CMA Part B Flashcards Preview

CMA > CMA Part B > Flashcards

Flashcards in CMA Part B Deck (77):
1

Rate of Return

[(Price2-Price1)+D]/Price1 {Price1=initial $, D=Dividend}

2

Capital Asset Pricing Model

Ke=Rf+B(Km-Rf)

3

Countertrading

bartering, good & services exchanged not sold for currency

4

Gordon Growth Model

V0 = Div1/[Ks-g]

5

Coefficient of Variation (CV)

Standard deviation (sigma)/expected return

6

Covariance

Summation of {P[(Ri-E1)]*[Ri,2-E(R2))}

7

Correlation

Cov 1,2/S1S2 is between -1<=1

8

Portfolio Return

Summation of WR w=% of total funds, r=return

9

Hedging

method of reducing exposure by taking an offsetting position in another investment (opposite)

10

Degree of Operating Leverage (DOL)

CM/Operating Income or % change in EBIT/ %change in Sales or Contribution Margin/EBIT

11

Degree of Financial Leverage (DFL)

% change in Net Income / % change in EBIT or EBIT/EBT

12

Degree of Total Leverage

DOL * DFL

13

Constant Dividend Growth

V0=D1/(ks-g)

14

Bond Indentures

agreements (terms, %, maturity, protective covenants, etc)

15

Bond Administration

Trustee, 3rd party who officially represents bondholder

16

Bond Principal

amount of bond at time its issued (aka par value, par, face value)

17

Bond Coupon rate

Bond interest

18

Bond Duration

measure of the sensitivity of the asset's price to interest rate movements. It broadly corresponds to the length of time before the asset is due to be repaid.

19

Bond Debentures

bonds secured with full faith and credit of the issuing firm

20

Effective duration

refers to price sensitivity in response to a change in yield-approximate

21

Effective annual interest rate

(interest)/(usable funds)

22

Bond Valuation Vb

I (PVIFAk,n)+F(PVIFK,n) [value of bond= interest*PV % annuity)+ FV (PV % factor)

23

Zero Growth V0

D/ks V-common stock price, D-constant annual div/share, Ks-req'd rate of return

24

Variable Div Growth P

D(1+g)/[Ks-g] P-stock price, D-dividend, K-req'd rate of return, g-growth rate

25

Preferred Stock Valuation Vp

D/k Vp-price preferred stock, D-dividend, k=discount rate

26

Derivative

financial contract getting value from underlying price of some back financial instrument. Has asset

27

Time draft

bill for payment to exporter on a specified date after the exporter has completed the contract.

28

Equity Carve out

when common stock of the subsidiary is sold directly to the public rather than distributing it to the parent?s shareholders. Usually, the parent will contain a controlling interest in the subsidiary during the equity carve-out

29

Swap

a private agreement between two parties to exchange (or swap) future cash payments. A swap is usually facilitated by an intermediary. Swaps are characterized by series of forward contracts and the exchange of payments on specified payment dates

30

Options

contract between 2 parties that the purchaser of a contract has a right to buy or sell a given amount of an underlying asset

31

Call Option

contract giving the contract owner the right to buy an asset from the writer at a fixed price

32

Put Option

contract giving owner the right to sell and asset at a fixed price

33

Strike Price

fixed price of the contract

34

Exercise Date

last date to exercise buying of asset (aka maturity date or expiration date)

35

Premium

initial purchase price of the option

36

European Option

contract allowing the owner to exercise the option only on maturity date

37

American Option

allowing the owner to exercise option any time during the exercise period

38

Floatation costs

direct costs (underwriting, filing fees, taxes) Indirect (mgmt time). Total costs are deducted from selling price of the stock

39

Cost of Preferred Stock

D/[Current price-Floatation Costs)

40

Historical Rate of Return

[Dividend/yr+Avg Annual Gain]/Purchase Price

41

Dividend Growth Model

Cost of Internal equity is [Dividend (1+Growth Rate)/market $] + growth rate

42

Marginal Cost of Capital Breakeven

TFi/Wi Tfi -Tot funds from cap Wi-% of perm cap

43

Marketable Securities

Tbills, Federal agency securities, Repurchase agreements, Bankers' acceptances (letter of credit), Commercial paper, auction rate preferred stock, CDs, Eurodollar deposits, ST muni

