make a tender offer and ask the stockholders of the target firm to tender their shares in exchange for the offered price.
Accrual
The act or process of accumulation; and increase
Investment Return
The additional income earned from saving or investing money, often expressed as an annual percentage of the amount invested.
policy
The agreement or contract between an individual and an insurance company.
Markup
The amount added to the cost of an item to cover expenses and ensure a profit.
Return on investment (ROI)
The amount earned as a result of an investment.
The Liquidation Value of Wealth
The amount of cash that would remian if all assets were sold now and used to pay off Liabilities.
Net profit
The amount remaining after expenses are deducted from sales revenue.
deductible
The amount you pay when you file an insurance claim
rate of return
The annual amount of money an investment makes, given as a percentage. For example, a $100 investment that is worth $112 the next year had a 12% return.
The annuity with growth dependent on the performance of securities in a separate account is called a __________ annuity.
The annuity with growth dependent on the performance of securities in a separate account is called a variable annuity.
Limitation of portfolio theory
The assumption does not hold in real life: 1. Stock return is not normal (fat tail, skewness) 2. Transaction cost and short selling constraints 3. Risk-free asset have SD 4. Investors may not equally access the inform. Limitation with mean-variance optimization 1. Stock return and SD vary over time 2. Correlation varies over time i.e. past inform. doesn't mean future 3. Optimal portfolio often concentrated (influence the price) 4. Optimal portfolio may not be implementable (extreme position, short selling)
"Margin call"?
The broker requires investors to add money/securities to the margin account, otherwise, the broker will payoff securities to restore the percentage margin to an acceptable level
What kind of relationship between a company's market cap and it's book value indicates good value on that company's stock?
The closer a company's market cap is to its book value, the better value you are getting on that stock. Avoid stocks where the market cap is twice as high as the book value. That stock is over-priced.
investment portfolio
The collection of investments you personally hold, including stocks, bonds, money market accounts, and savings accounts.
Define Merger?
The combination of two or more films to form a single firm.
premium
The cost of an insurance policy.
production costs
The costs related to making or acquiring goods and services that directly generates revenue for a company.
Break-even point
The point at which the money from product sales equals the costs of making and distributing the product.
capital reserves
The portion of business profits by capital retained and added to equity.
dividend
The portion of corporate profits paid out to stockholders
Financial Accounting
The preparation of financial information in forms of reports.
depreciation
The process of spreading the value of an asset over its useful life.
amortisation
The process of spreading the value of an intangible asset (intellectual property: patents, trademarks, copyrights, etc.) over its useful life.
return on investment (ROI)
The profit from an activity for a particular period compared with the amount invested in it.
Why will a project with a positive NPV (if it turns out, in fact, to be positive) accomplish a financial manager's corporate objective?
The project will increase shareholder wealth
Reverse Payment agreement
The purchase of securities with the agreement to sell them at a higher price at a specific future date.
According to the TCPA, what information must telephone solicitors provide to clients?
Their name, firm name, a telephone number, or address where they can be contacted, and the purpose of the call
10% Value at risk= 25M
There are 10% probability the portfolio will suffer 25M loss or more
Liabilities
These appear on the balance sheet and are claims by people other than owners against the assets (items of debt), and represent what is owed by the business. Current liabilities must be repaid within 12 months, whereas non-current liabilities must be met some time after the next 12 months.
Non-current liabilities
These appear on the balance sheet and are claims by people other than owners against the assets (items of debt), and represent what is owed by the business. These debt obligations must be met some time after the next 12 months. For example, debentures, unsecured notes and mortgages.
Current liabilities
These appear on the balance sheet and are claims by people other than owners against the assets (items of debt), and represent what is owed by the business. They must be repaid within 12 months. They usually include overdraft and accounts payable.
Non-current assets
These appear on the balance sheet and are items of value owned by the business that are not expected to be turned into cash within 12 months. For example, machinery, vehicles and fixtures.
Current assets
These appear on the balance sheet and are items of value owned by the business that can be turned into cash within 12 months. They usually include cash and accounts receivable.
Assets
These appear on the balance sheet and are items of value owned by the business. Current assets can be turned into cash within 12 months, whereas non-current assets are not expected to be turned into cash within 12 months.
Loans
These are borrowings from banks and other financial institutions and the business must make interest payments and repayments regularly.
Project budgets
These are budgets that relate to capital expenditure and research and development.
Financial budgets
These are budgets that relate to financial data of a business and include the budgeted income statement, balance sheet and cash flows.
Operating budgets
These are budgets that relate to the main activities of a business and may include budgets relating to sales, production, raw materials, direct labour, expenses and cost of goods sold.
Fixed costs (cost controls)
These are costs that are not dependent on the level of operating activity in a business. Fixed costs do not change when the level of activity changes — they must be paid regardless of what happens in the business. Examples of fixed costs are salaries, depreciation, insurance and lease.
Variable costs (cost controls)
These are costs that change proportionately with the level of operating activity in a business. For example, materials and labour.
Finance expenses
These are costs/expenses associated with borrowing money from outside the business and to minimise risk (eg interest on debt and insurance payments).
Administrative expenses
These are costs/expenses that relate to the general running of the business (eg stationery).
Selling expenses
These are expenses that relate to the process of selling the good or service (eg advertising).
Derivatives
These are simple financial instruments that may be used to lessen the exporting risks associated with currency fluctuations.
Debt finance
These are sources of finance that relate to the short-term and long-term borrowing from external sources by a business.
Payables
These are sums of money owed by the business to other businesses from whom it has purchased goods and services. Payables are recorded as accounts payable.
External sources of finance
These are the funds provided by sources outside the business, including banks, other financial institutions, government, suppliers or financial intermediaries.
Indirect costs
These are those costs that are shared by more than one product.
Direct costs
These are those costs that can be allocated to a particular product. Direct costs are also called variable costs.
Life insurance companies
These financial institutions are also non-bank financial intermediaries who provide cover and a lump sum payment in the event of death. Policy holders pay regular premiums and the insurer guarantees to pay the designated beneficiary a sum of money upon death of the insured person. Life insurance companies provide both equity and loans to the corporate sector through the insurance premiums they receive, which provide funds for investment.
Finance companies
These financial institutions are non-bank financial intermediaries that specialise in smaller commercial finance. They provide mainly short-term and medium-term loans to businesses through consumer hire-purchase loans, personal loans and secured loans. They are also the major providers of lease finance to businesses. Some finance companies specialise in factoring or cash flow financing.
Banks
These financial institutions are the major operators in financial markets and are the most important source of funds for businesses. Banks receive savings as deposits from individuals, businesses and governments, and, in turn, make investments and loans to borrowers.
Superannuation funds
These financial institutions provide funds to the corporate sector through investment of funds received from superannuation contributions. Superannuation funds are able to invest in long-term securities as company shares, government and company debt because of the long-term nature of their funds.
Investment banks
These financial institutions provide services in both borrowing and lending, primarily to the business sector. They provide a wide variety of different types of loans for businesses and can therefore customise loans to suit the business's specific needs.
Financial institutions
These institutions perform a range of financial services for businesses, especially giving loans. Examples include, banks, investment banks and superannuation funds.
Why do managers tout diversification as a good reason for doing a merger?
They contend that diversification helps to stabilize a firm's earnings and thus benefits its owners.
Owners' equity
This appears on the balance sheet and is the funds contributed by the owner(s) and represents the net worth of the business. It is calculated by subtracting total liabilities from total assets. Includes retained earnings and the money the owners initially put into the business (capital).
Cost of goods sold (COGS)
This appears on the income statement and is a term that refers to all the costs to the business directly associated with goods that have been sold to customers. This includes costs such as purchase and production costs.
Gross profit
This appears on the income statement and is a term that refers to that part of a business's profit that represents operating income (mainly from sales) minus cost of goods sold.
Net profit
This appears on the income statement and is a term that refers to the difference between the gross profit and expenses.
Sales
This appears on the income statement and is a term that refers to the total amount of money from selling products to customers over a period of time in the form of cash sales or credit sales.
Ordinary shares
This external source of equity finance is most commonly traded in Australia. Investors (individuals) pay funds in return for a share of ownership in a publicly listed company. This means they get voting rights according to the number of shares that they have and uncertain rewards in the form of dividends.
Profitability management
This financial management strategy involves controlling both the business's costs and its revenue.
Cash flow management
This financial management strategy is undertaken to improve financial performance and involves making sure that the business has sufficient cash to meet obligations at any point in time.
Working capital (liquidity) management
This financial management strategy is undertaken to improve the financial performance of the business and is concerned with monitoring and controlling how cash flows within the business with the aim to avoid cash flow shortages or excess surpluses. It involves determining the best mix of current assets and current liabilities needed to achieve the objectives of the business.
