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Financial Management > Final - Part 2 > Flashcards

Final - Part 2 Flashcards

1
Q

common stock

A

equity without priority for dividends or in bankruptcy

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2
Q

Over-the-counter market

A

securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories

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3
Q

Net present value

A

the difference between an investment’s market value and its cost; it measures how much value is created or added today by undertaking an investment

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4
Q

True or False: Net present value are estimates?

A

True

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5
Q

Payback Period

A

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

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6
Q

Payback Rule

A

an investment is acceptable if its calculated payback period is less than some prespecified number of years

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7
Q

Discounted payback

A

the length of time required for an investment’s discounted cash flows to equal its initial cost

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8
Q

Discounted Payback Rule

A

investment is acceptable if its discounted payback is less than some prespecified number of years

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9
Q

Advantages of the discounted payback period rule

A
  1. includes time value money
  2. easy to understand
  3. does not accept negative estimated NPV investments
  4. Biased toward liquidity
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10
Q

Disadvantages of the Discounted Payback Period Rule

A
  1. May reject positive NPV investments
  2. Requires an arbitrary cutoff date
  3. ignores cash flow beyond the cutoff date
  4. biased against long-term investments, such as research and development, and new projects
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11
Q

Internal Rate of Return Rule

A

an investment is acceptable if the IRR exceeds the required return, if not, then it should be rejected

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12
Q

Mutually exclusive investment decision

A

situation in which taking one investment prevents the taking of another

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13
Q

incremental cash flows

A

the difference between a firm’s future cash flows with a project and those without the project

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14
Q

Stand-alone principle

A

the assumption that evaluation of a project may be based on the projects incremental cash flows

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15
Q

Sunk Cost

A

cost that has already been incurred and cannot be removed and therefore, should not be considered in an investment decision

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16
Q

Opportunity Cost

A

the most valuable alternative that is given up if a particular investment is undertaken

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17
Q

Erosion

A

occurs when the cash flows of a new project come at the expense of a firm’s existing projects

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18
Q

Accelerated cost recovery system

A

depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications

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19
Q

Bottom-up approach

A

begin with the accountant’s bottom line (net income) and add back any noncash deductions such as depreciation

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20
Q

Top-down approach

A

start at the top of the income statement with sales and work out way down to net cash flow by subtracting costs, taxes, and expenses

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21
Q

Tax shield

A

approach that views OCF as having two components:
1. what the project’s cash flow would be if there were no depreciation expense
2. depreciation multiplied by tax rate

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22
Q

Forecasting Risk

A

the possibility that errors in projected cash flows will lead to incorrect decisions

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23
Q

Scenario Analysis

A

determination of what happens to NPV estimates when we ask what-if questions

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24
Q

Simulation analysis

A

a combination of scenario and sensitivity analysis, wherein we allow items to vary at the same time

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25
Q

operating leverage

A

the degree to which a firm or project relies on fixed costs

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26
Q

Systematic Risk

A

influences many assets (uncertainties about general economic conditions such as GDP, interest rates, or inflation)

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27
Q

Unsystematic risk

A

a risk that affects at most a small number of assets (the announcement of an oil strike by a company)

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28
Q

True or False: a portfolio with many assets has almost no unsystematic risk

A

True
explanation: unsystematic risk is essentially eliminated by diversification

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29
Q

Does systematic risk affect almost all assets?

A

Yes, systematic risk affects almost all assets to some degree, so no matter how many assets are in a portfolio, the systematic risk doesn’t go away

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30
Q

Systematic risk principle

A

the expected return on a risky asset depends on that asset’s systematic risk

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31
Q

Security Market Line

A

positively sloped, straight line displaying the relationship between expected return and beta

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32
Q

Market Risk Premium

A

Slope of the security market line

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33
Q

Capital Asset pricing model

A

the equation of the SML showing the relationship between expected return and beta

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34
Q

What does the cost of capital depend on?

