Finance Final Flashcards
The goal of managers is to
maximize firm value
Inflation
Rate at which prices as a whole are increasing
Real Value of $1
Purchasing power-adjusted value of a dollar
Nominal interest rate
rate at which money invested grows
Real interest rate
Rate at which the purchasing power of an investment increases
When interest rates go up
Bond prices go down
Bond is selling at a premium
Price > Face Value
Current yield =
Coupon / Price
Expectations theory
A major factor determining the shape of the yield curve is expected future interest rates
An upward sloping yield curve tells you that
Investors expect short term interest rates to rise
The liquidity-preference theory
Assumes that investors prefer buying short-term securities because these securities have less interest rate risk
The default premium is the
Difference between promised yield on a corporation bond and the yield on a Canada bond with the same coupon and maturity
Plowback =
EPS - Div / EPS
Efficient market
A market where prices reflect all available information
Security market line
Relationship between market risk of the security (beta) and its expected return
Profitability index
The ratio of NPV to initial investment
3 difference ways to calculate OCF
- Revenue - Expense - Tax
- Net Income + Depreciation
- (Rev - Exp)(1 - Tc) + (Depr x Tax)
Sensitivity Analysis
Analysis of the effects of changes in sales, costs, etc on project profitability
Scenario Analysis
Projects analysis given a particular combination of assumptions
Simulation analysis
Estimation of the probabilities of different possible outcomes - an extension of scenario analysis
OFC (break-even) =
Cost / (1/r - 1/r x 1+r^t) ; (Isolate R from revenue)
Operating leverage
The degree to which a firm’s operating costs are fixed
Degree of operating leverage
The percentage change in operating profits when sales change by 1%
A decision tree is a
Diagram of sequential decisions and the possible outcome of such decisions
In most companies, the Directors are elevated by
A majority voting system
Some companies operative a
Cumulative voting system
Most companies issue how many classes of stocks?
Just one
Preferred stock
Stock that takes priority over common stock in regards to dividends
Subordinate debt
Debt that may be repaid in bankruptcy only after senior debt is repaid
Secured debt
Debt that has first claim on specified collateral (assets) in the event of default
Venture capital
Is the equity capital in startup businesses
Venture capitalists are
Investors who are prepared to back an untired company in return for a share of the profits
Initial public offering (IPO)
First offering of stock to the general public
Underwriters typically price the IPO how?
Underprice
Once a firm decides to go public, its first step is
To select the underwriting
Public companies can issue securities either by making a:
Right issue or general cash offer to investors at large
General cash offer
Sale of securities open to all investors by an already public company
Right issue
Issue of securities offered only to current stakeholders
A private placement is
The sale of securities to a limited number of investors without a public offering
When there are no taxes and well-functioning capital market exist,
The market value of a company does not depend on its capital structure
Cost of financial distress
Costs arising from bankruptcy or distorted business decisions before bankruptcy
The trade-off theory
Financial managers choose the level of debt which will balance the firms interest tax shields against its cost of financial distress
The pecking order theory states that
Firms prefer to issue debt rather than equity if internal finance is insufficient
How dividends get paid
- Cash dividend: Payment of cash by the firm to its shareholders
- Payment date: Dividend cheques are mailed to investors
- Ex-dividend date: Date that determines whether a stockholder is entitled to a dividend payment
- Record date: Person who owns the stock on this date receives the dividend
Stock dividend
Distribution of additional shares, instead of cash, to the firm’s shareholders
Stock split
Issue of additional shares to firm’s shareholders
Reverse split
Issue of new shares in exchange for old shares, which results in the reduction of outstanding shares
Share repurchase
The firm buys back stock from its shareholders
Cash dividend and a share repurchase leave a
Shareholder in the same financial position
Dividend payout ratio
Percentage of earnings paid out as dividend
Information content of dividends
Dividend increases send good news about the future cash and earnings
Modigliani and Miller (MM) maintain that under ideal conditions
The value of the firm is unaffected by dividend policy
Changing the firm’s dividend policy may
Attract a new investor clientele but may not change firm value
- The main objective of the firm
Is to maximize shareholders wealth
- You cannot change the value of a firm by
Changing its dividend policy
- With taxes and no cost of financial distress you can maximize the value of the firm by
Eliminating all stock and replacing it with debt
- With no taxes, and the amount of debt increases, the cost of debt and equity may increase but
The WACC will not change
- A project that breaks even on an accounting basis will
Have a negative NPV
- Depreciation is not a ______; the ______ from depreciation is a ________
Cash flow; tax savings; Cash flow
- If a project has a zero NPV when the cash flows are discounted at the WACC
Then the project’s cash flows are just sufficient to give all investors the return they require
- If a project’s return lies above the security market line
Then it is an attractive investment opportunity
- You can reduce (and eliminate) the unique risk of stocks, but not the market risk,
By combining them into portfolios