Profitability
This financial objective is the ability of a business to maximise its profits. It is determined by the level of revenues less total costs. Increasing profitability involves either increasing revenues and/or reducing costs.
Efficiency
This financial objective is the ability of a business to minimise its costs and manage its assets so that maximum profit is achieved with the lowest possible level of assets.
Growth
This financial objective is the ability of the business to increase its size in the longer term and depends on its ability to develop and use its asset structure to increase sales, profits and market share. It can expand by acquiring more resources, merging with another business and acquiring another business.
Liquidity
This financial objective is the extent to which a business can meet its financial commitments in the short-term (less than 12 months). A business must have sufficient cash flow to meet its financial obligations or be able to convert current assets into cash quickly; for example, by selling inventory, to finance current liabilities.
Solvency
This financial objective is the extent to which the business can meet its financial commitments in the longer term (more than 12 months). Solvency is particularly important to the owners, shareholders and creditors of a business because it is an indication of the risks to their investment.
Global economic outlook (global market influences)
This global market influence refers specifically to the projected changes to the level of economic growth throughout the world and how this affects the revenues of Australian businesses that trade goods internationally.
Interest rates (global market influences)
This global market influence refers to the cost of borrowing money and how global market forces can affect domestic interest rates, impacting on the ability of firms to borrow.
Availability of funds (global market influences)
This global market influence refers to the ease with which a business can access funds (for borrowing) on the international financial markets.
Australian Securities and Investment Commission (ASIC)
This independent government body regulates and monitors activities by companies to ensure that corporate laws like the Corporations Act 2011 are followed.
Global market influences
This influence refers to how business decisions are not affected by domestic factors, but also by the events in global financial markets.
Influence of government
This influences financial management as it regulates what companies can and can't do and imposes penalties for non compliance. The primary regulatory bodies are the Australian Securities and Investment Commission (ASIC) and the Australian Taxation Office (ATO) because of company taxation.
Expense minimisation (cost controls)
This is a cost control measure that involves the process of reducing financial, administrative and selling costs in an effort to boost profitability.
Prospectus
This is a document accompanying an IPO that contains relevant details about the company so that investors can make informed decisions.
Australian Securities Exchange (ASX)
This is a financial institution that is the primary stock exchange group in Australia where shares are bought and sold by investors.
Cash flow statement
This is a financial statement that indicates the movement of cash receipts and cash payments resulting from transactions over a period of time. A cash flow statement is usually prepared from the income statement and balance sheet, as these summarise the transactions of the business. Only cash transactions are included in the cash flow statement.
Income statement
This is a financial statement that is a summary of the income earned and the expenses incurred over a period of trading. It helps users of information see exactly how much money has come into the business as revenue, how much has gone out as expenditure and how much has been derived as profit.
Balance sheet
This is a financial statement that represents a business's financial position at a particular point in time. It shows assets, liabilities and owners' equity and indicates what the business owns, what it owes and how its assets are financed.
Option contract
This is a form of derivative used by exporters that gives the buyer (option holder) the right, but not the obligation, to buy or sell foreign currency at some time in the future.
Forward exchange contract
This is a form of derivative used by exporters that is a contract to exchange one currency for another currency at an agreed exchange rate on a future date, usually after a period of 30, 90 or 180 days.
Swap contract
This is a form of derivative used by exporters that is an agreement to exchange currency in the spot market with an agreement to reverse the transaction in the future.
Commercial bills
This is a form of short term borrowing that are primarily short-term loans issued by financial institutions, for larger amounts (usually over $100 000) for a period of generally between 30 to 180 days.
Overdraft
This is a form of short term borrowing where the bank allows a business or individual to overdraw their account up to an agreed limit and for a specified time, to help overcome a temporary cash shortfall.
Hedging
This is a global management strategy that is implemented to minimise the risk of currency fluctuations.
Leasing
This is a long-term source of borrowing for businesses. It involves the payment of money for the use of equipment (such as machinery) that is owned by another party. It is a form of financing because the business does not have to outlay the entire sum initially.
Financial risk (planning and implementing)
This is a part of planning and implementing that involves assessing the risk to a business of being able to cover its financial obligations.
Financial needs (planning and implementing)
This is a part of planning and implementing that involves identifying the financial actions that need to be taken place to achieve specific outcomes. These are determined by the overall business plan.
Financial controls (planning and implementing)
This is a part of planning and implementing where policies and procedures are implemented to ensure that the plans of a business will be achieved in the most efficient way.
Budgets (planning and implementing)
This is a part of planning and implementing where the business forecasts the expected costs and revenues of business activities over a set of time. Financial outcomes of business activities, such as credit and debt levels and cash flow are considered.
Record systems (planning and implementing)
This is a part of planning and implementing whereby mechanisms are employed by a business to ensure that data are recorded and the information provided by record systems is accurate, reliable, efficient and accessible. The data is used for the production of cash flow statements, income statements and balance sheets.
Planning and implementing
This is a process of financial management where the business must plan and implement a clear system of financial management whereby outflows of money (costs) are matched by inflows (revenues) to avoid problems in the short and long term.
Revenue controls - marketing objectives
This is a profitability management strategy that is about controlling revenue through the marketing function to improve profitability. Marketing strategies and objectives should lead to an increase in sales and hence an increase in revenue.
Factoring (source of finance)
This is a short-term source of borrowing for a business that enables a business to raise funds immediately by selling accounts receivable at a discount to a firm that specialises in collecting accounts receivable. This is an important source of short-term finance because the business will receive up to 90 per cent of the amount of receivables within 48 hours of submitting its invoices to the company that has bought the accounts receivables.
Internal sources of finance
This is a source of finance that comes from within the business itself and do not require the business to turn to outside individuals or institutions. It can come from either the business's owners (equity or capital) or from the outcomes of business activities (retained profits).
Company taxation
This is a tax payable by all Australian businesses that have been incorporated — that is, all private and public companies. This tax affects profitability because it is a flat rate of 30 per cent of net profit. Company tax is paid before profits are distributed to shareholders as dividends.
Unsecured note
This is a type of long term debt finance from individuals or institutions investors for a set period of time. Unsecured notes are not secured against the business's assets and therefore present the most risk to the investors in the note (the lender) and for this reason the business pays a higher interest rate.
Debentures
This is a type of long term debt finance from investors that is issued by a company for a fixed rate of interest and for a fixed period of time. Interest is paid whether or not the business is making a profit.
Why are straddles useful?
This is a useful strategy for investors who believe a stock will move a lot in price but are uncertain about the direction of the move. The trader views the stock as more volatile than the market.
Cost controls
This is about controlling the costs that the business spends in running a business, such as production costs, marketing costs and administrative expenses.
Equity
This is an external source of funds that refers to the finance raised by a company through inviting new owners.
Owners' equity
This is an internal source of finance and are the funds contributed by owners or partners to establish and build the business.
Secondary market (ASX)
This is another securities market for a business managed by the ASX in their role as a financial institution, where it enables the sale of pre-owned or second-hand shares that are traded between investors who may be individuals, businesses, governments or financial institutions.
What is the industry policy regarding an RR who sets up an outside business that involves paid public speaking?
This is considered employment and the RR must receive employer approval.
Primary market (ASX)
This is important securities market for a business managed by the ASX in their role as a financial institution, where it enables a company to raise new capital through the issue of shares and through the receipt of proceeds from the sale of securities.
Gearing
This is related to the financial objective of solvency and is the proportion of debt (external finance) and the proportion of equity (internal finance) that is used to finance the activities of a business. Gearing ratios determine the firm's solvency.
Receivables
This is sums of money due to a business from customers to whom it has supplied goods or services. They are recorded as accounts receivable.
Inventories
This is the amount of raw materials, work-in-progress and finished goods that a business has on hand at any particular point in time.
Monitoring and controlling
This is the financial management process of measuring and comparing the actual performance of the business with against planned performance and taking corrective action as needed.
Retained profits (retained earnings)
This is the most common source of internal finance and are the funds that come from the profits of the business that are not distributed, but are kept in the business as a cheap and accessible source of finance for future activities.
Influences on financial management
This is the part of the syllabus that focuses on the decisions that financial management must make that are affected by a range of different factors, including the nature and availability of different sources of finance, government decisions, and global market conditions.
Accounting equation
This is the what forms the basis of the accounting process, shows the relationship between assets, liabilities and owners' equity.
Initial Public Offering (IPO)
This is when a company issues shares to the public for the first time and is required to issue a prospectus.
Capitalising expenses (limitation of financial reports)
This limitation to financial reports refers to an accounting method where a business records an expense as an asset on the balance sheet rather than as an expense on the income statement. This does not accurately represent the true financial condition of the business as it understates the expenses and overstates the profits as well as the assets of the business. Examples of capitalising expenses include research and development.
