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mos 1023 > final > Flashcards

final Flashcards

1
Q

What is Finance?

A

The study of how we allocate money and how it’s done

Finance addresses how resources are allocated, under what terms, and through what channels.

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2
Q

What are financial contracts/securities?

A

Occur whenever funds are transferred from issuer to buyer

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3
Q

What are real assets?

A

Tangible items owned by persons and businesses, such as:
* Residential structures and property
* Major appliances and automobiles
* Office towers, factories, and mines
* Machinery and equipment

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4
Q

What are financial assets?

A

What one individual has lent to another, such as:
* Consumer credit
* Loans
* Mortgages

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5
Q

Define money.

A

A scarce resource that serves as:
* A medium of exchange
* A measure of value
* A means of payment

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6
Q

What role do households play in the financial system?

A

Households provide funds to businesses and government, hold both real and financial assets, and must accumulate financial resources for retirement.

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7
Q

What is intermediation?

A

The transfer of funds from lenders to borrowers

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8
Q

What are the 3 ways funds can be channeled from savers to borrowers?

A

Funds can be channeled through:
* Direct transfer in a non-market transaction
* Direct intermediation through a market intermediary
* Indirect claims through a financial intermediary

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9
Q

What is the primary function of financial intermediaries?

A

Transform the nature of the securities they issue and invest in

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10
Q

What is the difference between market intermediaries and financial intermediaries?

A

Market intermediaries help make markets work by adding liquidity, while financial intermediaries invest on behalf of others.

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11
Q

What are the major categories of financial securities?

A

Two major categories:
* Debt instruments
* Equity instruments

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12
Q

What are non-marketable assets?

A

Assets that cannot be traded between investors, such as:
* Savings accounts
* Term deposits
* Guaranteed investment certificates (GICs)

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13
Q

What are marketable assets?

A

Assets that can be traded between investors after their original issue, such as:
* Stocks
* Bonds

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14
Q

What is a stock?

A

An investment that represents ownership in a company, typically through shares.

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15
Q

What is a bond?

A

A debt security issued by corporations or governments, where you lend money for a set period at a set interest rate.

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16
Q

What is the primary market?

A

Markets that involve the issue of new securities by a company in exchange for cash from investors.

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17
Q

What is the secondary market?

A

Markets that involve buyers and sellers of existing securities, with no new capital formed.

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18
Q

What is market capitalization?

A

The total market value of a company calculated as:
* Number of shares x Share price

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19
Q

What is venture capital?

A

Investing in early-stage companies until they become profitable.

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20
Q

What is bootstrapping?

A

The process by which entrepreneurs raise seed money and obtain resources necessary to start their businesses.

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21
Q

What are the three principal ways VC firms exit venture-backed companies?

A

Exit strategies include:
* Selling to a strategic buyer
* Selling to a financial buyer
* Initial public offering (IPO)

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22
Q

What is an IPO?

A

A company’s first sale of common stock in the public market.

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23
Q

What is the importance of staged funding in venture capital?

A

Allows venture capitalists to reassess performance and manage risk at each funding stage.

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24
Q

What does syndication in venture capital involve?

A

The common practice of selling a percentage of a deal to other VC firms to reduce risk and obtain financing.

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25
Q

True or False: Only 10% to 20% of firms that receive venture capital funding are successful.

A

True

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26
Q

What does VC stand for?

A

Venture Capital

Venture Capital refers to financing provided to early-stage, high-potential growth startup companies.

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27
Q

What is the typical annual return generated by a VC fund?

A

15-25%

These returns may vary based on market conditions and individual fund performance.

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28
Q

What is an IPO?

A

A company’s first sale of common stock in the public market

Initial Public Offerings allow companies to raise larger sums of cash and facilitate VC exits.

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29
Q

What is one advantage of a company going public through an IPO?

A

Larger amount of equity capital can be raised

Public equity markets typically allow for larger capital raises compared to private sources.

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30
Q

What is a disadvantage of an IPO related to management focus?

