EXAM 1 Flashcards
(125 cards)
1
Q
3 AREAS OF FINANCE
A
- CORPORATE FINANCE 2. INVESTMENTS 3. BANKING/FINANCIAL INSTITUTION
2
Q
CAPITAL BUDGETING DEFINITION
A
LONG-TERM INVESTMENT PLANNING
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Q
CAPITAL BUDGET ANALYSIS DEFINITION
A
DECIDING WHAT ASSETS TO BUY
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Q
ASSET PRICING DEFINITION
A
VALUING ASSETS
5
Q
CURRENT MARKET VALUE DEFINITION
A
WHAT A BUYER WILL CURRENTLY PAY FOR AN ASSET
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Q
3 INSTITUTIONS
A
- BANKS 2. INSURANCE COMPANIES 3. PENSION FUNDS
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Q
3 OLD NAMES FOR CORPORATE FINANCE
A
- MANAGERIAL FINANCE 2. FINANCIAL MANAGEMENT 3. BUSINESS FINANCE
8
Q
3 WAYS ASSET MANAGERS INVEST
A
- VENTURE CAPITAL 2. MUTUAL FUNDS 3. REAL ESTATE
9
Q
9 CAREERS IN FINANCE
A
- COMMERCIAL BANKING 2. CORPORATE FINANCE 3. FINANCIAL PLANNING 4. HEDGE FUNDS 5. INSURANCE 6. INVESTMENT BANKING 7. MONEY (ASSET) MANAGEMENT 8. PRIVATE EQUITY 9. REAL ESTATE
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Q
CASH MANAGEMENT DEFINITION
A
DAY TO DAY FINANCE OPS
11
Q
6 INVESTMENT BANKING ROLES
A
- COMPANY & INDUSTRY ANALYSIS 2. MERGERS & ACQUISITIONS 3. RAISING CAPITAL VIA CORPORATE OFFERINGS 4. SALES & TRADING 5. PRIVATE CLIENT SERVICES 6. BACK OFFICE SUPPORT
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Q
HARVEST DEFINITION
A
CASH/STOCK FROM SALES/IPO
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Q
BUYOUT DEFINITION
A
PURCHASE OF MAJORITY SHARES
14
Q
4 CORPORATE FINANCE ROLES
A
- CASH MANAGEMENT 2. TAX STRATEGIES 3. FINANCIAL POLICY IMPLEMENTATION 4. INVESTING & FINANCING
15
Q
5 FUNCTIONAL AREAS OF BUSINESS
A
- MARKETING 2. OPERATIONS 3. ACCOUNTING 4. HUMAN RESOURCES 5. STRATEGIC MANAGEMENT
16
Q
3 TYPES OF SECURITIES
A
- TREASURY SECURITIES 2. CORPORATE BONDS 3. STOCKS
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Q
SECURITIES DEFINITION
A
STOCKS/BONDS
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Q
SYNDICATE DEFINITION
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OVERSEES ISSUANCE OF STOCKS/BONDS
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Q
2 WAYS SYNDICATES ISSUE BONDS
A
- COMPETITIVE SALE 2. NEGOTIATED SALE
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Q
2 THINGS COMPOSING SYNDICATES
A
- INVESTMENT BANKS 2. OTHER INSTITUTIONAL INVESTORS
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Q
2 SECONDARY MARKETS
A
- AUCTION MARKET 2. DEALER MARKET
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Q
AUCTION MARKET DEFINITION
A
PHYSICAL, DETERMINED BY INVESTORS WILLINGNESS TO PAY
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Q
DEALER MARKET DEFINITION
A
MULTIPLE DEALERS, QUOTE PRICES FROM AN INVENTORY
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Q
SPECIALIST DEFINITION
A
PROVIDES LIQUIDITY IN SECONDARY FINANCIAL MARKETS
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THE SPECIALIST CHARGES WHAT TO WHOM?
