Shared Flashcard Set

Details

Ch. 1-4
Finance 3404 UCF Chapters 1-4
50
Finance
Undergraduate 3
05/22/2009

Additional Finance Flashcards

 


 

Cards

Term

 

 

 

 

Goal of the Firm?

Definition

 

 

 

Maximize Shareholder Wealth

 

Maximize the price of exsiting common stock

Term

 

 

 

 

Sole Proprietorship

Definition

 

 

 

 

A business owned by a single individual

 

unlimited liabilities

Term

 

 

 

 

General Partnership

Definition

 

 

 

 

Each partner is fully responsible for the liabilities incurred by the partnership

Term

 

 

 

 

Limited Partnership

Definition

 

 

 

A partnership which one or more of the partners has limited liability, restricted to the amount of capital they have invested

Term

 

 

 

 

Corporation

Definition

 

 

 

 

an entity that legally functions separate and apart from the owners

Term

 

 

 

 

 

Gross Profit

Definition

 

 

 

 

                           Sales

                         - Cost of Goods Sold

                           Gross Profit

Term

 

 

 

 

 

Operating Income (EBIT)

Definition

 

 

 

                       Sales

                      -Cost of Goods Sold

                      -Operating expenses

                          Operating Income (EBIT)

Term

 

 

 

 

Taxable Income (EBT)

Definition

 

 

 

                       EBIT

                     +Dividend income

                     - Interest Expenses

                          Taxable Income (EBT)

Term

 

 

 

 

Dividend Exclusion

Definition

 

 

 

 

70% excluded from being taxed

Term

 

 

 

 

Depreciation

Definition

 

 

 

 

The means by which a asset's value is expensed over it's useful life for federal income tax purposes.

Term

 

 

 

 

Capital Gain/Loss

Definition

 

 

 

 

A gain or loss resulting from the sales or exchange of a capital assets.

Term

 

 

 

 

Net Capital loss carryback/ forward

Definition

 

 

 

Back 3 Years

Forward 5 Years

Term

 

 

 

 

Operating loss carryback/ forward

Definition

 

 

 

 

Back 2 years

Forward 20 years

Term

 

 

 

 

Financial Markets

Definition

 

 

 

 

Markets that allow people to easily buy and sell (trade) financial securities (stocks and bonds), commodities (metals and agricultural goods) and other items of value at low transaction costs.

Term

 

 

 

Real Assests

Definition

 

 

 

 

Assets that are tangible or physical in nature such as land, machinery, and livestock.

Term

 

 

 

 

Financial Assets

Definition

 



An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits are all examples of financial assets. 

Term

 

 

 

 

Underwriter

Definition

 

 

 

 

The middleperson who buys the entire stock or bond issue from the issuing company and resells it to the general public in individual shares.

Term

 

 

 

 

Secondary Market

Definition

 

 

 

Currently outstanding securities are traded.

 

Ex. If someone buys some shares from Google then sells them it is done in the secondary market.

 

You can think of it as akin to the used car market.

Term

 

 

 

 

3 ways to transfer savings to businesses

Definition

1. Direct transfer -

you to the firm

 

2. Indirect transfer using Investment Banker -

you to investment bank to firm


3. Indirect transfer using financial intermediary -  you to Sun Trust to firm

Term

 

 

 

 

Public offering

Definition

 

 

 

 

both individual and intutional investors have the opportunity to purchase the securities.

Term

 

 

 

 

Private placement

Definition

 

 

 

 

a security offering limited to a small number of potential investors.

Term

 

 

 

 

Primary Market

Definition

 

 

 

 

New shares of stock entering the market

 

Ex. new car market - The only time Ford receives money is when they sell a new car.

Term

 

 

 

 

Money Market

Definition

 

 

Transactions in short term debt instruments (1 year or less).

 

Ex. US Treasury Bills

federal agency securities

commercial paper

Term

 

 

 

 

Capital Market

Definition

 

 

transactions in long term financial instruments anything beyond 1 year.

 

Ex. Financial leases

Corporate stocks and bonds

Term

 

 

 

 

Organized Security Exchange

Definition

 

 

 

are tangible entities;

 

they physically occupy space ( buildings);

 

financial instruments are traded on the premises

 

Term

 

 

 

 

Over- the- Counter Exchanges

Definition

 

 

 

includes all markets except the organized exchange;

 

most corporate bonds are trade here;

 

does not occupy a building

Term

 

 

 

Investment Banker

 

Definition

 

 

 

 

a financial specialist who underwrites and distributes new securities and advises corporate clients about raising new funds.

