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FNCE 2120 > FNCE 2120 Final > Flashcards

FNCE 2120 Final Flashcards

1
Q

terminal value

A

the future value of a cash flow stream

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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

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3
Q

annual compounding rate

A

another name for the simple interest rate’ does not consider the effect of interest compounding

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4
Q

amortized load

A

a loan that requires equal payments over its life; the payments include both interest and repayment of the debt

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5
Q

debt

A

a loan to a firm, government, or individual

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6
Q

treasury bills (t-bills)

A

discounted debt instruments issued by the us government

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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

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8
Q

federal funds

A

overni8ght loans from one bank to another bank

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9
Q

certificate of deposit

A

an interest-earning time deposit at a bank or other financial intermediary

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10
Q

eurodollar deposit

A

a deposit in a foreign bank that is denominated in the US dollars

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11
Q

money market mutual funds

A

pools of funds managed by investment companies that are primarily invested in short-term financial assets

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12
Q

bond

A

a long term debt instrument

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13
Q

mortgage bond

A

a bond backed by tangible (real) assets. first-mortgage bonds are senior in priority to second-mortgage bonfs

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14
Q

debenture

A

a long term bond that is not secured by a mortgage on specific property

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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

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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

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17
Q

income bond

A

a bond that pays interest to the holder only if interest is earned by the firm

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18
Q

indenture

A

a formal agreement (contract) between the issuer of a bond and the bondholders

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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

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20
Q

sinking fund

A

a required annual payment designated to amortize a bond issue

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21
Q

eurodebt

A

debt sold in a country other than the one in whose currency the debt is donominated

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22
Q

LIBOR

A

the london interbank offered rate

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23
Q

capital gains yield

A

the percentage change in the market price of a bond over some period of time

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24
Q

yield to call (YTC)

A

the rate of return earned on a bond when it is called before its maturity date

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25
Q

par value

A

the nominal or face value of a stock or bond

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26
Q

preferred dividends must be paid

A

before common stock dividends are paid

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27
Q

control of the firm

A

almost all preferred stock is nonvoting stock

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28
Q

the sooner the cash is recieved

A

the more valuable it is

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29
Q

less risky assets are more valuable than

A

riskier assets

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30
Q

proprietorship limitations

A

unlimited personal liability, limited life, transferring ownership is difficult, difficult to raise large amounts of capital

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31
Q

partnership

A

two or more owners generally can raise more capital than proprietorships because there are more owners

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32
Q

corporation

A

a legal entity

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33
Q

corporation disadvantages

A

cost of creating and report filing, double taxation

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34
Q

business organized vs. corporation value maximized

A

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

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35
Q

managerial actions to maximize stockholder wealth

A

capital structure decisions, capital budgeting decisions, dividend policy decisions

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36
Q

agency relationship

A

a principal (owner) hires an agent (management) to act on his or her behalf

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37
Q

business ethics

A

a company’s attitude and conduct toward its employees, customers, community, and stockholders (ie, the firm’s stakeholders)

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38
Q

corporate governance

A

the set of rules that a firm follows when conducting business

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39
Q

factors distinguishing domestic firms from multinational firms

A

different currency denominations, economic and legal ramifications, language differences, cultural differences, roles of governments, political risk

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40
Q

time

A

is the key element in the value of money

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41
Q

time affects the value of money due to the opportunity to…

A

earn interest

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42
Q

limited liability partnership LLP

A

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

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43
Q

corporate governance

A

deals with the set of rules that a firm follows when conducting business; these rules identify who is accountable for major financial decisions

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44
Q

proxy votes

A

voting power that is assigned to another party, such as another stockholder or institution

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45
Q

industrial groups

A

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

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46
Q

multinational companies

A

firms that operate in two or more countries

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47
Q

exchange rates

A

the prices at which the currency of one country can be converted into the currencies of other countries

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48
Q

firms go international to

A

operate in new market, search for raw materials, attain production efficiency, and to avoid domestic regulations

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49
Q

opportunity cost rate

A

the rate of return on the best available alternative investment of equal risk

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50
Q

annuity

A

a series of payments of an equal amount at fixed, equal interval for a specified number of periods