A

the cost of capital depends primarily on the use of funds, not the source

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35
Q

Cost of Equity

A

the return that equity investors require on their investment in the firm

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36
Q

SML approach advantages

A
  1. it explicitly adjusts for risk
  2. it is applicable to companies other than just those with steady dividend growth
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37
Q

SML approach disadvantages

A
  1. requires that two things be estimated, the market risk premium and the beta coefficient) and if the estimates are poor, the resulting cost of equity will be inaccurate
  2. are relying on the past to predict the future
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38
Q

Cost of debt

A

The return that lenders require on the firm’s debt

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39
Q

Cost of preferred stock is equal to…

A

the dividend yield on the preferred stock

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40
Q

Venture Capital

A

Financing for new, often high-risk, ventures

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41
Q

Prive Equity

A

often used to label the rapidly growing area of equity financing for nonpublic companies

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42
Q

Crowdfunding

A

the practice of raising small amounts of capital from a large number of people, typically via the internet

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43
Q

Registration Statement

A

a statement filed with the SEC that discloses all material information concerning the corporation marking a public offering

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44
Q

Prospectus

A

A legal document describing details of the issuing corporation and the proposed offering to potential investors

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45
Q

General Cash Offer

A

an issue of securities offered for sale to the general public on a cash basis

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46
Q

Rights offer

A

public issue of securities in which securities are first offered to existing shareholders

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47
Q

Initial Public Offering

A

A company’s first equity issue made available to the public; also called an unseasoned new issue

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48
Q

Seasoned Equity Offering

A

A new equity issue of securities by a company that has previously issued securities to the public

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49
Q

Underwriters

A

Investment firms that act as intermediaries between a company selling securities and the investing public

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50
Q

Gross spread

A

the difference between the underwriter’s buying price and the offering price, representing compensation to underwriter

51
Q

Syndicate

A

group of writers formed to share the risk and to help sell an issue

52
Q

What are the three types of underwriting involved in a cash offer?

A
  1. Firm Commitment
  2. Best Efforts
  3. Dutch Auction
53
Q

Firm commitment Underwriting

A

the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares

54
Q

Best Efforts Underwriting

A

the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsability

55
Q

Dutch Auction Underwriting

A

the offer price is set based on competitive bidding by investors; also called uniform price auction

56
Q

Green Shoe provision

A

gives the members of the underwriting group the option to purchase additional shares from the issuer at the offering price

57
Q

Lockup Agreements

A

specify how long insiders must wait after an IPO before they can sell stock

58
Q

Ex-rights date

A

the beginning of the period when stock is sold without recently declared right, normally two trading days before the holder-of-record date

59
Q

Holder of record date

A

the sate on which existing shareholders on company records are designated as the recipient of stock rights; also the date of record

60
Q

Dilution

A

the loss in existing shareholders’ value in terms of ownership, market value, book value, or EPS

61
Q

Financial Leverage

A

the extent to which a firm relies on debt

62
Q

M&M Proposition I

A

states that the value of the firm is independent of the firm’s capital structure

63
Q

Business Risk

A

the equity risk that comes from the nature of the firm’s operating activities

64
Q

Financial Risk

A

the equity risk that comes from the financial policy (capital structure of the firm)

65
Q

Liquidation

A

termination of the firm as a going concern, and it involves selling off the assets of the firm

66
Q

Reorganization

A

financial restructuring of a failing firm to attempt to continue operations as a going concern

67
Q

Regular Cash dividends

A

cash payments made by a firm to its owners in the normal course of business, usually paid four times per year

68
Q

Information content effect

A

the market’s reaction to a change in corporate dividend payout

69
Q

Clientele Effect

A

argument states that stocks attract particular groups based on dividend yield and the resulting tax effects

70
Q

Stock repurchase

A

the purchase, by a corporation, of its own shares of stock

71
Q

Stock Dividend

A

a payment made by a firm to its owner in the form of stock, diluting the value of each share outstanding

72
Q

Stock Split

A

an increase in a firm’s shares outstanding without any change in owner’s equity

73
Q

Activities that increase Cash

A
  1. increasing long-term debt
  2. increasing equity
  3. increasing current liabilities
  4. decreasing current assets other than cash
  5. decreasing fixed assets
74
Q

Activities that decrease cash

A
  1. decreasing long-term debt
  2. decreasing equity
  3. decreasing current liabilities
  4. increasing current assets other than cash
  5. increasing fixed assets
75
Q

Operating cycle

A

period between the acquisition of inventory and the collection of cash from receivables

76
Q

Inventory Period

A

the time it takes to acquire and sell the inventory

77
Q

Accounts Receivable period

A

the time between sale of inventory and collection of the receivable

78
Q

Accounts Payable period

A

the time between receipt of inventory and the payment for it

79
Q

Cash cycle

A

the time between cash disbursement and cash collection

80
Q

In which two ways will the short-term financial policy adopted by a firm be reflected?

