Final - Part 2 Flashcards
(123 cards)
1
Q
common stock
A
equity without priority for dividends or in bankruptcy
2
Q
Over-the-counter market
A
securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories
3
Q
Net present value
A
the difference between an investment’s market value and its cost; it measures how much value is created or added today by undertaking an investment
4
Q
True or False: Net present value are estimates?
A
True
5
Q
Payback Period
A
the amount of time required for an investment to generate cash flows sufficient to recover its initial cost
6
Q
Payback Rule
A
an investment is acceptable if its calculated payback period is less than some prespecified number of years
7
Q
Discounted payback
A
the length of time required for an investment’s discounted cash flows to equal its initial cost
8
Q
Discounted Payback Rule
A
investment is acceptable if its discounted payback is less than some prespecified number of years
9
Q
Advantages of the discounted payback period rule
A
- includes time value money
- easy to understand
- does not accept negative estimated NPV investments
- Biased toward liquidity
10
Q
Disadvantages of the Discounted Payback Period Rule
A
- May reject positive NPV investments
- Requires an arbitrary cutoff date
- ignores cash flow beyond the cutoff date
- biased against long-term investments, such as research and development, and new projects
11
Q
Internal Rate of Return Rule
A
an investment is acceptable if the IRR exceeds the required return, if not, then it should be rejected
12
Q
Mutually exclusive investment decision
A
situation in which taking one investment prevents the taking of another
13
Q
incremental cash flows
A
the difference between a firm’s future cash flows with a project and those without the project
14
Q
Stand-alone principle
A
the assumption that evaluation of a project may be based on the projects incremental cash flows
15
Q
Sunk Cost
A
cost that has already been incurred and cannot be removed and therefore, should not be considered in an investment decision
16
Q
Opportunity Cost
A
the most valuable alternative that is given up if a particular investment is undertaken
17
Q
Erosion
A
occurs when the cash flows of a new project come at the expense of a firm’s existing projects
18
Q
Accelerated cost recovery system
A
depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications
19
Q
Bottom-up approach
A
begin with the accountant’s bottom line (net income) and add back any noncash deductions such as depreciation
20
Q
Top-down approach
A
start at the top of the income statement with sales and work out way down to net cash flow by subtracting costs, taxes, and expenses
21
Q
Tax shield
A
approach that views OCF as having two components:
1. what the project’s cash flow would be if there were no depreciation expense
2. depreciation multiplied by tax rate
22
Q
Forecasting Risk
A
the possibility that errors in projected cash flows will lead to incorrect decisions
23
Q
Scenario Analysis
A
determination of what happens to NPV estimates when we ask what-if questions
24
Q
Simulation analysis
A
a combination of scenario and sensitivity analysis, wherein we allow items to vary at the same time
25
operating leverage
the degree to which a firm or project relies on fixed costs
26
Systematic Risk
influences many assets (uncertainties about general economic conditions such as GDP, interest rates, or inflation)
27
Unsystematic risk
a risk that affects at most a small number of assets (the announcement of an oil strike by a company)
28
True or False: a portfolio with many assets has almost no unsystematic risk
True
explanation: unsystematic risk is essentially eliminated by diversification
29
Does systematic risk affect almost all assets?
Yes, systematic risk affects almost all assets to some degree, so no matter how many assets are in a portfolio, the systematic risk doesn't go away
30
Systematic risk principle
the expected return on a risky asset depends on that asset's systematic risk
31
Security Market Line
positively sloped, straight line displaying the relationship between expected return and beta
32
Market Risk Premium
Slope of the security market line
33
Capital Asset pricing model
the equation of the SML showing the relationship between expected return and beta
34
What does the cost of capital depend on?
