value for investors Flashcards
financial assets
represent a claim to a future financial cash flow
financial instruments
assets that are paper or digital form
financial securities
instruments where a secondary market exists; can buy and sell after conceived
debt
- loans
- bonds
bond characteritiscs
principal = face value
period = maturity
interest = coupon
repayment = regular coupon face value at maturity
no ammortisation
bond price
- PV of all future cash flows
- PV of coupon + PV of face value
- PV of ordinary annuity + PV of single cash flow
coupon rate
- reflects actual rate received by investors
- fixed like bank interest rate
- only used to calculate coupon repayment
yield to matury
- reflects market rate
- opportunity cost
- similar to IRR as it represents highest discount rate, higher than coupon rate
equity
- ordinary shares
- preferred shares
ordinary shares
- optional payment of dividends
- must be issued when incorporated
- grants proportional ownership rights
- shareholders entitled to RESIDUAL cash flows left after bills are paid
- shareholders have limited liability;
preferred shares
- obliged to pay regular dividends
- ## rank ahead of ordinary shares, but behind debt in case of bankruptcy
dividend growth requires
- growth in earnings and cash flows
- positive NPV projects
growth in earnings and cash flows
- revenue and lower costs
- more volume/product lines
- increased efficiency/margins
- requires temporary high investment
reinvestment problem
- young firms should retain more
- old firms should payout more
- share price only increases if ROI>re
reinvested with high ROI
increases share price relative to 100% payout because future growth makes up for foregone dividends
reinvested with low ROI
decreases share price relative to 100% payout because foregone dividends are too costly compared to low future growth
