Final Managerial Finance Flashcards
the potential of losing something of value vs the potential of gaining something of value
risk
preventing a risk from being unfavorable
minimize risk
once risks are unfavorable, keep it from getting worse
mitigate risks
the return on a risky asset (stock) expected in the future
expected returns
a risk that influences a large number of assets
has market-wide effects
systematic risk
this is also called a non-diversifiable risk
systematic risk
a risk that influences a small number of assets
is firm or industry specific
unsystematic risk
also called diversifiable risk
unsystematic risk
systematic risk + unsystematic risk = ?
total risk
the expected return on a risky asset depends only on that assets (or that stocks) systematic risk
Systematic Risk Principle
spreading investments over a number of assets to eliminate unsystematic risk (but not systematic risk)
Principle of Diversification
a group of assets held by an investor
portfolio
the amount of systematic risk present in a particular risky asset, relative to that of the average asset
Beta
Levels of Risk in Beta:
less than average risk
0-1
Levels of Risk in Beta:
Average Risk
1
Levels of Risk in Beta:
More than Average Risk
1+
positively sloped line displaying the relationship between expected return and beta
Security Market Line (SML)
the return an investor receives is the cost of that security to the company that issued it
cost of capital
the return common stock investors require on their investment in the firm
cost of equity
the return preferred stock investors require on their investment
cost of preferred stock
the purpose of the cost of equity
for every $1 in common stock, equity is how much we are paying investors
Advantages of Dividend Growth Model to find the Cost of Preferred Stock and Cost of Equity
Simple model
Disadvantages of Dividend Growth Model to find Cost of Preferred Stock and Cost of Equity
- Only applies to companies issuing dividends
- Dividends must be fixed (for preferred stock)
- Dividends must be constant rate (common stock)
- Estimated Growth Rates
- Fails to consider risk
The return lenders require on the firm’s debt
Cost of Debt
the purpose of cost of debt
to see for every $1 in bonds, how much we pay our lenders
the cost of equity for the firm as a whole and can be interpreted as the required return on the overall firm
WACC
looks at how products and money move through a company
Cash Flow Timeline
measures time from when money leaves company to when it comes back
Cash Cycle
financial managers use this to estimate cash in and out of a company
- primary concern is to find if there’s a surplus or deficit of cash
Cash Budget
what is an unsecured loan?
a short term loan with no collateral
what is the most common type of loan?
unsecured loan
how long does a line of credit last?
1 year
what is a revolving credit arrangement?
just like a line of credit but last 2+ years
how does a line of credit work?
- last for 1 year
- Pay $0 for 60 days (clean up period)
- Can be commited (formal) or uncommited (informal)
what is a committed line of credit?
there is a commitment fee, and and application fee (floating interest)
what is a uncommited line of credit?
re-borrow on a previous loan
what is a secured loan?
have collateral attatched
bank gets first priority over me if you aren’t making payments on loans
accounts receivable financing
inventory is collateral up for loan
Inventory Loans
how many currencies are there in the world?
over 160
what factors are there to consider with international currencies?
different exchange rates different interest rates Accounting Methods (GAAP) Taxes Foreign Government (Government Intervention/Regulation)
what job in international finance has you paying for goods in foreign currency?
Importer
What job in international finance has you receiving foreign currency for our goods?
Exporters
What does a portfolio manager do? (international finance)
Buy and sell foreign stocks
What does a trader do in international finance?
“make a market” in foreign currency
Try to find inconsistencies in exchange rates
US shares of foreign stock
company sponsered, investment bank
American Depository Receipt (ADR)
the price of one currency expressed in another
Exchange Rates
British and Irish Government Securities
Gilts
Agreement to deliver one currency for another
Currency Swap
market in which currencies are traded
Foreign Exchange Market (FOREX)
what is the largest financial market in the world?
Foreign Exchange Market (FOREX)
what currencies are accepted in the FOREX?
USD, Euro, British Pound, Japanese Yen
Exchange of currencies is completed within 2 business days
Spot Trade
Exchange currenies, agree when this will happen today, but have up to 1 year to settle
Forward Trade
the idea that exchange rates are constantly adjusting to keep purchasing power constant
Purchasing Power Parity (PPP)
a commodity should cost the same regardless of the currency used to purchase it - but according to exchange rates
Absolute PPP
the process of converting through 2 or more currencies, then back to the original for the purpose of profit
Triangular Arbitriage