Normalised earnings (limitation of financial reports)
This limitation to financial reports refers to earnings being adjusted in financial reports to take into account changes in the economic and remove one-off factors.
Timing issues (limitation of financial reports)
This limitation to financial reports refers to how businesses can exploit timing issues in financial statements to give a misleading impression of the financial position of the business. For example, when an accountant records revenue, they should also record at the same time any expenses that were directly related to that revenue.
Debt repayments (limitation of financial reports)
This limitation to financial reports refers to how the issue of debt repayments can limit the usefulness of financial reports as it may not be clear when the repayments have to be made or how long has had or has been recovering debt.
Valuing assets (limitation of financial reports)
This limitation to financial reports refers to the difficulty in placing a value on some assets, which creates areas that businesses can exploit to create a misleading impression of their financial position.
Notes to the financial statements (limitation of financial reports)
This limitation to financial reports refers to the notes that are attached to the financial statements to help readers better understand the financial report. Information in these notes can be subjective and therefore potentially misleading.
Payment in advance (method of international payment)
This method of international payment allows the exporter to receive payment and then arrange for the goods to be sent.
Bill of exchange (method of international payment)
This method of international payment is a document drawn up by the exporter demanding payment from the importer at a specified time.
Letter of credit (method of international payment)
This method of international payment is a document that a buyer can request from their bank that guarantees the payment of goods will be transferred to the seller. The letter of credit is issued by the importer's bank to the exporter promising to pay them a specified amount once certain conditions have been met.
Clean payment (method of international payment)
This method of international payment occurs when the exporter ships the goods directly to the importer before payment is received.
Limitation of financial reports
This process of financial management refers to the need to be cautious when analysing financial reports because they may not give a completely accurate assessment of a business's financial position.
Ethical issues related to financial reports
This process of financial management refers to the ways in which businesses make decisions about methods used to compile financial reports, for example, how a business values it's assets and the extent to which the business complies with the legal aspects of financial regulations.
Dividends
This refers to a distribution of a company's profits (either yearly or half-yearly) to shareholders and is calculated as a number of cents per share. They do not have to be paid if the business is not making any money and the business decides on the amount that is paid. This does not have to legally be repaid.
Rights issues (ordinary shares)
This refers to a source of equity finance to raise funds after the IPO. Existing shareholders are offered the opportunity to purchase more shares in the company at a special price.
Placements
This refers to a source of equity finance where additional shares are offered at a discount to their current trading price to special institutions or investors. This discount is intended to persuade specific investors to invest in the company.
Share purchase plan
This refers to a source of equity finance where businesses give existing shareholders the opportunity to buy new shares at a reduced cost, for example without brokerage fees.
Private equity
This refers to a source of equity finance where money is invested in a (private) company not listed on the Australian Securities Exchange (ASX). The aim of the private company (like the publicly listed companies who sell ordinary shares) is to raise capital to finance future expansion/investment of the business.
New issues (ordinary shares)
This refers to a source of equity finance where new shares are sold for the first time on a public market e.g. the Australian Securities Exchange via an initial public offering (IPO).
Audit
This refers to an independent check of the accuracy of financial records and accounting procedures.
Expenses
This refers to costs of the business and are incurred in the process of acquiring or manufacturing a good or service to sell and the costs (direct and indirect) associated with managing all aspects of the sales of that good or service.
Business purpose
This refers to the activity or reason for which a business needs to acquire finance.
Investing activities (cash flow statement)
This refers to the cash inflows and outflows relating to purchase and sale of non-current assets and investments. These assets and investments are used to generate income for the business. Examples include the selling of an old motor vehicle, purchasing new plant and equipment or purchasing property.
Financing activities (cash flow statement)
This refers to the cash inflows and outflows relating to the borrowing activities of the business. Borrowing inflows can relate to equity (issue of shares or capital contribution from owner) or debt (loans from financial institutions). Cash outflows relate to the repayments of debt and cash drawings of the owner or payments of dividends to shareholders.
Operating activities (cash flow statement)
This refers to the cash inflows and outflows relating to the main activity of the business — that is, the provision of goods and services. Income from sales (cash and credit) make up the main operating inflow plus dividends and interest received. Outflows consist of payments to suppliers, employees and other operating expenses (insurance, rent, advertising, etc.).
Conflict between short-term and long-term objectives
This refers to the conflicts between these objectives. Improving one financial objective makes other financial objectives worse. For example, maintaining higher levels of liquidity means sacrificing potential opportunities for growth and profitability.
Sources of finance
This refers to the different ways that businesses can obtain money to perform business activities such as paying suppliers and buying equipment. They can be classified as internal sources (eg retained profits) and external sources (eg debt and equity).
Debt finance (long term borrowing)
This refers to the external sources of finance a business has borrowed for periods longer than 12 months. It can be secured or unsecured, and interest rates are usually variable. It is used to finance real estate, plant (factory/office) and equipment. Types includes mortgages and debentures.
Debt finance (short term borrowing)
This refers to the external sources of finance that a business is expected to repay within one year. It is provided by financial institutions through overdrafts, commercial bills and bank loans. This type of borrowing is used to finance temporary shortages in cash flow or finance for working capital.
Terms of finance
This refers to the legally binding conditions that determine the basis on which the business obtains finance (such as a loan agreement).
Financial management
This refers to the planning and monitoring of a business's financial resources to enable the business to achieve its financial objectives.
Matching principle
This refers to the principle that when a business identifies and plans to meet its financial objectives, it is necessary to match the terms of finance with its business purpose. This means that short-term finance should be used to purchase short-term assets and long-term finance should be used for long-term assets.
Strategic role of financial management
This refers to the role finance managers have in making funds available for business activities and ensuring that day-to-day transactions and operations run smoothly from a financial perspective.
Mortgage
This type of long term debt finance is a loan secured by the property of the borrower (business). Mortgage loans are used to finance property purchases, such as new premises, a factory or office. They are repaid with interest, usually through regular repayments, over an agreed period of time.
Leasing (working capital management strategy)
This working capital management strategy involves purchasing the rights to use an asset (eg machinery) by making periodic payments, for a period of time, rather than purchasing it outright.
Sale and lease back (working capital management strategy)
This working capital management strategy involves the selling of an owned asset to a lessor and leasing the asset back through fixed payments for a specified number of years.
Simulation Method
To develop a model for future stock price return, and running multiple hypothesis trials through the model(typically based on normal distribution)
What is the goal of discounted cash flow analysis?
To figure out what is the present value of cash flow forecasts. The forecasts come from pro forma statements.
P/E ratio
Translates to how many dollars you must invest in a stock to receive $1 of earnings from that stock.It's A good way to calculate value and avoid over paying for a Stock. The P/E should be 10 to 20 for large-cap or income stocks. For growth stocks, a P/E no greater than 30 to 40 is preferable. Try to compare the P/Es of companies in similar industries.
Financial Accounting
Treats money as a means of measuring econoic perormance. Involves past information and is required by law. Is for external users mainly.
T/F rising rates, which result in decreasing bond values, are of greatest concern
True
T/F: Internal development of new products is ofter perceived as a high risk activity
True
True or False: The Wilshire Associates Index is considered the broadest of the broad-based indexes.
True
True or False: Warrants are generally attached to the delivery of another security (stock or bond).
True
Is a $300 political contribution from a joint checking account a violation if the check is only signed by the MFP?
Yes. To avoid a violation, the check must be signed by both owners.
Yield-based options are ______-based.
Yield-based options are yield-based (rather than based on price).
Security markets ought to satisfy
a "no arbitrage condition"
Checking account
a bank account from which you can take money by writing checks
Savings account
a bank account in which people keep money to save
Debit Card
a bank card that automatically deducts the amount of a purchase from the checking account of the cardholder
Rolling Budget
a budget that is continuously updated/Periodically adjusted and ammended so that the next 12 months of operation are always budgeted.
agency
a business or organization established to provide a particular service, typically one that involves organizing transactions between two other parties.
describe a capital market
a capital market is for securities with maturities of more than one year, the primary provider of funds in the capital market are households.
Stock
a certificate documenting the shareholder's ownership in the corporation
Bond
a certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money
Owners of bonds would prefer
a debt ratio of 40 percent to a debt ratio of 60 percent a times‑interest‑earned of 5.1 to a times-interest-earned of 3.9
corporate bond
a debt security issued by a corporation and sold to investors, an interest is offered to this
Time value of money
a dollar invested today is more valuable than a dollar tomorrow.
money market
a financal relationship created between suppliers and demanders of SHORT TERM FUNDS.
