Corporate issuers Flashcards
(207 cards)
1
Q
What is sole proprietorship?
A
Business owned and operated by individual, unlimited liability, only clain to net profits
2
Q
What is business structure?
A
How business is set up from legal and organizational point of view
3
Q
What is general partnership?
A
Two or more owners, unlimited liability, profits are distributed and taxed as personal income
4
Q
What is partnership agreement?
A
It specifies reponsibilities and share of profit
5
Q
What is limited partnership?
A
It has two levels: general and limited partners
6
Q
What are general partners?
A
Owners with unlimited liability
7
Q
What are limited partners?
A
They are liable for the amount they invest only and have claims proportionate to their investments
8
Q
What is corporation?
A
It is legal entity separate from owners and managers, where all shareholders have limited liability. They may distribute profits and have greater access to capital
9
Q
What is role of investor in corporation?
A
They do not directly influence day to day operations, but appoints BoD
10
Q
What are non profit organizations?
A
They produce social benfit aor charitable goal, must reinvest all of the profits
11
Q
What does double taxation mean?
A
It taxes profits and dividends
12
Q
What is private placement memorandum (PPR)?
A
It gives information and risks on the company
13
Q
How about time horizon lenght and return from private companies?
A
Longer horizon and higher return than for public companies
14
Q
What is direct listing?
A
Stock exchange agrees to list existing shares
15
Q
Does no listing raise new capital?
A
No
16
Q
What is special purpose aquisition company (SPAC)?
A
It is corporate structure set up to aquire a private company in the future. It raises capital through IPO and puts the funds into trust it must use for acquisitions within specified period of time
17
Q
What is leveraged buyout?
A
Outside investors buy all companie’s outstanding shares and revenue in stock exchange listing, if its management buyout (company mangers do so).
18
Q
What are debt holders?
A
They have legal and contractual claim to the interest and principle payments the company promised to make
19
Q
What are equity holders?
A
Thet have residual claim to the net assets and has unlimited upside potential
20
Q
What is shareholder theory?
A
Primary focus is to governance interest of firms shareholders which is maximisation of the market value of firms common equity
21
Q
What is interest of shareholders?
A
Residual interest in the corporation, have voting rights which give them effective control of the firm and the management
22
Q
What is interest of BoD?
A
It is responsibility to protect interests of shareholders, manage senior management, set strategic direction and monitor financial performance
23
Q
What is one-tier board?
A
Executive and non-executive members serve on single board
24
Q
What is two-tier board?
A
Non-executive oversees management of executive
25
What is interest of senior managers?
To receive compensation + bonus + perqusities. Interest can include continued employment and maximising their compensation
26
What is interest of employees?
Interest in sustainability and success of the firm, their rate of pay, opportunity for career development, training and working conditions
27
What is interest of creditors?
Interest are protected by covenants and debt agreements
28
What is interest of suppliers?
Interest in ongoing relationship, profitability of trade and ongoing stability
29
What is principle-agent problem?
Agent is hired to act in the interest of principle, but agent's interest might conflict with that of principle
30
Shareholders/managers conflict
Managers might choose lower level of risk as their performance depends on it
31
Groups of shareholders conflict
Int he aquisition majority sharehoder might have better terms than minority and might force to enter into related party transactions that benefit entities in expense of minority shareholder
32
Creditors/shareholders conflict
Shareholders prefer more risk because of unlmited upside potential, also risk can be increased by issuing more debt or paying dividends
33
What is corporate governance?
It is system of internal controls and procedures by which individual companies are managed to minimie conflict between internal and external shareholders
34
What is vote of proxy?
It is ability to assign a voting right to those who attend AGM if you are not able to participate
35
What is super resolutions?
It requires supermajority vote, 2/3 or 3/4 of the votes and is usually required in the extraordinary shareholders meeting
36
What is majority voting?
Candidates with most votes is elected, one is voted from in single category
37
What is cumulative voting?
Shareholders can cast all of their votes for a single candidate or divide among board members
38
Which voting represents minority interest?
Cumulative voting
39
What is activist shareholder?
It pressures companies for change that believe will increase shareholder value
40
What is proxy fight?
It seeks proxies of shareholders to vote in power of their alternative proposals
41
What is hostile takeover?
It is attempt to gain control over target company by sidestepping their management and BoD
42
What is bond indenture?
It is rights of bondholders and companys obligation, can include covenants
43
What does is mean to be backed by collateral?
Bond holders will have a claim over this asset in case the bond fails
44
What are creditors committees?
