Fin Exam 1

Definition of corporation

A legal entity that is separate from its owners.

A) Compute the present value of $1000 that you're receiving in 1 year, if interest rate is 10% B) How about if you received the $1000 in 2 years, what would that value be today?

A) 1000 / ($1.10 in one year / $1.00 today) = $909.09 Low key also 1000 / 1.10 = $909.09 B) 909.09 / 1.1 = 826.45 so the equation is C / (1+r)^n

Market to Book Ratio - what is (typically) the ratio for successful firms?

M to B ration exceeds 1 for most successful firms, indicating that the value of the firms assets when put to use exceeds their historical cost (or liquidation value)

Enterprise Value (EV)

Market value of equity + Market Value of Debt - Cash

Listing standards - which is more strict Nasdaq or NYSE? also what are they

NYSE is more strict they are requirements a company must meet in order to be traded on exchange

Retained Earnings Equation can you write this down on notecard or is it illegal to write definitions?

Net Income - Dividends

primary vs secondary market?

Primary - when company first offers stock for sale. Secondary - stocks previously bought by other investors now being sold by those investors. People usually trade on secondary markets unless youre buying starbucks (or whatever) stock straight from company

Value Stock vs Growth Stock

Value = firms with low Market to Book ratios Growth Stock = firms with high market to book ratios

What is a hostile take over?

elon

What if the price TODAY of $1.00 in a year? interest rate is 10%

1 / (1+0.1) = $0.90909

(Perpetuity Question) If you want to donate $1000 to the alumni party every year, how much money would it take today? (bank pays 5% interest).

20,000

What is the I/Y if there is a 5% annual interest rate when computing for the monthly car payment (let's say you pay 15K per year)

5 / 12 (because youre interested in the MONTHLY payment and youre given the interest rate in years, so 5 / 12 months)

S Corp vs. C Corp

An S corporation is a type of DPP. Shareholders receive a pass-through of income and losses, and the S-Corp entity is not taxed. A C corporation is a taxable entity and shareholders receive dividends that were taxed at the entity level and will be taxed again at the shareholder level. Double taxation applies to dividends from C-Corps.

Annuity vs Perpetuity? What buttons on the calculator can you use for both?

Annuity: Beginning and end (a set period of time), WHITE BUTTONS Perpetuity: No ending, goes on forever -no shortcut buttons but formula is low key: PV = C/r

Your company has an investment opportunity w/the following cash flows: Cost = invest $100,000 today Benefit = you get $105,000 in 1 year A) Should you do it if interest rates are currently 10%? B) How about if interest rates were currently 4%?

Convert your present value of $100,000 to future dollars to see if it is less than $105,000. If it is then invest because you would be making more money than keeping it. A) So $100,000 today X ($1.1 in 1 year / $1.00 today) = $110,000. So dont invest, because you can make $5000 by keeping it with 10% interest. B) $100,000 today X (1.04 in 1 year / $1.00 today) = 104,000. So DO invest in this case because you would be making $1000 less by keeping it

Discount Factor Formula

DF = 1/(1+r)^t

EBITDA

Earnings before interest, taxes, depreciation, and amortization aka reflects cash a firm has earned from its operations

Equation for future value of a cash flow?

FV = C x (1 + r)^n n = years (or months, whatever the period is) C = cash flow r = interest

What does the timeline look like if I borrow $10,000 from you today and agree to pay you back with interest by making 6000 dollar payments in 1 year and again in 2 years?

I--------------------I---------------------I -10,000 6000 6000

Compound Interest

Interest paid on interest previously earned

EPS equation? A) If Petco had 2 million of net income and 3.6 million shares, whats the EPS B) What is a Dilution?

Net Income / # of Shares Outstanding A) $0.56 per share B) firms disclose the potential for dilution from options they have awarded by reporting Diluted EPS, which shows the EPS the company WOULD have if awarded stock options were exercised. So in the example above, if Petco gave its executives 200,00 shares, the diluted EPS would be: 2 million / 3.8 million shares = $0.53

Should you trade your Beach Boys tickets worth $150 for Kanye tickets worth $149?

No

You want to donate $1000 to the alumni party every year but to donate 2% more every year (since $1000 wont be worth as much in the future). How much money would you have to invest/put away today in order to do that? Bank Interest rate is 5%

PV = C/(r-g) PV = 1000 / (.05 - .02) PV = $33,333.33

Growing Perpetuity Formula

PV = C/(r-g) C= cash flow, PV = present value (youd invest today) g = growth rate r = interest rate

What is the profs favorite NFL team?

Packers

SOX (Sarbanes-Oxley Act)

Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.

Dodd-Frank Act

a law enacted in the aftermath of the financial crisis of 2008-2009 that strengthened government oversight of financial markets and placed limitations on risky financial strategies such as heavy reliance on leverage

Dow Jones Industrial Average

a measure based on the prices of the stocks of 30 large companies, widely used as a barometer of the stock market's health

Standard & Poor's 500

a stock index based on prices of 500 major US corporations in a variety of industries and market sectors

EBIT stands for?

earnings before interest and taxes

net value of investment

so basically the same idea but you have to convert your future value to present value. so going off example above(10% interest)... 105,000(in 1 year) / (1.1 in 1year / 1.00 today) = $95,454.55 in todays dollars net value of investment = 95,454.55 - 100,000 = -4,545.34 the negative value also means, like we figured out above, that you shouldnt invest

bid-ask spread

the difference between the bid price and the asked price

IF youre a company selling stock, are you selling it for the Bid OR ask price?

this will be on test i bet, also dont remember the answer, ask price i think

What is a dark pool?

trading venue where the size and price of orders arent disclosed to their participants. prices are within best bid and ask prices available on public market but traders risk their orders wont be fulfilled,