A

Encourages focus on short-term profits rather than long-term wealth maximization

This is due to the requirement for quarterly earnings forecasts and financial statements.

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31
Q

What are the three basic services provided by investment bankers during the IPO process?

A
  • Origination
  • Underwriting
  • Distribution
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32
Q

What is the risk-bearing part of the investment banking process?

A

Underwriting

Underwriters assume the risk of selling shares to the public.

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33
Q

What is the difference between firm-commitment and best-efforts underwriting?

A
  • Firm-commitment: IB guarantees a fixed amount from stock sale
  • Best-efforts: IB does not guarantee sale at a specific price
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34
Q

What happens during the pricing call in the IPO process?

A

Management makes the final pricing decision based on IB recommendations

This typically occurs after the due diligence process is complete.

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35
Q

What is underpricing in the context of IPOs?

A

Offering new securities for sale at a price below their true value

Underpricing can lead to financial losses for underwriters if the offer price is set too high.

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36
Q

What is the average first-day return for IPOs as a measure of underpricing?

A

Typically between 10 and 15 percent below the closing price

This indicates the common practice of underpricing in the market.

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37
Q

What is a general cash offer?

A

Sale of debt or equity, open to all investors, by a registered public company

This is often the lowest-cost source of external funds for firms with high credit ratings.

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38
Q

What is the main difference between competitive and negotiated sales in a general cash offer?

A
  • Competitive sale: Underwriters bid to buy the issue
  • Negotiated sale: Issuer selects the underwriter upfront
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39
Q

What does shelf registration allow a firm to do?

A

Register an inventory of securities for a 2-year period for future sales

This provides firms flexibility and reduces the costs associated with selling securities.

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40
Q

What are private placements?

A

Sales of unregistered securities directly to investors

This method is often used by firms to raise capital without the costs associated with public offerings.

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41
Q

What is a leveraged buyout?

A

A transaction where a large amount of debt is used to take over a company

This is a common strategy used by private equity firms.

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42
Q

What are PIPE transactions?

A

Transactions in which a public company sells unregistered stock to investors

PIPE deals often occur at a discount to market prices due to liquidity restrictions.

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43
Q

What is the Loan Pricing Model?

A

Interest rate = prime rate + default risk premium + adjustment for yield curve

This model helps banks determine the appropriate interest rate for loans.

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44
Q

What are the three basic costs associated with issuing stock in an IPO?

A
  • Underwriting spread
  • Out-of-pocket expenses
  • Underpricing
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45
Q

What does payout policy refer to?

A

A firm’s overall policy regarding distributions of value to stockholders

This includes dividends and other forms of shareholder value distribution.

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46
Q

What is a dividend?

A

Something of value distributed to stockholders on a pro-rata basis

This can include cash, assets, or discounts on products.

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47
Q

What is a dividend?

A

A dividend is a distribution of value to a firm’s stockholders, typically in the form of cash, assets, or discounts on products.

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48
Q

How does a dividend affect a stockholder’s claims against a firm?

A

It reduces the value of the stockholders’ claims against the firm.

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49
Q

What is the impact of a dividend on a stockholder’s investment in a firm?

A

It reduces the stockholders’ investment in a firm by returning some of that investment to them.

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50
Q

What are non-cash distributions?

A

Distributions of value that are not in the form of cash and do not reflect proportional ownership in the firm.

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51
Q

Who owns a corporation?

A

Shareholders are the owners.

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52
Q

Who governs a corporation?

A

The board of directors governs the corporation.

53
Q

Who manages a corporation?

A

The CEO and other C-suite executives manage the business.

54
Q

What is the formula for earnings per share (EPS)?

A

EPS = Income available to common shareholders / Common shares outstanding.

55
Q

What is the tax treatment of dividends for individuals?

A

Dividends received are taxed in the hands of the shareholder and receive preferential tax treatment.

56
Q

True or False: New firms are least likely to pay dividends.

A

True.

57
Q

What are the four types of cash dividends?

