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Corporate Finance > Final > Flashcards

Final Flashcards

1
Q

FV equation

A

PV * (1+r)^t

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2
Q

PV equation

A

FV/(1+r)^t

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3
Q

What do we always match the discount rate with?

A

The cash flow rate (monthly, yearly)

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4
Q

3 Annuity Rules

A

1st CF comes in one period
CFs must be constant
There must be a fixed endpoint

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5
Q

YTM

A

The interest rate that sets the present value of a bonds CFs = to its price

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6
Q

Operating Leverage

A

Sensitivity to a firms fixed costs of production

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7
Q

rd equation

A

YTM * (1-tax) (known as the after tax YTM)

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8
Q

Is Asset Beta also Unlevered Beta?

A

Yes

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9
Q

PV of Int Tax Shields equation

A

Tax * Debt

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10
Q

Asset Substitution

A

When shareholders take a -NPV project because its risky enough to get them some money

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11
Q

Debt Overhang

A

When shareholders reject a +NPV project because it is too safe and gives most of the money that they put into it to debtholders

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12
Q

Which group is affected most by agency costs?

A

Shareholders

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13
Q

Debt to Value Ratio

A

D/(D+E)

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14
Q

Concentration of Ownership

A

Leverage allows the original owners to preserve their equity stake

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15
Q

What does the IRR give you?

A

The annualized percentage return on a project

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16
Q

What three things do we care about to compute cash flows?

A

Money changing hands
Opportunity Costs
Side effects to other projects

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17
Q

Do we include interest and dividend payments in cash flows?

A

No

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18
Q

VL basic equation

A

VL = FCF1/(1+rwacc) + FCF2/(1+rwacc)^2…

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19
Q

Efficient Market Hypothesis

A

Security prices reflect all available and relevant data

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20
Q

Weak Form Efficiency

A

Prices reflect all historical data

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21
Q

Semistrong Form Efficiency

A

Prices reflect public data

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22
Q

Strong Form Efficiency

A

Prices reflect public and private data

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23
Q

What form of efficiency is the market believed to be?

A

Semistrong Form

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24
Q

How do Active Funds perform on average?

A

They underperform

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25
Q

Venture Capital

A

They make an investment for 2-5 years with the expectation of substantial growth before they sell the company

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26
Q

Private Equity

A

They take public companies private through purchasing all of their equity through a LBO

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27
Q

Firm Commitment IPO offering

A

The underwriter is responsible for any unsold shares, this is the most common type

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28
Q

Best Efforts IPO offering

A

There is no guarantee that the stock will be sold, typically done by smaller investment banks

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29
Q

What percentage of the gross spread is given to underwriters?

A

7%

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30
Q

SPAC

A

A public shell company that takes private firms public through acquisitions and mergers

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31
Q

Bearer Bond

A

A physical coupon is required for payment

32
Q

Registered Bond

A

Being on the coupon list is required for payment

33
Q

What two things are public and unsecured debt?

A

Notes and Debentures

34
Q

What two things are public and secured debt?

A

Asset Backed Bonds and Mortgage Bonds

35
Q

What three things are types of private debt?

A

Term Loans, Syndicated Bank Loans, Revolving Lines of Credit

36
Q

Private Placement

A

A bond that is sold to a small group of investors instead of to the public

37
Q

Do callable bonds trade at lower yields?

A

Yes

38
Q

Underpricing % equation

A

(Close $-Offer $)/Offer $

39
Q

Conversion Price

A

The face value of a convertible bond / the # of shares received at conversion

40
Q

Sovereign Debt

A

Debt from national governments

41
Q

Cash Cycle

A

The time between when a firm pays cash for inventory and when it receives cash from product sales

42
Q

Operating Cycle

A

The time between when a firm gets inventory and gets cash from product sales

43
Q

Which is usally longer, Cash Cycle or Operating Cycle?

A

Operating Cycle

44
Q

EAR of Trade Credit Formula

A

[1 + Credit/(Total-Credit)]^[365/(total days-discount days)] - 1

45
Q

Matching Principle

A

Short term needs should be financed by short term debts, and long term needs should be financed by long term debts

46
Q

Permanent Working Capital

A

The amount that a firm must keep invested in its short term assets to fund continuing operations

47
Q

Temporary Working Capital

A

The difference between actual short term capital needs and permanent working capital requirements

48
Q

Dividend Dates in Order

A

Declaration Date
Ex-Dividend Date
Record Date
Payable Date

49
Q

Dividend Declaration Date

A

The date that the dividend is authorized

50
Q

Ex-Dividend Date

A

The date where any new buyers don’t get the dividend (2 days before the Record Date)

51
Q

Dividend Record Date

A

Shareholders on record at this date get the dividend

52
Q

Dividend Payable Date

A

The date that the dividends are sent out (usually 1 month after the Record Date)

53
Q

Cum Dividend

A

When a stock trades before the Ex-Dividend Date

54
Q

In perfect capital markets to open market share repurchases have any effect on stock price?

A

No

55
Q

American Option

A

Can be exercised at any time prior to the expiration date

56
Q

European Option

A

Can only be exercised on the expiration date

57
Q

When do we want to exercise calls?

A

When the stock price is higher than the strike price

58
Q

When do we want to exercise puts?

A

When the stock price is lower than the strike price

59
Q

What do Option sellers want for their calls and puts?

A

Calls to be exercised when stock price is lower and puts to be exercised when stock price is higher than the strike price

60
Q

In Replicating Portfolio problems what do the X and Y values represent?

A

X represents the amount of shares to buy
Y represents the amount of money to borrow

61
Q

Black & Scholes

A

Gives the value of a European call option

62
Q

Black & Scholes Assumptions

A

European call option without dividends
Both rf and o are constant
Stock price changes are constant

63
Q

Real Option

A

The right to make a particular business decision

64
Q

Are Real Options traded in financial markets?

A

No

65
Q

What are the two types of nodes in decision trees?

A

Decision Node and Information Node

66
Q

Can you use Black Scholes and the Replicating Portfolio methods to evaluate Real Options?

A

Yes

67
Q

Black Scholes Parameters for a Real Option valuation

A

S - Current Market Value
K - Upfront Investment
T - Final Decision Date
rf - Risk Free Rate
o - Volatility

68
Q

Do mergers come in waves?

A

Yes

69
Q

Horizontal Merger

A

Target and Acquirer are in the same industry

70
Q

Vertical Merger

A

Target industry buys or sells to the Acquirers industry

71
Q

Conglomerate Merger

A

Target and Acquirer operate in unrelated industries

72
Q

Term Sheet

A

The initial nonbinding document outlining the proposed merger deal

73
Q

Do most acquirers pay a premium for targets?

A

Yes

74
Q

Risk Arbitrageurs

A

Traders that speculate on the outcome of mergers

75
Q

Proxy Fight

A

In a hostile takeover the acquirer attempts to convince shareholders to unseat the targets board

76
Q

Poison Pills

A

A rights offering that allows target shareholders the right o buy shares in the target at a significantly discounted price, diluting the shares and making the takeover cost very expensive

Corporate Finance (3 decks)

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