Midterm Flashcards
Money Markets
the markets for debt securities with maturities of less than 1 year
Capital Markets
markets for long-term debt and corporate shares
Primary Markets
the markets in which corporations raise new capital; secondary markets are for existing, already outstanding securities
WACC
the weighted average cost of capital is the average return required by all of the firm’s investors; it is determined by the firm’s capital structure, interest rates, risk, and the market’s attitude towards risk
Balance Sheet
snapshot of the firms’s financial position at a point in time; shows assets on the left in order of liquidity, and liabilities on the right in the order that they must be paid
Income Statement
reports the results of operations over a period of time, and it shows EPS as its “bottom line”
Statement of Changes in Equity
shoews the change in equity between balance sheet dates
Statement of Cash Flows
reports the effect of operating, investing, and financing activities on cash flows over an accounting period
Net Cash Flow
differs from accounting profit because some of the transactions and events reflected in accounting profits may not have been received or paid out in cash during the year
Operating Current Assets
the current assets that are used to support operations, such as cash, inventory, and accounts receivable; they do not include short-term investments
Operating Current Liabilities
current liabilities that occur as a natural consequence of operations, such as accounts payable and accruals; they do not include notes payable or any other short-term debts that charge interest
NOWC
net operating working capital is the difference between the assets and liabilities used to support operations; the difference between operating current assets and operating current liabilities; does not include notes payable or any other short-term debt that charges interest; the working capital aquired with investor-supplied funds
Operating Long-Term Assets
the long-term assets used to support operations, such as net plant and equipment; does not include long-term investments that pay interest or dividends
TNOC
total net operating capital, or operating capital, or net operating assets; the sum of net operating working capital and operating long-term assets; it is the total amount of capital needed to run the business, and equal to investor-supplied operating capital
NOPAT
net operating profit after taxes; it is the after-tax profit a company would have if it had no debt and no investments in nonoperating assets; a better measure of operating performance than net income beccause it excludes the effects of financial decisions; EBIT(1 - Tax Rate)
ROIC
return on invested capital; equal to NOPAT divided by total net operating capital; it measures the rate of return the operations are generating; the best measure of operating performance
Free Cash Flow (FCF)
the amount of cash flow remaining after a company makes the asset investments necessary to support operations; the amount of cash flow available for distribution to investors; the value of a company is directly related to its ability to generate free cash flow; NOPAT - Net Investment in Operating Capital
EBIT
earnings before interest and taxes; a firm’s sales minus its cost of goods sold and other operating expenses
COGS
cost of goods sold; includes labour, raw materials, and other expenses directly related to the production or purchase of the items or services sold
Working Capital
a firm’s investment in short-term assets – cash, marketable securities, inventory, and accounts receivable
Total Investor-Supplied Operating Capital
the total amount of short-term debt, long-term debt, preferred shares, and total common equity shown on a balance sheet; it is the amount of financing used in operations that investors have provided to a company; also called investor-supplied operating capital
Net Working Capital
current assets minus current liabilities; diffferent from net operating working capital, because current assets and current liabilities may contain non-operating accounts such as short-term investments and short-term loans
Net Investment in Operating Capital
the change in total net operating capital from the previous year, which represents the net amount that the company has spent on operating capital during the year
Current Ratio
(Current Assets/Current Liabilities); liquidity ratio that shows the firm’s ability to meet maturing debts
Quick Ratio
[(Current Assets - Inventories)/(Current Liabilities)]; demonstrates firm’s ability to meet maturing liabilities without considering potentially illiquid inventories as a current asset
Inventory Turnover Ratio
(Cost of Goods Sold/Inventories); COGS includes depreciation, and measures how many times inventories are sold and restocked per year; using average inventories improves this ratio
Day’s Sales Outstanding
(Receivables/Avg Sales per Day); DSO is the average collection period
Average Payables Period
(Payables/[Annual Operating Cost/365]); evaluates how quickly the firm pays its suppliers
DuPont Equation
the DuPont equation is designed to show how the profit margin on sales, the assets turnover ratio, and the use of debt (equity multiplier) interact to determine the rate of return on equity
Debt Ratio
(interest-paying debt)/(total assets)
Growing Annuity
calculate the future value in real terms, and then compute the real interest rate (or vice versa); the initial payment can be found which must grow with the inflation rate to reach the future target net of inflation
Interest-Rate Risk
bonds with lower coupon rates are more sensitive to fluctuations in the interest rate, as are bonds with longer maturities; short-term bonds are sensitive to reinvestment rate risk
Sinking Fund Provision
the company must set aside funds to to have athe ability to repay the bond at maturity; the issuer may be required to buy back a percentage of the bonds each year either in the open market or by calling them (firm chooses lowest-cost method)
Maple Bonds
foreign bonds sold in Canadian markets in Canadian dollars (removes foreign exchange risk)
Canada Call
sets the buyback price based on the equivalent maturity GOC bond plus a premium (make-whole provision in the US)
Yield to Call
if current interest rates are below a callable bond’s coupon rate, investors estimate its expected return as the yield to call, using call price as face value
Indenture
a legal document that spells out the rights of the bondholder and issuing corporation; it may include restrictive covenants on the issuer
Debenture
an unsecured bond
Current Rate
Annual Coupon / Current Bond Price
Stand-Alone Risk
the greater the probability that the actual return will be far below the expected return, the greater the asset’s stand-alone risk
Relevant Risk
under CAPM, the risk an individual asset contributes to the risk of a well-diversified portfolio
Security Market Line
the return required for any security is equal to the risk-free rate plus the market risk premium times the security’s beta
Factors that Affect ROR
in equilibrium, the expected ROR must equal its required return; however, several things can happen to cause the rate of return to change:
(1) the risk-free rate can change
(2) a stock’s beta can change
(3) investors’ aversion to risk can change
Correlation Coefficient
the tendency of two variables to move together is called correlation, and the correlation coefficient (greek letter rho, p) measures this tendency; the estimate of correlation from a sample of historical data is often called “R”
Coefficient of Variation
the coefficient of variation (CV) shows the risk per unit of return, and it provides a more meaningful basis for comparison the standard deviation when the expected returns on two alternatives are not the same; equals the standard deviation divided by the expected return
Covariance with the Market
the correlation coefficient of the stock with the market, multiplied by the standard deviation of the stock and the standard deviation of the market
Beta Coefficient
the amount of risk that the stock contributes to the market portfolio; calculated as the stock’s correlation coefficient with the market, multiplied by the stock’s variance, divided by the market’s variance
Portfolio Beta
is equal to the weighed average of its individual securities’ betas
