Exam 3 Review Flashcards
(131 cards)
1
Q
Financial statements are accounting reports issued periodically to:
A
Show past performance
Present a snapshot of the firm’s assets
Provide information about how the assets are financed
2
Q
Financial statements provide reliable information to who?
A
Investors
Financial analysts
Managers
Creditors
3
Q
Public companies must file statements with who?
A
Securities and Exchange Commission
4
Q
How often must the annual report with financial statements be sent to shareholders?
A
Every year
5
Q
Balance sheet lists:
A
firm’s assets and liabilities
6
Q
What does the balance sheet provide a snapshot of?
A
The firm’s financial position at a given point in time
7
Q
The income statement lists:
A
revenues and expenses over a period of time
8
Q
Another name for the income statement
A
Profit and Loss statement
9
Q
The bottom line of the income statement is referred to as what?
A
Net income or earnings
10
Q
What information does the statement of cash flows use?
A
Info from the income statement and balance sheet
11
Q
What does the statement of cash flows determine?
A
How much cash the firm has generated
How that cash has been allocated during a set period
12
Q
A forecasting method that assumes that the balance sheet and income statement items grow proportionately with sales
A
Percentage of Sales Method
13
Q
What do you typically assume about interest expense?
A
That it remains the same
14
Q
What does the difference between assets and L+E indicate on the pro forma balance sheet?
A
The net new financing to fund growth
15
Q
When you need new funding on the balance sheet you must choose between what types?
A
Debt or equity
16
Q
What will change if debt is chosen for the new funding on the balance sheet?
A
The interest assumption
17
Q
This forecasting method first identifies capacity needs and financing options
A
Capacity-Driven Forecasting
18
Q
When L+E > A
A
Excess cash is available
19
Q
Operating cycle
A
Length of time between purchasing inventory and receiving the cash back from selling products
20
Q
Cash cycle
A
Length of time between payment of cash to purchase initial inventory and receiving cash from the sale of a product
21
Q
Cash Conversion Cycle
A
= Inventory Days + A/R days - A/P days
22
Q
The difference between receivables and payables that is the net amount of a firm’s capital consumed as a result of those credit transactions
A
Trade Credit
23
Q
The credit that a firm extends to its customers
A
Trade Credit
24
Q
Cost of Trade Credit
A
Effective Annual Rate
25
Three steps of establishing a credit policy:
1. Establishing credit standards
2. Establishing credit terms
3. Establishing a collection policy
26
5 C's of Credit
```
Character
Capacity
Capital
Collateral
Conditions
```
27
Accounts Receivable Days
Average number of days that it takes a firm to collect on its sales
28
Aging Schedule
Categorizes accounts by the number of days they have been on the firm's books
29
Aging Schedule can be prepared using what two ways?
The number of accounts or the dollar amount of the accounts receivable outstanding
30
Firms should monitor their accounts payable to ensure what?
That they are making their payments at an optimal time
31
When a firm ignores a payment due period and pays later
Stretching accounts payable
32
What might the supplier implement if accounts payables are stretched too far?
Cash On Delivery
or
Cash Before Delivery
33
Benefits of Holding Inventory
Minimize stock-out risk
| Can pursue most efficient production cycle rather and try to meet demand patterns (like seasonality)
34
Costs of Holding Inventory
Acquisition Costs
Order Costs
Carrying Costs
35
When a firm acquires inventory precisely when needed so that its inventory balance is always zero, or very close to it
Just-In-Time Inventory Management
36
Motivation for Holding Cash
Transaction Balance
Precautionary Balance
Compensating Balance
37
Transaction Balance
To meet day-to-day needs
38
Precautionary Balance
To compensate for the uncertainty associated with cash flows
39
Compensating Balance
To satisfy bank requirements
40
The first step in short-term financing is to forecast the company's future cash flows to discover:
Cash surplus or deficit?
| Temporary or permanent?
41
Reasons for short-term financing needs
Negative cash flow shocks
Positive cash flow shocks
Seasonalities
42
Matching Principle
Short-term needs should be financed with short-term debt and long-term needs should be financed with long-term sources of funds
43
Permanent working capital
The amount that a firm must keep invested in short-term assets to support continuing operations
44
Temporary working capital
The difference between the actual level of investment in short-term assets and the permanent working capital investment
45
Promissory note
Single, end of period payment loan (uses benchmark rate, such as prime rate or LIBOR)
46
Promissory Note Line of Credit Types
Uncommitted
Committed
Revolving
Evergreen
47
Bridge Loan
Often a discount loan with fixed interest rate; with a discount loan, borrower pays interest at the beginning of the loan period
48
Commercial paper
Short-term, unsecured debt used by large corporations
49
What is commercial paper usually cheaper than?
