Finance Test

efficiency, Fairness

2 aspects of economic activity: economic ____ this refers to getting the most output from productive resources. ___ refers to the idea that all humans have access to a decent standard of living.

initial public offering private placement

2 types of primary transactions 1. ____: securities sold to general public 2. ____: negotiated sale involving specific buyer

auction markets dealer markets

2 types of secondary transactions 1. ___: exchange has a physical location, primary function is to bring buyers and sellers together. brokers and agents are main factors ex: NYSE 2. ___ (OTC) have no central location buying and selling done by dealers and most trading in debt securities takes place in dealer markets ex: NASDAQ

product, production, fianance

3 decisions managers must make

current

A ___ asset has a life of less than one year. This means that the asset will normally convert to cash within 12 months. For example, inventory would normally be purchased and sold within a year. Cash and account receivable (money owed to the firm by its customers) are other examples.

fixed

A ___ asset is one that has a relatively long life. It can either be tangible, such as a truck or a computer, or intangible, such as a trademark or patent.

put

A ___ bond allows the holder to force the issuer to buy the bond back at a stated price. The put feature is therefore just the reverse of the call provision and is a relatively new development.

convertible

A ___ bond can be swapped for a fixed number of shares of stock anytime before maturity at the holder's option. Convertibles are relatively common, but the number has been decreasing in recent years.

negative

A ___ covenant is a "thou shalt not" type of covenant. It limits or prohibits actions that the company might take. A positive covenant is a "thou shalt" type of covenant.

sinking

A ___ fund is an account managed by the bond trustee for the purpose of repaying the bonds. The company makes annual payments to the trustee, who then uses the funds to retire a portion of the debt. The trustee does this by either buying up some of the bonds in the market or calling in a fraction of the outstanding bonds.

sole proprietorship

A ___ is a business owned by one person. Simplest business to start and least regulated.

corporation

A ___ is a legal person separate and distinct from its owners, and it has many of the rights, duties, and privileges of an actual person.

proxy

A ___ is the grant of authority by a shareholder to someone else to vote that shareholder's shares. For convenience, much of the voting in large public corporations is actually done by proxy.

public

A ___ offering, as the name suggests, involves selling securities to the general public, whereas a private placement is a negotiated sale involving a specific buyer. debt and equity are often sold privately to large financial institutions such as life insurance companies or mutual funds. Such private placements do not have to be registered with the SEC and do not require the involvement of underwriters (investment banks that specialize in selling securities to the public)

call

A ___ provision allows the company to repurchase, or "call," part or all of the bond issue at stated prices over a specific period. Corporate bonds are usually callable.

protective

A ____ covenant is that part of the indenture or loan agreement that limits certain actions a company might otherwise wish to take during the term of the loan.

general, unlimited

A ____ partnership- all the partners share in gains and losses, and all have ___ liability for all partnership debts.

zero

A bond that pays no coupons at all must be offered at a price that is much lower than its stated value. Such bonds are called ___ coupon bonds. , the issuer of a zero coupon bond deducts interest every year even though no interest is actually paid. Similarly, the owner must pay taxes on interest accrued every year, even though no interest is actually received.

taxes, double taxation, corporate, personal

A corporation must pay ___. money paid out to stockholders in the form of dividends is taxed again as income to those stockholders. This is ___, meaning that corporate profits are taxed twice: at the ___ level when they are earned and again at the ___ level when they are paid out.

long-term

A debt that is not due in the coming year is classified as a ___ liability

dividends

A distinctive feature of corporations is that they have shares of stock on which they are authorized by law to pay ___ to their shareholders. Dividends paid to shareholders represent a return on the capital directly or indirectly contributed to the corporation by the shareholders. The payment of dividends is at the discretion of the board of directors.

limited, personal

A limited partner's liability for business debts is ___ to the amount the partner contributes to the partnership. All income is taxed as ___ income to the partners, and the amount of equity that can be raised is limited to the partner's combined wealth. Ownership is not easily transferred because a new partnership must be formed.

noncash

A primary reason that accounting income differs from cash flow is that an income statement contains ___ items.

short term credit loaned in resources from suppliers

Accounts Payable (aka value of trading credit) :

Less liquid as cash, bc customer might default or delay payments

Accounts receivable (aka value of trade credit)

Accountant matches outflows to inflows; measures whether the firm is incurring expenses which do not generate matching value in revenue.

