Term
| What is the principle goal of firms? |
|
Definition
| Maximize Shareholder Wealth |
|
|
Term
| What are the 4 major components of finance? |
|
Definition
Circulation of Money
Granting of Credit
Making of Investments
Provision of Banking Facilities |
|
|
Term
| focuses on decisions relating to how much and what type of assets to acquire, how to raise the capital needed to purchase assets, and how to run the firm so as to maximize its value. |
|
Definition
|
|
Term
| relate to the markets where interest rates, along with stock and bond prices, are determined. |
|
Definition
|
|
Term
| relate to decisions concerning stocks and bonds and include a number of activities |
|
Definition
|
|
Term
| What are the 3 main activities of investments? |
|
Definition
Security Analysis
Portfolio Theory
Market Analysis |
|
|
Term
| practice involving finding proper values of stocks and bonds |
|
Definition
|
|
Term
| theory pertaining to the best way to structure baskets of stocks and bonds |
|
Definition
|
|
Term
| whether stocks are too high, too low, or about right at any given time. (Behavioral finance is included in this) |
|
Definition
|
|
Term
| What is the hieararchical order of a business? |
|
Definition
Board of Directors
CEO
COO and CFO
Respective departments |
|
|
Term
| What are the four forms of business organizations? |
|
Definition
Proprietorships
Partnerships
Corporations
Limited Liability Companies and Limited Liability Partnerships |
|
|
Term
| a legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability. |
|
Definition
|
|
Term
| special designation that allows small business with no more than 100 stockholders to be taxes as if they were a partnership or proprietorship rather than a corporation. |
|
Definition
|
|
Term
| means all information is assumed to be present to interpret market behavior of a company |
|
Definition
|
|
Term
| means what investors expect given the limited information they have |
|
Definition
|
|
Term
| investor whose views determine the actual stock price. |
|
Definition
|
|
Term
| Who owns the majority of stocks today? |
|
Definition
| The majority of stocks today are owned by institutional investors such as insurance companies, pension funds, hedge funds, mutual funds, and private equity groups. |
|
|
Term
| individuals who target corporations for takeover because they are undervalued in the stock market. Acquisition is called a Hostile Takeover. |
|
Definition
|
|
Term
| __________ generally receive fixed payments regardless of how well the company does. ________ do better when the company does better. |
|
Definition
| Debtholders, Stockholders |
|
|
Term
| How is shareholder wealth defined? |
|
Definition
| Stock Price and dividends if received |
|
|
Term
| one party hires another to act on behalf of the their party. |
|
Definition
| Agency Relationship(principal/agent relationship) |
|
|
Term
| What are four ways to promote good performance in a business? |
|
Definition
Monitoring
Threatening to Fire
Compensation Packages that align interests of management and shareholders.
Threat of takeover |
|
|
Term
| contract provision that allows an upper manager to exit a firm, with perks, even if a firm gets taken over. |
|
Definition
|
|
Term
| makes your company less appealing to take over (can be used in conjunction with a golden parachute since new owners will have to pay out old CEO) |
|
Definition
|
|
Term
| cost that results from the princiaple/agent relationship (not managing well). |
|
Definition
|
|
Term
| making decisions that benefit in the short term due to compensations, but can harm the long term. |
|
Definition
|
|
Term
| Business selling stocks or bonds directly to savers without going through any financial institution. |
|
Definition
|
|
Term
| Investment Banks are _______ that facilitate the issuance of securities. |
|
Definition
|
|
Term
| obtains funds from savers in exchange for securities they purchase from a business. |
|
Definition
|
|
Term
| values are derived from changes in the prices of other “underlying” assets. |
|
Definition
|
|
Term
| What is the difference between a money market and a capital market? |
|
Definition
Money Markets- markets for short term, highly liquid debt securities
Capital Markets- markets for intermediate or long-term debt and corporate stocks |
|
|
Term
| What is the difference between public and private markets? |
|
Definition
Private Markets- transactions are worked out directly between two parties.