HIGHER = SELLERS LOWER = BUYER
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DIFFERENCE BETWEEN BID & ASK OF STOCK
BID-ASK PRICE
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2 TYPES OF TRADE ORDERS IN FINANCIAL MARKETS
1. MARKET ORDERS 2. LIMIT ORDERS
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MARKET ORDERS DEFINITION
USED BY INVESTORS, FIRST COME FIRST SERVED
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LIMIT ORDERS DEFINITION
USED BY INVESTORS, ONLY IF MARKET PRICE REACHES "LIMIT" PRICE
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MARKET ORDERS TO SELL STOCK EXECUTE AT THE CURRENT ___ PRICE
BID
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MARKET ORDERS TO BUY STOCK EXECUTE AT THE CURRENT ___ PRICE
ASK
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EARNINGS =
NET INCOME
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3 ROLES OF PRICES
1. PRICES CONVEY INFORMATION 2. PRICES AFFECT THE DISTRIBUTION OF INCOME 3. PRICES AFFECT INCENTIVES
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IN EFFICIENT MARKETS, PRICES ARE PREDICTABLE/NOT PREDICTABLE?
NOT PREDICTABLE
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SECURITIES RETURNS FORMULA
HOW MUCH INVESTOR GETS / HOW MUCH INVESTOR INVESTED
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2 SECURITIES RETURNS
1. DOLLAR RETURNS 2. PERCENTAGE RETURNS
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INCREASE OR DECREASE IN PRICE OF HELD SECURITY
DOLLAR RETURNS DEFINITION
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PERCENTAGE RETURNS DEFINITION
% INCREASE OR DECREASE IN PRICE OF HELD SECURITY
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DOLLAR RETURNS FORMULA
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PERCENTAGE RETURNS FORMULA
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COSTS FROM NOT ACTING IN SHAREHOLDER BEST INTERESTS
AGENCY COSTS DEFINITION
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How much of capital is financed by Debts and Equities is the \_\_\_-term, ___ decision of a financial manager?
LONG TERM, FINANCING DECISION
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3 SUBSPECIALTIES OF FINANCE
1. INSTITUTIONS 2. INVESTMENTS 3. CORPORATE FINANCE
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Portfolio decisions consist of 3 THINGS
1. what asset classes to invest in.
2. which asset to invest in.
3. how much to invest in each asset.
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Market value of a firm is the relevant measure of maximizing shareholder wealth because it \_\_\_?
reflects cash flows and risk of the firm.
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A long-term investing strategy in which the investor contributes a set amount into an investment on a set schedule
Dollar-Cost Averaging
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An acceptable return for a passive investor
Fair Return
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CORPORATE FINANCE'S PRIMARY FUNCTION
maximizing shareholder or owner wealth for privately held companies
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Roth IRA DEFINITION
A tax-sheltered retirement plan individuals can use to avoid taxes on portfolio returns
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Credit Analysts DEFINITION
A commercial bank employee with the responsibility to assess the riskiness of lending to borrowers and determining whether or not loans should be extended to potential bank clients
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Market Efficiency DEFINITION
The degree to which prices in a market reflect all available information
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Discount Rate DEFINITION
Discount Rate=Risk-Free Rate+Risk Premium
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Future Value FORMULA
Future Value=Present Value×(1+i)^n
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PRESENT VALUE FORMULA
Present Value=FV÷(1+i)^n
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Future Value of an Annuity FORMULA
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Present Value of an Annuity FORMULA
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Effective Yield FORMULA
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WHAT KIND OF FORMULA IS THIS?
PRESENT VALUE
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Present Value of a Perpetuity FORMULA
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What is the present value of an annual payment of $10,000 that is received in perpetuity if the discount rate is 13%?
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Suppose that an investment product pays an investor $10,000 in perpetuity. If the appropriate discount rate is 12%, what should the price (or present value) of this product be?
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Calculate the present value of the following perpetuity?
$500 discounted at 4% annually
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use BEG/END mode to find present value of a 20-year annuity due of $2,500 given an 8% discount rate?