Accrual Method / Matching Principle

owners, management

An agency problem is the the possibility of conflict of interest between the ___ and management of a firm.

positive

An investment should be accepted if the net present value is ___ and rejected if it is negative.

junk

Bonds that drop into ___ territory from above are called "fallen angels.

discount

Calculation of the present value of some future amount.

market

Capitalism is a ___ economy

incentives, cumulative

Capitalism: Market participants act on ___ to maximize their welfare. Scarce resources are allocated based on the ___ trade of market participants. This maximizes the standard of __ for the society as a whole.

operating capital net working capital

Cash flow from assets involves: 1. ___ cash flow 2. ___ spending 3. change in ___

creditors

Cash flow to ___ is interest paid less net new borrowing

common stockholders have right to profits after all other claimants have been paid. May be paid out in dividends, or retained and reinvested in company Bear the residual risk of the company In this course, equity refers to common stock

Common Stock

compound

Compounding the interest means earning interest on interest, so we call the result ___ interest.

stockholders

Control of the firm ultimately rests with ____. They elect the board of directors, who, in turn, hires and fires management.

public, private

Corporations engage in two types of primary market transactions: ___ offerings and ___ placements.

over-the-counter (OTC)

Dealer markets in stocks and long-term debt are called ___ markets.

Opportunity cost: All values are relative. Cash flows: Cash is king! Time value: Only the future counts. Risk: The future is uncertain.

Economic Value

wealth

Economic __ is control over economic assets.

assets

Economic ___ are function as stores of value and over which ownership rights are enforced.

value

Economic ___ is the value assigned by markets to economic assets. Economic Value is the maximum dollar price that one is willing to pay for an economic asset, and should be examined carefully when making wealth increasing decisions.

Activity

Economic ____ involves the production, distribution and consumption of goods and services

produce, distribute, consume

Economic activity is a social activity in which humans use scarce resources to ___, ____ and ___ goods and services.

residual

Equity holders are only entitled to the ___ value, the portion left after creditors are paid. If the firm sells its assets and pays its debts, whatever cash is left belongs to the shareholders.

incentives

Every action you take is guided by ___. We do something to get something or to avoid having something done to us!

matching principle

Expenses shown on the income statement are based on the _____. The basic idea here is to first determine revenues as described earlier and then match those revenues with the costs associated with producing them. So, if we manufacture a product and then sell it on credit, the revenue is recognized at the time of sale. The production and other costs associated with the sale of that product would likewise be recognized at that time.

government external audits lawsuits against management from stockholders large instiutional investors takeover/ outside acquisition

External managerial control devices: 1. 2. 3. 4. 5.

banks, insurance companies

Financial institutions are ___ and ___.

articles of incorporation

Forming a corporation involves preparing ____ (or a charter) and a set of bylaws.

System of accounting rules that guide businesses formal , standardized framework for presenting business information Formal to make room for all information Standardized so companies can be compared against each other Managed by the Financial Accounting Standards Board (FASB)

GAAP: Generally accepted accounting principles

audited financial statements in the United States generally show assets at historical cost

Generally Accepted Accounting Principles (GAAP)

premium

Generally, the call price is above the bond's stated value (that is, the par value). The difference between the call price and the stated value is the call ____.

equity stock

Good financial decisions will: 1. increase market value of shareholder ___ 2. increase value of the firm's existing ___

evaluative, maximizing, resourceful

Humans are ___, imperfectly ___, and ____

cost

If management does not take the investment, then the stockholders may lose a valuable opportunity. This is one example of an agency ___.

