Term
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Definition
The study of ways to answer these three questions:
1. What long term investments should you take on?
2. Where will you get the long-term financing to pay for your investment?
3. How will you manage your everyday financial activities such as collecting from customers and paying suppliers? |
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Term
| Main goal of financial manager |
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Definition
| to maximize the current value per share of the existing stock |
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Term
| What is Capital budgeting? |
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Definition
| The process of planning and managing a firms long-term investments |
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Term
| What is Capital structure? |
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Definition
| The mixture of debt and equity maintained by a firm |
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Term
| What is Working capital management? |
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Definition
| A firms short-term assets and liabilities |
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Term
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Definition
| The possibility of conflict of interest between the stockholders and management of a firm. |
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Term
Which parties have what preferences in the
firm? |
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Definition
Management preferences include personal gains and doing what is least risky for the company.
Shareholders are more interested in raising stock value. |
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Term
What is the main purpose of Sarbanes-
Oxley act? |
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Definition
| to protect investors from corporate abuses. |
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Term
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Definition
| the ability to meet maturing obligations as they come due. |
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Term
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Definition
| refers to the speed and ease an asset can be converted to cash. |
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Term
| What is internal growth rate? |
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Definition
| The highest level of growth achievable for a business without obtaining outside financing. |
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Term
| What is sustainable growth rate? |
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Definition
| The maximum growth rate a firm can achieve without external equity financing while maintaining a constant debt-equity ratio. |
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Term
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Definition
| The process of accumulating interest on an investment over time to earn more interest |
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Term
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Definition
| A level stream of cash flows for a fixed period of time |
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Term
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Definition
| An annuity in which the cash flows continue forever |
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Term
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Definition
| an annuity for which the cash flows occur at the beginning of the period |
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Term
What is the di fference between APR and
EAR? |
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Definition
EAR:Effective rate expressed as if it were compounded once per year
APR: The interest rate charged per period multiplied by the number of periods per year |
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Term
| What are the types of loans? |
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Definition
Pure discount loan - the simplest form of a loan. The borrower receives the money today and repays a single lump sum at some time in the future.
Interest only loans - The borrower to pay interest each period and to repay the entire principal (the original loan amount) at some point in the future.
Amortized loans - Unlike pure discount and interest only loans, where the principal is repaid all at once, the lender may require the borrower to repay parts of the loan amount over time. |
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Term
| What are the features of bonds? |
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Definition
Coupon - the stated interest payment made on a bond
Face value - the principal amount of a bond that is repaid at the end of the term. also called par value
Coupon rate - the annual coupon divided by the face value of a bond.
Maturity - the specified date on which the principal amount of a bond is paid |
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Term
What is interest rate risk? What affect the
interest rates risk? |
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Definition
| is the risk (variability in value) borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa. Interest rate risk is commonly measured by the bond's duration. |
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Term
What is the indenture? What are the com-
ponents of it? |
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Definition
The written agreement between the corporation and the lender detailing the terms of the debt issue.
Components:
1. The basic terms of the bonds
2. The total amount of the bonds issued
3. A description of the property used as security
4. The repayment arrangements
5. The call revisions
6. Details of the protective covenants |
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Term
| What are bond rating concerned about? |
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Definition
| The bedt rating s are an assessment of the creditworthiness of the corporate issuer. The definitions of creditworthiness are based on how likely the firm is to default and the protection creditors have in the events os a default. |
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Term
What kind of bonds does the U.S. Treasury
issue? |
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Definition
The govt. borrows money on a short term basis (a year or less) by selling t-bills. A t-bill is a promise by the govt. to repay a fixed amount at some time in the future-for example, 3 months or 12 months.
-pure discount laons |
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Term
What is the difference between Real and
Nominal rates? |
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Definition
Real rates - interest rates or rates of return that have been adjusted for inflation.
Nominal rates - interest rates or rates of return that have not been adjusted for inflation. |
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Term
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Definition
| Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. |
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Term
| What is the Fisher e ffect? |
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Definition
The relationship between nominal returns, real returns, and inflation
1+R=(1+r)X(a+h)
where h is inflation
R=nominal
r= real rate |
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Term
| What is the term structure of interest rates? |
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Definition
| The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is the pure time value of money |
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Term
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Definition
| A stocks expected cash dividend divided by its current price |
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Term
| What is capital gains yield? |
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Definition
| The dividend growth rate, or the rate at which the value of an investment grows. |
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Term
What are the di fferences between common
stock and preferred stock? |
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Definition
Common stock - equity without priority for dividends or in bankruptcy
Preferred stock - Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights |
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Term
| How does NPV help investment decisions? |
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Definition
| The NPV represents the difference between an investments market value and its cost. It helps make investment decision because it can tell you if you're going to make money by purchasing an investment or not. |
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Term
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Definition
| The amount of time required for an investment to generate cash flows sufficient to recover its initial cost |
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Term
| What is Internal rate of return? |
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Definition
| The discount rate that makes the NPV of an investment zero |
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Term
| What are the weaknesses of IRR? |
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Definition
| the only way to find the iRR in general is by trial and error, either by hand or by calculator. |
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Term
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Definition
| A cost that has already been incurred and conn apt be removed and therefore should not be considered in an investment decision. |
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Term
| What is opportunity cost? |
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Definition
| The most valuable alternative that is given up if a particular investment is undertaken |
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Term
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Definition
| both good and bad changes in future cash flow due to outside events like the release of a new product. When the cash flows of a new project that come at the expense of a firms existing projects it called Erosion. |
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Term
| What is forecasting risk? |
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Definition
| The possibility that errors in projected cash flows will lead to incorrect decisions/ Also, estimation risk. |
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Term
| What is sensitivity analysis? |
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Definition
| Investigation of what happens to NPV when only one variable is changed |
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Term
| What is simulation analysis? |
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Definition
| A combination of scenario and sensitivity analysis |
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Term
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Definition
| Costs that do not change when the quantity of output changes during a particular time period. |
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Term
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Definition
| Costs that change when the quantity of output changes |
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Term
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Definition
| The change in costs that occurs when there is a small change in output |
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Term
What is the di fference between cash break-
even and accounting break-even? |
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Definition
Cash-break-even - The sales level that results in a zero operating cash flow
Accounting break-even - The sales level that results in zero project net income |
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Term
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Definition
| A new project will have a positive NPV only if its return exceeds what the financial markets offer on investments of similar risk. We call this minimum required return the Cost of Capital associated with the project. |
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Term
| What is Weighted average cost of capital? |
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Definition
| WACC - The weighted average cost of equity and the aftertax cost of debt |
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Term
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Definition
Total debt/Total equity
+ 1 =Equity multiplier
It represents how many times over a company can pay its debt with its equity. |
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Term
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Definition
| Net income/average equity |
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Term
| Price Earnings ratio, P/E |
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Definition
| Price per share/Earnings per share |
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Term
| Market to book ratio, M/B |
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Definition
| Market value per share/Book value per share |
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Term
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Definition
| Dividends per share/Earnings per share |
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Term
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Definition
| Basic present value used to determine the discount rate. |
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Term
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Definition
| Use when coupon payments are are forever |
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Term
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Definition
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Term
| Effective annual rate (EAR) |
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Definition
(1+Quoted rate/m)^m - 1
m = is the number if times interest has been compounded in a year |
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Term
If m from the above equation is very large,
then |
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Definition
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Term
| Weighted average cost of capital (WACC) |
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Definition
WACC = (E/V) X RE + (D/V) X RD X (1-Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate |
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