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CFA > Corporate Issuers > Flashcards

Corporate Issuers Flashcards

Explore corporate governance, capital sources and uses, cost of capital, capital structure, and measures of leverage.

1
Q

Define:

Antidilutive

A

Transaction or security that would increase earnings per share or result in EPS higher than the company’s basic EPS, as opposed to reducing it (diluting it).

antidilutive securities are not included in the calculation of diluted EPS.

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2
Q

Define:

Basic EPS

A

Net earnings available to common shareholders

(NI - pref dividends) / weighted avg common shares outstanding

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3
Q

Define:

Cannibalization

A

When an investment or product takes customers and sales away from another product or part of the company.

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4
Q

Define:

Capital budgeting

A

Allocating funds to long-range projects or investments.

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5
Q

Define:

Capital expenditure

CAPEX

A

Spending/investing in physical capital (fixed assets).

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6
Q

Define:

Capital stock

A

All buildings, machinery, and equipment used to produce goods and services.

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7
Q

Define:

Capital structure

A

Mix of debt and equity which a company utilizes in order to finance its business.

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8
Q

Define:

Competitive strategy

A

A company’s plan for responding to threats/opportunities presented by the external environment.

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9
Q

Define:

Component cost of capital

A

Rate of return required by suppliers of different sources of capital (debt or equity) that a company uses to finance its operations and investments.

cost of debt capital or cost of equity capital

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10
Q

Define:

Corporate governance

A

System of rules, practices, processes, and structures by which a company is directed, controlled, and operated.

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11
Q

Define:

Cost of capital

A

Rate of return suppliers of capital require as compensation for their contribution of capital.

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12
Q

Define:

Cost of debt

A

Cost of debt financing to a company (issuances of bonds or utilizing bank loans).

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13
Q

Define:

Cost of preferred stock

A

The cost to a company of issuing preferred stock.

Dividend yield on preferred shares

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14
Q

Define:

Cost structure

A

Mix of a company’s costs (variable and fixed).

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15
Q

Define:

Degree of financial leverage

DFL

A

Sensitivity of cash flows available to owners when operating income changes.

% Change NI / % Change EBIT

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16
Q

Define:

Degree of total leverage

DTL

A

Sensitivity of cash flows to owners to changes in the number of units produced and sold.

% Change NI / % Change Units Sold

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17
Q

Define:

Degree of operating leverage

DOL

A

Sensitivity of operating income to changes in units sold.

% Change EBIT / % Change Units Sold

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18
Q

Define:

Diluted EPS

A

EPS if all dilutive securities were converted into common shares.

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19
Q

Define:

Diluted shares

A

Number of shares that would be outstanding if all potentially dilutive securities were exercised.

convertible debt, convertible preferred stock, employee stock options

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20
Q

Define:

Equity risk premium

A

Premium investors require in order to invest in equities.

E(return on equities) - risk free rate

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21
Q

Define:

Ex-dividend date

A

The first date a share trades without the dividend.

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22
Q

Define:

Financing activities

A

Activities related to obtaining/repaying capital used in the business

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23
Q

Define:

Impact investing

A

Investing with the goal of achieving social or environmental objectives (+ good returns) by engaging with, or direct investment in, a company or project.

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24
Q

Define:

Negative screening

A

Excluding certain sectors or companies, which do not align with an investor’s accepted standards, from investment consideration.

ESG implementation

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25
Q

Define:

Principal–agent relationship

A

A relationship in which a principal hires an agent to perform a particular task or service on their behalf.

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26
Q

Define:

Positive screening

A

Identifying companies that embrace desired ESG-related principles.

ESG implementation

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27
Q

Define:

Project sequencing

A

When projects occur at different points in time (sequenced), so that investing in a project creates the option to invest in future projects.

projects may need to be deferred until current projects are resolved.

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28
Q

Define:

Proxy contest

A

Corporate takeover mechanism: a group seeking a controlling position on a company’s board of directors attempts to persuade shareholders to vote for them.

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29
Q

Define:

Stakeholders

A

Individuals or groups likely affected (either directly or indirectly) by a decision.

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30
Q

Define:

Target capital structure

A

A company’s desired proportions of debt and equity financing.

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31
Q

Define:

Tender offer

A

Corporate takeover mechanism: shareholders are solicited to sell their interests directly to the group seeking to gain control.

32
Q

Define:

Vote by proxy

A

A mechanism that allows a designated party to vote on the shareholder’s behalf.

33
Q

Define:

Weighted average cost of capital

WACC

A

A weighted average of the required rates of return (after-tax) on a company’s common stock, preferred stock, and long-term debt.

Weight determined by % of target capital structure component constitutes

34
Q

Define:

Working capital

A

current assets - current liabilities

35
Q

Define:

Working capital management

A

A company’s management of short-term assets and liabilities.