fixed

If our time horizon is relatively short, however, some costs are effectively ____—they must be paid no matter what (e.g., property taxes). Other costs, such as wages to laborers and payments to suppliers, are still variable. As a result, even in the short run, the firm can vary its output level by varying expenditures in these areas.

limited

In a ___ partnership, one or more general partners will run the business and have unlimited liability, but there will be one or more limited partners who do not participate in the business.

stockholders, managers, board of directors

In a large corporation, the ___ and the ___ are usually separate groups. The stockholders elect the ____, who then select the managers. Management is charged with running the corporation's affairs in the stockholders' interests. In principle, stockholders control the corporation because they elect the directors.

preemptive

In addition, shareholders sometimes have the right to share proportionally in any new stock sold. This is called the ___ right.

variable

In the long run, all business costs are ____. Given sufficient time, assets can be sold, debts can be paid, and so on.

managerial, job prospects

Incentives managers have to maximize share value- job prospects, and compensation Management will frequently have a significant economic incentive to increase share value for two reasons. First, ___ compensation, particularly at the top, is usually tied to financial performance in general and oftentimes to share value in particular.The second incentive managers have relates to ___. Better performers within the firm will tend to get promoted

net sales cost of goods sold asset depreciation financing expenses taxes paid net income

Income statement includes 1. 2. 3. 4. 5. 6.

income= revenues- expenses

Income= ____-____

1. compensation for good performance 2. board of directors oversees managers performance and determines their compensation 3. charters and bylaws 4. managers

Internal managerial control devices 1. 2. 3. 4.

stocks, bonds

Investments- deals with financial assets such as ___ and ___

conversion, value

Liquidity really has two dimensions: ease of ___ versus loss of ___. Assets are normally listed on the balance sheet in order of decreasing liquidity, meaning that the most liquid assets are listed first. Accounts receivable, for example, represent amounts not yet collected from customers on sales already made.

Short term investments where businesses can store liquid purchasing power; Earn interest but can be quickly liquidated Treasury bills, commercial paper, certificates of deposit, bankers' acceptances

Marketable securities

equity

Maximize the market value of the existing owners' ___. With this goal in mind, it doesn't matter whether the business is a proprietorship, a partnership, or a corporation.

positive

Net working capital is ____ when current assets exceed current liabilities.

unlimited, limited

Ownership (represented by shares of stock) can be readily transferred, and the life of the corporation is unlimited. The corporation borrows money in its own name. As a result, the stockholders in a corporation have ___ liability for corporate debts. The most they can lose is what they have invested.

has a higher claim on the company's profits, meaning preferred stockholders receive dividends before common stockholders

Preferred Stock:

stated

Preferred shares have a ___ liquidating value, usually $100 per share. The cash dividend is described in terms of dollars per share

discount

Present value is thus just the reverse of future value. Instead of compounding the money forward into the future, we ___ it back to the present.

price risks, rewards mixture

Questions about investments include: 1. What determines the ____ of a financial asset, such as a share of stock? 2. What are the potential ___ and ___ associated with investing in financial assets? 3. What is the best ___ of the different types of financial assets to hold?

cash, inventory credit financing

Questions about working capital: 1. How much ___ and __ should we keep on hand? 2. Should we sell on __ to our customers? 3. How will we obtain any needed short-term ___? 4. If we borrow in the short term, how and where should we do it?

fraud, malpractice

Sarbanes Oxyley Act is intended to strengthen protection against corporate accounting ___ and financial ___. Since its implementation, hundreds of public firms have chosen to "go dark," meaning that their shares are no longer traded in the major stock markets, in which case Sarbox does not apply.

command

Socialism a ____ economy

collective, fair

Socialism, a command economy, uses ___ or governmental control of property rights. This means the government directs the economy to provide a ___ distribution of society's output.

unlimited, personal

Sole proprietorship has ___ liability for business debts. This means that creditors can look to the proprietor's personal assets for payment. All business income is taxed as __ income.

crossover

Some bonds are called "___" or "5B" bonds. The reason is that they are rated triple-B (or Baa) by one rating agency and double-B (or Ba) by another, a "split rating."

employees, customers, suppliers, government

Stakeholders

long-term, pay, manage

Starting your own business have to ask: 1. What ___ investments should you take on? What lines of business will you be in, and what sorts of buildings, machinery, and equipment will you need? 2. Where will you get the long-term financing to __ for your investments? Will you bring in other owners, or will you borrow the money? 3. How will you ___ your everyday financial activities, such as collecting from customers and paying suppliers?

outflows

Taxes can be one of the largest cash ____ that a firm experiences.

