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corporate finance > midterm 1 > Flashcards

midterm 1 Flashcards

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1
Q

compounding interest

A

the continual addition of interest to the original principal sum of a loan or deposit, often referred to as interest on interest

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2
Q

compounding period

A

the period between points in time when interest is paid or added to the principal

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3
Q

consumer price index (CPI)

A

a measure that examines the weighted average of prices of a basket of consumer goods and services such as transportation, food, and medical care

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4
Q

discount rate

A

the interest rate used to determine the present value of future cash inflows, value; may derive from several sources, such as stated contract rates, costs to borrow, or expected rates of return on investments

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5
Q

financial instrument

A

an asset or bundle of assets, including monetary contracts between parties, that can be bought, sold, or traded for financial gain

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6
Q

financial risk

A

the possibility of losing money or purchasing power on an investment, business transaction, or venture or simply due to inflation

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7
Q

future value

A

the value that a current amount will grow to at a given interest rate over a given period of time

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8
Q

growth rate

A

the percentage increase of a specific variable within a specific time period; synonymous with interest rate in the context of the time value of money

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9
Q

interest

A

the amount of money that is paid by a borrower to a lender for the use of their money, typically calculated from an annualized rate

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10
Q

investment

A

an asset or item acquired with the goal of generating financial gain through increased income or appreciation in value

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11
Q

liquid asset

A

an asset that can be readily converted into cash within a short period of time

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12
Q

present value

A

the current value of a future amount, calculated by discounting the future value back at a known discount or interest rate for a specified period of time

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13
Q

real interest rate

A

a rate of interest that has been adjusted to account for the effects of inflation

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14
Q

time value of money (TMV)

A

the concept that an amount of money is worth more today than the exact same amount of money at some point in the future

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15
Q

underinvested

A

describes an insufficient amount of investment or an investment that is earning an insufficient rate of interest

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16
Q

annuity

A

a stream of regular, periodic payments to be received or paid

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17
Q

annuity due

A

a stream of periodic payments in which the payment or receipt occurs at the beginning of each period

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18
Q

constant perpetuity

A

a stream of periodic payments that is expected to continue indefinitely with no change in thee amount paid or received

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19
Q

effective interest rate

A

the interest rate that results when compounding occurs multiple times within a year; the true cost of borrowing

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20
Q

growing perpetuity

A

a stream of periodic payments that is expected to continue indefinitely with growth of the amount paid or received in the future, usually by a fixed percentage

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21
Q

loan amortization

A

the scheduling of periodic repayment of a debt, typically involving regular payments or receipts of amounts that include both interest payment and repayment of the principal of the amount owed

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22
Q

ordinary annuity

A

a stream of periodic payments in which the payment or receipt occurs at the end of each period

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23
Q

preferred stock

A

shares of ownership in a corporation that typically entitle the holder to a fixed dividend per share, if declared by the corporation, with priority over holders of that corporation’s common stock

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24
Q

required rate of return

A

the minimum amount of return that an investor will accept on an investment given the level of risk involved

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25
Q

retirement planning

A

the process of determining one’s objectives for retirement, including one’s finances, and developing strategies and tactics to achieve them

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26
Q

structured settlements

A

monetary legal settlements that are paid out in installments, such as an annuity, rather than a lump sum cash amount

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27
Q

capital investment

A

a major expenditure that requires a large up-front investment and is expected to generate substantial cash inflow in return

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28
Q

cash flow

A

the amount of cash actually flowing into and out of a business, as opposed to income (which is based on accounting rules, accruals, and reports)

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29
Q

mixed stream

A

a set of cash flows over a period of time that can vary in amount from one period to the next

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30
Q

business finance

A

the study and application of how managers can apply financial principles to maximize the value of a firm in a risky environment

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31
Q

capital budgeting

A

the process of determining which long-term or fixed assets to acquire in an effort to maximize shareholder value

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32
Q

capital structure

A

the mix of financing, usually debt and equity, used by a firm

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33
Q

commercial paper (CP)

A

short-term, unsecured financial obligations issued by firms as a means of short-term financing for items such as inventory or payables

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34
Q

default risk

A

the risk that the issuer of a financial security will be unable to make payments as specified in the terms of a financial contract

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35
Q

diversifiable risk

A

also called unsystematic risk, a risk that can be eliminated without the loss of expected return by holding a portfolio of securities

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36
Q

inflation risk

A

the risk of reduced purchasing power of goods and services due to rising prices

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37
Q

money market

A

the market for short-term, low-risk, highly liquid, homogeneous financial securities; common money market securities include T-bills, NCDs, and commercial paper

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38
Q

money market mutual funds

A

created by investment companies to pool the money of many investors to purchase and then manage short-term, low-risk, liquid financial portfolios of securities

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39
Q

municipal bonds

A

long-term debt obligations issued by state or local governments that often have important tax advantages relative to corporate bonds