It is protection of bondholder interest in the times of financial distress
45
What is role of audit commitee?
Everything accounting, reporting and audit related
46
What is role of governance commitee?
Governance and regulations related
47
What is role of nominations commitee?
Everything related to elections of BoD
48
What is role of remuneration commitee?
Everything compensation to directors and senior managers, benefits for employees and evaluation of senior managers
49
What is role of risk commitee?
Everything risk policy and tolerance related
50
What is role of investment commitee?
Everything related to aquisitions, CAPEX and disposals
51
Which comittee is usually required by law?
Audit committee
52
What are employee, customers and suppliers mechanism?
Labor laws, employment contracts and rights to form unions, contracts
53
What are government mechanisms?
Is to establish agencies to regulate industries
54
What is common law system?
It is when judges ruling becomes law in some instances
55
What is civil law system?
It is when judges are bound on specifically enacted laws
56
What is responsible investing?
Considering ESG factors in investment decision
57
What is sustainable investing?
it is inveting in companies on industries based on their perceived sustainable output
58
What is socially responsible investing?
Choosing investment based on moral and social norms
59
What is negative screening?
It is excluding companies and industries based on their practices regarding human rights, environmental concerns or corruption
60
What is full integration?
Inclusion of ESG factors/scores in the traditional fundamental analysis
61
What is thematic investing?
Inveting in sectors/companies to promote ESG related goals
62
What is engagement/active ownership?
It is using ownership as a platforms to promote improved ESG practices
63
What is green finance?
It is producing economic growth in more sustainable way by reducing emissions and better resource management
64
What are green bonds?
Bonds for which resources raised are used for projects with positive environmental impact
65
What is business model?
How company proposes to make money
66
What does business model should include? (5)
Potential customers, product and service description, how firm will sell products, describe key assets and suppliers, explain pricing strategy
67
What is channel strategy?
How products will be sold and delivered
68
What is omnichannel strategy?
Firm usage of both digital and physical channels
69
What is value-based pricing?
Setting prices based on value perceived
70
What is cost based pricing?
Setting prices based on costs of producing + profit
71
What is price discrimination?
Changing different prices to different customers
72
What is tiered pricing?
It is based on volume of purchase
73
What is dynamic pricing?
It depends on tiering to a day or a week
74
What is bundling?
Pricing complementary products
75
What is razor-and-blades pricing?
Price of equipment at low prices and make profits by selling consumable goods
76
What is option pricing?
Options and add-ons with high margins are added after the purchase decision been made
77
What is penetration pricing?
Low margins or free to grow market and achieve sale of operations
78
What is freemium pricing?
Offer product at basic functionality at no cost, but sell/unlock other functionality for a fee
79
What is hidden revenue?
Online content might be free, but generate revenues through ads
80
What is fractional ownership?
Time share companies sell condominium ownership by the week
81
What is franchising?
It permits to sell in a specified area and pay % of sales to the franchiser
82
What is value proposition?
How customers will value the characteristics of the product giving competing products and pricing
83
What is value chain?
It is execution of value proposition
84
What is private label manufacturer?
Produce products for others to market under their own brand name
85
What is licencing agreements?
A brand is used on another product for a fee
86
What are value-added resellers?
Offer services as support, installation etc.
87
What is affiliate marketing?
Another company is paid commision for measurable marketing
88
What is marketplace?
Provide platform but do not own the products
89
What are aggregators?
Provide marketplace but you sell products and services under own brand name
90
What are network effects?
Increase in the value of a network as its user base grows
91
What is crowdsurfing?
It benefits from user contribution
92
What are hybrid business models?
It is platform and traditional sales models
93
What are external factors affecting risk? (3)
Changes in economic condition, changing in demographics, political, legal and regulatory changes
94
What is macro risk?
It is risk arising from economic, political and legal risk factors, as well as other risks that affect all businesses within region or country
95
What is competitive risk?
It is erosion of existing competitive advantage over time or introduction of innovative business models that disrupt the industry
96
What is product market risk?
Expectations for growth in demand might decrease
97
What is capital investment risk?
Investing firm assets in opportunities that do not provide returns above firm's cost of capital
98
What are ESG risk?
Focus on corporate governance risk, but the risk of running afront of current expectations can damage reputation
99
What is operating leverage?
Fixed amount of the costs
100
What are business maintanance investments?
Going concern projects and regulatory/compliance projects
101
What are going concern projects?
They are needed to maintain business and reduce costs
102
What are regulatory/compliance projects?
