Midterm 4 Part 6 Flashcards
What is a depreciation expense?
It’s just the amount that your asset has depreciated within a given period
True or False: Depreciation expenses are tax deductible
True
What does CAFE stand for?
Corporate average fuel economy
What does CAFE mean?
It is a deal between the U.S. and oil companies to make sure that vehicles travel a certain distance on a gallon of oil (ensures economic minimum)
What is the Modigliani and Miller model?
The sum of two corporations is worth more than both parts
True or False: Sunk costs are considered in current operations calculations
FALSE
True or False: Sunk costs are fixed costs
True
What does OCF stand for?
Operating cash flow
What is OCF?
It is the normal amount of cash generated by a company’s business operations
What is a paper loss?
It is essentially the MV - BV equation. The loss happens when the market value does not match the book value
What is a c corp?
The owners are taxed separately from the business entity
What is a hurtle rate?
It is the minimum amount of return an investor requires
What is bad debt?
Money that you have to write off because it’s uncollectable (like if they went out of business and can’t pay you back)
What is a bad debt expense?
The AR that you can’t collect (because it’s bad debt)
True or False: The government gives you a tax break for buying a house and owning your home
True
How do you get a write off for your mortgage payment?
You file something with the IRS
True or False: Personal loans are tax deductible
False
True or False: Other than personal loans, most loans are tax deductible
True
What is a reverse mortgage?
It is the ability to take out a loan against the equity of your house (if you own house).
What is a good faith estimate?
It is the document that estimates the costs of getting a reverse mortgage.
I think it can technically be anything though. Like any instance where you would need an estimate of possible costs of the agreement.
True or False: You give up earnest money BEFORE doing inspections
Pretty sure it’s true.
You have an inspection contingency in place, so that if the inspection fails, you get your earnest money back.
True or False: When a firm is in a steady state, there is zero growth
True
Why is it important to know the value of a firm in the merger and acquisition market?
Because if you want to buy a company, you want to know how much the entire thing is worth.
Also consider MnM
What is an IPO?
Initial public offering. It is when a privately held company issues stocks publicly for the first time (when a private company goes public)
What does LTV stand for?
Loan to value
What is a loan to value ratio?
It is a ratio that determines if the loan amount matches the market value of the asset.
What is a market cap?
It is the value of stocks held by all stockholders. The value of the firm being held by stockholders.
True or False: It’s best to have a larger market cap
True
Why are larger market caps better?
Because they usually represent well established companies with good histories
What is the Earnings yield ratio?
E/P
It is the inverse of the P/E ratio.
When would you use the Earnings yield ratio?
It can be used to determine which assets are under priced or over priced, it determines optimal asset allocation
When would you use the M/B ratio? market to book
When you are trying to see how the market values a particular asset.
Which types of companies use M/B ratio most often?
Companies with tangible assets that have an easily definable market and book value.
Like real estate
Where would a CEO’s salary be on a balance sheet.
Under current liabilities - maybe
Why are smaller companies usually the ones who don’t take the CEO’s salary into account when valuing a company?
Because they’re usually being run by a single person who just takes what’s left of the profits at the end of the month rather than pay a set salary.
Larger corporations have better systems in place and follow legal rules more closely.
What is the DOW?
It is an index fund that tracks the 30 most prominent companies
True or False: The more synergy two companies have when merging, the more efficient the new company will be
True
Examples of synergies
- Increased revenues
- Combined talent
- Combined technology
- Cost reductions
What is the MACRS schedule?
Year 1: 33.3 %
Year 2: 44.5 %
Year 3. 14.8 %
Year 4. 7.4 %
What is P/EBITDA used for?
Entrepreneurial finance
True or False: DCF valuation is concerned with intrinsic valuation
True