Being an **annuity due**, the payments are paid at the beginning of each year. (Use Beg. mode)
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2 STEP PROCESS TO SOLVE If you are going to receive $70,000 for 20 years starting 5 years from now, what is the present value of the cash flows discounted at 12%?
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2 STEP PROCESS TO SOLVE What is today’s value of a $5,000 annual perpetuity starting in 40 years discounted at 8%?
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FV COMPOUND INTEREST FORMULA
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PV SINGLE SUM FORMULA
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3 GENERAL PROBLEM TYPES
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UNEVEN CF, PV
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TVM PROBLEM 1
UNEVEN CF, FV
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TVM PROBLEM 2
PERPETUITY, PV
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TVM PROBLEM 3
ANNUITY, DEFERRED, PV
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PVIFA STANDS FOR
PRESENT VALUE OF INTEREST FACTOR FOR ANNUITY
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TVM PROBLEM 4
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TVM PROBLEM 7
SINGLE SUM, FV, COMPOUND QUARTERLY
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PVA
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EFFECTIVE ANNUAL RATE (EAR) (EFFECTIVE YIELD)
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EAR STANDS FOR
EFFECTIVE ANNUAL RATE (EFFECTIVE YIELD)
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PMT OF 50.77
FVAD
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"Sources of firm financing that appear in the debt section of the balance sheet."
"Debt Capital"
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"An approximation of the current yield that does not incorporate the time value of money. Current Yield = Annual Coupon/Current Market Value."
"Current Yield"
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"The sum of money that a corporation promises to pay at the expiration of a bond; also called par value."
"Face Value"
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"A legal contract that governs the relationship between a firm and its bondholders."
"Bond Indenture"
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"Unsecured bonds that are not backed by collateral and that have a lower claim than normal debentures to the assets of the firm in the event of firm liquidation."
"Subordinated Debentures"
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"Bonds that pay no coupon payments but often sell at deep discounts."
"Zero-coupon Bonds"
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"The required rate of return on a bond; also called yield to maturity."
"Promised Yield"
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"The stated interest rate of a bond; also known as coupon rate."
"Coupon Yield"
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"Unsecured bonds that are not backed by collateral."
"Debentures"
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"How much it costs the firm (in percentage terms) to finance its operations through debt and/or equity."
"Cost of Capital"
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"Bonds issued by local governments that are almost always exempt from federal taxes."
"Municipal Bonds"
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"A bond covenant that describes things the company pledges itself to do in order to protect bondholders."
"Affirmative Covenants"
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"A bond covenant that describes things the company pledges itself not to do in order to protect bondholders."
"Negative Covenants"
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"The required rate of return of a bond; also called promised yield."
"Yield to Maturity (YTM)"
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"The present value of the stream of expected cash flows discounted at an appropriate required rate of return."
"Intrinsic Value"
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"The sum of money that a corporation promises to pay at the expiration of a bond; also called face value."
"Par Value"
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"The stated interest rate of a bond; also known as coupon yield."
"Coupon Rate"
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"A bond that has specific collateral in the form of real estate holdings or real property."
"Mortgage Bond"
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"A bond that is payable in a currency not native to the country in which it is issued."
"Eurobond"
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"Bonds that are issued in a domestic market by a foreign firm but in the domestic currency."
"Foreign Bonds"
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"Rules set forth in the bond indenture to protect bond investors."
"Covenants"
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"A measure of the interest rate sensitivity of a bond."
"Duration"
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"Speculative bonds rated BB or below."
"Junk Bonds"
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"A debt agreement that obligates a corporation to make certain payments to investors in exchange for money the investor lends to the corporation."
"Bond"
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"The ability of a bond to be converted into equity securities."
"Convertibility"
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"A high-quality bond rated BBB or above and considered to be fairly low risk."
"Investment-grade Bond"
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THE VALUE OF ANY ASSET = \_\_\_
PRESENT VALUE OF THE STREAM OF EXPECTED CF, DISCOUNTED AT REQUIRED RATE OF RETURN
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Current Yield = Annual Coupon/Current Market Price of Bond
= Annual Coupon/Current Market Price of Bond
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price of this bond
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