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Corporate Finance - FINA 4200
final exam concepts
65
Finance
Undergraduate 3
05/04/2009

Additional Finance Flashcards

 


 

Cards

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
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
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
value of a call
Definition
stock price * Δ - amount borrowed
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