Bank
a financial institution that accepts deposits and channels the money into lending activities
"clawback" clause
a firm must disclose mechanism for recovering executive compensation during the past 3 years if it is later discovered that such compensation was paid in error
Equity
a firm represents an ownership share in the corp. equity holders are not promised any particular payment. receive dividends. The value of equity is tied directly to the success of the firm and its real assets.
alliance management capability
a firms ability to effectively manage three alliance-related tasks concurrently. (1) partner selection and alliance formation (2) alliance design and governance (3) Post-formation alliance management
Preferred stock generally pays
a fixed dividend
managerial hubris
a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary
An exit fee has the same impact of
a load fee of the same percentage
corporate bond
a long-term debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms
golden parachutes
a lump sum severance package that is paid to top management who would be terminated following a takeover
Credit Union
a nonprofit financial institution that is owned by its members and organized for their benefit
trustee
a paid individual, corporation, or commercial bank trust department that acts as the third party to a bond indenture and can take specified actions on behalf of the bondholders if the terms of the indenture are violated
With holding
a portion of an employee's wages deducted for taxes
greenmail
a post-offer takeover defense where the target buy back, at a premium, the shares already bough/held by the potential acquirer or bidder
Standard Costing
a predetermined, budgeted or expected unit cost; the amount that something should cost over a period of time.
security interest
a provision in the bond indenture that identifies any collateral pledged against the bond and how it is to be maintained. The protection of bond collateral is crucial to guarantee the safety of a bond issue
Creditors would prefer
a quick ratio of 1.2 to a quick ratio of 0.8 days sales outstanding of 35 to a days sales outstanding of 46
Collateral
a security pledged for the repayment of a loan
derivative
a security that gets its value from the values of another asset
Commercial paper is generally
a short-term unsecured debt of a corporation
for bonds with a longer maturity,
a small change in interest rates will lead to a substantial change in the bond's value
NPV (net present value)
a sophisticated capital budgeting technique; found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital NPV = present value of cash inflows - initial investment if the NPV is GREATER than $0, ACCEPT the project if the NPV is LESS than $0, reject the project if the NPV is GREATER than $0, the firm will earn a return GREATER than its cost of capital. Such action should increase the market value of the firm, and therefore the wealth of its owners by an amount equal to the NPV a robust valuation method value-creation measurement correct mathematics rank projects
Index funds tend to track
a specific measure of the market
restructuring:
a strategy through which a firm changes its set of businesses or finc. structure
Cash Flow Report
a summary of cash received and disbursed showing the beginning and ending amounts.
market economy
a system based on private ownership, free trade, and competition
s corp
a taxed reporting entity that allows certain corporations with 100 or fewer stockholders to chose to be taxed as a partnership.
Prestige pricing
a technique in which higher-than-average prices are used to suggest status and prestige to the customer.
Price skimming
a technique of charging high prices on a new product to recover costs, then dropped when the product is no longer unique.
Note
a written agreement to repay borrowed money
One means to adjust for risk is
a. standardize funds' returns by their beta coefficients
cost of common stock: new equity
aka cost of a new issue of common stock is the cost of common stock, net of underpricing and associated flotation costs new shares are underpriced if the stock is sold at a price below its current market price, P0 rn = new equity or new issued common stock D1= dividend Nn = net proceeds from sale of common stock (sale of common stock - underpricing&flotation) -will be less than the current market price - therefore, the cost of new issues will always be greater than the cost of existing issues, rs, which is equal to the cost of retained earnings - the cost of new common stock is normally greater than any other long-term financing cost g = growth rate rn = D1/Nn + g
factor beta
also known as factor loading or factor sensitivities
debtor (GB) / accounts receivable (US)
amounts of money owed by the customer for goods or services purchased on credit
futures contract
an asset at a specified delivery or maturity date for an agreed-upon price, called the futures price, to be paid at contract maturity. Long: Take buy Short: Make sell
corporation
an entity created by law (fake person)
overdraft
an extension of credit from a lending institution when an account reaches zero (bank allows customers to borrow a set amount of money).
Debit (left)
an increase to an asset or a decrease to a liability
financial institutions
an intermediary that channels the savings of individuals, businesses and gov. into loans or investments.
Variable expenses
an occasional cost of doing business that varies in amount from month to month.
perpetuity
annuity that goes on forever P= CF/I
agency cost
any benefit a manager derives from a company that does not increase shareholder wealth and is not part of the manager's agreed upon compensation
Asset
anything of value that is owned
Real-Option Perspectives
approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time
organized markets
are auction markets driven by buy and sell orders have a physical location
Rates of return reported by mutual funds
are based on change in net asset value and the fund's distributions
Exchange traded funds
are bought and sold in secondary markets
over the counter markets
are done on-line are dealer markets and are quote driven
Financial markets
are forums in which suppliers of funds and demanders of funds can transact business directly
Cash dividends
are paid from earnings reduce the firm's assets
mutually exclusive projects
are projects that compete with one another, so that the acceptance of one eliminates from further consideration all other projects that serve a similar function implies they are in a capital rationing situation and will use a ranking approach to determine which project to invest in
independent projects
are projects whose cash flows are unrelated to (or independent of) one another; the acceptance of one does not eliminate the others from further consideration implies they are in an unlimited funds situation and that they will used a accept-reject approach to determine what projects to invest in
federal reserve board of governors are
are seven members appointed by the president of the United States and confirmed by the senate
issued shares
are shares of common stock that have been put into circulation issued shares = outstanding shares + treasury stock
Financial services
area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments.
what is the formation if a partnership
articals of a partnership, strongly recomended easy to form hard to liquidate or transfer ownership
what is the formation of a corporation
articals of incorp incorp. according to laws of state more expensive but easier transfer of ownership
information ratio
assess the manager's ability to generate excess return relative to benchmark
Book value
assets - liabilities= net worth
constant growth valuation (Gordon model)
assumes that the value of a share of stocks equals the present value of all future dividends (assumed to grow at a constant rate) that it is expected to provide over an infinite time horizon P0 = D1 / rs - g does not look at risk; it uses market price, P0, as a reflection of the expected risk- returned preference of investors in the marketplace can easily be adjusted for flotation costs to find the cost of new common stock theoretically equivalent to CAPM
equity alliance
at least one partner takes partial ownership in the other partner
conversion feature
benefits bondholders allowing them to change each bond into a stated number of shares of common stock if feature benefits the holder, it makes the bond more valuable
call feature
benefits issues (bond seller), allowing them to repurchase bonds at a stated call price prior to maturity -the call price is the stated price at which a bond may be repurchased, by use of a call feature, prior to maturity - the call premium is the amount by which a bond's call price exceeds its par value -if feature benefits the issuer, it makes the bond less valuable (increases interest rate)
Hostile tender offer
bidder circumvents the targets management and BODs, reach out directly to target shareholders, and offer to purchase their shares
litigation
bidder files lawsuits accusing the target board of improper conduct
A political contribution made from a joint checking account may exceed $250 if signed by ___________.
both owners
sole proprietorship
business owned by one person and opporated for his or her own profit.
share repurchase or buy back plans
buy shares from specific shareholders most likely to sell them to a hostile bidder or from an open market just like other buyers
futures contract
calls for delivery of an asset (or in some cases, its cash values) at a specified delivery or maturity date for an agreed-upon price, called the future price, to be paid at contract maturity.
credit terms
can either be standard or negotiated that control the monthly and total credit amount, the payback time, discount for early payment and the late payment penalty.
general of corp
can hire professionals managment team, can offer attractive retirement plans , greater government regulation
fund raising partnership
can raise more funds then sole p
a $60,000 outlay for a new machine with usable life of 15 years is called
capital expenditure because it is expected to produce benefits over a period of time greater than 1 year
Treasury Notes and Treasury Bonds are traded in which markets
capital markets T notes have maturities from 1-10 years T bonds have maturities from 10-30 years
the key inputs to the valuation process include
cash flow, cash flow timing, risk
current assets are those that can be converted to
cash in less than a year
finance revenues
cash received
vertical acquisitions bring market power because
controlling additional parts of the value chain brings market power
COGS
cost of goods sold
agency cost
costs arise from agency problems that are birne by shareholders and represent a loss of sharehollders wealth
Period Cost
costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued
bonds: PMT
coupon payment annual PMT = coupon rate * FV divide by 2 for semi-annual PMTS
Dodd-Frank Act (2010)
created executive compensation committees, proxy access, say on golden parachutes, and broker discretionary voting
Securities Act (1933 and 1934)
created the SEC and charged it with writing and enforcing securities regulations
advantages of hostile takeovers
creates an element of surprise which affords time to the target management to develop takeover defenses, and friendly takeovers may leak to the public which causes prices of the target to increase
who are the investors of bonds
creditors
raise antitrust challenge
cry to regulators about market power and monopoly pricing
M1 =
currency travelers checks demand deposits other checkable depossits
current ratio
current assets/current liabilities
INVESTMENT
current commitment of money or other resources in the expectation of reaping future benefits.