Term

 

 

 

 

Investment Banker's functions

Definition

 

 

 

1. Underwriting

 

2. Distributing

 

3. Advising

Term

 

 

 

 

Nogotiated Purchase

Definition

 

 

 

Underwriting in which the purchase price and the public offering price are determined through negotiations between the issuer and a single syndicate, as opposed to through multiple competitive bidding. Most underwriting is negotiated.

 

Term

 

 

 

 

Distribution Methods

Definition

 

 

Negotiated Purchase

Competitive Bid Purchase

Best Effort Basis

Privileged Subscription

Dutch Auction

Direct Sale

Term

 

 

 

 

Competitive Bid Purchase

Definition

Several underwriting groups bid for the right to purchase the new issue from the corporation that is raising funds.

 

The investment bank willing to pay the greatest dollar amount per new security will win the competitive bid.

Term

 

 

 

 

Best Effort Basis

Definition

 

 

The investment banker attempts to sell the issue in return for a fixed commision on each security actually sold.

 

Unsold securities are then returned to the corporation.

Term

 

 

 

 

Privileged Subscription

Definition

 

The process of marketing a new security issue to a select group of investors.

 

Tarket market

1.Current stockholder

2. Employees

3. Customers of the firm

Term

 

 

 

 

Direct Sales

Definition

 

 

 

 

Issuing firm sells the securities directly to the investing public without involving an investment banker.

Term

 

 

 

 

Flotation cost

Definition

 

 

Transaction cost incurred when a firm raises funds by issuing a particular type of security.

Term

 

 

 

 

Securities Act of 1933

Definition

 

 


First Congressional law regulating the securities industry. Required registration and disclosure and included measures to discourage fraud and deception.

Term

 

 

 

 

Securities Exchange Act of 1934

Definition

 

 

 

The act which created the SEC, outlawed manipulative and abusive practices in the issuance of securities, required registration of stock exchanges, brokers, dealers, and listed securities, and required disclosure of certain financial information and insider trading.

Term

 

 

 

 

Securities Acts Amendments of 1975

Definition

 

 

 

 

Congressional law amending the Securities Act of 1933 to enable the establishment of a National Market System, and to encourage fair and efficient handling of securities transactions. 

 

 

Term

 

 

 

 

 

Shelf Registration

Definition

 

 

 

A registration of a new issue which can be prepared up to two years in advance, so that the issue can be offered quickly as soon as funds are needed or market conditions are favorable.

Term

 

 

 

 

Opportunity Cost of Funds

Definition

 

 

 

 

The next-best rate of return available to the investor for a given levelof risk.

 

 

Term

 

 

 

 

Maturity Premium

Definition

 

 

 

The additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuations on those securities caused by interest rate changes.

Term

 

 

 

 

Liquidity Premium

Definition

 

 

 

The additional return required by investors for securities that cannot be quickly converted into cash at a reasonably predictable price.

Term

 

 

 

 

 

Nominal rate of Interest

Definition

 

 

 

 

The interest rate paid on debt securities without an adjustment for any loss in pruchasing power.

Term

 

 

 

 

Real Rate of Interest

Definition

 

 

 

 

The nominal rate of interest less any loss in purchasing power of the dollar during the time of the investment.

 

 

Term

 

 

 

 

Term structure of Interest Rates

Definition

 

 

 

 

The relationship between interest rates and the term to maturity, where the risk of default is held constant.

Term

 

 

 

 

Unbiased Expections Theory

Definition

 

 

 

 

The term structure is determined by expections of future rates.

Term

 

 

 

 

Liquidity Preference Theory

Definition

 

 

 

Investors require risk premiums to invest for longer terms.

 

Longer the term the higher expected rate of return.

Term

 

 

 

 

Market Segmentation Theory

Definition

 

 

The term structure of interest rates is built on the notion that legal restrictions and personal preferences limit choices for investors to certain ranges of maturities.

 

commerical banks prefer short term liabilities

 

life insurence companies prefer long term liabilities

Term

 

 

 

 

Yield to Maturity

Definition

 

 

 

 

Rate of return a bondholder will recieve if the bond is held to maturity.

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