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Finance 357 > Final Review > Flashcards

Final Review Flashcards

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1
Q

Four Types of Firms

A

Sole Proprietorship
Partnership
Limited Liability Companies
Corporation

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2
Q

Corporation pays tax on its profits and shareholders pay their own personal income taxes

A

C Corporation

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3
Q

Firm’s profits/losses are not subject to corporate taxes

A

S Corporation

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4
Q

Financial Management Tasks

A
  • Investment decisions
  • Financing decisions
  • Manage cash flow from operating activities
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5
Q

Holding the time period constant while decreasing the interest rate _______ present values.

A

Increases

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6
Q

Equally-spaced cash flows that increase in size at a constant rate forever

A

Growing Perpetuity

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7
Q

Equally-spaced cash flows that increase in size at a constant rate for a finite number of periods

A

Growing Annuity

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8
Q

Does not account for the number of compounding periods or adjust the annualized interest rate for the time value of money

A

APR

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9
Q

Accounts for the number of compounding periods and adjusts the annualized interest rate for the time value of money

A

EAR

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10
Q

More accurate measure of rates involved in lending and investing

A

EAR

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11
Q

Real rate of interest

A

Interest rate that would exist in the absence of inflation

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12
Q

Nominal rate of interest

A

Interest rate adjusted for inflation

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13
Q

Interest rates tend to follow

A

the business cycles

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14
Q

Interest rates tend to decrease during an

A

economic contraction

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15
Q

Interest rates tend to increase during an

A

economic expansion

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16
Q

Slopes upward from left to right and imply higher interest rates are likely

A

Ascending Yield Curve

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17
Q

Slopes downward from left to right and implies lower interest rates are likely

A

Descending Yield Curve

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18
Q

Implies interest rates are unlikely to change

A

Flat

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19
Q

Three factors that influence the shape of the yield curve:

A

Real rate of interest
Expected rate of inflation
Interest rate risk

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20
Q

The longer the maturity of a security, the _______ its interest rate risk.

A

greater

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21
Q

The interest rate risk premium adds _______ _____ to the slope of the yield curve

A

Upward bias

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22
Q

Treasury notes

A

Original maturities from one to ten years

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23
Q

Treasury bonds

A

Original maturities of more than ten years

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24
Q

If coupon rate is equal to the yield, the bond is sold at?

A

par

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25
Q

If coupon rate is less than its yield, the bond is sold at?

A

A discount

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26
Q

If coupon rate is greater than its yield, the bond is sold at?

A

A premium

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27
Q

Bonds with higher coupon rates are _____ sensitive to interest rate changes because they pay higher cash flows up-front

A

less

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28
Q

Four features of debt instruments responsible for the differences in corporate borrowing costs and determine the level and structure of interest rates:

A

Marketability
Call feature
Default risk
Term-to-maturity

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29
Q

Yield to maturity of a defaultable bond is not equal to what?

A

the expected return of investing in the bond

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30
Q

Risks affecting individual companies or industries are called ________ risk

A

Unsystematic or Private

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31
Q

Risks affecting the entire market are called _________ risk

A

Systematic

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32
Q

________ risk can be diversified away in a large portfolio

A

Unsystematic

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33
Q

Risk premium of a security is only determined by its __________ risk

A

Systematic

34
Q

The total risk of a portfolio is the _____

A

volatility

35
Q

Small firms and value firms do better than big firms and growth firms according to what model

A

Fama-French

36
Q

WACC Assumptions

A

Average Risk
Constant Debt-Equity Ratio
Limited Leverage Effects

37
Q

A private company can seek funding from several potential sources:

A

Angel investors
Venture capital firms
Institutional investors
Corporate Investors

38
Q

Advantages of going public:

A

Greater liquidity

Better access to capital

39
Q

Disadvantages:

A

Equity holders more dispersed

Must satisfy requirements of public companies

40
Q

Investment banking firm that manages the IPO and designs its structure

A

Underwriter

41
Q

Syndicate

A

other underwriters that help market and sell the issue

42
Q

Underwriter Tasks

A

SEC Filings

Valuation

43
Q

Underwriter guarantees that it will sell all of the stock at the offer price

A

Firm Commitment Arrangement

44
Q

Underwriter does not guarantee that the stock will be sold

A

Best-efforts basis

45
Q

Company or its investment bankers auction off the shares directly to the public

A

Auction IPO

46
Q

Private Debt

A

Bank Loans

Private Placements

47
Q

Bank Loans

A

Term Loan
Syndicated Bank Loan
Revolving Line of Credit
Asset-Backed Line of Credit