They might be required anf often include safety related and environmental concerns
103
What are business growth projects?
They include expansion projects and other that include size and scope of the company
104
What is capital allocation process?
Identifying and evaluating capital projects
105
What is process of capital allocation process? (5)
Idea generation, analysing project proposals, creating firm-wide capital budget, monitoring decision and conducting post audit
106
What are sunk costs?
Cost that cannot be avoided regardless if the project is taken or not
107
What are principles of capital allocation? (5)
Decisions are based on incremental cashflows, CF are are based on opportunity costs, timing of CF is important, CF are analyzed on aftertax basis, financing costs are reflected in required rate of return
108
What are externalities?
Effects of project acceptance may have on other firms cash flows
109
What is cannibalization?
New project takes sales from an existing project
110
What is conventional CF pattern?
If the sign on the CF changes only once
111
What is unconventional CF pattern?
More than one sign change
112
What are independent projects?
Projects that can be evaluated solely on their own profitability
113
What are mutually exclusive projects?
Only one project can be accepted so profitability must be evaluated among projects
114
Formula of NPV
CF0+sum of CF/(1+k)^t
115
What is NPV rule?
If projects are independent, accept projects with positive NPV
116
What is IRR?
Discount rate that makes PV just equal to initial cost of the project
117
What is IRR rule?
If IRR>required rate of return, then accept the project
118
What is hurdle rate?
Minimum IRR required
119
What is key advantage of NPV?
Direct measure and best methods
120
What is flaw of NPV?
It does not take into account size of the project
121
What is key advantage of IRR?
It measures profitability as %, showing return and provides information on margin of safety
122
What is disadvantage of IRR?
It may produce different rankings of mutually exclusive projects and possibility that products have multiple IRRs
123
How to measure whether value for investors is created?
Compare return of company's investment to cost of capital
124
Formula of ROIC
after-tax net profit/average book value of total capital
or
net operating profit after tax/average book value of total capital
125
Formula of after tax net profit
net income+after tax interest expense
126
Formula of net operating profit after tax
Subtract after-tax nonoperating income
127
When management is creating value for a firm?
ROIC>WACC
128
What is effect of NPV on stock price?
Proportional increase in the stock price
129
What are real options?
Future actions firm can take given they invest in project today, cannot be negative
130
What are timing options?
Allow a company to delay making investment as more information will be available in the future
131
What are abandoment options?
Abandon a project if PV of CF from exiting project exceeds the PV of CF for continuing the project
132
What are expansion options?
Allows to make additional investments in the future
133
What are flexibility options?
Gives managers choice regarding operational aspect
134
What are two flexibility options?
Price setting and production
135
What are fundamental options?
Projects that are options themselves because payoffs depend on the price of the underlying asset
136
Formula of operating cash flow
Net income+D&A-dividends
137
What is account receivable?
Amounts owed to a company from customers sales it makes on credit
138
Interpretation of 2/15 net 45
2% discount if paid within 15 days, if not, then have to pay in full in 45 days timeframe
139
What are marketable securities?
Liquid debt that company intends to sell within a year
140
What is uncommitted line of credit?
Bank extends an offer of credit for a certain amount but may refuse to lend if circumstances change
141
What is committed line of credit?
Bank extends an offer of credit that it commits to for some period of time
142
What is revolving line of credit?
Usually for longer terms, company's can borrow and repay funds as their needs change
143
What is blank lien?
Claim to all current and future firms assets as collateral in case primary collateral is insufficient
144
What is factoring?
Sale of receivable at a discount from their face value
145
What is commercial paper?
Short-term debt security, up to one year, issued by companies with lower credit rating
146
What is conservative working capital management?
Current assets higher as % of sales
147
What is aggressive WC management?
Current assets lower as % of sales
148
What is primary source of liquidity?
Sources of cash it uses in its normal day-to-day operations
149
What is secondary source of liquidity?
Liquidating short-term or long-lived assets, renegotiating debt or filing for bankruptcy and reorganizing the company
150
What are drags on liquidity?
Delay or reduce cash inflows or increase borrowing costs
151
What are pulls on liquidity?
Accelerated cash outflows
152
What is formula of WACC?
wd * (kd(1-t))+wps * kps+wce * kce
153
What is after tax cost of debt?
Interest rate at which firms can issue new debt
154
What to use for cost of debt?
YTM of new debt, it not available then for current debt
155
Formula for cost of preffered stock
Dps/P
156
What is cost of equity?