Margin of Saftey (equation)
current output- breakeven output
stock price is determined by the
current value of all future cash flows
The Farma-French (FF) Three Factor Model
currently the dominant approach to specifying factors as candidates for relevant sources of systematic risk uses firm characteristics that seem on empirical grounds to proxy for exposure to systematic risk.
Money market
debt securities that are short term, highly marketable, and generally of very low risk.
stockholder return < expected return
decrease in share price
bondholders protect themselves by
demanding protection in the form of long, written agreements that constrain managers, like demanding no dividends to shareholders unless the firm meets certain cash flow requirements
capital asset pricing model (CAPM)
describes the relationship between the required return, rs, and the nondiversifiable risk of the firm as measured by the beta coefficient rs = Rf + b * (rm -Rf) Rf = risk free rate of return rm = market return; return on the market portfolio of assets differs from the constant-growth valuation in that it directly considers the firm's risk, as reflected by beta, in determining the required return or cost of common stock equity does not provide simple adjustment mechanism to flotation costs because it does not include market price, P0, a variable needed to make the adjustment theoretically equivalent to constant growth valuation
if return on equity is declining, you can use dupont analysis to
determine which of profit margin total asset turnover leverage is the problem
Public Company Accounting Oversight Board (PCAOB)
develop, maintain, and enforce standards that guide auditors in monitoring and certifying corporate financial reports
conversion premium
dif. between market price of the convertible bond and its conversion value
Mutual funds __________ realized capital gains and income
distribute
common stockholders expect to earn a return by receiving
dividends
return of stock
dividends ( not tax deductible)
share of profit corp
dividends and growth in stock value
Financial Assets
do not contribute directly to the productive capacity of the economy
issue new class of shares with superior voting rights
each share given 10 votes, concentrate in hands of management uncommon in the US
taxation of mutual funds
each years net gains must be distributed by dec. 31. may receive a long term capital gain distribution from the fund even though they personally held the fund for less than a year. holding period determined by funds holding period for the securities. net capital losses are not distributed; gain=sales price -adj.tax basis
EBITDA
earnings before interest and taxes depreciation and amortisation
Profits are generally measured in
earnings per share
Price elasticity
economic concept that deals with how much demand varies according to changes in price
bondholders do not -
elect company leaders, set managers salaries, or otherwise directly affect manager's welfare.
risk free rate
embodies the real rate of interest (R*) plus the expected inflation premium (IP)
corporate venture capital (CVC)
equity investments by established firms in entrepreneurial ventures. CVC falls under the broader rubric of equity alliances
two most important functions of markets
establish equitable prices provide liquidity
agency relationship
exists whenever a principal hires an agent to act on his or her behalf
1989 flat yield curve
expectation of moderating inflation offsets the requirement for a higher rate to compensate for tying up cash -rates dont vary much at different maturities
Black-Scholes pricing formula
formula to value an option that uses the stock price, risk free interest rate, the time to expiration, and the standard deviation of the stock return
Taxation of future contrats
gains and losses 60% long term 40% short term
"say on pay" provision
gave shareholders of listed firms the right to vote on executive compensation to curb widespread abuses
corporate restructuring activities
going private through management buyout, sale of crown jewels, fat-man acquisition defense, liquidation
What caused the financial crisis
gov encourage the erosion of conventional lending standards lowering of interest rates - high house - high yield on bonds SEC Rule changes lead to highly leveraged lending doubling of debt/income ratios
FDIC-insured
government agency that insures depositors' money. Banks and savings and loan companies that are FDIC-insured pay a percentage of their deposits to the FDIC to pay for the insurance.
Capital Market Line
graph of the relationship between expected return and standard deviation risk in the CAPM context
board of directors
group elected by the firms stockholders and typically responsible for approving strategic goals and plans setting general policy guiding corptarte afairs and approving major expendatures
stakeholders
groups such as employees customers suppliers creditors owners and others who have a direct economic link to the firm.
Closed‑end investment companies
have a fixed capital structure may sell for a premium over net asset value
Closed-end investment companies with beta
have less systematic risk than the market
Mutual funds with beta coefficients greater than 1.0
have more systematic risk than the market
risk common stock
high
Which of the following is a reason for selecting a mutual fund?
high tax efficiency
passive management
hold highly diversified portfolios without spending effort or other resources attempting to improve investment performance through security analysis
Bear hug (arm twisting)
hostile takeover tactic where the bidder, without warning, sends an acquisition proposal to the CEO and BOD of the target and demands a rapid decision. the price includes a substantial premium
Finance In a corporate context
how firms raise money from investors, how firms invest money in an attempt to earn a profit and how they decide whether to reinvest profits in the business or distribute them back to investors.
An American investor may take a position in foreign equities by acquiring
iShares specializing in foreign country indexes, international mutual funds country closed-end investment companies
liquidity ratios as a whole help reveal
if a firm can meet its short-term and credit obligations
break-up or termination fees
if the target breaks the no shop agreement, forgo the merger and pursue another strategy.
Profit maximization
ignores the time value of money, and risk and return.
Duration
immunization reduces the interest rate risk and reinvestment rate risk to a bond portfolio; estimates the percentage price fluctuation w.r.t. 1% in int. rates; inversely related to YTM and the size coupon rates.
why do firms enter strategic alliances?
in order to: -strengthen competitive position, -enter new markets, hedge new markets, -access critical complementary assets, -learn new capabilities
managerial cost benefit analysis
in preparation of financing, statements recognized revenues at the time of the sale, and recognized expenses when they are incurred
intrinsic value
in the money call options because it gives the payoff that could be obtained by immediate exercise.
Debt
includes all borrowing incurred by a firm, including bonds, and is repaid according to a fixed schedule of payments
The quick ratio
includes cash and cash equivalents
as market interest rates decrease, prices of bonds
increase
stockholder return > expected return
increase in share price
wealth maximization goal leads to very rational directive to managers:
increase the firm's cash flows, get those cash flows to the firm as fast as possible, do this while minimizing risk
wealth maximization goal leads to a very rational directive
increase the firm's cash flows, get those cash flows back to the firm as soon as possible, and do this while minimizing risk
Credit (Right)
increase to liability, decrease to an asset
wealth maximization goal puts emphasis on
increasing the stock price, rather than on profits or earnings per share
General info if sole p
independent, owner (jack of all trades), difficult to give employees long term oppertunities
indifference curve
indifference curves do not measure satisfaction; they indicate relative rankings of satisfaction; increasing slope of the curve shows that investors require ever increasing amounts of additional returns for the same additional risks; indifference curves show a trade-off between risk and return
Finance in a personal context
individuals' decisions about how much of their earnings they spend, how much they save, and how they invest their savings.
Inadequate evaluation of the target is due to
ineffective due diligence
crown jewels lock-ups
initial bidder has the option to buy important/ strategic assets from the seller if the seller chooses to sell to another party
steps of a friendly takeover
initial search for potential acquisition candidates, screening process, contact the selected target company, initiate negotiations, develop integration plans, close the deal, implement post closing integration, conduct post closing evaluation
When is the control model of corporate governance used?
institutional and block shareholders with significant ownership and control discipline bad managers, shares are not listed/traded rare illiquid, equity ownership's heavily concentrated, etc
investment banks
institutions that assist companies in raising capital advise firms on major transactions such as managers or financial restructuring and engage in trading and market making activities.
commercial banks
institutions that provide savers with a secure place to invest their funds and that offer loans to individuals and business borrowers.
four popular nondepositories are
insurance companies brokerage firms investment companies pension funds
major non-depository institutions are
insurance companies brokerage firms investment companies pension funds
Federal Savings and Loan Insurance Corporations
insure S&L deposits like FDIC does
the discount rate is the
interest rate charged by the Fed for loans to banks
return of bonds
interest tax deductible
taxation of bonds
interests taxed in the year earned at ordinary rates for federal income tax purposes; exempt from state and local income taxes; sale proceeds: capital gain or loss for federal and state
Eurocurrancy market
international equivelancy of the domestic markett.
dollar cost average
invest fixed amt of dollars, reduce the effects of market price fluctuation,
A style portfolio manager offers two things
investment skill combined with the style
A real estate investment trust
invests in mortgages or rental properties
risk arbitrage
involves attempts to profit by forecasting information releases. such as a merger or buyout
purchasing put
is a bearish strategy, the puts provide profits when the stock price decreases
writing a put
is a bullish strategy
purchasing call
is a bullish strategy, the calls provide profits when the stock price increases
Sole proprietorship
is a business owned by one person and operated for his or her own profit, the owner has unlimited liability.