A short-term bank loan
50
What is the minimum face value of commercial paper?
$25,000
51
Interest on commercial paper is typically paid how?
By selling it at an initial discount
52
Direct Paper
Firm sells directly to investors
53
Dealer paper
Dealers sell to investors in exchange for a spread (or fee) for their services
The spread decreases the proceeds that the issuing firm receives, increasing the effective cost
54
Secured Loans
Loans collateralized with short-term assets (usually a/r or inventory)
55
Most common sources of secured loans:
Commercial banks
Finance companies
Factors (firms that purchase the receivables of other companies)
56
Pledging of Accounts Receivable
Lender reviews the invoices and decides which credit accounts it will accept as collateral, based on its own credit standards
57
Factoring of Accounts Receivable
- The firm sells receivables to the lender
| - Lender pays the firm the amount due from its customers at the end of the firm's payment period less a factor's fee
58
Lien
All of the inventory is used to secure the loan
59
Trust receipts loan or floor planning
Distinguishable inventory items are held in a trust as security for the loan
60
Warehouse arrangement
Inventory that serves as collateral is stored in a separate warehouse
61
Option
Contract which grants the buyer the right - but not the obligation - to buy or sell an underlying asset at a fixed price at or before an expiration date.
62
What is the value of an option based on?
The value of some underlying asset
63
The price or value of this asset gives us a "signal" about what?
Whether or not to exercise an option
64
Financial options are traded in a what?
Market
65
What is the cost of the option?
Premium
66
Call option holder has the right to what?
Buy underlying asset
67
Put option holder has the right to what?
Sell underlying asset
68
Price at which the underlying asset can be bought or sold if the option is exercised
Strike price
69
Last date on which the option can be exercised
Expiration date
70
These types of options can only be exercised at the expiration date
European options
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These types of options can be exercised at expiration or any time beforehand
American
72
Intrinsic Value
Payoff if option is exercised immediately
73
"In-the-money"
Intrinsic value > 0
74
"Out-of-the-money"
Intrinsic value less than 0
75
"At-the-money"
Intrinsic value = 0
76
Extrinsic value
Value in waiting to exercise
77
Increased volatility of stock price always does what to value?
Increases value!!!!
78
Financial options
Options to buy and sell market-traded assets (stock, commodities, foreign currency, etc)
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Real Options
Options to alter the cash flow stream associated with a real asset
80
Timing Option
Delay a project until expected cash flows are more favorable
81
Expansion Option
Increase the scale and scope of an investment in response to realized demand
82
Contract, shut-down, and abandonment option
Slow down, halt, or permanently abandon a project
83
Switching Option
Switch inputs or outputs in a project
84
The effect of optimal decision making under uncertainty is to change what?
The distribution (and expected value) of the project NPV
85
A discrete lattice or tree models what?
The uncertain value of the project over time
86
Binomial Lattice Model is a convenient what?
Decision-making model
87
Merger Waves
More mergers during economic expansions
88
Types of Mergers
Horizontal
Vertical
Conglomerate
89
Method of Payment for Mergers & Acquisitions
Stock swap
Cash merger or acquisition
Some combination of stock and cash
90
Why do acquirers typically pay substantial premiums?
```
Economies of Scale and/or Scope
Vertical Integration
Expertise
Monopoly Gains
Efficiency Gains
Tax Savings from Operating Losses
Diversification
Earnings Growth
Managerial motives to merge
```
91
Valuation Methods in Takeover Process
Compare the target to similar companies or use discounted cash flows
92
Tender Offer
Public announcement of cash transaction or stock swap
93
A stock swap has a positive NPV transaction if what?