Required rate of return on firm's common stock
157
Formula of CAPM
rf+B(E(rmkt)-rf)
158
Formula of other way of determining cost of capital
bond yield+risk premium
159
Formula of adjusted B
2/3unadjusted beta+1/3
160
Why individual B varies?
Due to financial leverage and tax rates
161
What is formula of asset beta?
Bequity *(1/(1+[(1-t) * D/E]))
162
Formula for company's Beta
Basset(1+[(1-t)*D/E])
163
What to do with groups B?
Take average
164
What are floating costs?
Fees charged by IB when company raises external capital
165
How to incorporate floating costs?
By adjusting selling price
166
What is the best method to incorporate floating costs?
As cash outflow in NPV model
167
What is optimal capital structure?
The one which minimizes WACC
168
What industry characteristics allows to make on more debt? (3)
Non-cyclical, low fixed operating costs, subscription based
169
What is debt capacity?
Extent to which it can finance itself with debt without risking insolvency
170
What is tax rate effect on value of a company?
Higher tax rates gives higher tax shield hence increases value of a leveraged company
171
How credit spreads move with business cycles?
They are narrow during expansions and widen during contractions
172
What are stages of company life cycle?
Start-up, growth stage and mature stage
173
What is start-up stage?
Risk is high, debt is risky requiring higher interest rate, hence mostly financed by equity
174
What is growth stage?
Risk is somewhat reduced, up to 20% might include debt
175
What is mature stage?
Debt might be in excess of 20% of firm's capital structure
176
What is MM assumption I?
Capital structure is irrelevant for firms value
177
What are assumptions of MM (I)?
(5)
Capital markets are perfectly competitive, investors have homogenous expectations, riskless borrowing and lending, no agency costs, investment decisions are unaffected by financing decisions
178
What is MM assumption II?
As companies increase proportion of debt financing, the risk of CF to equity holders increases, which increases cost of equity, WACC and cost of debt does not change
179
MM formula of cost of equity
r0+D/E(r0-rd), where r0 is cost of equity with no debt
180
What is MM assumption III?
Optimal capital structure with taxes is 100%, as proportion of debt increases, WACC decreases
181
MM formula for leveraged firms value
leveraged firm's value = unlevered firm + tax shield
182
MM formula of cost of equity with taxes
r0+D/E(r0-rd)(1-t)
183
What are costs of financial distress?
Increased costs a company faces when earnings decline to the point where the firm has trouble paying its fixed financing costs
184
What is probability of financial distress?
Firm's use of operating and financial leverage
185
What is state (trade-off theory)?
Costs of financial distress balances with the tax shield benefits from using debt
186
Formula of leveraged company under trade-off theory
Vu+t*d-PV(costs of financial distress)
187
What is effect of asymmetric information on cost of debt and equity
Direct relationship
188
What are monitoring costs?
Expenses of reporting to shareholders and paying BoD
189
What are bonding costs?
Assuring managers are working the shareholder's best interest
190
What is pecking order theory?
Signals management send to investors through its financing choices
191
What is funding preference from most to least?
Internally generated capital -> debt -> external equity
192
Whats is cost leverage?
Amount of fixed costs firm has
193
What is sales risk?
Uncertainty about the sales
194
What is operating risk?
Uncertainty about operating earnings caused operating costs
195
What is financial risk?
Additional risk that firm's common stockholders must bear when firm has fixed costs financing
196
What is degree of operating leverage (DOL)?
% change in EBIT that results from given percentage change in sales, highest at low levels of sales
197
Formula of degree of operating leverage (DOL)
change in EBIT/change in sales
Q(P-V)/Q(P-V)-F or S-TVC/S-TVC-F
198
What is degree of financial leverage (DFL)
% change in net income/EPS to change in EBIT
199
Formula of degree of financial leverage (DFL)
change in EPS/change in EBIT
EBIT/EBIT-interest or S-TVC/S-TVC-I
200
What is degree of total leverage (DTL)
Combined degree of DOL and DFL
201
Formula of degree of total leverage (DTL)
DOL*DFL
Q(P-V)/Q(P-V)-F-I or S-TVC/S-TVC-F-I
202
What is relationship between financial leverage and ROE?
Direct
203
What is break even quantity of sales?
Quantity of sales for which revenue=total costs
204
What is contribution margin?
It is difference between price and variable costs per unit
205
Formula for break-even quantity of sales
fixed operating+fixed financing costs/price-variable costs per unit
206
What is operating break even quantity of sales formula?
fixed operating costs/price-variable cost per unit
207
What is relationship between fixed costs and break even quantity?
Direct
