Wrong Answers Flashcards
(30 cards)
Type of Distribution for modeling Asset Prices
Lognormal: Because
1. Values cannot be negative
2. Values aren't bounded on upside
Significance Level of a test
- Probability of rejecting a True Null, by chance
- is % of the time that a true null will be rejected
- NOT 1-SL % of the time a correct decision is made
- Bc there’s still the chance of a type 2 error
Potential Expansion Multiplier (Reserve Ratio)
PEM = 1/reserve ratio
Increase in M Supply = PEM x Increase in deposits
Opportunity Cost of One good for another
Units of Labor
Goods: Cheese = 25 UoL and Leather = 20 UoL
L/C = 0.8
-Opp cost of 1 unit of Leather = 0.8 units of cheese
C/L = 1.25
-Opp cost 1 unit of Cheese = 1.25 units of Leather
Groups that hamper a Single Set of FAR standards
- Regulators: Differences of opinions on some stds
- Lobbyists/Political pressure: Representing businesses that would be worse of under new Stds
NOTE: Firms actually support it -> Save $$ on reporting
Decreasing Prices: Effect on LIFO Reserve
- Causes LIFO reserve to decrease
- Even if inventory stable/decreasing
FCFF Formula
FCFF = CFO + AT(Int Exp) - NET(CAPEX)
GAAP & IFRS: Item with Most Similar Treatment
Discontinued Ops
Non-recurring Items included in Continuing Ops
Above NI
- Unusual OR Infrequent Items
- Impairment Writedowns
- Reported before Tax
Non-recurring Items excluded from Continuing Ops (Below NI)
- Results of Discontinued Ops
- Extraordinary Items: Unusual AND Infrequent
- Not expected to continue in future
- GAAP only, IFRS doesn’t allow - Reported Net of Tax
yrs of Minimum Lease Pmts that must be Disclosed
- 5 individual years of Min(Pmts)
2. Sum of the next 5 yrs of Min(Pmts)
3 Factors that can lead to Low-quality Reporting
Use aggressive/fraudulent accounting
- Motivation - By Mgmt for career gain
- Meet/beat analyst expectations
- Opportunity - Weak Internal Controls
- Any factor weakening ICs
- Rationalization - “I’ll fix it next period”
- Need my bonus to pay the bills, etc.
Non-Financial Risks: Difference from Financial Risk
- NF Risks: Arise from an Organization’s Operations
- **Are outside the scope of financial mkts
- i.e. Money-related risks that seem financial are NF
- ex: Solvency Risk
P/E Formula Excluding Price & Earnings
P/E = Payout Ratio / (k - g)
Equity Swap
Exchange of fixed pmts for pmts linked to the values of stocks/a portfolio/index
Companies’ Equity to Evaluate with Asset-Based Model
- Natural Resource Firms
- Firms getting Liquidated
- Unprofitable Firms
- DDM or Earnings multiplier: would be misleading
Mgmt Buyout (MBO)
- Investor group including the Firm’s key Mgmt buys 100% of the shares outstanding
- Takes it private
5 Phases of Industry Life Cycle Model (Beg. to End)
- Embryonic - Highest risk of failure
- Large upfront investment, Px High
- Growth - All is well (profits, competition, etc)
- Shakeout - Everything sucks
- Overcapacity, slow g, profits drop, competition, etc.
- Maturity - Only the big boys but slow g
- Consolidation, stable Px, High BTE, mkt sh gain, etc.
- Decline - The end
- Consolidation, negative g, Px declines
Conditions that could cause MVs to be unequal to Intrinsic values
Any factor that reduces market efficiency
- Short selling restrictions - Most likely of the 3
- High Trans. Costs
- Arbitrage trading Restrictions
Stop vs. Limit Order
- Stop: Doesn’t fill until stop price triggers it
- Limit: Fills at any price that is favorable, up to the limit
- Limit Buy: Any price below, and up to limit
- Limit Sell: Any price above, and down to limit
Semiannual Coupon Bond Valuation using BEY spot Rates
- NEED to adjust BEYs to 6mo rates to get ea. discount rt
- And raise ea. DR to the #of coupon pmts in the future
- ie 2nd pmt of yr 2: (1+DR)^4
Rollover Risk
- Faced by firms that rely on Commercial Paper
- Risk of being unable to issue new CP when outstanding CP matures
IR Risk if YTM increases
- Higher YTM (x-axis) reaches flatter section of the convex price-yield curve
- IR risk decreases
ST vs. LT IR-volatility: Shape of YC
- If ST rates more volatile -> negative slope
- If LT rates more volatile -> positive slope
- If ST volatility = LT -> Flat