Accountants record the purchase price of assets and do not adjust price to reflect changes in market value Asset value recorded at cost, may not reflect the asset's true market value

The Cost Principle

1. Corporate Finance 2. Investments 3. Financial Institutions 4. International Finance

The Four Areas of Finance 1. 2. 3. 4.

zero

The IRR on an investment is the required return that results in a ___ NPV when it is used as the discount rate.

Accountants recognize and take stock of revenues when contractual obligations occur (i.e. time of the sale); time may pass between when the contract is entered into; when the product is produced; when product is shipped; and when the customer actually pays. Means that accounting revenue and cash revenue are generally not equal.

The Realization Principle

IRR

The ___ is the rate of return earned on an investment adjusted for time value.

controllers tax, cost

The ___ office handles cost and financial accounting, tax payments, and management information systems. the ___ manager and ___ accounting manager

treasurer's cash, credit

The ___ office is responsible for managing the firm's cash and credit, it's financial planning, and its capital expenditures. the ___ manager and ___ manager

balance sheet

The ____ is a financial statement showing a firm's accounting value on a particular date. (snapshot of the firm)

income statement

The _____ measures performance over some period of time, usually a quarter or a year

owns, owes

The balance sheet is a snapshot of the firm. It is a convenient means of organizing and summarizing what a firm ___ (its assets), what a firm ___ (its liabilities), and the difference between the two (the firm's equity) at a given point in time

present value (PV)

The current value of future cash flows discounted at the appropriate discount rate.

stockholders

The financial manager in a corporation makes decisions for the ___ of the firm

treasurer, controller

The financial manager is often called the CFO. The Vice president finance Coordinates the actives of the ___ and ___

maximize, stock

The goal of financial management is to ___ the current value per share of the existing ___.

limited, limited, personal

The life of a sole proprietorship is __ to the owner's life span, and the amount of equity that can be raised is ___ to the proprietor's ___ wealth. Ownership is difficult to transfer because requires sale of the entire business to a new owner.

proxy fight

The mechanism by which unhappy stockholders can act to replace existing management is called a ___.

greater

The more debt a firm has (as a percentage of assets), the ___ is its degree of financial leverage. Financial leverage increases the potential reward to shareholders, but it also increases the potential for financial distress and business failure.

face value (par)

The principal amount of a bond that is repaid at the end of the term.

stockholders, management

The relationship between ___ and ___ is called an agency relationship. Such a relationship exists whenever someone (the principal) hires another (the agent) to represent his or her interest.

structure

The relationship between short- and long-term interest rates is known as the term ___ of interest rates. Tells us what nominal interest rates are on default-free, pure discount bonds of all maturities. These rates are, in essence, "pure" interest rates because they involve no risk of default and a single, lump-sum future payment. Tells us the pure time value of money for different lengths of time.

maturity, rate

The risk that arises for bond owners from fluctuating interest rates is called interest rate risk. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes. This sensitivity directly depends on two things: the time to ___ and the coupon ____.

common

The term ___ stock means different things to different people, but it is usually applied to stock that has no special preference either in paying dividends or in bankruptcy.

leverage

The use of debt in a firm's capital structure is called financial ____.

auction, dealer

There are two kinds of secondary markets: ___ markets and ___ markets.

Welfare, Opportunistic, Markets

Three Key Roles of the Government 1. Focus on Economic __ of Citizens 2. Limit ___ Behavior 3. Modify or Replace ___

A plot of the yields on Treasury notes and bonds relative to maturity.