A
  • Regular cash dividend
  • Extra dividend
  • Special dividend
  • Liquidating dividend
58
Q

What does the dividend yield represent?

A

The ratio that shows how much a company pays out in dividends each year relative to its stock price.

59
Q

What marks the beginning of the dividend payment process?

A

The board votes to approve the dividend.

60
Q

What is the ex-dividend date?

A

The first date on which the stock will trade without rights to the dividend.

61
Q

What is the record date?

A

The date on which the company assesses all shareholders to determine who will receive the dividend.

62
Q

What is the payable date?

A

The date when the stockholders of record actually receive the dividend.

63
Q

What is the cash flow identity?

A

A company’s cash flows are equal to the cash paid to shareholders and the payments made to creditors.

64
Q

Why do managers use dividends?

A

To distribute excess earnings and avoid surprising investors with bad news.

65
Q

What did the 1956 survey by John Lintner reveal about dividend policy?

A

Firms have a long-term target payout ratio, and dividends change if there is a shift in long-term sustainable earnings.

66
Q

What is a practical consideration in setting a dividend payout?

A

Managers should ensure they can maintain dividends during periods of lower earnings or higher investment requirements.

67
Q

What can affect the value of a firm regarding dividend policy?

A

Dividend policy can affect the value of a firm under certain conditions.

68
Q

What are the costs associated with dividends for a firm?

A
  • Taxes
  • Increased cost of debt
  • Brokerage fees for reinvesting dividends
69
Q

How is a stock repurchase different from a dividend?

A

It does not represent a pro-rata distribution of value to stockholders.

70
Q

What are the two types of tender offers in stock repurchases?

A
  • Fixed-price
  • Dutch auction
71
Q

What is the difference in tax treatment between dividends and stock repurchases?

A

Dividends are taxed on the full amount, while stock repurchases are taxed only on the profit from the sale.

72
Q

What happens to earnings per share (EPS) after a stock repurchase?

A

EPS typically increases because the number of shares outstanding decreases.

73
Q

What is a stock dividend?

A

A type of dividend that does not involve the distribution of cash or assets.

74
Q

What is the rationale for stock splits?

A

To make shares more affordable and increase liquidity.

75
Q

What do managers prefer when purchasing shares?

A

Managers prefer purchasing shares when they believe that the shares are undervalued in the market.

76
Q

What is the primary motive for mergers and acquisitions?

A

Creation of synergy.

77
Q

Define cash dividend.

A

Shareholders receive cash.

78
Q

What is a stock dividend?

A

Type of dividend that does not involve the distribution of value.

79
Q

How does a stock dividend affect the number of shares owned?

A

It increases the number of shares each stockholder owns.

80
Q

What happens to the value of shares when a stock dividend is paid?

A

The value goes down proportionately.

81
Q

What is a stock split?

A

Division of each share into more than one share.

82
Q

What is a key distinction between stock dividends and stock splits?

A

Stock dividends are typically regularly scheduled events, while stock splits occur infrequently.

83
Q

What can stock splits signal to investors?

A

A positive signal about the outlook management has.

84
Q

What is synergy value in the context of mergers?

A

The amount by which the value of the combined firm exceeds the sum value of the two individual firms.

85
Q

List two types of operating synergies.

A
  • Economies of scale
  • Geographic synergies
86
Q

What are financing synergies?

A

Access to funding and reducing cash flow variability.

87
Q

What are managerial motivations for mergers?

A
  • Increased firm size
  • Reduced firm risk through diversification
88
Q

What is a takeover?

A

Occurs when control is transferred from one ownership group to another.

89
Q

What distinguishes an acquisition from a merger?

A

An acquisition involves one firm purchasing another.

90
Q

What is a going private transaction?

A

An acquisition where the purchaser already owns a majority stake in the target company.

91
Q

What is the purpose of securities legislation in takeovers?

A

To ensure transparency and fair treatment of all shareholders.

92
Q

What is the ‘10% early warning’ rule?

A

A report is sent to alert other shareholders that a potential acquirer is accumulating a position.

93
Q

What does a shareholder control when they own 50.1% of a company?

