EXAM 1 Flashcards
3 AREAS OF FINANCE
- CORPORATE FINANCE 2. INVESTMENTS 3. BANKING/FINANCIAL INSTITUTION
CAPITAL BUDGETING DEFINITION
LONG-TERM INVESTMENT PLANNING
CAPITAL BUDGET ANALYSIS DEFINITION
DECIDING WHAT ASSETS TO BUY
ASSET PRICING DEFINITION
VALUING ASSETS
CURRENT MARKET VALUE DEFINITION
WHAT A BUYER WILL CURRENTLY PAY FOR AN ASSET
3 INSTITUTIONS
- BANKS 2. INSURANCE COMPANIES 3. PENSION FUNDS
3 OLD NAMES FOR CORPORATE FINANCE
- MANAGERIAL FINANCE 2. FINANCIAL MANAGEMENT 3. BUSINESS FINANCE
3 WAYS ASSET MANAGERS INVEST
- VENTURE CAPITAL 2. MUTUAL FUNDS 3. REAL ESTATE
9 CAREERS IN FINANCE
- COMMERCIAL BANKING 2. CORPORATE FINANCE 3. FINANCIAL PLANNING 4. HEDGE FUNDS 5. INSURANCE 6. INVESTMENT BANKING 7. MONEY (ASSET) MANAGEMENT 8. PRIVATE EQUITY 9. REAL ESTATE
CASH MANAGEMENT DEFINITION
DAY TO DAY FINANCE OPS
6 INVESTMENT BANKING ROLES
- COMPANY & INDUSTRY ANALYSIS 2. MERGERS & ACQUISITIONS 3. RAISING CAPITAL VIA CORPORATE OFFERINGS 4. SALES & TRADING 5. PRIVATE CLIENT SERVICES 6. BACK OFFICE SUPPORT
HARVEST DEFINITION
CASH/STOCK FROM SALES/IPO
BUYOUT DEFINITION
PURCHASE OF MAJORITY SHARES
4 CORPORATE FINANCE ROLES
- CASH MANAGEMENT 2. TAX STRATEGIES 3. FINANCIAL POLICY IMPLEMENTATION 4. INVESTING & FINANCING
5 FUNCTIONAL AREAS OF BUSINESS
- MARKETING 2. OPERATIONS 3. ACCOUNTING 4. HUMAN RESOURCES 5. STRATEGIC MANAGEMENT
3 TYPES OF SECURITIES
- TREASURY SECURITIES 2. CORPORATE BONDS 3. STOCKS
SECURITIES DEFINITION
STOCKS/BONDS
SYNDICATE DEFINITION
OVERSEES ISSUANCE OF STOCKS/BONDS
2 WAYS SYNDICATES ISSUE BONDS
- COMPETITIVE SALE 2. NEGOTIATED SALE
2 THINGS COMPOSING SYNDICATES
- INVESTMENT BANKS 2. OTHER INSTITUTIONAL INVESTORS
2 SECONDARY MARKETS
- AUCTION MARKET 2. DEALER MARKET
AUCTION MARKET DEFINITION
PHYSICAL, DETERMINED BY INVESTORS WILLINGNESS TO PAY
DEALER MARKET DEFINITION
MULTIPLE DEALERS, QUOTE PRICES FROM AN INVENTORY
SPECIALIST DEFINITION
PROVIDES LIQUIDITY IN SECONDARY FINANCIAL MARKETS
THE SPECIALIST CHARGES WHAT TO WHOM?
HIGHER = SELLERS LOWER = BUYER
DIFFERENCE BETWEEN BID & ASK OF STOCK
BID-ASK PRICE
2 TYPES OF TRADE ORDERS IN FINANCIAL MARKETS
- MARKET ORDERS 2. LIMIT ORDERS
MARKET ORDERS DEFINITION
USED BY INVESTORS, FIRST COME FIRST SERVED
LIMIT ORDERS DEFINITION
USED BY INVESTORS, ONLY IF MARKET PRICE REACHES “LIMIT” PRICE
MARKET ORDERS TO SELL STOCK EXECUTE AT THE CURRENT ___ PRICE
BID
MARKET ORDERS TO BUY STOCK EXECUTE AT THE CURRENT ___ PRICE
ASK
EARNINGS =
NET INCOME
3 ROLES OF PRICES
- PRICES CONVEY INFORMATION 2. PRICES AFFECT THE DISTRIBUTION OF INCOME 3. PRICES AFFECT INCENTIVES
IN EFFICIENT MARKETS, PRICES ARE PREDICTABLE/NOT PREDICTABLE?
NOT PREDICTABLE
SECURITIES RETURNS FORMULA
HOW MUCH INVESTOR GETS / HOW MUCH INVESTOR INVESTED
2 SECURITIES RETURNS
- DOLLAR RETURNS 2. PERCENTAGE RETURNS
INCREASE OR DECREASE IN PRICE OF HELD SECURITY
DOLLAR RETURNS DEFINITION
PERCENTAGE RETURNS DEFINITION
% INCREASE OR DECREASE IN PRICE OF HELD SECURITY
DOLLAR RETURNS FORMULA
PERCENTAGE RETURNS FORMULA
COSTS FROM NOT ACTING IN SHAREHOLDER BEST INTERESTS
AGENCY COSTS DEFINITION
How much of capital is financed by Debts and Equities is the ___-term, ___ decision of a financial manager?
LONG TERM, FINANCING DECISION
3 SUBSPECIALTIES OF FINANCE
- INSTITUTIONS 2. INVESTMENTS 3. CORPORATE FINANCE
Portfolio decisions consist of 3 THINGS
- what asset classes to invest in.
- which asset to invest in.
- how much to invest in each asset.