Treasury yield curve

book

Under GAAP assets are listed on the balance sheet at ___ value

same- when NPV is 0 the IRR= r conflict- mutually exclusive, non conventional cash flows

Under what circumstances will the IRR and NPV rules lead to the same accept-reject decisions? When might they conflict?

GAAP, times, costs

When looking at an income statement, the financial manager needs to keep three things in mind: 1. ___ 2. cash versus noncash items 3. ____ and ___.

simple

With ___ interest, the interest is not reinvested, so interest is earned each period only on the original principal.

flat-rate

With a ___ tax, there is only one tax rate, and this rate is the same for all income levels. With such a tax, the marginal tax rate is always the same as the average tax rate.

NPV

__ is cost-benefit analysis, where we compare the costs of a decision to its benefits. The costs and benefits are stated in terms of cash flows and are discounted to the present to make the comparison.

peer group

___ analysis identify similar firms which compete in same market, have similar assets and operate in similar ways

growing

___ annuity: Its cash flows increase at a regular growth rate.

level

___ annuity: Those with regular payments that are the same in each time period. Its cash flows are the same in each period. For this course, level annuities are further classified by when their cash flows occur. An ordinary annuity is cash flow that occurs at end of each period. An annuity due is cash flow that occurs at beginning of each period.

book

___ assets shown at historical cost i.e. what the firm PAID for them regardless of current value

period

___ costs are incurred during a particular time period and might be reported as selling, general, and administrative expenses. Once again, some of these period costs may be fixed and others may be variable. The company president's salary, for example, is a period cost and is probably fixed, at least in the short run.

annuity

___ is A level stream of cash flows for a fixed period of time. Almost all consumer loans (such as car loans) and home mortgages feature equal payments, usually made each month.

Net Present Value

___ is a decision-making process used to measure whether or not a decision will increase your wealth.generally incurred at the beginning of a project. The inflows occur as cash inflows from the project. Both are tied together through time by the opportunity cost.

depreciation

___ is a non cash item

depreciation

___ is the accountant's estimate of the cost of fixed assets; equipment used in the production process matched with the benefits from owning it. allocating a capital asset's expense over the projected life of the asset.

net working capital

___ is the difference between a firm's current assets and its current liabilities

indenture

___ is the written agreement between the corporation (borrower) and the lender (creditors)detailing the terms of the debt issue.

noncash

___ items: Expenses charged against revenues that do not directly affect cash flow, such as depreciation. The most important of these is depreciation.

secondary

___ markets are those in which these securities are bought and sold after the original sale. Involves one owner or creditor selling to another. Provide the means for transferring ownership of corporate securities.

Structured

___ notes are bonds that are based on stocks, bonds, commodities, or currencies. One particular type of structured note has a return based on a stock market index. At expiration, if the stock index has declined, the bond returns the principal. However, if the stock index has increased, the bond will return a portion of the stock index return, say 80 percent. Another type of structured note will return twice the stock index return, but with the potential for loss of principal.

monetary policy

___ policy guiding the nation's economy thru a central bank -management of interest rates - creating money - changing interest rates - lending money to market participants

Monetary

___ policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks such as the Federal Reserve.

matching

___ principle requires that rev be matched with expenses

discount

___ rate is he rate used to calculate the present value of future cash flows.

working capital

___ refers to a firm's short-term assets and liabilities. Refers to a firm's short-term assets, such as inventory, and its short term liabilities, such as money owed to suppliers.

Expected Return

___ return The future return, which is generally uncertain, that one expects to get from an investment. This is the return that is used in making most business decisions

Property

___ rights are the right to control an asset. This control includes how the property should be used, how the benefits from this use are distributed, and the ability to dispose of the asset.

average

___ tax rate is your tax bill divided by your taxable income, in other words, the percentage of your income that goes to pay taxes.

