Corportate Issuers and Equity Investments
Short seller must pay all dividends to the lender of the stock (t/f)
True
Secondary Sources of liquidity
liquidating short-term or long-lived assets, renegotiating debt agreements, or filing for bankruptcy and reorganizing the company.
Cannibalization
negative externality. Introduction to new product which reduces current product sales. Pepsi vs. Diet pepsi
Cyclical firm
one whos earnings are highly dependent on the stage of the business cycle. High earnings volatility and operating leverage.
fundamental options
projects that are options themselves because the payoffs depend on the price of an underlying asset
Securities that can be sold back to the issuing firm at a specific price
putable shares
Index Reconstitution Vs. Index Rebalancing
reconstitution The process of adding or removing securities included in the index Rebalancing adjusting weights of securities in a portofolio. Usually quarterly in indexes.
Secondary sources of liquidity include
renegotiating debt contracts, liquidating assets, and filing for bankruptcy protection and reorganization.
book value of equity
value of the firms assets on the balance sheet minu
The yield on a company's 7.5%, $50 par preferred stock is 6%. The value of the preferred stock is closest to:
$62.50. Question ID: 1379020
Types of Equity Indices
+Broad market index +Multi-market index +Multi-market index with fundamental weighting +Sector index +Style index
Stakeholder management Infrastructures
1. Legal- Identifies laws relevant to stakeholders 2. Contractual- Contacts between company and stakeholders that indentify their role & responsibilities of the compnay 3. Organizational- refers to company corp gov procedures. 4. Governmental- Comprises regulations companies face.
which of the following indexes will rebalancing occur most frequently?
An Equal weighed index
Gordon growth model
An economic model to compute the value of a stock assuming the stock will have constant dividend growth. V= D1/(r-g).
Equal weighted price indicatorseries
An equal dollar investment is made in each stock in the index.
uncommitted line of credit
An offer of credit for a certain amount a bank extends but may refuse to lend if conditions change.
Valuation method to estimate the floor value for a liquidation of a firm?
Asset- Based
With a one-tier board structure:
Both executive and non executive can serve on the BOD.
Business Risk
Both sales risk and operating risk
exchange where traders buy/sell long term gov bonds with other traders
Capital Market
Companies moving from the start-up stage to the growth stage most likely exhibit increasing:
Cash flow.
Mental Accounting
Classifying investments in separate accounts
Agency costs of Equity
Conflicts of interest between managers and owners.
Shareholder and creditor interests are considered to be better protected in
Common-law system.
best described as non-cyclical and defensive
Consumer Staples
Weak form market efficiency
Current security prices fully reflect all currently available security market data. Cant use technical analysis
quote driven market
Customers trade with dealers at bid/ask prices, by dealers (market makers)
experience curve
Declining curve that graphs cost per unit relative to output. Used for industry analysis.
Drags vs Pulls On liquidity
Drags on liquidity delay or reduce cash inflows, or increase borrowing costs. Pulls on liquidity- accelerate cash outflows.
Convertible Preferred stock and Convertible Bonds
Each of these specifies a number of common shares that the security owner can convert their securities into.
Stop buy order
Executed by a stop (trigger) above to current market price to BUY security.
Flotation Costs
Fees charged by bankers when company raises external equity capital.
consumer discretionary
Firms are cyclical & sell Automotive. Apparel. Hotels and restaurants.
Flexibility option
Give managers choices regarding the operational aspects of a project. Price setting & Production- flexibility options
Capital Allocation/ Budgetting Process (4- step)
Idea generation, Decision off of cash flows, Create capital budget, monitor decisions
Behavioral finance
Investors behave in ways that are not rational. Loss aversion- Disliking losses more than they like gains. Overconfidence- Gamblers fallacy- Recent results affect estimates of future probabilities.
An asset-based valuation model is most appropriate for a company that:
Is likely to be liquidated
When interest rates have fallen to low levels that are expected to persist, firms are most likely to have a preference for:
Issuing debt. Firms increase their target proportion of DEBT to reflect its lower cost.
Civil Law System
Judges are bound to rule based only on specifically enacted laws
a market that exhibits operational efficiency will have:
Low transaction costs.
Asymmetric Information
Managers have more info about company future performance than owners or creditors. Complex products tend to have higher costs of Asymmetric information
A company's optimal capital structure:
Maximizes firm value & minimizes WACC.
he average number of days that it takes to turn raw materials into cash proceeds is a firm's:
Operating Cycle
Financing costs for a capital project are included in:
Required Rate of Return
Securitizers
Pool large amounts of securities or other assets and sell interests in the pool to other investors; The returns from the pool, net of fees, are passed through to investors; Cash flows are segregated by risk into tranches
The after-tax cost of preferred stock is always equal to
Pre-tax cost of preferred stock
The advantage of participating preferred shares versus non-participating preferred shares is that
Preferred shares can receive EXTRA dividends.
