Finance Final Flashcards by isabelle alarms

The goal of managers is to

maximize firm value

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Inflation

Rate at which prices as a whole are increasing

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Real Value of $1

Purchasing power-adjusted value of a dollar

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Nominal interest rate

rate at which money invested grows

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Real interest rate

Rate at which the purchasing power of an investment increases

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When interest rates go up

Bond prices go down

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Bond is selling at a premium

Price > Face Value

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Current yield =

Coupon / Price

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Expectations theory

A major factor determining the shape of the yield curve is expected future interest rates

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An upward sloping yield curve tells you that

Investors expect short term interest rates to rise

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The liquidity-preference theory

Assumes that investors prefer buying short-term securities because these securities have less interest rate risk

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The default premium is the

Difference between promised yield on a corporation bond and the yield on a Canada bond with the same coupon and maturity

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Plowback =

EPS - Div / EPS

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Efficient market

A market where prices reflect all available information

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Security market line

Relationship between market risk of the security (beta) and its expected return

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Profitability index

The ratio of NPV to initial investment

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3 difference ways to calculate OCF

Revenue - Expense - Tax
Net Income + Depreciation
(Rev - Exp)(1 - Tc) + (Depr x Tax)

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Sensitivity Analysis

Analysis of the effects of changes in sales, costs, etc on project profitability

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Scenario Analysis

Projects analysis given a particular combination of assumptions

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Simulation analysis

Estimation of the probabilities of different possible outcomes - an extension of scenario analysis

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OFC (break-even) =

Cost / (1/r - 1/r x 1+r^t) ; (Isolate R from revenue)

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Operating leverage

The degree to which a firm’s operating costs are fixed

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Degree of operating leverage

The percentage change in operating profits when sales change by 1%

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A decision tree is a

Diagram of sequential decisions and the possible outcome of such decisions

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In most companies, the Directors are elevated by

A majority voting system

Some companies operative a

Cumulative voting system

Most companies issue how many classes of stocks?

Just one

Preferred stock

Stock that takes priority over common stock in regards to dividends

Subordinate debt

Debt that may be repaid in bankruptcy only after senior debt is repaid

Secured debt

Debt that has first claim on specified collateral (assets) in the event of default

Venture capital

Is the equity capital in startup businesses

Venture capitalists are

Investors who are prepared to back an untired company in return for a share of the profits

Initial public offering (IPO)

First offering of stock to the general public

Underwriters typically price the IPO how?

Underprice

Once a firm decides to go public, its first step is

To select the underwriting

Public companies can issue securities either by making a:

Right issue or general cash offer to investors at large

General cash offer

Sale of securities open to all investors by an already public company

Right issue

Issue of securities offered only to current stakeholders

A private placement is

The sale of securities to a limited number of investors without a public offering

When there are no taxes and well-functioning capital market exist,

The market value of a company does not depend on its capital structure

Cost of financial distress

Costs arising from bankruptcy or distorted business decisions before bankruptcy

The trade-off theory

Financial managers choose the level of debt which will balance the firms interest tax shields against its cost of financial distress

The pecking order theory states that

Firms prefer to issue debt rather than equity if internal finance is insufficient

How dividends get paid

1. Cash dividend: Payment of cash by the firm to its shareholders 2. Payment date: Dividend cheques are mailed to investors 3. Ex-dividend date: Date that determines whether a stockholder is entitled to a dividend payment 4. Record date: Person who owns the stock on this date receives the dividend

Stock dividend

Distribution of additional shares, instead of cash, to the firm's shareholders

Stock split

Issue of additional shares to firm's shareholders

Reverse split

Issue of new shares in exchange for old shares, which results in the reduction of outstanding shares

Share repurchase

The firm buys back stock from its shareholders

Cash dividend and a share repurchase leave a

Shareholder in the same financial position

Dividend payout ratio

Percentage of earnings paid out as dividend

Information content of dividends

Dividend increases send good news about the future cash and earnings

Modigliani and Miller (MM) maintain that under ideal conditions

The value of the firm is unaffected by dividend policy

Changing the firm's dividend policy may

Attract a new investor clientele but may not change firm value

1. The main objective of the firm

Is to maximize shareholders wealth

2. You cannot change the value of a firm by

Changing its dividend policy

3. With taxes and no cost of financial distress you can maximize the value of the firm by

Eliminating all stock and replacing it with debt

4. With no taxes, and the amount of debt increases, the cost of debt and equity may increase but

The WACC will not change

5. A project that breaks even on an accounting basis will

Have a negative NPV

6. Depreciation is not a ______; the ______ from depreciation is a ________

Cash flow; tax savings; Cash flow

7. If a project has a zero NPV when the cash flows are discounted at the WACC

Then the project's cash flows are just sufficient to give all investors the return they require

8. If a project's return lies above the security market line

Then it is an attractive investment opportunity

9. You can reduce (and eliminate) the unique risk of stocks, but not the market risk,

By combining them into portfolios

Finance Final Flashcards

(62 cards)