Future

___ value refers to the amount of money an investment will grow to over some period of time at some given interest rate.

market

___ value the amount of cash you would get for the asset if you sold it today (true value of an asset)

cumulative

___ voting: A procedure in which a shareholder may cast all votes for one member of the board of directors.

Socialism

___, a command economy, uses collective or governmental control of property rights. This means the government directs the economy to provide a fair distribution of society's output. Governmental control of property rights reduces economic inequality, leading to greater social cohesion and the protection of the dignity of each member of society.

Simple Interest

___- Interest earned on the original principal

annuity due

___- is An annuity for which the cash flows occur at the beginning of the period.

IRR

____ The discount rate that makes the net present value of an investment zero. we want this rate to be an "internal" rate in the sense that it only depends on the cash flows of a particular investment, not on rates offered elsewhere.

Realized Return

____ The return that is actually received at the end of the investment period.

time trend

____ analysis compares current ration to past ratio to find trend in changes in the ratio over time Time trend analysis is an example of management by exception

stakeholders

____ are someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm. Such groups will also attempt to exert control over the firm, perhaps to the detriment of the owners.

Product

____ costs include such things as raw materials, direct labor expense, and manufacturing overhead. These are reported on the income statement as costs of goods sold, but they include both fixed and variable costs.

seniority

____ indicates preference in position over other lenders, and debts are sometimes labeled as senior or junior to indicate seniority. Some debt is subordinated, as in, for example, a subordinated debenture.

maturity

____ is Specified date on which the principal amount of a bond is paid.

deferred call provision

____ is a Bond call provision prohibiting the company from redeeming the bond prior to a certain date. (call protected)

debenture

____ is an unsecured debt, usually with a maturity of 10 years or more. The term note is generally used for such instruments if the maturity of the unsecured bond is less than 10 or so years when the bond is originally issued. Debenture holders only have a claim on property not otherwise pledged, in other words, the property that remains after mortgages and collateral trusts are taken into account.

capital structure, debt, equity

____ is the mixture of long-term ___ and ___ maintained by a firm. 2 concerns: How much should the firm borrow? What are the least expensive sources of funds for the firm? Have to decide how and where to raise money.

capital budgeting, long-term

____ is the process of planning and managing a firm's ___ investments. Financial manager evaluates the size, timing, and risk of future cash flows.

Current

____ liabilities have a life of less than one year (meaning they must be paid within the year), and they are listed before long-term liabilities. Accounts payable (money the firm owes to its suppliers) is one example of a current liability.

primary

____ market refers to the original sale of securities by governments and corporations. The corporation is the seller, and the transaction raises money for the corporation. Corporations engage in two types of primary market transactions: public offerings and private placements

fiscal policy

____ policy guiding of the economy through government spending and taxing; collective term for taxing and spending actions of governments - the government can stimulate the economy through spending - US determined by executive and legislative branches - taxes - the more money taken by the government for taxes less disposable income individuals have to spend in market - taxes modify behavior: can be incentive to choose one product over another - taxes may be used to redistribute income

Fiscal

____ policy is the collective term for the taxing and spending actions of governments. In the United States, the national fiscal policy is determined by the Executive and Legislative Branches.

Operating cash flow

____ refers to the cash flow that results from the firm's day-to-day activities of producing and selling. Expenses associated with the firm's financing of its assets are not included because they are not operating expenses.

Capital spending

____ refers to the net spending on fixed assets (purchases of fixed assets less sales of fixed assets).

Preferred

____ stock differs from common stock because it has preference over common stock in the payment of dividends and in the distribution of corporation assets in the event of liquidation. Preference means only that the holders of the preferred shares must receive a dividend (in the case of an ongoing firm) before holders of common shares are entitled to anything.Preferred stock is a form of equity from a legal and tax standpoint. It is important to note, however, that holders of preferred stock sometimes have no voting privileges

marginal

____ tax rate is the extra tax you would pay if you earned one more dollar. (what is listed on table)

straight

____ voting: A procedure in which a shareholder may cast all votes for each member of the board of directors.

Capitalism

____, a market economy, uses individual control of property rights. Market participants act on incentives to maximize their welfare. By allowing individuals to pursue their own benefit, scarce resources are allocated based on the cumulative trade of market participants. This maximizes the standard of living for the society as a whole.