the cost of capital depends primarily on the use of funds, not the source
35
Cost of Equity
the return that equity investors require on their investment in the firm
36
SML approach advantages
1. it explicitly adjusts for risk
2. it is applicable to companies other than just those with steady dividend growth
37
SML approach disadvantages
1. requires that two things be estimated, the market risk premium and the beta coefficient) and if the estimates are poor, the resulting cost of equity will be inaccurate
2. are relying on the past to predict the future
38
Cost of debt
The return that lenders require on the firm's debt
39
Cost of preferred stock is equal to...
the dividend yield on the preferred stock
40
Venture Capital
Financing for new, often high-risk, ventures
41
Prive Equity
often used to label the rapidly growing area of equity financing for nonpublic companies
42
Crowdfunding
the practice of raising small amounts of capital from a large number of people, typically via the internet
43
Registration Statement
a statement filed with the SEC that discloses all material information concerning the corporation marking a public offering
44
Prospectus
A legal document describing details of the issuing corporation and the proposed offering to potential investors
45
General Cash Offer
an issue of securities offered for sale to the general public on a cash basis
46
Rights offer
public issue of securities in which securities are first offered to existing shareholders
47
Initial Public Offering
A company's first equity issue made available to the public; also called an unseasoned new issue
48
Seasoned Equity Offering
A new equity issue of securities by a company that has previously issued securities to the public
49
Underwriters
Investment firms that act as intermediaries between a company selling securities and the investing public
50
Gross spread
the difference between the underwriter's buying price and the offering price, representing compensation to underwriter
51
Syndicate
group of writers formed to share the risk and to help sell an issue
52
What are the three types of underwriting involved in a cash offer?
1. Firm Commitment
2. Best Efforts
3. Dutch Auction
53
Firm commitment Underwriting
the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares
54
Best Efforts Underwriting
the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsability
55
Dutch Auction Underwriting
the offer price is set based on competitive bidding by investors; also called uniform price auction
56
Green Shoe provision
gives the members of the underwriting group the option to purchase additional shares from the issuer at the offering price
57
Lockup Agreements
specify how long insiders must wait after an IPO before they can sell stock
58
Ex-rights date
the beginning of the period when stock is sold without recently declared right, normally two trading days before the holder-of-record date
59
Holder of record date
the sate on which existing shareholders on company records are designated as the recipient of stock rights; also the date of record
60
Dilution
the loss in existing shareholders' value in terms of ownership, market value, book value, or EPS
61
Financial Leverage
the extent to which a firm relies on debt
62
M&M Proposition I
states that the value of the firm is independent of the firm's capital structure
63
Business Risk
the equity risk that comes from the nature of the firm's operating activities
64
Financial Risk
the equity risk that comes from the financial policy (capital structure of the firm)
65
Liquidation
termination of the firm as a going concern, and it involves selling off the assets of the firm
66
Reorganization
financial restructuring of a failing firm to attempt to continue operations as a going concern
67
Regular Cash dividends
cash payments made by a firm to its owners in the normal course of business, usually paid four times per year
68
Information content effect
the market's reaction to a change in corporate dividend payout
69
Clientele Effect
argument states that stocks attract particular groups based on dividend yield and the resulting tax effects
70
Stock repurchase
the purchase, by a corporation, of its own shares of stock
71
Stock Dividend
a payment made by a firm to its owner in the form of stock, diluting the value of each share outstanding
72
Stock Split
an increase in a firm's shares outstanding without any change in owner's equity
73
Activities that increase Cash
1. increasing long-term debt
2. increasing equity
3. increasing current liabilities
4. decreasing current assets other than cash
5. decreasing fixed assets
74
Activities that decrease cash
1. decreasing long-term debt
2. decreasing equity
3. decreasing current liabilities
4. increasing current assets other than cash
5. increasing fixed assets
75
Operating cycle
period between the acquisition of inventory and the collection of cash from receivables
76
Inventory Period
the time it takes to acquire and sell the inventory
77
Accounts Receivable period
the time between sale of inventory and collection of the receivable
78
Accounts Payable period
the time between receipt of inventory and the payment for it
79
Cash cycle
the time between cash disbursement and cash collection
80
In which two ways will the short-term financial policy adopted by a firm be reflected?
