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Nova > Financial Management > Flashcards

Financial Management Flashcards

1
Q

Why is firm leverage irrelevant for shareholders?

A

Same capital invested in levered and unlevered (percentage wise of whole equity) –> same returns

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2
Q

What are disadvantages of the Payback Period?

A

There are several disadvantages: it does not discount CF (does not take into account TVM); does not consider the CF after the payback period; it is an arbitrary decision rule.

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3
Q

What are advantages of the Payback Period?

A

The biggest advantages of the payback period as a decision rule are that it is simple to compute and easy to explain / communicate.

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4
Q

How can you call systematic risk as well?

A

idiosyncratic risk

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5
Q

Common Stock

A
  • Dividends are unpredictable
  • Voting shares
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6
Q

Preferred Stock

A
  • Dividends predetermined
  • Mostly no voting power
  • Senior to common stock
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7
Q

Priority terms

A

Senior vs Junior

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8
Q

Control on company of Debt on Company and example

A

Covenants
- no extraordinary dividends
- want to limit investment decisions

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9
Q

Systematic risk: two factors /Business risk

A
  • cyclicality of revenues
  • Operation leverage
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10
Q

Idiosyncratic risk

A

Specific risk

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11
Q

Specific risk is also called

A

Idiosyncratic Risk

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12
Q

What kind of repayments have bonds usually?

A

Bullet Payment

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13
Q

What is a syndicated loan?

A

Loan from multiple debt holders

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14
Q

Bonds maturity?

A

Longer term

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15
Q

Notes maturity

A

Medium term

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16
Q

Commercial paper maturity

A

short term

17
Q

Length of short, medium and long term

A
  • Short-term (<1 year)
    ▪ Medium-term (1-5 years)
    ▪ Long-term (>5 years)
18
Q

Which debt is mostly more expensive?

A

long term debt

19
Q

Amortizing repayment

A

Installments throughout time –> Loans

20
Q

Bullet repayment

A

Principal payment at once at the end (often bonds)

21
Q

Interest rate

A
  • Fixed Vs Floating (changes over time, dependent on market conditions, EURIBOR)
  • Derivates are one type of interest rate swaps (from floating to fixed)
  • Rating/Spread: Interest rate depends on credit worthiness
22
Q

Credit worthiness/Ratings are dependent on

A
  • Ability to generate cash-flows
  • credit worthiness of its assets
  • current level of leverage
23
Q

Dual class

A

Class A vs Class B Shares
- differences in voting power & dividends
- Class A more power but also more expensive
- Advantage: smaller investors are attracted

24
Q

Dual Listing

A

Public companies might have different entities (legally) but shares are about one company with one profits. Managing and financing is together

25
Q

Shares to employees

A
  • dilution for current shareholders
  • locking employees
26
Q

Dividend in kind

A

Instead of giving cash you give asset

27
Q

Companies with intangibles are usually mostly financed with:

A

Equity

28
Q

Companies with a lot of tangibles/assets that can serve as collateral are mostly mainly financed with:

A

Debt

29
Q

Financial distress costs: direct costs

A
  • Legal expenses
  • Court costs
  • Advisory fees
30
Q

Financial distress costs: Indirect Costs

A
  • result from financial distress
  • Reputation (spare parts, customer relationship (airlines), Suppliers stop sending raw materials, lose flexibility cause closer observed by creditors) -> less revenue
  • Fire Sales
31
Q

Financial distress costs: Agency Costs

A
  • Risk Shifting
  • Debt overhang
  • Cashing out
32
Q

Risk Shifting

A

Shareholders may take high risk, negative NPV projects in the hope of realizing the upside potential, leaving bondholders to bear the downside risk (overinvestment)

33
Q

Debt Overhang

A

Shareholders may be unwilling to finance positive NPV projects when the firm is in financial distress since debt holders have priority over the CFs (underinvestment)

34
Q

Cashing Out

A

Shareholders may try to get money out of the firm ahead of higher priority claims (e.g. by paying cash dividends)

Nova (6 decks)

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