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40
Q

primary market

A

a term used in financial markets to identify the market for the purchase and sale of new securities

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41
Q

secondary market

A

a term used in financial markets to represent the purchase or sale of used securities that trade after the initial sale by the offering firm

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42
Q

treasury bonds

A

long-term debt obligations issued by the US government characterized by having maturities of greater than 10 years and making periodic interest payments as well as principal payment at maturity

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43
Q

treasury notes

A

long-term debt obligations issued by the US government characterized by having maturities of 2 to 10 years and making periodic interest payment as well as principal payment at maturity

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44
Q

agency theory

A

a principle that is used to explain and resolve issues in the relationship between business principals and their agents, most commonly between shareholders (principals) and company executives (agents)

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45
Q

annual meeting

A

a meeting of the general membership and shareholders of a corporation; also known as an annual general meeting (AGM)

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46
Q

annual report

A

a document describing a public corporation’s operations and financial condition that must be provided to shareholders once per year; also known as Securities and Exchange Commission (SEC) Form 10-K

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47
Q

C corporation

A

a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity

48
Q

close (closely held) corporation

A

a company that has only a limited number of shareholders

49
Q

corporation

A

a legal entity that is separate and distinct from its owners

50
Q

ESG

A

environmental, social, and governance (ESG) standards for a company’s operations that socially conscious investors use to screen potential investments

51
Q

hybrid form of business

A

a limited liability company (LLC) or limited liability partnership (LLP) that combines the characteristics of a corporation with those of a sole proprietorship or partnership

52
Q

limited liability corporation (LLC)

A

a US-specific form of a private limited company; a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation

53
Q

limited liability partnership (LLP)

A

a partnership in which some or all partners have limited liabilities; can exhibit elements of both partnerships and corporations

54
Q

non-stock corporation

A

a corporation that does not have owners represented by shares of stock but typically has members who are the functional equivalent of stockholders in a stock corporation (having the right to vote, etc.); describes the vast majority of not-for-profit corporations

55
Q

shareholder/stockholder

A

an individual or institution that legally owns one or more shares of the share capital of a public or private corporation; may be referred to as members of a corporation

56
Q

stakeholder

A

a person with an interest or concern in a business

57
Q

stock corporation

A

a for-profit organization that issues shares of stock to shareholders (also known as stockholders) to raise capital, with each share representing partial ownership of the corporation and granting shareholders certain ownership rights to shape company policies

58
Q

bond call

A

a feature of certain bonds or other fixed-income instruments that allows the issuer to repurchase and retire these instruments before maturity

59
Q

bond price

A

the present, discounted value of the future cash stream generated by a bond; the sum of the present values of all likely coupon payments and the present value of the par value at maturity

60
Q

bond ratings

A

grades assigned to bonds by rating services that indicate their overall credit quality

61
Q

call risk

A

the risk that a bond issuer will redeem a callable bond prior to maturity

62
Q

cash rate

A

the interest rate that a central bank, such as the Reserve Bank of Australia or the US Federal Reserve System, will charge commercial banks for loans; also known as the bank rate or the base interest rate

63
Q

convertible bonds

A

fixed-income corporate debt securities that yield interest payments but can be converted into a predetermined number of common stock or equity shares

64
Q

coupon payment

A

the periodic dollar value of interest that is paid to a bondholder by the bond issuer

65
Q

coupon rate

A

the amount of annual interest paid by the bond issuer; is multiplied by the face value of a bond to determine annual interest or coupon payment amounts

66
Q

credit risk

A

the risk taken by a bond investor that the bond issuer will default by failing to pay interest and repay the principal on schedule

67
Q

deep discount bonds

A

bonds that sell at significantly lower values than their par values

68
Q

default

A

when an issuer fails to make scheduled interest or principal payments on its bonds

69
Q

default risk

A

the risk taken by investors that payments will be delayed or will not occur

70
Q

discount bond

A

a bond currently trading for less than its par value in the secondary market; offers a coupon rate that is lower than prevailing interest rates

71
Q

duration

A

a measure of how much bond prices are likely to change if and when interest rates move

72
Q

duration risk

A

the risk associated with the sensitivity of a bond’s price to a 1% change in interest rates

73
Q

interest rate risk

A

the risk of investment losses that result from changes in interest rates

74
Q

investment grade

A

describes a municipal or corporate bond with a rating that indicates it presents a low risk of default

75
Q

junk bonds

A

bonds that have been given a low credit rating, below investment grade; riskier than other bonds due to a greater chance that the issuer will default or experience a credit event

76
Q

liquidity risk

A

risk that stems from the lack of marketability of an investment, meaning that it cannot be bought or sold quickly enough to prevent or minimize a loss

77
Q

mautrity date

A

the date on which a bondholder ceases to receive interest payments on a bond investment and instead is repaid its par, or face, value

