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Finance Final Flashcards

1
Q

The goal of managers is to

A

maximize firm value

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2
Q

Inflation

A

Rate at which prices as a whole are increasing

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3
Q

Real Value of $1

A

Purchasing power-adjusted value of a dollar

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4
Q

Nominal interest rate

A

rate at which money invested grows

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5
Q

Real interest rate

A

Rate at which the purchasing power of an investment increases

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6
Q

When interest rates go up

A

Bond prices go down

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7
Q

Bond is selling at a premium

A

Price > Face Value

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8
Q

Current yield =

A

Coupon / Price

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9
Q

Expectations theory

A

A major factor determining the shape of the yield curve is expected future interest rates

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10
Q

An upward sloping yield curve tells you that

A

Investors expect short term interest rates to rise

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11
Q

The liquidity-preference theory

A

Assumes that investors prefer buying short-term securities because these securities have less interest rate risk

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12
Q

The default premium is the

A

Difference between promised yield on a corporation bond and the yield on a Canada bond with the same coupon and maturity

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13
Q

Plowback =

A

EPS - Div / EPS

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14
Q

Efficient market

A

A market where prices reflect all available information

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15
Q

Security market line

A

Relationship between market risk of the security (beta) and its expected return

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16
Q

Profitability index

A

The ratio of NPV to initial investment

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17
Q

3 difference ways to calculate OCF

A
  1. Revenue - Expense - Tax
  2. Net Income + Depreciation
  3. (Rev - Exp)(1 - Tc) + (Depr x Tax)
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18
Q

Sensitivity Analysis

A

Analysis of the effects of changes in sales, costs, etc on project profitability

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19
Q

Scenario Analysis

A

Projects analysis given a particular combination of assumptions

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20
Q

Simulation analysis

A

Estimation of the probabilities of different possible outcomes - an extension of scenario analysis

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21
Q

OFC (break-even) =

A

Cost / (1/r - 1/r x 1+r^t) ; (Isolate R from revenue)

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22
Q

Operating leverage

A

The degree to which a firm’s operating costs are fixed

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23
Q

Degree of operating leverage

A

The percentage change in operating profits when sales change by 1%

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24
Q

A decision tree is a

A

Diagram of sequential decisions and the possible outcome of such decisions

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25
Q

In most companies, the Directors are elevated by

A

A majority voting system

26
Q

Some companies operative a

A

Cumulative voting system

27
Q

Most companies issue how many classes of stocks?

A

Just one

28
Q

Preferred stock

A

Stock that takes priority over common stock in regards to dividends

29
Q

Subordinate debt

A

Debt that may be repaid in bankruptcy only after senior debt is repaid

30
Q

Secured debt

A

Debt that has first claim on specified collateral (assets) in the event of default

31
Q

Venture capital

A

Is the equity capital in startup businesses

32
Q

Venture capitalists are

A

Investors who are prepared to back an untired company in return for a share of the profits

33
Q

Initial public offering (IPO)

A

First offering of stock to the general public

34
Q

Underwriters typically price the IPO how?

A

Underprice

35
Q

Once a firm decides to go public, its first step is

A

To select the underwriting

36
Q

Public companies can issue securities either by making a:

A

Right issue or general cash offer to investors at large

37
Q

General cash offer

A

Sale of securities open to all investors by an already public company

38
Q

Right issue

A

Issue of securities offered only to current stakeholders

39
Q

A private placement is

A

The sale of securities to a limited number of investors without a public offering

40
Q

When there are no taxes and well-functioning capital market exist,

A

The market value of a company does not depend on its capital structure

41
Q

Cost of financial distress

A

Costs arising from bankruptcy or distorted business decisions before bankruptcy

42
Q

The trade-off theory

A

Financial managers choose the level of debt which will balance the firms interest tax shields against its cost of financial distress

43
Q

The pecking order theory states that

A

Firms prefer to issue debt rather than equity if internal finance is insufficient

44
Q

How dividends get paid

A
  1. Cash dividend: Payment of cash by the firm to its shareholders
  2. Payment date: Dividend cheques are mailed to investors
  3. Ex-dividend date: Date that determines whether a stockholder is entitled to a dividend payment
  4. Record date: Person who owns the stock on this date receives the dividend
45
Q

Stock dividend

A

Distribution of additional shares, instead of cash, to the firm’s shareholders

46
Q

Stock split

A

Issue of additional shares to firm’s shareholders

47
Q

Reverse split

A

Issue of new shares in exchange for old shares, which results in the reduction of outstanding shares

48
Q

Share repurchase

A

The firm buys back stock from its shareholders

49
Q

Cash dividend and a share repurchase leave a

A

Shareholder in the same financial position

50
Q

Dividend payout ratio

A

Percentage of earnings paid out as dividend

51
Q

Information content of dividends

A

Dividend increases send good news about the future cash and earnings

52
Q

Modigliani and Miller (MM) maintain that under ideal conditions

A

The value of the firm is unaffected by dividend policy

53
Q

Changing the firm’s dividend policy may

A

Attract a new investor clientele but may not change firm value

54
Q
  1. The main objective of the firm
A

Is to maximize shareholders wealth

55
Q
  1. You cannot change the value of a firm by
A

Changing its dividend policy

56
Q
  1. With taxes and no cost of financial distress you can maximize the value of the firm by
A

Eliminating all stock and replacing it with debt

57
Q
  1. With no taxes, and the amount of debt increases, the cost of debt and equity may increase but
A

The WACC will not change

58
Q
  1. A project that breaks even on an accounting basis will
A

Have a negative NPV

59
Q
  1. Depreciation is not a ______; the ______ from depreciation is a ________
A

Cash flow; tax savings; Cash flow

60
Q
  1. If a project has a zero NPV when the cash flows are discounted at the WACC
A

Then the project’s cash flows are just sufficient to give all investors the return they require

61
Q
  1. If a project’s return lies above the security market line
A

Then it is an attractive investment opportunity

62
Q
  1. You can reduce (and eliminate) the unique risk of stocks, but not the market risk,
A

By combining them into portfolios

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