Details Title: Corporate Finance - FINA 4200 Description: final exam concepts Total Flash Cards: 65 Created: 05/04/2009 13:09:07		New Users: To study from this flashcard set, or to create your own your own study flash cards, REGISTER HERE. Existing Users: CLICK HERE. Additional Finance Flashcards
Cards in this set: Term capital budgeting Definition what long term investments a firm should choose Term capital structure Definition how to finance the long term investments selected Term managing working capital Definition how short term assets should be financed and managed Term how to solve agency problem Definition threat of a take over by a competitor and threat of a proxy fight Term current assets Definition inventory and cash Term average tax rate Definition measure the total taxes you pay divided by your taxable income Term marginal tax rate Definition the tax rate you would pay on the next $1 Term liquidity Definition balance sheet accounts are listed in order of decreasing liquidity Term internal rate of return (IRR) Definition rate generated solely by the CFs of an investment; causes NPV=O Term growing perpetuity Definition an asset characterized by CFs that increase at a constant rate forever Term difference between an annuity due and an ordinary annuity Definition an annuity due pays on 1st of each month (like rent) and has a higher FV than an ordinary annuity that is in all other ways the same Term bond sold at a discount Definition coupon rate < YTM Term bond sold at a premium Definition coupon rate > YTM Term stock liquidity Definition brokerage fee is a component of trading costs, improving liquidity results in a lower cost of capital, disclosing info narrows the gap between informed and uninformed traders (improves liquidity), investors demand a higher expected return when investing in stocks with high trading costs Term behavioral challenges to market efficient hypothesis Definition people deviate from rationality in the same way, limit to arbitrage because mkt can stay irrational longer than an arbitrageur can stay insolvent Term US treasury bills Definition lowest real rate of return; used as risk free rate Term WACC Definition used to discount expected CF when the firm has debt and equity Term efficient market Definition prices of security rise immediately upon the release of new positive info with no further price adjustments related to that info. Term strong form efficiency Definition security prices reflect all information - public and private Term semi-strong form efficiency Definition security prices reflect all publicly available info. Term weak form efficiency Definition security prices reflect all info. found in past prices Term trade-off theory Definition investors will generally view an increase in debt as a positive sign for the firm's value Term ex-dividend date Definition date that determines whether a stockholder is entitled to a dividend payment; anyone holding stock immediately before this date is entitled to a dividend; 3 days before the record date (only counting busi.days) Term record date Definition date on which company determines existing shareholders; 3 business days after ex-div. date (including the actual days) Term dividend policy Definition it is irrelevant because you can create your own homemade divident Term shares repurchase Definition flexibility, executive compensation, undervaluation, tax benefits over div. Term why would you choose a high div. policy? Definition desire for current income, self control, agency costs, dividend signaling Term clientele effect Definition personal taxes favor low-div. policy while other factors favor high div. policy - overall cancel each other out Term dividend smoothing Definition corporations try and keep divident payments the same as to not signal anything to shareholders   formula: div. change=div1-div0= s*(t*EPS1-div0)   Term stock dividends Definition pay in additional shares of stocks instead of in cash; decreases stock price and increases the number of shares outstanding Term process of intial public offering (IPO) Definition 1. board approval 2. registration & approval by SEC (20 days) 3. pricing the issue 4. public offering & sale 5. mkt. stabilization (30 days) Term liquidating dividend   Definition cash payment made by a firm to its owners when some of the firm's assets are sold off Term consistent dividend policy Definition primary factor affecting a firm's dividend decision Term stock repurchase Definition will reduce total assets of the firm, increase the EPS, and reduce the total equity Term order of dividend dates Definition declaration date, ex-dividend date, date of record, payment date Term homemade dividends   Definition change the cash div. payout received by selling off shares to receive desired div. Term rights offering Definition issuing of an option directly to the shareholders to acquire stock Term winner's curse Definition behavior of the informed investor and why some IPOs have such large initial return Term firm commitment method Definition the underwriter buys the securities for less than the offering price and accepts the risk of not selling the isuse Term best efforts method Definition underwriter does not purchase the shares but merely acts as an agent Term competitive bid Definition issuing firm can offers its securities to the highest bidder Term negotiated bid Definition only one investment banker is used Term debt capacity is the reason value of the stock falls when equity issued Definition because management has info. that the probability of default has risen, limiting the debt capacity causing the firm to raise equity capital Term indenture Definition written agreement between a corporation and the bondholder's representative Term open-ended mortgage trust indenture Definition allows for unlimited bond issuance Term closed-end mortgage trust indenture   Definition does not allow for unlimited bond issuance Term sinking fund Definition part of the bond issuance, a corp. makes annual payments into an account managed by a trustee in order to make payments on bonds Term positive covenant to an indenture or loan agreement Definition sets a condition that the co. must follow such a providing regular fina. stmts to the lender Term negative covenants Definition agreements to protect the bondholders that specificy a co. canNOT do something; ex. can't pledge any other assets to other lenders, can't merge with another firm Term call provision   Definition allows the issuer to call in bonds before the maturity date Term put provision Definition allows the buyer to sell back the bond before the maturity date Term Definition Term option's instrinsic value   Definition value of an option if it were to immediately expire Term at-the-money option   Definition  stock price = exercise price Term out-of-the-money call option Definition when the exercise price > stock price; negative intrinsic value Term Definition Term in-the-money call option   Definition positive intrinsic value; stock price > exercise price Term lower bound on a call option   Definition 0 or S-E (whichever is greater) Term upper bound on a call option Definition stock price Term shareholders accept a -NPV in a leveraged firm if... Definition its increase the standard deviation on the returns of the firm's assets Term Δ of a call Definition swing in the price of the call relative to the swing in the price the stock Term Definition Term Definition Term value of a call Definition stock price * Δ - amount borrowed Term Definition