78
Q

par value

A

also called the face amount or face value; the value written on the front of the bond, which is the amount of money that bond issuers promise to be paid at maturity

79
Q

premium bond

A

a bond that is trading above its par value in the secondary market; offers a coupon rate that is higher than the current prevailing interest rates being offered

80
Q

prime rate

A

the interest rate that banks charge creditworthy corporate customers; among the most widely used benchmarks for setting home equity lines of credit and credit card rates, based on the federal funds rate set by the Federal Reserve

81
Q

rating agencies

A

independent service agencies, such as Fitch, Moody’s, or Standard & Poor’s, that perform the isolated function of credit risk evaluation

82
Q

realized return

A

the actual return that an investor earns over a given time period through the buying and selling of a security

83
Q

reinvestment risk

A

the risk that an investor will be unable to reinvest cash flows received from an investment (e.g., coupon payments or interest) at a rate comparable to their current rate of return

84
Q

savings bonds

A

debt securities purchased by investors, as a personal investments or as gifts, that the US government issues to pay for certain public or government programs

85
Q

yield curve

A

a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates; gives an idea of future interest rate changes and economic activity

86
Q

yield to maturity

A

the total return anticipated on a bond if the investment is held until maturity

87
Q

zero-coupon bonds

A

bonds that are issued at a deep discount from face value and offer no interest or coupon payments

88
Q

amortization

A

the process of spreading business costs in accounting; similar to depreciation, but differs in that it generally refers to intangible assets such as patents or copyrights

89
Q

common stock

A

a security that represents partial ownership of a corporation

90
Q

comparable company analysis

A

a method for valuating a company using the metrics of other businesses of similar size in the same industry

91
Q

depreciation

A

the process of spreading business costs in accounting; similar to amortization, but differs in that it generally refers to fixed, tangible assets such as buildings, machinery, furniture, fixtures, and equipment

92
Q

discounted cash flow (DCF)

A

a method for estimating the value of an investment based on the present value of its expected future cash flows

93
Q

dividend

A

a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits or reserves

94
Q

dividend discount model (DDM)

A

a quantitative method for predicting the price of a company’s stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value

95
Q

dividend yield

A

a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price, expressed as a percentage

96
Q

earnings per share

A

the ratio of a company’s profits to the outstanding shares of its common stock; serves as an indicator of a company’s profitability

97
Q

EBIT

A

short for earnings before interest and taxes; an indicator of a firm’s profitability before the effects of interest or taxes; also referred to as operating earnings, operating profit, and profit before interest and tax

98
Q

efficient markets

A

markets in which costs are minimal and prices are current, fair, and reflective of all available relevant information

99
Q

enterprise value (EV)

A

a company’s total value; often used as a more comprehensive alternative to equity market capitalization

100
Q

enterprise value (EV) multiples

A

also known as company value multiples; ratios used to determine the overall value of a company and, by extension, the value of its common stock

101
Q

equity multiples

A

metrics that calculate the expected or achieved total return on an initial investment

102
Q

gordon growth model

A

a methodology used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate

103
Q

intangible assets

A

assets that are not physical in nature, such as goodwill, brand recognition, and intellectual property (i.e., patents, trademarks, and copyrights)

104
Q

intrinsic value

A

the value of a firm’s stock based entirely on internal factors, such as products, management, and the strength of company brands in the marketplace

105
Q

market capitalization

A

the value of a company traded on the stock market, calculated by multiplying the total number of shares by the current share price

106
Q

preferred stock

A

stock that entitles the holder to a fixed dividend, the payment of which takes priority over payment of common stock dividends

107
Q

price-to-book (P/B) ratio

A

also called the market-to-book (M/B) ratio; a metric used to compare a company’s market capitalization, or market value, to its book value

108
Q

price-to-cash-flow (P/CF) ratio

A

a stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share

109
Q

price-to-earnings (P/E) ratio

A

a ratio that indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings

110
Q

price-to-sales (P/S) ratio

A

a ratio that indicates how much investors are willing to pay for a company’s stock per dollar of that company’s sales

111
Q

goals of financials mgmt

A

-beat the competition
-maximize sales of market share
-minimize costs
-maximize profits

112
Q

legal firms for companies

A

-sole proprietorships
-partnerships
-corporations
-and hybrid form

113
Q

advantages of a sole proprietorship

A

-simple and cheapest form of starting a business
-few gov’t regulations
-no corporate income tax
-all profits are taxed as individual income

114
Q

disadvantages of a sole proprietorship

A

-unlimited liability for the owner
-limited to the life of the owner
-difficult to obtain large amounts of funding

115
Q

advantages of a partnership

A

-easily and inexpensively formed
-few gov’t regulations
-no corporate income taxes; tax on an individual basis

116
Q

disadvantages of a partnership

A

-unlimited liability for general partners
-difficult to obtain large amounts of capital

corporate finance (1 decks)

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