FNCE 2120 Final Flashcards
1
Q
terminal value
A
the future value of a cash flow stream
2
Q
simple interest rate
A
the annual, non-compounded rate quoted by borrowers and lenders; it is used to determine the rate earned per compounding period
3
Q
annual compounding rate
A
another name for the simple interest rate’ does not consider the effect of interest compounding
4
Q
amortized load
A
a loan that requires equal payments over its life; the payments include both interest and repayment of the debt
5
Q
debt
A
a loan to a firm, government, or individual
6
Q
treasury bills (t-bills)
A
discounted debt instruments issued by the us government
7
Q
repurchase agreement
A
an arrangement where one firm sells some of its financial assets to another firm with a promise to repurchase the securities at a later date
8
Q
federal funds
A
overni8ght loans from one bank to another bank
9
Q
certificate of deposit
A
an interest-earning time deposit at a bank or other financial intermediary
10
Q
eurodollar deposit
A
a deposit in a foreign bank that is denominated in the US dollars
11
Q
money market mutual funds
A
pools of funds managed by investment companies that are primarily invested in short-term financial assets
12
Q
bond
A
a long term debt instrument
13
Q
mortgage bond
A
a bond backed by tangible (real) assets. first-mortgage bonds are senior in priority to second-mortgage bonfs
14
Q
debenture
A
a long term bond that is not secured by a mortgage on specific property
15
Q
subordinated debenture
A
a bond which, in the event of liquidation, has a claim on assets only after the senior debt has been paid off
16
Q
zero coupon bond
A
a bond that pays no annual interest but sells at a discount below par, thus providing compensation to investors in the form of capital appreciation
17
Q
income bond
A
a bond that pays interest to the holder only if interest is earned by the firm
18
Q
indenture
A
a formal agreement (contract) between the issuer of a bond and the bondholders
19
Q
call provision
A
a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date
20
Q
sinking fund
A
a required annual payment designated to amortize a bond issue
21
Q
eurodebt
A
debt sold in a country other than the one in whose currency the debt is donominated
22
Q
LIBOR
A
the london interbank offered rate
23
Q
capital gains yield
A
the percentage change in the market price of a bond over some period of time
24
Q
yield to call (YTC)
A
the rate of return earned on a bond when it is called before its maturity date
25
par value
the nominal or face value of a stock or bond
26
preferred dividends must be paid
before common stock dividends are paid
27
control of the firm
almost all preferred stock is nonvoting stock
28
the sooner the cash is recieved
the more valuable it is
29
less risky assets are more valuable than
riskier assets
30
proprietorship limitations
unlimited personal liability, limited life, transferring ownership is difficult, difficult to raise large amounts of capital
31
partnership
two or more owners generally can raise more capital than proprietorships because there are more owners
32
corporation
a legal entity
33
corporation disadvantages
cost of creating and report filing, double taxation
34
business organized vs. corporation value maximized
limited liability reduces risk, which increases market value. The ease of raising capital allows corporations to take advantage of growth opportunities. ownerships can be easily transferred, investors will pay more for the corporation
35
managerial actions to maximize stockholder wealth
capital structure decisions, capital budgeting decisions, dividend policy decisions
36
agency relationship
a principal (owner) hires an agent (management) to act on his or her behalf
37
business ethics
a company's attitude and conduct toward its employees, customers, community, and stockholders (ie, the firm's stakeholders)
38
corporate governance
the set of rules that a firm follows when conducting business
39
factors distinguishing domestic firms from multinational firms
different currency denominations, economic and legal ramifications, language differences, cultural differences, roles of governments, political risk
40
time
is the key element in the value of money
41
time affects the value of money due to the opportunity to...