Partnership
is a business owned by two or more people and operated for profit.
spread
is a combination of two or more call options (or two or more puts) on the same stock with differing exercise prices (money spread) or times of maturity (time spread).
direct debit
is a financial transaction in which one person withdraws funds from another person's bank account.
American Depository Receipts (ADR)
is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange
cost of capital
is a weighted average of the cost of funds which reflects the interrelationship of financing decisions
constant-growth model (Gordon model)
is a widely cited dividend valuation approach that assumes that dividends will grow at a constant rate, but a rate that is less than the required return P0 = D1/ rs - g
Corporation
is an entity created by law. Corporations have the legal powers of an individual in that it can sue and be sued, make and be party to contracts, and acquire property in its own name. A business entity that legally exists and functions separate and apart from its owners. Owners' liability is limited to the amount of their investment in the firm. Owners hold common stock certificates, and ownership can be transferred by selling the certificates, and ownership can be transferred by selling certificates.
collar
is an option strategy that brackets the value of the portfolio between two bounds.
operating expenditure
is an outlay of funds by the firm resulting in benefits received within 1 year
capital expenditure
is an outlay of funds by the firm that is expected to produce benefits over a period of time GREATER than 1 year
life span of partnership
is disolved when partner dies
straddle
is established by buying a call and a put on a stock with the same exercise price and the same expiration date.
futures long position
is held by the trader who commits to purchasing the asset on the delivery date.
A hedge fund
is open to a select number of individual investors
IRR
is the discount rate that equates the NPV of an investment opportunity with $0 (because the present value of cash inflows equals the initial investment); it is the rate of return that the firm will earn if it invests in the project and receives the given cash inflows complex calculation, fraught with math problems -visually and intuitively preferred -no value measurement -can rank projects if math correctly assessed
accept-reject approach
is the evaluation of capital expenditure proposals to determine whether they meet the firm's minimum acceptance criterion implies projects are independent and will unlimited funds approach to determine what projects to invest in
capital rationing
is the financial situation in which a firm has only a fixed number of dollars available for capital expenditures, and numerous projects compete for these dollars implies projects are mutually exclusive and that they will use a ranking approach to decide what projects to invest in
unlimited funds
is the financial situation in which a firm is able to accept all independent projects that provide an acceptable return implies that projects are independent and will use the accept-reject to determine what projects to invest in
coupon interest rate
is the percentage of a bond's par value that will be paid annually, typically in 2 equal semiannual payments, as interest
capital budgeting
is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing shareholder wealth
covered call
is the purchase of a share of stock with a simultaneous sale of a call option on that stock.
The return on equity
is the ratio of net income to equity
Public Offering (IPO) of securities
is the sale of either bonds or stocks to general
bond's maturity date
is the time at which a bond becomes due and the principal must be repaid
yield
is the total amount of profit, a company earns through a former investment.
Open‑end investment companies
issue new stock whenever investors buy shares
outstanding shares
issued shares of common stock held by investors, this includes private and public investors authorized shares become outstanding shares when they are issued or sold to investors
treasury stock
issued shares of common stock held by the firm; often these shares have been repurchased by the firm
repurchase agreement (repos)
issuer agrees to repurchase at a higher price than the selling price
take on debt
issues bonds, now has significant interest payments takes the money from bonds and pays to shareholders in form of special dividend hope it is so unappealing that bidder will no longer want the company considered a last resort
If a closed-end investment company sells for a discount,
its price is less than the net asset value
external factors that affect corporate governance
legislation and legal system, regulators, institutional activists, corporate control market,
bond holders do what and why?
lend companies money and are paid interest until the debt matures and they're paid back the principal
liquidity preference theory
lenders prefer to make short-term loans while borrowers prefer to borrow by taking out long-term loans; long term borrowers must therefore pay a higher rate to compensate lenders for making a longer term loan
Assets
liabilities + Net Worth
what is the formation of a sole p.
licenses easy and inexpensive
fund rasing sole p
limited
Advantages of the corporate form of business include
limited liability for stockholders
what is the life span of bonds
limited life, has a maturity date at which time the face value must be repaid
life of corp
ling life of firm
downward sloping yield curve reflects
lower expected future rates of interest
Pre‑emptive rights permit stockholders to
maintain the proportionate share of ownership
banks are allowed to
make and service loans operate trust departments handle gold
Financial managers
make financial management decisions to maximize stock holder's wealth
goal of the white night takeover defense
make the target less attractive to other bidders
Sarbanes Oxley act
makes CFO responsible for all financial statements, and forces them to sign off on them
Passive strategy
makes no attempt to outsmart the market. A passive strategy aims only at establishing a well-diversified portfolio of securities without attempting to find under- or overvalued stocks.
leveraged recapitalizations
makes the target less attractive due to high leverage and financial risk
agency problems
managers , who are hired as agents of the shareholders, may pursue their own interests instead
management entrenchment theory
managers want to increase their longevity of the firm and hostile takeover promotes good governance by installing good managers and removing bad ones
diversification
many assets are held in the portfolio so that exposure to any particular asset is limited.
market discount bond
market discount amt not includable in income until sale or disposition and then treated as interest income;
Exchange-traded funds
mimic an index of securities
advantages of takeovers
minimize agency costs and transfer control to those who can more efficiently manage the assets
Credit
money that a bank or business will allow a person to use and then pay back in the future
income
money that is earned from work, investments, business, etc.
As the debt ratio increases
more assets are debt financed the ratio of debt to equity increases
in general of partnership
more avalible management skills, shared responsibility
the low-coupon bond will have
much more volatility (changing rapidly and unpredictably) with respect to changes in the discount rate because lower coupon bonds are proportionately more dependent on the face amount to be received at maturity
Institutional activists
mutual funds, pension funds, hedge funds, and private equity firms can acquire control of firms to discipline underperforming managers or influence policies of firms in which they have invested
basic rights of preferred stock
non-voting, right to receive dividends in any one year before common stockholders, right to receive money before common stockholders in event of bankruptcy
bonds with a shorter maturity will
not be as sensitive to interest rate changes
payment of stock
not required
share capital
number of shares x nominal (par) value (=market capitalisation)
OSHA laws
occupational safety hazard agency laws.
pre-offer takeover defenses
occur before the target receives an offer and include poison pills, shark repellants, and golden parachutes
post-offer takeover defenses
occurs after the target receives an offer and includes white knight and white squire, pac-man, and fat-man
The debt ratio is a measure
of financial leverage of the use of debt financing
convertible bonds
offer the investor a fixed interest rate and the opportunity for equity capital appreciation; when the value of the underlying common stock increases, the price of the convertible bond will increase; most convertible bonds are not secured; at issurance, convertible bonds will typically have a lower YTM than the corporations non convertible unsecured debt.
How to solve the agency problem
offering stock options, and offer bonuses to management. so it is in their own interest to keep stockholder profit maximized
perfect correlation
on a slope graph, the plot of expected return versus standard deviation, any two well diversified portfolio will lie on the straight line (the CML)
non-systematic factor
on a slope graph, the scatter plots are close but not on the CML line.
Career opportunities in financial services include
personal financial planning, investments, corporate, banking, real estate, and insurance.
Which of the following is a consideration when selecting a mutual fund?
portfolio turnover 12b-1 fees unrealized losses in the fund's portfolio
well-diversified portfolio
portfolios with equal betas must have equal expected returns in market equilibrium, or arbitrage opportunities exist.
white knight
post-offer takeover defense where a target may find another more favorable firm (white knight) whose offer price and terms are better than those of the hostile bidder. if other bidders still pursue the takeover, white knight exercises the option and buys the majority of the stocks and sells them at a profit
agency problem
problems that arise when managers place personal goals ahead of the goals of the shareholders
proxy contests (fight)
process by which a dissident group of shareholders obtain the right to vote on behalf of other shareholders
The advantages offered by investment companies include
professional management portfolio diversification
proposal generation
proposals for new investment projects are made at all levels within a business organization and are reviewed by finance personnel
Purpose of corporate governance
protect the rights of shareholders, other stakeholders, and make managers (and BOD) accountable for their actions
explain the role of the security exchanges
provide liquidity for investors and help to create efficient markets. The forces of demand and supply are constantly working in the exchanges and help to create the most true price for a security.
currency options
provide payoffs that depend on the difference between the exercise price and the exchange rate at expiration.
build-borrow-or-buy framework
provides a conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual arrangement or strategic alliance (borrow), or acquire new sources, capabilities, and competencies (buy)
Investment bank
provides services such as raising financial capital by underwriting or acting as the client's agent in the issuance of securities.
