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| 3 Questions answered by Corporate Finance |
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Definition
1. What long-term investments should the firm engage in?
2. How can the firm raise the money for the required investments?
3. How much short-term cash flow does a company need to pay its bills? |
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| Current Assets - Current Liabilities... The financial manager must ensure that the firm has enough cash on hand to meet its obligations at each point in time. |
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Term
| Goal of the financial manager |
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Definition
Investment, Financing and Working capital decisions are made within the context of the overriding goal of financial management— to maximize the wealth of the owners,
the stockholders. Wealth considers risks, not just profit. |
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Term
| Ways to reduce principal agent problem of corporations |
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Definition
• Making managers (decision makers) and employees into stockholders
• Giving the BOD and stockholders more power in firing or removing incompetent management
• Providing lenders with prior commitments and legal protection
• By providing information honestly and promptly to financial markets
• By converting social costs into economic costs
• In an efficient market, there is always the threat of takeover |
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Term
| Three Rules of Time Travel |
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Definition
| 1. Only values at the same point in time can be combined or compared 2. To move a cash flow forward in time you must compound it 3. To move a cash flow backward in time you must discount it |
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Term
| FV of a cash flow formula |
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Definition
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| PV of a cash flow formula |
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| PV of a perpetuity formula |
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| PV = C/r x [1-(1/(1+r)^n)] |
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| PV of a growing perpetuity formula |
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Definition
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Term
| 4 Required financial statements |
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Definition
– The balance sheet,
– The income statement,
– The statement of cash flows, and the
– The statement of stockholders‘equity |
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Term
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Definition
| The book value of the firm’s equity. It differs from the market value of the firm’s equity, its market capitalization, because of the way assets and liabilities are recorded for accounting purposes |
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| Book debt-to-equity Ratio |
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Definition
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| Market debt-to-equity Ratio |
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| Current Assets/Current Liabilities |
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| (Current Assets-Inventory / Current Liabilities) |
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| Accounts Receivable/Avg. Daily Sales |
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| MV Equity/Net Income or Stock Price/EPS |
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| CPN = (Coupon Rate x FV) / Number of CPNs per year |
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Term
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| PV = C/r x {1-[1/(1+r)^n]} + FV/(1+r)^n |
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Term
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Definition
| Current Yield = Coupon/Price |
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Term
| When does a Bond trade at a premium? |
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Definition
| When the Coupon Rate > YTM |
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| When does a Bond trade at a discount? |
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Definition
| When the Coupon Rate < YTM |
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Term
| How do maturity and price sensitivity relate? |
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Definition
| The longer the maturity, the higher price sensitivity |
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Term
| What is the cutoff rating for a junk-bond? |
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