earn interest
42
limited liability partnership LLP
a partnership wherein at least one partner is designated as a general partner with unlimited personal financial liability, and the other partners are limited partners whose liability is limited to the amounts they invest in the firm
43
corporate governance
deals with the set of rules that a firm follows when conducting business; these rules identify who is accountable for major financial decisions
44
proxy votes
voting power that is assigned to another party, such as another stockholder or institution
45
industrial groups
organizations of companies in different industries with common ownership interests, which include firms necessary to manufacture and sell products; network of manufacturers, suppliers, marketing, organizations, distributors, retailers, and creditors
46
multinational companies
firms that operate in two or more countries
47
exchange rates
the prices at which the currency of one country can be converted into the currencies of other countries
48
firms go international to
operate in new market, search for raw materials, attain production efficiency, and to avoid domestic regulations
49
opportunity cost rate
the rate of return on the best available alternative investment of equal risk
50
annuity
a series of payments of an equal amount at fixed, equal interval for a specified number of periods
51
ordinary annuity
an annuity with payments that occur at the end of each period
52
uneven cash flows
multiple payments of different amounts over a period of time
53
future value
the amount to which a cash flow or series of cash flows will grow over a given period when compounded at a given interest rate
54
compounding
the process of determining the value to which an amount or a series of cash flows will grow in the future when compound interest is applied
55
cash flow CF
this term designates cash flows in general, including uneven cash flows
56
present value PV
the value today-that is, the current value-of a future cash flow or series of cash flows
57
discounting
the process of determining the present value of a cash flow or a series of cash flows to be received (paid) in the future, the reverse of compounding
58
perpetuities
streams of equal payments that are expected to continue forever
59
annual compounding
the process of determining the future (or present) value of a cash flow or series of cash flows when interest is paid once per year
60
semiannual compounding
the process of determining the future (or present) value of a cash flow or series of cash flows when interest is paid twice per year
61
effective annual rate
the annual rate of interest actually being earned, as opposed to the quoted rate; considers the compounding of interest
62
amortization schedule
a schedule showing precisely how a loan will be repaid, it gives the payment required on each payment date and a breakdown of the payment, showing how much is interest and how much is repayment of the principal
63
discounted securities
securities selling for less than par value
64
commercial paper
a discounted instrument that is a type of promissory note or legal IOU issues by large financially sound firms
65
bankers acceptance
an instrument issued by a bank that obligates the bank to pay a specified amount at some future date
66
term loans
a loan generally obtained from a bank or insurance company, on which the borrower agrees to make a series of payments consisting of interest and principal
67
coupon rate
interest paid on a bond or other debt instrument stated as a percentage of its face (maturity) value
68
government bonds
debt issued by a federal, state, or local government
69
municipal bonds
bonds issued by a state or local government
70
corporate bonds
long-term debt instruments issued by corporations
71
putable bond
a bond that can be redeemed at the bondholder's options when certain circumstances exist
72
indexed (purchasing power) bond
a bond that has interest payments based on an inflation index protection to protect the holder from loss of purchasing power
73
floating-rate bond
a bond whose interest rate fluctuates with shifts in the general level of level rates
74
junk bond
a higher risk, high yield bond; used to finance mergers, leveraged buyouts, and troubled companies
75
conversion feature
permits bondholders to exchange their investments for a fixed number of shares of common stock
76
foreign debt
debt sold by a foreign borrower but denominated in the currency of the country where it is sold
77
current (interest) yield
the interest payment dividend by the market price of the bond
78
interest rate price risk
the risk changes in bond prices to which investors are exposed as the result of changing interest rates
79
interest rate reinvestment risk
the risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates
80
dividend discount model
a quantitative method used for predicting the price of a company's stock based on the theory that its present-day price is worth the sum of all its future dividend payments when discounted back to their present value
81
cumulative dividends
a protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid
82
preferred stock: hybrid security
similar to bonds with fixed dividend payments. similar to common stock because dividends are not required to be paid and there is no specified maturity date
83
cumulative dividends
any preferred dividends not paid in previous periods must be paid before common dividends can be disturbed
84
maturity
has no specific maturity date
85
priority to assets and earnings
preferred dividends are paid after interest on debit is paid
86
convertibility
preferred stock that can be converted to common stock at the option of the investor
87
dividends
the firm has no legal obligation to pay common stock dividends
88
finance
decisions about money (cash flows)
89
finance decisions
deal with how money is raised and used
90
primary forms of business organization
proprietorship, partnership,corporation
91
proprietorship advantages
ease of formation, subject to few government regulations, no double taxation
92
corporation advantages
unlimited life, easy transfer of ownership limited liability, ease of raising capital
93
corporations can
issue stocks and bonds
94
goals of the corporation
stockholder wealth maximization, managerial incentives, social responsibility
95
factors influenced by managers that affect stock price
projected cash flows, timing of cash flow streams, risk of projected cash flows (earnings), use of debt (capital structure), dividend policy
96
stockholder vs. managers
managers are naturally inclined to act in their own best interests
97
mechanisms to motivate managers to act in the shareholders best interest
managerial compensation (incentives), shareholder intervention, threat of takeover
98
good corporate governance
generally generates higher returns to stockholders
99
foreign firms
have a higher concentration of ownership, ie., fewer owners then US firms
100
multinational corporations (5 reasons to go international)
to seek new markets
to seek raw materials
to seek new technology
to seek production efficiency
to avoid political and regulatory hurdles
101
compound interest
interest earned on original and previously earned interest "interest on interest"
102
annuity
constant payment, fixed period
103
corporate charter
a legal document that state issues to a company based on information the company provides in the articles of incorporation
104
limited liability company (LLC)
offers the limited personal liability associated with a corporation; however, the company's income is taxed like that of a partnership
105
S corporation
a corporation with no more than 100 stockholders that elects to be taxed in the same manner as proprietorships and partnerships, so that the business income is only taxed once
106
value
the present, or current, value of the cash flows that an asset is expected to generate in the future
107
agency problem
a potential conflict of interest between outside shareholders (owners) and managers who make decisions about how to operate the firm
108
hostile takeover
the acquisition of the company over the opposition of its management
109
stakeholers
those who are associated with a business, including managers, employees, customers, suppliers, creditors, stockholders, and other parties with an interest in the firm's well-being
110
the primary goal of the financial manager should be to
maximize the value of firm aka stock price
111
lump-sum amount
a single payment (received or made) that occurs either today or at some date in the future
112
annuity due
an annuity with payments that occur at the beginning of each period
113
payment PMT
this term designates constant cash flows-that is the amount of an annuity payment
114
risk
the chance that an outcome other than the expected one will occur
115
probability distribution
a listing of all possible outcomes or events with a probability (chance of occurrence) assigned to each outcome
116
expected rate of return (r hat)
the rate of return is expected to be realized from an investment, which is the mean value of the probability distribution of possible results
117
Standard deviation
a measure of the tightness, or variability of a set of outcomes
118
coefficient of variation (CV)
a standardized measure of the risk per unit of return. it is calculated by dividing the standard deviation by the expected return
119
risk aversion
risk-averse investors require higher rates of return to invest in higher-risk securities
120
risk premium (RP)
the portion of the expected return that can be attributed to the additional risk of an investment. it is the difference between the expected rate of return on a less risky asset
121
expected return on a portfolio (rp)
the weighted average of the expected returns on stocks held in a portfolio
122
realized rate of return r...
