Finance Lectures Flashcards
(133 cards)
1
Q
Sole Proprietorship qualities?
A
1 )Wealth limited to individuals
2) Owners liable for own assets
3) No legal distinction between owner and business
2
Q
Partnership qualities?
A
1) Wealth limited to owners
2) Unlimited liability
3
Q
Limited Corporations qualities?
A
1) Not wealth limited
2) Have articles of incorporation and memorandum of association
3) Shareholders and Managers separate groups
4
Q
Single-tier board structure and named example
A
Shareholder, board of directors, managers (UK)
5
Q
Two-tiered board structure and named example
A
Executive board reports to Supervisor board who monitors performance (Germany)
6
Q
Financial Managers run corporations for whose interest?
A
Shareholders
7
Q
Advantages of a Limited Corporation
A
- Limited liability
- Limited Life
- Separation of owners and managers
- Transfer of ownership is easy
- Easy to raise Capital
8
Q
Disadvantages of a limited Corporation
A
- Separation of owners and managers (own interests)
- Double tax due to Corporate tax and personal Tax rate.
9
Q
How do financial managers get money to invest?
A
1) More owners by issuing equity and stocks
2) Borrow money by issuing debt and bonds
10
Q
Long Term Investments include
A
Machinery, RnD, Buildings.
11
Q
How do you manage short term cash flows?
A
Collecting from customers or paying suppliers.
12
Q
Examples of Capital budgeting?
A
Spending on new objects, construction bringing future incomes
13
Q
Examples of Financial decisions?
A
Return money to Shareholders and Borrowing money from the bank
14
Q
What are the 5 Stages of a financial Manager
A
1) raise cash from investors
2) invest into firm
3) cash generated by operations
4a) reinvestment into firm
4b) cash returned to investors
15
Q
Examples of Current Assets
A
Cash, Trade receivables, inventory.
16
Q
Examples of Current Liabilities
A
Loans, Trade Payable, Taxes
17
Q
What is Net Working Capital and what makes it positive?
A
CA-CL, positive cash flow is CA greater :)
18
Q
What is the Agency relationship?
A
Stockholders hire managers to represent their interests
19
Q
What is the Agency Problem?
A
Managers act for their own interests
20
Q
Define Agency cost
A
Value lost from Agency problem
21
Q
What 4 mechanisms reduce the Agency problem?
A
-Managerial compensation
-control of firm (board of directors)
-threat of takeovers by another firm
-corporate governance
(laws and regulations also protect shareholders)
22
Q
What is the balance sheet identity equation?
A
A=L+E
23
Q
Name two examples of NCA and one for NCL
A
- Building and machinery
- long term debt
24
Q
Define Shareholder Equity
A
Total Value of shares of firm to investors
25
How do you work out Equity?
A-L
26
Define Book Value
Value of asset or security in a firms book
27
How is The book Value calculated
- Based off rules of accounting
- International standards of accounting
- Best rough Approximation of asset replacement cost
28
Define Market Value
Value based on Market evaluations
29
3 Things book value doesn't take into account
- Reputation
- CEO talent
- changing value of assets
30
What is the realisation principle of revenue
Only recognise once goods associated with revenue have been delivered.
31
What is the matching principle of Expenses
Expenses recorded based on period they occurred
32
What do non cash items refer to
The ownership of intangible assets such as patients depreciation and investment.
33
Name the 3 Cash flow equations
1) CF= CF in- CF out
2) CF from assets= CF to creditors+ Equity invested
3) TCF= CF from operation activities,investing and financing activities added.
34
Why do we use Ratio analysis?
To help us understand how healthy a firm is
35
What is the least liquid asset and what it is a sign of?
Inventory, Short term trade.
36
What are asset management ratios used for?
How efficient a firm uses assets to generate sales.
37
How fast we collect sales is measured by?
Receivable turnover
38
Define ROA
Measure of profitability per unit of asset
39
Define ROE
Measure of how shareholders fare during the year.