cash flow

____, we simply mean the difference between the number of dollars that came in and the number that went out.

invisible hand

____- businesses that don't follow the wants of their customers (acting in customers own self interest) the business will fail

perpetuity

____- is an annuity in which the cash flows continue forever. perpetuity pv= C/r

compound interest

____Interest earned on the accumulated interest added to the principal each period.

coupon

____The stated interest payment made on a bond.

Liquidity

_____ refers to the speed and ease with which an asset can be converted to cash. Gold is a relatively liquid asset; a custom manufacturing facility is not.

the recognition principle

____is to recognize revenue when the earnings process is virtually complete and the value of an exchange of goods or services is known or can be reliably determined. This principle usually means that revenue is recognized at the time of sale, which need not be the same as the time of collection.

cost

agency ____ when the principal loses out on a potential opportunity due to the decision of its agent. Cost of delegating responsibility to the agent

The interest rate charged per period multiplied by the number of periods per year.

annual percentage rate (APR)

assets= liabilities + shareholder's equity

assets= ___+___

The basic terms of the bonds. The total amount of bonds issued. A description of property used as security. The repayment arrangements. The call provisions. Details of the protective covenants.

bond indenture provisions include:

The dividend growth rate, or the rate at which the value of an investment grows.

capital gains yield

cash flow from assets= cash flow to creditors + cash flow to stockholders

cash flow from assets= ____+____

stockholders

cash flow to ____ is dividends paid less net new equity raised.

The annual coupon divided by the face value of a bond.

coupon rate

The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.

default risk premium

Calculating the present value of a future cash flow to determine its value today. (b) The process of valuing an investment by discounting its future cash flows.

discounted cash flow (DCF) valuation

A stock's expected cash dividend divided by its current price.

dividend yield

The interest rate expressed as if it were compounded once per year.

effective annual rate (EAR)

opportunity

equality of ___: all members of society should be free to pursue economic opportunities, not regulated by government to ensure equality; success not guaranteed.

results

equality of ___: all members of society should live within acceptive SOL (education, healthcare, etc) FOr social cohesion, there should not be exremes of wealth or poverty

evaluative, maximizing, resourceful

humans are 1) ___, 2) imperfectly ____, and 3) ____.

noncash

income statements differ from the measure of cash flow because it includes ___ items

The portion of a nominal interest rate that represents compensation for expected future inflation.

inflation premium

The compensation investors demand for bearing interest rate risk.

interest rate risk premium

The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.

liquidity premium

compensation

managerial ___ managers have a strong incentive to increase stock value for 2 reasons 1. managerial control tied to financial performance 2. job prospects improve with better stock performance

The possibility that more than one discount rate will make the net present value of an investment zero.

multiple rates of return

A situation where taking one investment prevents the taking of another.

mutually exclusive investment decisions

interest and taxes

net earning is earnings earned after ___ and ___

net income, cash flow

noncash items are expenses that directly affect ____ but do not directly affect ___

depreciation, interest

operating cash flow does not include ___ or ___

corporation

primary markets the ___ is the seller

The interest rate expressed in terms of the interest payment made each period. Also quoted interest rate.

stated interest rate

The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.

taxability premium

spent

the change in net working capital is the amount ___ on net working capital.It is measured as the change in net working capital over the period being examined and represents the net increase or decrease in current assets over current liabilities.

net present value

the difference between an investment's market value and its cost is called the ____ of the investment

equity

the difference between the total value of the assets (current and fixed) and the total value of the liabilities (current and long-term) is the shareholders' ____

compounding

this process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called ___.

market

whenever we speak of the value of an asset or the value of the firm, we will normally mean its ____ value. NOT on a balance sheet

The rate required in the market on a bond.

yield to maturity (YTM)

per share vaule= D/r

zero growth