1. the size of the firm's investments in current assets
2. the financing of current assets
81
Carrying costs
coss that rise with increases in the level of investment in current assets
82
Shortage costs
costs that fall with increases in the level of investment in current assets
83
Cash Budget
a forecast of cash receipts and disbursements for the next planning period
84
What are the four categories of cash disbursements
1. payment of accounts payable
2. wages, taxes, and other expenses
3. capital expenditures
4. long-term financial expenses
85
Line of Credit
a formal or informal rearranged, short-term bank loan
86
Compensating balance
money kept by the firm with a bank as part of a loan agreement
87
Accounts receivable financing
secured short-term loan that involves either the assignment of the factoring of receivables
88
inventory loan
a secured short-term loan to purchase inventory
89
commercial paper
consists of short-term notes issued by large, highly rated firms
90
Trade Credit
involves a firm increasing the accounts payable period
91
What are the three liquidity motives?
1. Speculative motive
2. precautionary motive
3. transaction motive
92
speculative motive
the need to hold cash to take advantage of additional investment opportunities such as bargain purchases
93
precautionary motive
the need to hold cash as a safety margin to act as a financial reserve
94
Transaction motive
the need to hold cash to satisfy normal disbursement and collection activities associated with a firm's ongoing operations
95
Float
the difference between book cash and bank cash, representing the net effect of checks in the process of clearing
96
Lockboxes
special post office boxes set up to intercept and speed up accounts receivable payments
97
Cash concentration
the practice of, and procedures for, moving cash from multiple banks into the firm's main account
98
Terms of sale
the conditions under which a firm sells its goods and services for cash or credit
99
Credit analysis
the process of determining the probability that customers will not pay
100
Collection Policy
the procedure followed by a firm in collecting accounts receivable
101
Credit Period
the length of time for which credit is granted
102
Cash Discount
given to reduce prompt payment
103
What factors should be considered when evaluating credit policy
1. revenue effects
2. cost effects
3. the cost of debt
4. the probability of nonpayment
5. the cash discount
104
Five C's of credit
Character
Capacity
Capital
Collateral
Conditions
105
Credit scoring
the process of quantifying the probability of default when granting consumer credit
106
Aging Schedule
compilation of accounts receivable by the age of each account
107
Materials requirement planning
set of procedures used to determine inventory levels for demand-dependent inventory types such as work-in-progress and raw materials
108
Just-in-time inventory
system for managing demand-dependent inventories that minimizes inventory holdings
109
Horizontal Acquisition
an acquisition of a firm in the same industry as the bidder
110
Vertical acquisition
involves firms at different steps of the production process
111
Conglomerate acquisition
occurs when the bidder and the target firm are in unrelated lines of business
112
Strategic alliance
an agreement between firms to cooperate in pursuit of a joint goal
113
Joint Venture
typically an agreement between firms to create a separate, co-owned entity established to pursue a joint goal
114
Poxy contests
an attempt to gain control of a firm by soliciting enough stockholder votes to replace existing management
115
Synergy
positive incremental net gain associated with the combination of two firms through a merger or acquisition
116
Benefits of mergers and acquisitions
1. revenue enhancement
2. cost reductions
3. lower taxes
4. reduction in capital need
117
Poison Pill
financial device designed to make unfriendly takeover attempts unappealing, if not impossible
118
Share Rights plan
provisions allowing existing stockholders to purchase stock at some fixed price should an outside takeover bid come up, discouraging hostile takeover attempts.
119
Golden Parachute
some target firms provide compensation to top-level managers if a takeover occurs
120
Poison put
a variation of poison pill
121
crown jewel
firms often sell of threaten to sell major assets when faced with takeover threat
122
white knight
firm facing an unfriendly merger offer might arrange to be acquired by a different, friendly firm
123
Lockup
option granted to a friendly suitor giving it the right to purchase stock or some fort of assets of a target firm at a fixed price in the event of an unfriendly takeout