48
Q

Public Debt

A

Notes
Debentures
Mortgage Bonds
Asset-backed Bonds

49
Q

Subordinated Debenture

A

debenture issue that has a lower priority claim to the firm’s assets than other outstanding debt

50
Q

Tranches

A

different classes of securities that comprise a single bond issuance

51
Q

Debt that involves foreign investors:

A

Domestic bonds
Foreign Bonds
International Bonds

52
Q

Issued by a local entity and traded in a local market, but purchased by foreigners

A

Domestic Bonds

53
Q

Issued by a foreign company in a local market and are intended for local investors

A

Foreign Bonds

54
Q

International bonds that are NOT denominated in the local currency of the country in which they are issued

A

Eurobonds

55
Q

Combines the features of domestic, foreign, and Eurobonds and are offered for sale in several different markets simultaneously

A

Global bonds

56
Q

Limits the issuer in a bond contract from taking actions that might hinder its ability to pay bondholders

A

Covenants

57
Q

Advantages of Covenants

A

May reduce a firm’s cost of borrowing, and the reduction might more than outweigh the cost of the loss of flexibility associated with covenants

58
Q

Yield of a callable bond assuming that the bond will be called on the earliest call date

A

Yield to Call

59
Q

When coupon rate is above current market yield, YTC is less than YTM what will the firm do?

A

call the bond

60
Q

When coupon rate is below current market yield, YTC is greater than YTM what will the firm do?

A

NOT call the bond

61
Q

A perfect capital market is a market in which:

A

Securities are fairly priced
No tax consequences or transaction costs
Investment cash flows are independent of financing choices

62
Q

MM Prop I:

A

In perfect capital market, the total value of a firm is equal to the market value of the free cash flows generated by its assets and is not affected by its choice of capital structure

63
Q

Indirect costs of financial distress:

A

Loss of customers
Loss of suppliers
Loss of employees
Fire sale of assets

64
Q

As debt increases, tax benefits increase until ______ _______ exceeds EBIT

A

interest expense

65
Q

Costs that arise when there are conflicts of interest between stakeholders

A

agency costs

66
Q

Pecking order hypothesis

A

Managers have a preference to fund investment using retained earnings, followed by debt, and will only choose to issue equity as a last resort

67
Q

Share repurchases to distribute cash to shareholders:

A

Open Market Repurchases
Tender offer
Targeted Repurchase

68
Q

A firm must _______ the tax costs of holding cash with the potential benefits of not having to raise external funds in the future

A

balance

69
Q

Paying out excess cash through dividends or share repurchases can ______ the stock price by reducing managers’ ability and temptation to waste resources

A

boost

70
Q

Asymmetric information

A

when managers have better information than investors regarding the future prospects of the firm, their payout decisions may signal this information

71
Q

The practice of maintaining relatively constant dividents

A

dividend smoothing

72
Q

Dividend signaling

A

the idea that dividend changes reflect managers views about a firm’s future earnings prospects

73
Q

Consequences of Stock Dividends

A
  • Firm doesn’t pay out any cash to shareholders
  • Increase in the number of shares outstanding (stock price will fall)
  • Stock dividends are not taxed
74
Q

Why issue a stock dividend?

A

Typical motivation for a stock split is to keep the share price in a range thought to be attractive to small investors

75
Q

When a firm sells a subsidiary by selling shares as a non-cash special dividend in the subsidiary alone

A

Spin-offs

76
Q

Advantages of a spin-off

A
  • avoids the transaction costs associated with such a sale

- special dividend is not taxed as a cash distribution

77
Q

What is the financial managers most important job?

A

Making investment decisions

78
Q

What strategies are available to shareholders to help ensure managers are motivated to act in the shareholders interests?

A
  • Ensure that employees are paid with company stock and/or stock options
  • Mount hostile takeovers
  • Ensure that underperforming managers are fired
  • Write contracts that ensure the interests of the managers and shareholders are closely aligned
79
Q

What is an example of a physical market?

A

New York Stock Exchange (NYSE)

80
Q

What is an example of an over-the-counter market?

A

NASDAQ

Finance 357 (2 decks)

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