40
What does the price earning ratio measure
How much investors are willing to pay per unit of currency earnings.
41
Name the 3 uses of the financial statement.
1) performance evaluation
2) party comparison
3) evaluate competitors
42
Define time trend analysis
Look at same ration over a number of years
43
Define peer group analysis
Compare ratios with firms and companies in same industry.
44
What are the issues with Ratio analysis comparisons
-Different accounting standards of firms
45
Define aspirant analysis
compare with firm at the top of their industry
46
What is total interest?
Interest earned on an initial principle
47
What is Simple interest?
Interest that is earned on OG amount
48
What is compound interest?
Interest earned on previous interest payments
49
What is an Annuity?
Flow of cash streams for a fixed period of time
50
What is a Perpetuity?
A stream of cash flows forever
51
Three principle set of players in the financial market include
1) Borrowers
2) Investors
3) Financial Institutions
52
What is the money market and give an example.
Debt instruments with maturity of less than one year. e.g. T bills.
53
What is the capital market, and give some examples
Money borrowed for a period of over a year to fiance projects. examples of this include Bonds, Share and preferred shares
54
What is the Primary market?
Where securities are created, new shares are given at a price to the public.
55
What is the Secondary Market?
Where stocks and shares are bought.
56
What is a Discount Bond?
A bond selling for less than its face value
57
What is a Premium Bond?
A bond selling for more than its face value
58
Bond sells for par means?
YTM= current yield= CR
59
Discount Bond means?
YTM> current yield> CR
60
Premium Bond means?
YTM< current yield< CR
61
What increases the risk of interest rates rising
- Longer time to Maturity
| - Lower coupon rate
62
Bond issuer default is when
investors receive less than promised return
63
Bond rating
reflect the probability of bond going into default. AAA is a high grade bond CCC is a low grade bond.
64
What is the Real rate of interest?
Adjustments in the nominal rate of interest for the expected rate of inflation.
65
What is the term structure of an interest rate?
Relationship between long term and short term interest rates.
66
Determinants of term structure include
- Real interest rates compensating that investors demand for money used.
- Inflation premium compensation for expected inflation shown as nominal interest
- interest rate risk premium, the compensation investors demand for bearing interest rate risk.
67
Treasury yield curve represents
treasury yields increase as maturity increases.
68
Define Default risk premium
Nominal Interest rate representing compensation for possible defaulting of bond.
69
In what two ways do stockholders receive cash?
- Company pays Dividends
| - sell shares to market
70
Define Dividends
Equity provided at irregular intervals.
71
Price stock is equal to
PV of expected cash flows
72
What are the 5 traits of Debt
- Not ownership interest
- creditors no voting rights
- interest is tax deductible
- creditors can take legal action of interest not payed
- excess debt causes financial distress and bankruptcy
73
What are the 5 traits of Equity
- Ownership interest
- Shareholders have voting rights
- Dividends not tax deductible
- Stockholders have no legal recourse if dividends not paid
- All equity firm cant go bankrupt.
74
What are three difficulties with share evaluation
1) CFs uncertain
2) Life of Investment uncertain
3) hard to measure expected returns
75
What does increased debt cause (Balance sheet)
- increase debt leads to increased interest
- increased financial distress
- reduced taxes and taxable income.
76
Describe the relationship between stock price and growth rate (g)
positive correlation
77
Describe the relationship between stock price and required return (R)
negative correlation
78
What does R equal
Dividend yield+ Capital Gain.
79
what are preferred stocks
corporation promises buyers fixed dividends forever.