A

Voting decisions under normal voting.

94
Q

What is a friendly takeover?

A

The acquisition of a target company that is willing to be taken over.

95
Q

What is due diligence?

A

The process of evaluating a target company by a potential buyer.

96
Q

What is a tender offer?

A

An approach to shareholders offering compensation for their shares to control majority voting shares.

97
Q

What are defensive tactics in a hostile takeover?

A
  • Poison pills
  • Selling the crown jewels
  • White knights
98
Q

What characterizes a horizontal merger?

A

Two firms in the same industry combine.

99
Q

What is a vertical merger?

A

Merger between companies that operate on different stages of the same supply chain.

100
Q

Define a conglomerate merger.

A

Two firms in unrelated businesses combine.

101
Q

What is globalization in the context of financial management?

A

Supports free trade and the integration of national economies.

102
Q

What is a multinational corporation?

A

A business firm that operates in more than one country but is headquartered in its home country.

103
Q

What is country risk?

A

Political uncertainty associated with a particular country.

104
Q

What does foreign exchange rate risk refer to?

A

Uncertainty of future exchange rate movements.

105
Q

How do cultural differences impact international business?

A

They shape business practices and attitudes toward business.

106
Q

What is foreign exchange rate risk?

A

Uncertainty of future exchange rate movements

Also known as exchange rate risk

107
Q

What does an economic system determine?

A

How a country mobilizes its resources to produce and distribute goods and services needed by society

108
Q

What are the goals of International Financial Management?

A
  • Stockholder value maximization
  • Maximizing corporate wealth
  • Maximizing market share
  • Maintaining full employment
109
Q

True or False: The time value of money is affected by whether a transaction is domestic or international.

A

False

110
Q

What are the three basic economic benefits of foreign exchange markets?

A
  • Mechanism to transfer purchasing power
  • Way for corporations to pass risk
  • Channel for credit acquisition
111
Q

Which city is the largest foreign exchange trading center?

A

London

112
Q

What is the equilibrium exchange rate?

A

The price at which the quantity of currency demanded equals the quantity supplied

113
Q

Fill in the blank: A cross rate allows you to find the exchange rate between the 3rd pair of currencies when given _______.

A

2 quotes of foreign exchange rates involving 3 currencies

114
Q

What is the forward premium or discount?

A

Difference between forward rate and spot rate

Calculated using the formula: (forward rate - spot rate) / spot rate x 360 / number of days x 100

115
Q

What are the reporting requirements for foreign currency in financial statements?

A
  • Balance sheet items reported at the current rate
  • Income statement items reported at the average rate
116
Q

What is foreign exchange rate risk?

A

Risk associated with unexpected exchange rate changes when conducting business abroad

117
Q

What does hedging a currency transaction involve?

A

Engaging in a financial transaction to reduce risk

118
Q

What is the main objective of international capital budgeting?

A

To maximize stockholder wealth by accepting projects with positive NPV

119
Q

What is a country risk premium?

A

An additional return required by management for projects in politically unstable countries

120
Q

What can extreme nationalization entail?

A

Local government taking over a plant without compensation

121
Q

What is the purpose of taxation?

A
  • Revenue generation
  • Distribution of wealth
  • Provide services
  • Influence behavior
122
Q

What are the different levels of government responsible for in Canada?

A
  • Municipal: Road service, waste management
  • Provincial: Healthcare, schooling
  • Federal: National defense
123
Q

What is a tax return?

A

Reconciliation of how much tax you’ve paid and owe

124
Q

What is the difference between tax deductions and tax credits?

A
  • Deductions reduce taxable income
  • Credits reduce tax payable
125
Q

What is the capital gains tax rate for gains above $250,000?

A

66.6%

126
Q

What is the maximum contribution limit for a TFSA?

A

$7,000

127
Q

What tax rate do small businesses under $500,000 in Canada pay?

A

9%

128
Q

True or False: You can lower your tax rate by setting up a corporation.

A

False

mos 1023 (1 decks)

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