the return is actually earned. the actual return (r..) differs from the expected return (r^)
123
diversification
reduction of stand alone risk of an individual investment by combining it with other investments in a portfolio
124
correlation coefficient (p)
a measure of the degree of relationship between two variables
125
firm specific (diversifiable risk)
that part of a security's risk is associated with random outcomes generated by events or behaviors, specific to the firm. it can be eliminated by proper diversification
126
market (non-diversifiable) risk
the part of a security's risk associated with economic, or market, factors that systematically affect all firms to some extent. it cannot be eliminated by diversifification
127
relevant risk
the portion of a security's risk that cannot be diversified away; the security's market risk. it reflects the security's contribution to the risk of a portfolio
128
beta
a measure of the extent to which the returns on a given stock move with the stock market
129
capital asset pricing model (CAPM)
a model used to determine the required return on an asset, which is based on the proposition that an asset return should be equal to the risk-free return plus a risk premium that reflects the asset's non-diversifiable (relevant) risk
130
security market line (SML)
the line that shows the relationship between risk as measured by beta and the required rate of return for individual securities
131
market risk premium
the additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk
132
equilibrium
the condition under which the expected return on a security is just equal to its required return (r hat=r) and the price is stable
133
capital budgeting
the process of planning and evaluation expenditures on assets whose cash flows are expected to extend beyond one year
134
replacement decisions
decisions whether to purchase capital assets to take the place of existing assets to maintain or improve existing operations
135
independent projects
projects whose cash flows are not affected by decisions made about other projects
136
mutually exclusive projects
a set of projects in which the acceptance of one project means the others cannot be accepted
137
post-audit
a comparison of the actual and expected results given capital project
138
net present value (NPV)
the present value of an assets future cash flows minus its purchase price (initial investment)
139
internal rate of return (IRR)
the discount rate that forces the PV of a project's expected cash flows to equal its initial cost; IRR is the same as the YTM on a bond
140
required rate of return (hurdle rate)
the discount rate (cost of funds) that the IRR must exceed for a project to be considered acceptable
141
net present value profile
a graph that shows the NPV's for a project at various discount rates (required rates of return)
142
reinvestment rate assumption
the assumption that cash flows from a project can be reinvested (1) at the firm's required rate of return, if using the NPV method or (2) at the internal rate of return if using the IRR method
143
multiple IRRs
the situation in which a project has two or more IRRs
144
modified IRR (MIRR)
the discount rate at which the present value of a projects cash outflows is equal to the present value, where the terminal value is found as the sum of the future values of the cash inflows compounded at the firmed required rate of return and the present value of the cash outflows is found using the same required rate of return
145
traditional payback period (PB)
the length of time it takes to recover the original cost of an investment from its unadjusted (raw) expected cash flows
146
discounted payback period (DPB)
the length of time it takes for a project's discounted cash flows to repay the cost of the investment
147
relevant cash flows
the specific cash flows that should be considered in capital budgeting decision
148
incremental (marginal) cash flow
the change in a firms net cash flow attributable to an investment project
149
sunk cost
a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected
150
opportunity cost
the return on the best alternative use of an asset; the highest return that will not be earned if funds are invested in a particular project
151
externalities
the effect accepting a project will have on the cash flows in other parts (areas) of the firm
152
initial investment outlay
the incremental cash flows associated with a project that will occur only at the start of a projects life
153
supplemental operating cash flows
the changes in day-to-day cash flows that result from the purchase of a capital project and continue until the firm disposes of the asset
154
terminal cash flow
the net cash flow that occurs at the end of the life of a project, including the cash flows associated with 1, the final deposit of the project and 2, returning the firms operations to where they were before the project was accepted
155
expansion project
a project that is intended to increase sales
156
replacement analysis
an analysis involving the decision as to whether to replace an exisiting asset with a new asset
157
stand-alone risk
the risk an asset would have if it were a firm's only asset. it is measured by the variability of the assets expected returns