36
Q

Define:

Abandonment Option

A

Option to terminate an investment at a future time if the financial results are disappointing.

37
Q

Define:

Accredited Investors

A

Individuals considered sophisticated enough to take greater risk.

less need for regulatory oversight

38
Q

Define:

Affiliate Marketing

A

When a company generates revenues via sales made on websites other than its own.

39
Q

Define:

Agency Costs

A

Costs due to conflicts of interest between principals and agents.

Agent is instituted to represent the principal, but may have own interests which conflict and create costs for the principal.

40
Q

Define:

Aggregators

A

A market where products and services are redistributed under their own brand.

41
Q

Define:

Bundling

A

Pricing approach: combining products/services so that customers buy more than they likely would have otherwise (more likely to buy them together).

42
Q

Define:

Cost of equity

A

Return required by equity investors.

43
Q

Define:

Crowdsourcing

A

Business model which uses contributions made from users.

44
Q

Define:

Debt tax shield

A

Tax paid on debt is tax deductible (reduces taxable income).

45
Q

Define:

Disruption

A

New competitors taking market share from established companies.

May be due to new tech or business model

46
Q

Define:

Direct sales

aka direct to consumer sales

A

Selling directly to end consumer.

Not using a distributor

47
Q

Define:

Drop shipping

A

Goods are delivered directly to customer from manufacturer.

48
Q

Define:

Dynamic pricing

A

Ability to charge different prices at different times.

surge pricing

49
Q

Define:

Engagement/active ownership

A

Using shareholder power to influence corporate decision making.

shareholder proposals, proxy voting

ESG approach

50
Q

Define:

Execution risk

A

Risk that management will fail to do what was promised (fail to deliver expected results).

51
Q

Define:

Franchising

A

Third party operator granted permission to use an asset/intellectual property in exchange for royalty compensation.

52
Q

Define:

Fungible

A

interchangeable

53
Q

Define:

Green finance

A

Financing for economic growth while also giving consideration to addressing environmental issues.

54
Q

Define:

Green bonds

A

Bonds used to finance environmental products/projects.

55
Q

Define:

Hidden revenue business model

A

Providing services for free, but generating revenue elsewhere.

like advertisements on some video streaming services

56
Q

Define:

Licensing arrangement

A

Right to produce a product or use intangible assets in return for a royalty.

57
Q

Define:

Marketplace business

A

Business which creates networks of buyers and sellers.

Doesn’t take any ownership of goods

58
Q

Define:

Omnichannel

A

Distribution strategy utilizing both digital and physical sales channels.

59
Q

Define:

Optimal capital structure

A

Capital structure that maximizes value of company

60
Q

Define:

Optional product pricing

A

Pricing approach which is applied if customer buys additional services or features.

61
Q

Define:

Pay-in-advance

A

Business model requiring payment before product or service is delivered.

reduces the need for working capital

62
Q

Define:

Pecking order theory

A

If managers consider how actions will be perceived by outsiders when considering how to finance, sources which are less visible to outsiders (internally generated funds) are more desirable.

Equity is less desirable

63
Q

Define:

Penetration pricing

A

Discount pricing to build scale and secure market share.

64
Q

Define:

Pet projects

A

Investments because manager uses their influence (typically not subjected to usual capital allocation analysis).

65
Q

Define:

Price discrimination

A

Charging different prices to different customers based on willingness to pay.

66
Q

Define:

Price setting option

A

Adjusting prices when demand varies from forecast.

67
Q

Define:

Product market risk

A

Risk the market for a new product/service is less than expected.

68
Q

Define:

Production-flexibility option

A

Adjusting production when demands varies from forecast.

69
Q

Define:

Subscription Pricing

A

Customers essentially “rent” a product or service.

generate recurring revenue

70
Q

Define:

Socially responsible investing

A

Choosing investments which align with investor’s social, moral, or faith-based beliefs.

71
Q

Define:

Special purpose acquisition company

SPAC

A

Publicly listed shell company used to acquire an unspecified private company at a point in the future.

72
Q

Define:

Static trade off theory of capital structure

A

Optimal level of debt is the point where additional debt causes costs of financial distress to increase more than the benefit of the additional tax shield.

73
Q

Define:

Tiered pricing

A

Charging different prices to different buyers (often based on volume).

74
Q

Define:

Uncommitted lines of credit

A

Least reliable form of bank borrowing. Bank offers a line of credit for an extended period of time, while retaining the right to refuse different uses of the LOC.

75
Q

Define:

Value added resellers

A

Business which distribute a product but provide value by handling more complex aspects of installation, customization, servicing, or support.

76
Q

Define:

Value based pricing

A

Pricing based upon the value of the product or service to the specific customer.

77
Q

Define:

Value chain

A

Systems/processes of a firm which create value for customers.

CFA (10 decks)

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