A
  1. the size of the firm’s investments in current assets
  2. the financing of current assets
81
Q

Carrying costs

A

coss that rise with increases in the level of investment in current assets

82
Q

Shortage costs

A

costs that fall with increases in the level of investment in current assets

83
Q

Cash Budget

A

a forecast of cash receipts and disbursements for the next planning period

84
Q

What are the four categories of cash disbursements

A
  1. payment of accounts payable
  2. wages, taxes, and other expenses
  3. capital expenditures
  4. long-term financial expenses
85
Q

Line of Credit

A

a formal or informal rearranged, short-term bank loan

86
Q

Compensating balance

A

money kept by the firm with a bank as part of a loan agreement

87
Q

Accounts receivable financing

A

secured short-term loan that involves either the assignment of the factoring of receivables

88
Q

inventory loan

A

a secured short-term loan to purchase inventory

89
Q

commercial paper

A

consists of short-term notes issued by large, highly rated firms

90
Q

Trade Credit

A

involves a firm increasing the accounts payable period

91
Q

What are the three liquidity motives?

A
  1. Speculative motive
  2. precautionary motive
  3. transaction motive
92
Q

speculative motive

A

the need to hold cash to take advantage of additional investment opportunities such as bargain purchases

93
Q

precautionary motive

A

the need to hold cash as a safety margin to act as a financial reserve

94
Q

Transaction motive

A

the need to hold cash to satisfy normal disbursement and collection activities associated with a firm’s ongoing operations

95
Q

Float

A

the difference between book cash and bank cash, representing the net effect of checks in the process of clearing

96
Q

Lockboxes

A

special post office boxes set up to intercept and speed up accounts receivable payments

97
Q

Cash concentration

A

the practice of, and procedures for, moving cash from multiple banks into the firm’s main account

98
Q

Terms of sale

A

the conditions under which a firm sells its goods and services for cash or credit

99
Q

Credit analysis

A

the process of determining the probability that customers will not pay

100
Q

Collection Policy

A

the procedure followed by a firm in collecting accounts receivable

101
Q

Credit Period

A

the length of time for which credit is granted

102
Q

Cash Discount

A

given to reduce prompt payment

103
Q

What factors should be considered when evaluating credit policy

A
  1. revenue effects
  2. cost effects
  3. the cost of debt
  4. the probability of nonpayment
  5. the cash discount
104
Q

Five C’s of credit

A

Character
Capacity
Capital
Collateral
Conditions

105
Q

Credit scoring

A

the process of quantifying the probability of default when granting consumer credit

106
Q

Aging Schedule

A

compilation of accounts receivable by the age of each account

107
Q

Materials requirement planning

A

set of procedures used to determine inventory levels for demand-dependent inventory types such as work-in-progress and raw materials

108
Q

Just-in-time inventory

A

system for managing demand-dependent inventories that minimizes inventory holdings

109
Q

Horizontal Acquisition

A

an acquisition of a firm in the same industry as the bidder

110
Q

Vertical acquisition

A

involves firms at different steps of the production process

111
Q

Conglomerate acquisition

A

occurs when the bidder and the target firm are in unrelated lines of business

112
Q

Strategic alliance

A

an agreement between firms to cooperate in pursuit of a joint goal

113
Q

Joint Venture

A

typically an agreement between firms to create a separate, co-owned entity established to pursue a joint goal

114
Q

Poxy contests

A

an attempt to gain control of a firm by soliciting enough stockholder votes to replace existing management

115
Q

Synergy

A

positive incremental net gain associated with the combination of two firms through a merger or acquisition

116
Q

Benefits of mergers and acquisitions

A
  1. revenue enhancement
  2. cost reductions
  3. lower taxes
  4. reduction in capital need
117
Q

Poison Pill

A

financial device designed to make unfriendly takeover attempts unappealing, if not impossible

118
Q

Share Rights plan

A

provisions allowing existing stockholders to purchase stock at some fixed price should an outside takeover bid come up, discouraging hostile takeover attempts.

119
Q

Golden Parachute

A

some target firms provide compensation to top-level managers if a takeover occurs

120
Q

Poison put

A

a variation of poison pill

121
Q

crown jewel

A

firms often sell of threaten to sell major assets when faced with takeover threat

122
Q

white knight

A

firm facing an unfriendly merger offer might arrange to be acquired by a different, friendly firm

123
Q

Lockup

A

option granted to a friendly suitor giving it the right to purchase stock or some fort of assets of a target firm at a fixed price in the event of an unfriendly takeout

Financial Management (2 decks)

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