44

Granting Credit

5 C's Character, conditions, Cash Flow, Credit, Collateral

45

Average Collection Period

365/[A/R Turnover]

46

Average Collection Period

AR/(Sales)*365

47

Total contribution margin

(after-tax contribution margin on annual revenue) ? (bad debt expense + collection costs)(1 ? tax rate) ? (interest cost on accounts receivable) ? (interest cost on inventory)

48

Economic Order Quantity (EOQ)

he quantity of a regularly ordered item to be purchased at a point in time resulting in minimum ordering and storage costs

49

Cash Discount Rate

[Dr/(1-DR)*365/(N-DP)] DR-discount rate, N-Net pay period, DP-discount period

50

Effective Interest Rate

(PR+CF)/(1-CB)*365/M PR-principal interest, CB-compensating balance, CF-commitment fee, M-loan length in days. Also [(interest + fees)/(usable funds)][(365)/(days to maturity)]

51

Compensating Balance

non-interest bearing deposit maintained in the company's deposit accounts at the bank, for account service charges, lines of credit, or investments

52

EID

Discount (DR)/(1-DR)*(365/(Payment period-discount period))

53

Leveraged buyout

an acquisition that occurs when a buyer of a company borrows a major portion of the purchase price using the purchased assets as collateral for the borrowing

54

Mergers/Acquisitions

obtain another co's assets, skills or tech; economies of scale; resources; customers; grow faster than internally possible; diversify?synergies

55

Consolidation

combination of a few companies to a new company

56

Merger

combine 2 companies into one company

57

Horizontal Merger

happens when two or more firms within the same market, also referred to as competitors, join together. When a horizontal merger occurs, fewer competitors in the market result; thus having the potential of leading towards a monopolistic circumstance.

58

Vertical Merger

suppliers or customers merge

59

Conglomerate

unrelated companies

60

Leveraged Buyout (LBO)

merger that a buyer borrows a major portion of the purchase price using the purchased assets as collateral.

61

Defenses against hostile takeovers

staggered terms of board, Golden parachutes for exec, Corporate charters requiring supermajority to approve takeover, Poison pills, white knight (find friendly buyer to merge with), Pacman (role reversal in target co tries to buy buyer), greenmail (buyer purchases enough shares in co to threaten takeover), Nancy Reagan (where firm just says no to buy out)

62

Spin-offs

parent co distributes stock in a sub and sub becomes a separate company

63

Equity Carve-outs

equity is sold directly to public rather than being distributed to parent's stockholders

64

Split-Ups

single company splits into 2 or more co's.

65

Call Options

Gives you the right to buy at a price

66

Put Options

Gives you the right to sell at a price

67

Debentures

are unsecured bonds. They are backed by the full faith and credit of the issuing firm

68

Transfer Pricing

move parts from high tax to low tax country at arm's length. To manage their effective worldwide tax rate

69

Letter of Credit

sent from importers bank to an exporter. States bank backs importers obligation to pay.

70

Time Draft

bill for payment to the exporter after contract is completed

71

American Depository Receipts (ADRs)

certificates representing ownership of foreign stocks.

72

Zero Coupon Bonds

have no ongoing interest payments. Bond sold at deep discount and redeemed a fv as interest accrues

73

Participating Preferred Stock

Preferred SH div increases when common SH div reaches specific amount

74

Risks

Credit risk, fx risk, interest rate risk, market rate risk, market risk, industry risk, political risk, default risk (can't pay bills)

75

Relationship of Risk & Return (less to more)

Tbill>Gov't Bonds>Corp Bonds>Stocks

76

Diversification

mix of assets (equity, bonds), mix of asset classes, mix of maturity dates

77

How to manage risk

Manage Risk by hedging, speculating, arbitrage, maturity matching, and portfolio mgmt