80
3 Traits of Preferred stocks include:
- must be paid before dividends
- not liability of firm
- cant be deferred
81
Define NPV
PV of cash flows minus initial investment
82
What is the opportunity cost of capital
discount rate (r)
83
If NPV is positive we
accept the investment project
84
define decision rule
accept project id payback period is less than some preset limit
85
What are the pitfalls of the payback rule
1) ignores time value of money and cost of Cap
2) ignores CFs after payback period
3) based on long term projects
4) rely on ad hoc decision criterion
86
Payback decision rule implies
you accept the project which receives the NPV before the payback period
87
IRR is equal to
the discount rate and makes NPV=0
88
You accept the project if IRR is greater than
required return (Dec rule )
89
NPV method is better than IRR method as
it warns you away from borrowing money at 50% for Co
90
What are non conventional cash flows and what should you do if you encounter them
when C1+ C2- C3+ and you should look at the NPV profile
91
If you're given a higher IRR value than a project but it has a lower NPV what project should you choose
Always choose higher NPV
92
Define benefit cost ratio
PV of investments future cash flows divided by initial cost
93
What does a 1.1 profitability index figure signify
for every one dollar invested we create an addition 0.10 in value
94
What cash flows should be included in the CAPITAL BUDGETING ANALYSIS
Incremental cash flows if the project is accepted
95
Define the Stand-alone principle
Isolation of firms to focus of incremental cash flows
96
What are the 6 features of incremental cash flows:
1) forget sunk costs
2) forget OC
3) side effects such as benefits and costs to other projects
4) forget finance cost
5) include changes in NWC
6) taxes matter
97
What are the 9 steps of the financial statement
- Revenue
- Expenses
- Depreciation
- NI
- OCF ( 3+4)
- NWC changes
- Capital spending
- TCF (5+6+7)
- Criterion for NPV
98
Define straight line depreciation
Depreciation allowing linear write off of assets over their life time
99
What is a reduced balance method of deprecation
depreciation at 20% of initial value, continuously then a large chunk taken at the end.
100
Why do we have to conciser NWC separately
1) sales not recorded
2) record cost of goods sold even if we haven't payed the suppliers
3) Buy inventory even if cash not collected to support sales
101
5 lines in working change in NWC
- NWC
- INITIAL
- CHANGE
- NWC RECOVERY
- TOTAL CHANGE
102
What is a forecasting decision
possible errors in CFs leading to a bad investment decision
103
Define best case estimate
estimate NPV based on in initial CFs
104
Define scenario analysis
examine best and worst case scenario of NPV
105
define sensitivity analysis
Effecting NPV while changing one input variable
106
define stimulation analysis
vary several inputs to find NPV estimates
107
The greater the volatility in NPV when changing one value causes there to be a
larger forecasting risk
108
An example of sensitivity analysis is
freeze everything except unit sales
109
price is likely to increase if
market size increases
110
Stimulation analysis represents NPV as a
probability
111
Assume you graph a project's net present value given various sales
quantities. Which one of the following is correct regarding the
resulting function?
The slope of the function measures the sensitivity of
| the net present value to a change in sales quantity.
112
Short term Gov Bonds
Low return and variability
113
Long term gov bonds
Higher return and variability
114
Long term Comp stocks
Higher return than bonds, higher variability
115
Small company stocks
highest return and highest variability
116
What is used as a risk free asset
T bills
117
Define risk premium
return in excess of the risk free rate
118
What does it mean if you have a higher risk premium
your investment is riskier
119
Over the long term risky assets earn
a higher risk premium
120
ER equals
pxR
121
What is a portfolio
group of equities and bonds held by an investor
122
whats a portfolio weight
% of a portfolio total value in a particular asset
123
total return=
ER+U
124
ANNOUNCEMENT=
Expect part+ surprise
125
unsystematic risk is also known as
diversifiable risk
126
systematic risk is also known as
non diversifiable risk
127
E(R) DEPEND ON
assets systematic risk
128
beta coefficient
amount of systematic risk in an risky asset
129
expected return increases when
risk of portfolio increases
130
In equilibrium the reward to risk ration for all assets must be
EQUAL
131
security market line represents
relationship between ER and beta
132
market risk premium equals
slope of SML
133
define cost of capital
return investors could expect to earn if they invest in securities ( min required return)