covenants
provisions contained by bonds that are designed to protect the bondholders' interests most common restrictive covenants do the following 1. require a minimum level of liquidity, to ensure against loan default 2. prohibit the sale of accounts receivable to generate cash(selling receivables could cause a long-run cash shortage if proceeds were used to meet current obligations) 3. impose fixed-assets restrictions. The borrower must maintain a specified level of fixed assets to guarantee its ability to repay the bonds 4. Constrain subsequent borrowing. Additional long-term debt may be prohibited, or additional borrowing may be subordinated to the original loan. Subordination means that subsequent creditors agree to wait until all claims of senior debt are satisfied 5. limit the firm's annual cash dividend payments to a specified percentage or amount
Creeping takeover strategy
purchasing voting stocks in the target in relatively small increments until the bidder has gained effective control of the firm
Maxim $5 - asymmetric information
refers to the difference in the information set held by different participants in the financial marketplace, business participants must handle these differences
free float
refers to the number of outstanding shares that are available to the public for trade.
payment of bonds
required
YTM is also expressed as
required rate of return
Sarbanes- Oxley Act (2002)
requires greater corporate transparency and accuracy in financial statements
supermajority provision
requires shareholder vote, raise approval to 80%, not just majority approve
CEO ( Chief executive officer)
responsible for managing the firms day to day operations ad carying out the policies established by the board of directors.
sinking fund requirements
restrictive provision often included in a bond indenture, providing for the systematic retirement of bonds prior to their maturity
follow-up
results are monitored and actual costs and benefits are compared with those that were expected. Action may be required if actual outcomes differ from projected ones
When is the market model of corporate governance used?
retail or "small" shareholders sell their shares to discipline bad managers, capital markets are liquid, equity ownership is widely dispersed, etc
Earnings are
retained and/or distributed
dupont ratio determine
return on equity as the product of: profit margin total asset turnover leverage
cost of common stock
return required on the stock by investors in the marketplace 2 forms of common stock financing 1. retained earnings 2. new issues of common stock
operating profit
revenue - cogs - opex
employee benefits
reward other than salary provided by an employer
goal of share repurchase and buy back plans
reward shareholders, signal undervaluation, adjust capital structure, and defense against hostile takeovers
Stockholders generally have which of the following
right to share in the firm's earnings right to sell the stock
interest rising enrivonment
rising interest precedes recessionary periods; price declines; sell more volatile bonds and purchase less volatile bonds; call risk declines; swap long term bonds for short term
Functions of the BOD
safeguard interests of and oversee financial reports to shareholders, hire and fire CEO, set CEO compensation, set corporate strategy, and oversee management
white squire
same as white knight except with less (minority) ownership interests
finance
science and art of managing money.
Banks are not allowed to
sell insurance, own or manage real estate investments, run armored car services or travel agencies underwrite securities
sell crown jewels
sell off division or asset that target really wants to another company
primary markets
sell the security first, all subsequent trades are conducted on secondary markets
payment frequency of bonds
semiannually
good internal corporate governance practices
separation of CEO and chairman of the board, board dominated by independent members, size of BOD 10 members
Financial Accounting Standards Board (FASB)
sets and maintains accounting standards
Stocks
shares of ownership in a company
stocks
shares of ownership in a company
close end mutual funds sell
shares of stock to the public and use the proceeds from the sale to purchase other securities such as stocks and bonds
An option portfolio is worthless until
shares sells more than the exercise price of the call.
the problem with profit maximization it is
short sighted ignores risk ignores timing of cash flows
Money markets
short term transactions
marketable securities
short-term debt instruments such as us U.S treasury bill, commercial paper, and negotiable certificates of deposit issued by the gov. business and financial institution respectively.
Hedge funds follow investment strategies such as
shorting "overvalued" stocks while buying "undervalued" stocks
If mutual funds make investments in efficient financial markets, they
should not outperform the market consistently
Since closed-end investment companies acquire securities in efficient financial markets, they
should not outperform the market consistently
insolvency
situation where an entity cannot raise enough cash to meet its obligations, or to pay debts as they become due for payment company needs to sell off any assets to pay outstanding debts
learning races
situations in which both partners in a strategic alliance are motivated to form an alliance for learning, but the rate at which the firms learn may vary
What does the yeild curve look like if the Fed is going to increase interest rates?
slopes upward
purpose of takeover defenses
slow down hostile takeovers (gives management more time to develop defenses) or force the bidder to increase the offer price to the advantage of the target shareholders
Efficient Market Hypothesis
stock prices already reflect all of the available information favorable future performance leads to favorable current performance
zero-growth stock
stock that does not anticipate a dividend change assumes that the stock will pay the same dividend each year, year after year P0 = D1/rs the equation shows that with zero growth, the value of a share of stock would equal the present value of a perpetuity of D1 dollars discounted at a rate rs
financial assets
stocks and bonds sheet of papers do not contribute directly to the productive capacity of the economy. the means by which individuals in well-developed economies hold their claims on real assets. financial assets are claims to the income generated by real assets
Many exchange-traded funds limit their portfolios to
stocks included in an aggregate measure of stock prices
Blue Chip Stocks
stocks of large, well-established corporations with a solid record of profitability
investment asset
stocks, bonds, real estate, commodities
shark repellants
takeover defenses achieved by amending either the corporate charter or corporate by-laws which enables the target's BOD to retain control of the firm
pacman defense
target firm takes over bidding firm effective if there is only one bidder
interest payments on debt are
tax deductible
market premium bond
taxed at ordinary income as bond interest is paid but wait until disposal to recover the premium
Momentum factor
that the natural increase is not contributing to growth
A positive NPV indicates
that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs ( also in present dollars).
federal open market commitee
the 7 members of the board of governors plus 5 reps from the federal reserve banks.
Phase 1 decision
the CMA's test for reference (its 'duty to refer') will be met if the CMA has a reasonable belief, objectively justified by relevant facts, that there is a realistic prospect that the merger will lessen competition substantially.
Compounding
the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future
nominal rate of interest
the actual rate of interest charged by the supplier of funds and paid by the demander -differs from real rate of interest, r*, as a result of 2 factors 1. inflationary expectations reflected in an inflation premium (IP) 2. issuer and issue characteristics such as default risks and contractual provisions as reflected in a risk premium (RP)
Agency problem
the agent makes decisions that are not in the best interest of principals and, represent the conflict of interest between management and owners resulting in "agency costs"
earnings per share epa
the amount earned during the period on behalf of each outstanding share of common stock calculated by dividing the period's total earnings available for the firm's common stockholders by the number of shares of common stock outstanding.
take home pay
the amount of income left after taxes and other deductions are taken out
expenses
the amount of money that is needed to pay for or buy something
payback method
the amount of time required for a firm to recover its initial investment in a project, as calculated from cash inflows the length of the maximum acceptable period is determined by management -if the payback period is LESS than the maximum acceptable pay back period, ACCEPT the project - if the payback period is GREATER than the maximum acceptable payback period, REJECT the period simple internal go / no-go signal no value measurement
Finance
the art and science of managing money
Ratio Analysis
the assessment of a firm's financial condition using calculations and interpretations of financial ratios developed from the firm's financial statements
out of the money
the asset price is less than the exercise price.
active management
the attempt to improve performance either by identifying mis-priced securities or by timing the performance of broad asset class.
when YTM > coupon then
the bond trades at a discount
when YTM < coupon then
the bond trades at a premium
when YTM = coupon then
the bond trades at par RARE
interest rate risk
the chance that interest rates will change and thereby change the required return and bond value
The current ratio is unaffected by
the collection of an account receivable
unlimited liability
the condition of a sole proprietorship or partnerships gives creditor the right ot make a claim against the owners personal managment.
(bond) maturity
the date on which the life of a transaction ends. On that date is either has to be renewed or it will cease to exist. Example: They had to establish a new loan because the old one reached its maturity.
liquidity
the degree to which an asset can be bought or sold quickly in the market without affecting the asset's price.
Capital Gain
the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller
time value
the difference between the actual call price and the intrinsic value.
internal rate of return
the discount rate that equates the present value of the cash inflows with the initial investment
supply and demand
the driving force of economic markets; there must be both a source of a product and a need for it.
Arbitrage
the exploitation of security mispricing in such a way that risk-free profits can be earned.