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51
Q

ordinary annuity

A

an annuity with payments that occur at the end of each period

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52
Q

uneven cash flows

A

multiple payments of different amounts over a period of time

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53
Q

future value

A

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

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54
Q

compounding

A

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

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55
Q

cash flow CF

A

this term designates cash flows in general, including uneven cash flows

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56
Q

present value PV

A

the value today-that is, the current value-of a future cash flow or series of cash flows

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57
Q

discounting

A

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

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58
Q

perpetuities

A

streams of equal payments that are expected to continue forever

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59
Q

annual compounding

A

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

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60
Q

semiannual compounding

A

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

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61
Q

effective annual rate

A

the annual rate of interest actually being earned, as opposed to the quoted rate; considers the compounding of interest

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62
Q

amortization schedule

A

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

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63
Q

discounted securities

A

securities selling for less than par value

64
Q

commercial paper

A

a discounted instrument that is a type of promissory note or legal IOU issues by large financially sound firms

65
Q

bankers acceptance

A

an instrument issued by a bank that obligates the bank to pay a specified amount at some future date

66
Q

term loans

A

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
Q

coupon rate

A

interest paid on a bond or other debt instrument stated as a percentage of its face (maturity) value

68
Q

government bonds

A

debt issued by a federal, state, or local government

69
Q

municipal bonds

A

bonds issued by a state or local government

70
Q

corporate bonds

A

long-term debt instruments issued by corporations

71
Q

putable bond

A

a bond that can be redeemed at the bondholder’s options when certain circumstances exist

72
Q

indexed (purchasing power) bond

A

a bond that has interest payments based on an inflation index protection to protect the holder from loss of purchasing power

73
Q

floating-rate bond

A

a bond whose interest rate fluctuates with shifts in the general level of level rates

74
Q

junk bond

A

a higher risk, high yield bond; used to finance mergers, leveraged buyouts, and troubled companies

75
Q

conversion feature

A

permits bondholders to exchange their investments for a fixed number of shares of common stock

76
Q

foreign debt

A

debt sold by a foreign borrower but denominated in the currency of the country where it is sold

77
Q

current (interest) yield

A

the interest payment dividend by the market price of the bond

78
Q

interest rate price risk

A

the risk changes in bond prices to which investors are exposed as the result of changing interest rates

79
Q

interest rate reinvestment risk

A

the risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates

80
Q

dividend discount model

A

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
Q

cumulative dividends

A

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
Q

preferred stock: hybrid security

A

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
Q

cumulative dividends

A

any preferred dividends not paid in previous periods must be paid before common dividends can be disturbed

84
Q

maturity

A

has no specific maturity date

85
Q

priority to assets and earnings

A

preferred dividends are paid after interest on debit is paid

86
Q

convertibility

A

preferred stock that can be converted to common stock at the option of the investor

87
Q

dividends

A

the firm has no legal obligation to pay common stock dividends

88
Q

finance

A

decisions about money (cash flows)

89
Q

finance decisions

A

deal with how money is raised and used

90
Q

primary forms of business organization

A

proprietorship, partnership,corporation

91
Q

proprietorship advantages

A

ease of formation, subject to few government regulations, no double taxation

92
Q

corporation advantages

A

unlimited life, easy transfer of ownership limited liability, ease of raising capital

93
Q

corporations can

A

issue stocks and bonds

94
Q

goals of the corporation

A

stockholder wealth maximization, managerial incentives, social responsibility

95
Q

factors influenced by managers that affect stock price

A

projected cash flows, timing of cash flow streams, risk of projected cash flows (earnings), use of debt (capital structure), dividend policy

96
Q

stockholder vs. managers

A

managers are naturally inclined to act in their own best interests

97
Q

mechanisms to motivate managers to act in the shareholders best interest

A

managerial compensation (incentives), shareholder intervention, threat of takeover

98
Q

good corporate governance

A

generally generates higher returns to stockholders

99
Q

foreign firms

A

have a higher concentration of ownership, ie., fewer owners then US firms

100
Q

multinational corporations (5 reasons to go international)

A

to seek new markets
to seek raw materials
to seek new technology
to seek production efficiency
to avoid political and regulatory hurdles

101
Q

compound interest

A

interest earned on original and previously earned interest “interest on interest”

102
Q

annuity

A

constant payment, fixed period

103
Q

corporate charter

A

a legal document that state issues to a company based on information the company provides in the articles of incorporation

104
Q

limited liability company (LLC)

A

offers the limited personal liability associated with a corporation; however, the company’s income is taxed like that of a partnership

