Final Study Guide Flashcards
Loan from investor to firm
Bond
Firm pays interest payments periodically until the bond
matures plus the bond price
Ownership in the corporations
Stocks
The goal of a corporation is to
Enhance long run stock value
Balance risk vs.
Profit
Essentials for success
Equity, productive employees and capital equipment, customer demand
Corporations are simply
passthrough legal entities
The benefits and costs of corporations are shared by
Shareholders, employees, and customers
Management makes self-interest to benefit themselves rather than achieving organizational goals
Agency cost
Principles of financial decision making
Efficient market prices
Balancing risk and return
Time value of money
Competitive, liquid, transparent, standardized
Efficient market prices
Return must compensate for risk
Balancing risk and return
Risk premium for buying a riskier stocks or bonds or securities
Risk Aversion
The value of money depends upon size, timing, and certainty of receipt
Time value of money
Financial Markets involve two types of firms
Non-Financial (Walmart, Microsoft, GM) that sell stocks and bonds
Financial Firms (BlackRock, fidelity) that manage pensions, 401k, and buy stocks and bonds
IPO stands for
Initial Public Offering
Selling for the first time in the primary market
Initial Public Offering
Disclosure of potential risks and returns
Prospectus
Group of investment banks underwriting security issuance
Syndicate
Firm issues stock/bonds to be bought by the investors
Primary Markets
Every time they issue bonds or stock, they do so where
in the Primary Markets
Corporations get cash
Cash inflow
Stock/bonds are traded among investors; the firm is not involved
Secondary Markets
Competitive bid/as from many buyers and sellers
Auction Market
The New York Stock Exchange is an example of
Auction Market
A dealer buys and sells securities upon investor inquiry
Dealer Market
NASDAQ is an example of a
Dealer Market
10K Reports are filed
Annually
10 Q Reports are filed
Quarterly
Assets = Liabilities + Equity
Balance Sheet
Increase in asset = cash outflow
Balance sheet
Increase in liability/equity = cash flow
Balance Sheet
Sales Revenue - Cost of Goods Sold =
Gross Profit
Gross Profit - Operating Expense - Depreciation =
EBIT
EBIT - Interest =
EBIT minus taxes
EBIT minus taxes (@25%)=
Net Income
Net Income/sales =
Net Margin
Dividends Paid + Added to Retained Earnings =
Net Income
Dividends Paid/ Net Income =
Payout Ratio
The Statement of Cash Flows includes
Cash Flow from Operations (CFO)
Cash Flow from Investments (CFI)
Cash Flow from Financing (CFF)
CFO is cash earned by
Producing and selling the firm’s products
CFO =
Net Income + Depreciation Expense - ((Increase in Current Assets - Decrease in Current Assets) - (Increase in Current Liabilities - Decrease in Current Liabilities))
Examples of Current Assets
Accounts Receivable
Inventory
Prepaid Expenses
Examples of Current Liabilities
Accounts Payable
Accrued Expenses
Current assets are also referred to as
Operating Expenses
Current Liabilities are also referred to as
Operating Liabilities
CFF is cash raised by
selling bonds and stocks
CFF =
Increase in stock + Increase in bonds - Dividend paid
CFI is cash spent for
Investing projects
Bill paying capacity
Liquidity
Ratios dealing with liquidity
Current Ratio
Quick Ratio
Revenue Per Asset
Efficiency
Ratios dealing with efficiency
Total Asset Turnover
Fixed Asset Turnover
Debt Vs. Equity
Financing
Ratios dealing with financing
Debt Equity
Financial Leverage
Net Income
Profitability
Ratios dealing with profitability
Return on Equity
Return on Assets
Trend Analysis, Cross Sectional, and Goals
Financial Ratio Analysis
Compares ratios of a firm over time
Trend Analysis
Compares firm to competitors
Cross Sectional
Internal performance goals
Goals
The value of money depends on when you receive it
Time Value of Money (TVM)
The value of cash today
Present value
The value of cash in future
Future Value
The metric that translates between PV and FV
Interest Rate
The rate of increase in a cash balance per period
Interest rate
PV * (1 + interest rate)
FV
PV * (1+ inflation rate)
FV
FV/(1+Interest Rate)
PV
When the Market rate is equal to the coupon rate, bonds will sell at
par value
When the market rate is greater than the coupon rate, bonds will sell at
a discount
When the market rate is less than the coupon rate, bonds will sell at
a premium
PV of future cash flows, discounted at the risk-adjusted required return
Bond & Stock Price
A loan from an investor
Bond
Investor becomes part owner
Stock
Principal of a bond
Face Value of the Bond
Principal of stock
Price of stock
Interest of a bond is
a legal obligation of the firm
Dividends of stock are distributed
at the discretion of the firm
Maturity of bond
Principal repaid to the investor
Maturity of stocks
none
Pricing of both stocks and bonds
Vary with the market
Liquidity of both stocks and bonds
Can be sold to other investors
If not mentioned in the question, FV for a bond is
$1000
Bonds:
Annual Interest Payment =
Coupon Rate * Face Value
A bond’s price and yield keeps changing based on the
supply and demand of the market
Coupon rate at par price
yield
If price increase, yield
increases
If price decreases, yield
decreases
If the bond yield increases from 4-5%, the price drops. This drop in price caused by the 1% increase in yield is called
Duration
Long term bonds have a
Higher Duration and Greater Price Volatility
Bond’s required return is the yield necessary to compensate for risk
Required return for a bond
What factors affect a bond’s required yield?
Treasury Yields
Credit Risk
Economy
Term
Collateral
Taxes