Market value of a firm is the relevant measure of maximizing shareholder wealth because it ___?
reflects cash flows and risk of the firm.
A long-term investing strategy in which the investor contributes a set amount into an investment on a set schedule
Dollar-Cost Averaging
An acceptable return for a passive investor
Fair Return
CORPORATE FINANCE’S PRIMARY FUNCTION
maximizing shareholder or owner wealth for privately held companies
Roth IRA DEFINITION
A tax-sheltered retirement plan individuals can use to avoid taxes on portfolio returns
Credit Analysts DEFINITION
A commercial bank employee with the responsibility to assess the riskiness of lending to borrowers and determining whether or not loans should be extended to potential bank clients
Market Efficiency DEFINITION
The degree to which prices in a market reflect all available information
Discount Rate DEFINITION
Discount Rate=Risk-Free Rate+Risk Premium
Future Value FORMULA
Future Value=Present Value×(1+i)^n
PRESENT VALUE FORMULA
Present Value=FV÷(1+i)^n
Future Value of an Annuity FORMULA
Present Value of an Annuity FORMULA
Effective Yield FORMULA
WHAT KIND OF FORMULA IS THIS?
PRESENT VALUE
Present Value of a Perpetuity FORMULA
What is the present value of an annual payment of $10,000 that is received in perpetuity if the discount rate is 13%?
Suppose that an investment product pays an investor $10,000 in perpetuity. If the appropriate discount rate is 12%, what should the price (or present value) of this product be?
Calculate the present value of the following perpetuity?
$500 discounted at 4% annually
use BEG/END mode to find present value of a 20-year annuity due of $2,500 given an 8% discount rate?
Being an annuity due, the payments are paid at the beginning of each year. (Use Beg. mode)
2 STEP PROCESS TO SOLVE If you are going to receive $70,000 for 20 years starting 5 years from now, what is the present value of the cash flows discounted at 12%?
2 STEP PROCESS TO SOLVE What is today’s value of a $5,000 annual perpetuity starting in 40 years discounted at 8%?
FV COMPOUND INTEREST FORMULA
PV SINGLE SUM FORMULA
3 GENERAL PROBLEM TYPES
UNEVEN CF, PV
TVM PROBLEM 1
UNEVEN CF, FV
TVM PROBLEM 2
PERPETUITY, PV
TVM PROBLEM 3
ANNUITY, DEFERRED, PV
PVIFA STANDS FOR
PRESENT VALUE OF INTEREST FACTOR FOR ANNUITY
TVM PROBLEM 4
TVM PROBLEM 7
SINGLE SUM, FV, COMPOUND QUARTERLY
PVA
EFFECTIVE ANNUAL RATE (EAR) (EFFECTIVE YIELD)
EAR STANDS FOR
EFFECTIVE ANNUAL RATE (EFFECTIVE YIELD)
PMT OF 50.77
FVAD
“Sources of firm financing that appear in the debt section of the balance sheet.”
“Debt Capital”
“An approximation of the current yield that does not incorporate the time value of money. Current Yield = Annual Coupon/Current Market Value.”
“Current Yield”
“The sum of money that a corporation promises to pay at the expiration of a bond; also called par value.”
“Face Value”
“A legal contract that governs the relationship between a firm and its bondholders.”
“Bond Indenture”
“Unsecured bonds that are not backed by collateral and that have a lower claim than normal debentures to the assets of the firm in the event of firm liquidation.”
“Subordinated Debentures”
“Bonds that pay no coupon payments but often sell at deep discounts.”
“Zero-coupon Bonds”
“The required rate of return on a bond; also called yield to maturity.”
“Promised Yield”
“The stated interest rate of a bond; also known as coupon rate.”
“Coupon Yield”
“Unsecured bonds that are not backed by collateral.”
“Debentures”
“How much it costs the firm (in percentage terms) to finance its operations through debt and/or equity.”
“Cost of Capital”
“Bonds issued by local governments that are almost always exempt from federal taxes.”
“Municipal Bonds”
“A bond covenant that describes things the company pledges itself to do in order to protect bondholders.”
“Affirmative Covenants”
“A bond covenant that describes things the company pledges itself not to do in order to protect bondholders.”
“Negative Covenants”
“The required rate of return of a bond; also called promised yield.”
“Yield to Maturity (YTM)”
“The present value of the stream of expected cash flows discounted at an appropriate required rate of return.”
“Intrinsic Value”
“The sum of money that a corporation promises to pay at the expiration of a bond; also called face value.”
“Par Value”
“The stated interest rate of a bond; also known as coupon yield.”
“Coupon Rate”
“A bond that has specific collateral in the form of real estate holdings or real property.”
“Mortgage Bond”
“A bond that is payable in a currency not native to the country in which it is issued.”
“Eurobond”
“Bonds that are issued in a domestic market by a foreign firm but in the domestic currency.”
“Foreign Bonds”
“Rules set forth in the bond indenture to protect bond investors.”
“Covenants”
“A measure of the interest rate sensitivity of a bond.”
“Duration”
“Speculative bonds rated BB or below.”
“Junk Bonds”
“A debt agreement that obligates a corporation to make certain payments to investors in exchange for money the investor lends to the corporation.”
“Bond”
“The ability of a bond to be converted into equity securities.”
“Convertibility”
“A high-quality bond rated BBB or above and considered to be fairly low risk.”
“Investment-grade Bond”
THE VALUE OF ANY ASSET = ___
PRESENT VALUE OF THE STREAM OF EXPECTED CF, DISCOUNTED AT REQUIRED RATE OF RETURN
Current Yield = Annual Coupon/Current Market Price of Bond
= Annual Coupon/Current Market Price of Bond
price of this bond