105
Q

S corporation

A

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
Q

value

A

the present, or current, value of the cash flows that an asset is expected to generate in the future

107
Q

agency problem

A

a potential conflict of interest between outside shareholders (owners) and managers who make decisions about how to operate the firm

108
Q

hostile takeover

A

the acquisition of the company over the opposition of its management

109
Q

stakeholers

A

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
Q

the primary goal of the financial manager should be to

A

maximize the value of firm aka stock price

111
Q

lump-sum amount

A

a single payment (received or made) that occurs either today or at some date in the future

112
Q

annuity due

A

an annuity with payments that occur at the beginning of each period

113
Q

payment PMT

A

this term designates constant cash flows-that is the amount of an annuity payment

114
Q

risk

A

the chance that an outcome other than the expected one will occur

115
Q

probability distribution

A

a listing of all possible outcomes or events with a probability (chance of occurrence) assigned to each outcome

116
Q

expected rate of return (r hat)

A

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
Q

Standard deviation

A

a measure of the tightness, or variability of a set of outcomes

118
Q

coefficient of variation (CV)

A

a standardized measure of the risk per unit of return. it is calculated by dividing the standard deviation by the expected return

119
Q

risk aversion

A

risk-averse investors require higher rates of return to invest in higher-risk securities

120
Q

risk premium (RP)

A

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
Q

expected return on a portfolio (rp)

A

the weighted average of the expected returns on stocks held in a portfolio

122
Q

realized rate of return r…

A

the return is actually earned. the actual return (r..) differs from the expected return (r^)

123
Q

diversification

A

reduction of stand alone risk of an individual investment by combining it with other investments in a portfolio

124
Q

correlation coefficient (p)

A

a measure of the degree of relationship between two variables

125
Q

firm specific (diversifiable risk)

A

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
Q

market (non-diversifiable) risk

A

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
Q

relevant risk

A

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
Q

beta

A

a measure of the extent to which the returns on a given stock move with the stock market

129
Q

capital asset pricing model (CAPM)

A

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
Q

security market line (SML)

A

the line that shows the relationship between risk as measured by beta and the required rate of return for individual securities

131
Q

market risk premium

A

the additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk

132
Q

equilibrium

A

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
Q

capital budgeting

A

the process of planning and evaluation expenditures on assets whose cash flows are expected to extend beyond one year

134
Q

replacement decisions

A

decisions whether to purchase capital assets to take the place of existing assets to maintain or improve existing operations

135
Q

independent projects

A

projects whose cash flows are not affected by decisions made about other projects

136
Q

mutually exclusive projects

A

a set of projects in which the acceptance of one project means the others cannot be accepted

137
Q

post-audit

A

a comparison of the actual and expected results given capital project

138
Q

net present value (NPV)

A

the present value of an assets future cash flows minus its purchase price (initial investment)

139
Q

internal rate of return (IRR)

A

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
Q

required rate of return (hurdle rate)

A

the discount rate (cost of funds) that the IRR must exceed for a project to be considered acceptable

141
Q

net present value profile

A

a graph that shows the NPV’s for a project at various discount rates (required rates of return)

142
Q

reinvestment rate assumption

A

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
Q

multiple IRRs

A

the situation in which a project has two or more IRRs

144
Q

modified IRR (MIRR)

A

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
Q

traditional payback period (PB)

A

the length of time it takes to recover the original cost of an investment from its unadjusted (raw) expected cash flows

146
Q

discounted payback period (DPB)

A

the length of time it takes for a project’s discounted cash flows to repay the cost of the investment

147
Q

relevant cash flows

A

the specific cash flows that should be considered in capital budgeting decision

148
Q

incremental (marginal) cash flow

A

the change in a firms net cash flow attributable to an investment project

149
Q

sunk cost

A

a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected

150
Q

opportunity cost

A

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
Q

externalities

A

the effect accepting a project will have on the cash flows in other parts (areas) of the firm

152
Q

initial investment outlay

A

the incremental cash flows associated with a project that will occur only at the start of a projects life

153
Q

supplemental operating cash flows

A

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
Q

terminal cash flow

A

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
Q

expansion project

A

a project that is intended to increase sales

156
Q

replacement analysis

A

an analysis involving the decision as to whether to replace an exisiting asset with a new asset

157
Q

stand-alone risk

A

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

FNCE 2120 (1 decks)

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