The share price of merged firm exceeds pre-merger acquirer price
94
Stock swap is positive NPV if:
Share Price of Merged Firm > Pre-merger Share Price of Acquirer
95
Friendly Takeover
Target board of directors supports takeover
96
Hostile takeover
Corporate raider
97
Reasons board may not approve even if a premium is offered:
Might think offer price is too low
In a stock swap, might think acquirer is overvalued
Might be self interest (agency problem)
98
Proxy Fights
In a hostile takeover, the acquirer attempts to convince target shareholders to use proxy votes to support acquirers' candidates for election to the target board
99
Strategies to stop proxy fights:
Can force a bidder to raise the bid
| Can entrench management more securely
100
Posion Pills
Rights offering that gives existing target shareholders the right to buy shares in the target at a deeply discounted price under certain conditions
101
Poison Pills do what to the value of shares held by acquirer?
Dilutes them
102
Downside of Poison Pills
- Makes it more difficult to replace bad managers
- Firm's stock price drops when poison pill is adopted
- Firms with poison pills have below average financial performance
103
Staggered boards do what to acquirers?
Makes it more difficult for them to gain board control because only one-third of directors are up for election each year
104
White Knights
Target looks for a friendlier company to acquire it
105
White Squire
Large friendly investor only purchases substantial block of shares and does not exercise control rights
106
Golden Parachutes
Lucrative severance packaged guaranteed to senior managers in the event that the firm is taken over and the managers are let go
107
Golden Parachutes are suggested to do what to value?
Increase value because management is more likely to be receptive to a takeover.
108
Recapitalization
Company changes capital structure to make itself less attractive (for example, pay out large dividend)
109
Other Defensive Strategies for Takeover
- Supermajority voting requirements for merger approval
- Restricted voting rights for large shareholders
- "Fair" price requirements, defined by BOD
110
Toeholds
Initial ownership stake in a firm that a corporate raider can use to initiate a takeover attempt
111
In a toehold, a raider can acquire what percent of the firm in secret?
10%
112
In a toehold, a corporate raider performs what?
An important service because management knows they exist
113
Leveraged Buyout
A lower-cost mechanism for corporate raiders. Instead of using their own cash, the raider borrows money through a shell corporation with the shares as collateral. If the tender offer succeeds, the raider can merge the target with the shell corporation and debt is owed by the target.
114
Freezout Merger
Used by companies acquiring other companies. The acquiring company makes a tender offer at a slight premium and if offer succeeds, acquirer gains control and merges into a new corporation.
Non-tendering shareholders faced with losing their shares, because target firm ceases to exist.
No benefit to holding out so existing shareholders will accept offer.
115
Floating Rate
Exchange rate that changes constantly depending on the supply and demand for each currency in the market
116
Supply and demand for each currency is driven by three factors:
1. Firms trading goods
2. Investors trading securities
3. The actions of the central banks in each country
117
Importer-Exporter Dilemma
If companies set prices in a certain currency, they risk losing money if the exchange rate rises or falls
118
Currency Forward Contract
A contract that sets a currency exchange rate, and an amount to exchange, in advance of a future delivery date
119
Forward Exchange Rate
The exchange rate set in a currency forward contract, it applies to an exchange that will occur in the future
120
Cash-and-Carry Trades
1. Borrow dollars today at the dollar interest rate
2. Exchange the dollars for euros at the spot exchange rate
3. Deposit the euros for one year at the euro interest rate
121
The difference between the forward and spot exchange rates is related to the _______ _________ ___________ between the currencies.
interest rate differential
122
What allows firms to lock in a future exchange rate?
Currency Forward Contracts
123
In a currency forward contract must the firm pay the rate it locks in no matter what?
Yes
124
Allows firms to insure themselves against the exchange rate moving beyond a certain level
Currency Options
125
In a currency options must the firm pay the rate in the option contract?
No! They can pay the rate in the option or the current - whichever is better
126
Differences in the forward rate vs option hedge:
- cost of premium (if exchange rate goes up)
| - benefit (cost reduction if exchange rate goes down)
127
When any investor can exchange currencies in any amount at the spot or forward rates and is free to purchase or sell any security in any amount in any country at its current market prices
Internationally Integrated Capital Markets
128
In Internationally Integrated Capital Markets, the value of an investment does not depend on the ________ used in analysis
currency
129
Given future expected cash flow in foreign currency, you can either:
- Discount with foreign rate and convert using the spot rate
- Convert future cash flows and discount using dollar rate
130
When L + E is less than Assets
Additional financing is needed
131
Internationally Integrated Capital Markets
When any investor can exchange currencies in any amount at the spot or forward rates and is free to purchase or sell any security in any amount in any country at its current market prices