Which of the following is not a consideration for investing in real estate investment trusts (REITs)?
the federal tax rate paid by the trust
secondary market
the financial market in which pre-owned securities (those that are not new issues) are traded.
primary market
the financial market in which securities are initially used the only market in which the user is directly involved in the transaction.
before-tax cost of debt
the financing associated with new funds through long-term borrowing -typically the funds are raised through the sale of corporate bonds -rate of return the firm must pay on new borrowing net proceeds: are the funds actually received by the firm from the sale of a security -Np = (bond price - flotation) *if flotation cost given as % then Np = bond price - (FC%*1000) flotation costs: are the total costs of issuing and selling a security. The include 2 components 1. underwriting costs- compensation earned by investment bankers for selling the security 2. administrative costs - issuer expenses such as legal, accounting, and printing
Inventory turnover may increase if
the firm lowers the prices of its goods
private placement
the firm sells new securities directly to an investor or a group of investors
Dividend policy depends on
the firm's earnings investment opportunities available to the firm
Which of the following has no impact on cash flow?
the firm's equity
Which of the following occurs when a 10 percent stock dividend is paid?
the firm's retained earnings decrease
Initial Public Offering (IPO)
the first time a company issues stock that may be bought by the general public
after-tax cost of debt
the interest payments paid to bondholders are tax deductible for the firm, so the interest expense on debt reduces the firm's taxable income, and therefore, the firm's tax liability -pretty much saying that this is the cost of debt because firms have to pay tax on bonds ri = rd * (1-T) T = government issued tax rate -typically, the cost of long-term debt for a given firm is less than the cost of preferred or common stock, partly because of the tax deductibility or interest
Real assets
the land, buildings, machines, and knowledge that can be used to produce goods and services
limited liability
the legal provision that limits stockholders liability for a corporation debts to the amount they initially invested in the firm by purchasing stock.
The cost of investing in a mutual fund includes
the loading charges commissions when the fund buys and sells securities management fees
Corporate takeover market
the market in which bidders or acquirers takeover or purchase the acquirer using various methods while targets employ tactics to resist the takeover
deal market
the market in which the buyer and seller are not brought together directly but instead have their orders executed by securities dealers that make markets in the given security
capitol market
the market that enables suppliers and demanders of long-term funds to make transactions LONG TERM
shareholder wealth is measured as
the number of shares held multiplied by the price per share
Stock dividends increase
the number of shares outstanding
Money
the official currency issued by a government or national bank
stock lock-ups
the option granted by a target to an initial bidder to purchase a target company's stocks before making a takeover and is meant to facilitate the negotiation process
stockholders
the owner of a corporation, whose ownership or wquity takes the form of common stock or less frequently prefered stock.
Interest Rate
the percentage of a sum of money charged for its use
Return on Investment
the percentage of the total cost of purchasing an investment and the profit made from selling that investment
BreakEven
the point at which the costs of producing a product equal the revenue made from selling the product
factors the bidder should consider in hostile takeovers
the premium to offer the target shareholders, BOD compensation, composition of target stock ownership, sentiment and investment horizon of shareholders, target bylaws, hold-up problem
investors, not the market makers, determine
the price of a security
Stock dividends cause
the price of a share of stock to fall
Which of the following occurs when a stock is split two‑for‑one?
the price of the stock decreases
Interest
the price paid for the use of borrowed money
insurance premiums should be
the probability of the incident X the cost of the incident + some margin of profit
The more related the acquired firm is to the acquiring firm, the greater
the probability that the acquisition will be successful
capital budgeting
the process of evaluating and selecting long-term investments that are consistent with the firm's goal of maximizing owner wealth
horizontal integration
the process of merging with a competitor at the same stage of the industry value chain
secularization
the process of pooling mortsges or other types of loans and then selling claims or secutiries against that pool in the secondary market
Debt, preferred stock, & common stock all determine
the prospective weightings of each components
open market operations are
the purchase and sale of government securities that affect both interest rates and the amount of reserves in the banking system
acquisition
the purchase or takeover of one company by another; can be friendly or unfriendly
common stock
the purset basic form of the corporate ownership.
ranking approach
the ranking of capital expenditure projects on the basis of some predetermined measure, such as the rate of return implies projects are mutually exclusive and are using capital rationing approach to determine what project to invest in
Marginal tax rate
the rate at which additional income is taxed
yield to maturity (YTM)
the rate of return that investors earn if they buy a bond at a specific price and hold it until maturity (assumes that the issuer makes all scheduled interest and principal payments as promised) the yield to maturity on a bond with a current price equal to its par value will always equal the coupon interest rate when the bond value differs from par, the YTM will differ from the coupon interest rate
Earnings per preferred share are
the ratio of earnings to number of preferred shares
term structure of interest rates
the relationship between the maturity and rate of return for bonds with similar levels of risk
If an investor's excess return is negative
the required return exceeded the realized return
shareholder interest theory
the resistance to a takeover is a good bargaining strategy to increase the purchase price to the benefit of the shareholders of the target
SMB (Small minus Big)
the return of a portfolio of small stocks in excess of the return on a portfolio of large stocks.
HML (High minus Low)
the return of a portfolio of stocks with a high book to market ratio in excess of the return on a portfolio of stocks with a low book to market ratio.
Price risk
the risk of occurs when a security's value drop below the price one paid to it
Private placement
the sale of a new security directly to an investor or group of investors.
cost of retained earnings
the same as the cost of an equivalent fully subscribed issue of additional common stock, which is equal to the cost of common stock equity rr = rs
broker market
the security exchange on which of the two sides of a transaction the buyer and the seller are brought together to trade securities
The procedure for the distribution of dividends does not include
the settlement date
preferred stock
the special form of ownership having a fixed periodic dividend that must be paid prior to payment of any dividends to common stockholders
Days sales outstanding (average collection period or receivables turnover) measures
the speed with which accounts receivable are collected
economy
the system by which goods and services are produced, sold, and bought in a country or region
Marginal Tax Rate
the tax that the individual pays on each extra (additional) dollar of income.
Average Tax Rate
the total tax paid divided by total taxable income.
in calculating cost of common stock
the use of the constant-growth valuation model is often preferred because the data required are more readily availableq
security analysis
the valuation of particular securities that might be included in the portfolio
basic common stock valuation equation
the value of a share of common stock is equal to the present value of all future cash flows (dividends) that it is expected to provide P0 = D1/ (1+rs)^1 P0 = value of common stock Dt = per-share dividend expected at the end of year t Rs= required return on common stock
in a hostile tender offer, minority shareholders are "frozen out of their position" because
they must agree to terms negotiated by the BOD and approved majority shareholders, they can't stop the merger, and they can't ask for a premium over and above what was paid to he majority shareholders
share issue
to offer shares on the stock market
Put-Call Parity Relationship
to relate the price of a put option to the price of the corresponding call. A violation of the parity indicates mispricing.
solvency ratio
total assets - external liabilities / total assets
Net Worth
total assets minus total liabilities
market capitalization
total value of a company's shares (par) value at a given moment
market capitalisation
total value of the firm
futures short position
trader commits to delivering the asset at contract maturity.
Which of the following should not have default risk?
treasury bills
executive share option plans (ESOP)
trusts that hold shares on behalf of the target and employees can buy shares on the open market or issue shares to employees/ management
flip-over pill
type of poison pill where the existing shareholders of the target can purchase shares of the combined firm after acquisition at a discounted price
liquidation
type of restructuring activity that includes liquidating the firm the pay off outstanding financial obligations distribute the residuals to shareholders as liquidating dividends
sale of crown jewels
type of restructuring activity that involves a sell or disposal of the asset which makes the target attractive to the bidder and uses the cash to develop other defenses
going private through management buyout
type of restructuring activity where the management team buys a bulk of the shares at a premium
Fundamental Analysis
uses economic and accounting information to predict stock prices
Technical Analysis
uses patterns in prices and volume to predict prices
par of common stock
usually small
conversion value
value of the bond if it were converted based on current market conditions; conversion ratio*market price of common stock
S&P 500
value-weighted
income common stock
variable
risk premium
varies with specific issuer and issue characteristics because the Treasury bond would represent the risk-free, long-term security, we can calculate the risk premium of the other securities by subtracting the risk-free rate
going public
when a firm wishes to sell its stock in the primary market, it has 3 alternatives 1. a public offering 2. a rights offering 3. private placement
synergy
when assets are worth more when used in conjunction with each other than they are used seperately
risk-return trade-off
with higher-risk assets priced to offer higher expected returns than lower-risk assets
writing a naked put
writing a put without an offsetting short position in the stock for hedging purposes, exposes the writer to losses if the market falls.
tax retuned filed corp
yes
tax returned filed partnership
yes information returned
pure expectations theory
yield curve depends on the average of interest rates expected during each period that the loan spans, if investors believe inflation will be higher in the future than previously thought, interest rates will rise.
The common factor is constructed to have
zero expected value.
Assumptions of MPT
• Asset returns are normally distributed random variables. • Investors attempt to maximize economic market returns. • Investors are rational and avoid risk when possible. • Investors all have access to the same sources of information for investment decisions. • Investors share similar views on expected returns. • Taxes and brokerage commissions are not considered. • Investors are not large enough players in the market to influence the price. • Investors have unlimited access to borrow (and lend) money at the risk free rate.