Cumulative preferred stock
Preferred stock on which undeclared dividends accumulate until paid. Paid in priority over common stock holders.
New issues of securities are transactions in:
Primary Market
Securitie market structures: quote, order & brokered.
Quote-Driven: investors trade with dealers using bid /ask spreads (market makers) Order-Driven: Rules are used to match buyer and sellers (electronic crossing) Brokered markets broker finds counterparties. , illiquid securities
depository reciepts
Represent ownership in a foreign firm and are traded in the markets of other countries in local market currencies.
Stop Sell Order
Sell shares to protect profits (or mitigate loss). Buy at 50, stop sell at $45. Triggers Market Order to sell at 45
If the momentum effect persists over time, it would provide evidence against which of the following forms of market efficiency?
Semi strong & weak. Question ID: 1378922
For relative valuation, a peer group is best described as companies:
Similar business activities & competitive factors.
Market Anomaly
Something that would lead to a rejection of the hypothesis that markets are efficient. Market inefficiencies
Primary source of liquidity
Sources of cash it uses in its normal day-to-day operations.
Sponsored vs. Unsponsored DRs
Sponsored DR - provides the investor voting rights and is usually subject to greater disclosure requirements.
market value of equity
Total value of a firms outstanding equity shares based on market price and reflects the expectations of investors.
If the company has no debt outstanding, then its degree of total leverage equals
its degree of operating leverage. no debt, would mean DFL =0. Thus DTL=DOL
Companies that use significant short term funding in their capital structure should
Use multiple sources for specific type of lending.
Prevailing market prices are determined by
transactions that take place on the secondary market.
underwritten offering
When the investment bank agrees to entire issue at a negotiated price; Bank is stuck with position if undersubscribed
Private Placement
a primary market issue that is negotiated between the issuing corporation and a small group of accredited investors.
Operating risk is
additional variability in operating earnings (EBIT) caused by fixed operating costs.
Market that directs capital to its most productive use
allocationally efficient
revolving line of credit
allows companies to borrow & repay funds as their needs change over time.
order driven market
buy orders and sell orders are matched up by exchange according to order matching rules.
large, creditworthy manufacturing firm would get short-term financing
issuing commerical paper
Total return index
calculated by multiplying the beginning value by the geometrically linked series of index total returns. Which would include both the price changes of the securities that constitute the index and any cash flows from the securities (dividends, interest, and other distributions). A total return index cannot increase at a slower rate (or decrease at a faster rate) than an otherwise identical price return index because cash
which of the following types of stock has the most risk from the investor's perspective
callable shares
Compared to a passive investment strategy, active management, on average:
can outperform markets that are weak-form efficient but not semi-strong efficient
Timing Options
company to delay making an investment because they expect to have better information in the future.
switching costs
costs that make customers reluctant to switch to another product or service
A significantly lower days of receivables compared to its industry avg might mean
credit policies are too strict
semi-strong form efficiency
current security prices fully reflect all publicly available informations. Cant use fundamental analysis
American depository receipts
denominated in USD, issues in the US and represent shares in a foreign company's stock.
Externalities
effects the acceptance of a project may have on other firm cash flows.
Credit Default swaps
financial insurance contracts that provide payments to holders of bonds if they default.
consumer staples
firms are less cyclical and sell goods and services -food -beverage -tobacco
Pecking order theory
firms prefer to issue debt rather than equity if internal finance is insufficient.
strong form market efficiency
fully reflect all information, both private and public. No investor should be able to consistently achieve positive ABNORMAL returns.
Preferred stock
has qualities of both debt and equity and is, therefore, referred to as a hybrid security.
Static trade off theory
seeks to balance the costs of financial distress with the tax shield benefits from using debt. Under the static trade off theory, there is an optimal capital structure that has an optimal proportion of debt.
An example of a primary source of liquidity is:
short-term investment portfolios.
Expansion Options
similar to call options. Allow a company to make additional investments in a project if doing so creates value
Abandonment Options
similar to puts, they allow management to abandon a project in the PV of the incremental cash flows from exiting a project exceeds the PV of the incremental cash flows from continuing a project
Global Depository receipts
sued outside the United States and the issuer's home country. Mostly traded on the London and Luxembourg exchanges.
industry experience curve shows
the cost per unit relative to: Output