Public Markets- markets in which standardized contracts are traded on organized exchanges |
|
|
Term
| What is difference between a spot and future market? |
|
Definition
Spot market- market in which assests are bought or sold for on the spot delivery
Future market- markets in which participatnts agree today to buy or sell an asset at some future date |
|
|
Term
| What is the difference between a primary and secondary market? |
|
Definition
Primary Market- market in which corporations raise new capital.
Secondary market- market in which existing, already outstanding securities are traded among investors.
|
|
|
Term
| What are the three financial problems of globalization? |
|
Definition
1) Different structure in nations’ banking and securities industries
2) Trend toward financial services conglomerates, which obscures developments in various market segments
3) Reluctances of individual countries to give up control over their national monetary policies. |
|
|
Term
| contracts that offer protection against the default of a particular security. (Bank pays institution regularly for insurance against losses if the buyer does not pay) |
|
Definition
|
|
Term
| can be used to reduce risk exposure. |
|
Definition
|
|
Term
| Sold by U.S. treasury to finance federal expenditures |
|
Definition
|
|
Term
A firm's note, but one guaranteed by a bank.
|
|
Definition
|
|
Term
| Issued by financially secure firms to large investors |
|
Definition
|
|
Term
| Issued by major money-center commercial banks to large investors. |
|
Definition
| Negotiable Certificates of Deposit |
|
|
Term
| Invest in treasury bills, CDs, and commercial paper; held by individuals and businesses. |
|
Definition
| Money Market Mutual Funds |
|
|
Term
| Issued by banks, credit unions, and finance companies to individuals. |
|
Definition
|
|
Term
| What are the 7 money market instruments? |
|
Definition
U.S. treasury bills
Bankers' acceptances
Commercial paper
Negotiable Certificates of Deposit
Money Market Mutual Funds
Eurodollar market time deposits
Consumer Credit
|
|
|
Term
| What are the 7 capital market instruments? |
|
Definition
U.S. Treasury notes and bonds
Mortgages
State and local government bonds
Corporate bonds
Leases
Preferred Stocks
Common stocks |
|
|
Term
| Issued by U.S. government |
|
Definition
| U.S. Treasuary Notes and Bonds |
|
|
Term
Loans to individuals and businesses secured by real estate; bought by banks and other institutions.
|
|
Definition
|
|
Term
| Issued by state and local governments; held by individuals and institutional investors. |
|
Definition
| State and local government bonds |
|
|
Term
| Issued by corporations; held by individuals and institutional investors. |
|
Definition
|
|
Term
| Similar to debt in that firms can lease assets rather than borrow and then buy the assets |
|
Definition
|
|
Term
| Issued by corporations to individuals and institutional investors. |
|
Definition
| Preferred and Common Stock |
|
|
Term
| help companies raise capital |
|
Definition
|
|
Term
| historically they handled checking accounts and controlled the money supply via the federal reserves policies. |
|
Definition
|
|
Term
| large conglomerates that combine many different financial institutions within a single corporation. |
|
Definition
| Financial Services Corporation |
|
|
Term
| retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies. |
|
Definition
|
|
Term
| take annual premium payments and invest them for customers. Then make payments to beneficiary parties. |
|
Definition
|
|
Term
| accept funds from savers and pool funds to reduce risk by diversification. |
|
Definition
|
|
Term
| Are mutual funds well regulated? Why or why not? |
|
Definition
| Well regulated since many small investments are sold to small investors. |
|
|
Term
| buy shares of their own and sell to the public. |
|
Definition
|
|
Term
| accept money from savers and use those funds to buy securities. |
|
Definition
|
|
Term
| Are hedge funds regulated? Why or why not? |
|
Definition
| Largely unregulated since they are sold to large institutions and wealthy individuals |
|
|
Term
| buy and manage entire firms. Often use borrowed money to buy firms. |
|
Definition
|
|
Term
| Are private equity companies regulated? |
|
Definition
|
|
Term
| interest bearing checking accounts. |
|
Definition
|
|
Term
| funds that try to outperform the overall markets |
|
Definition
|
|
Term
| funds designed simply to replicate the performance of a specific market index. |
|
Definition
|
|
Term
| What were the three portions of the Dodd-Frank Act? |
|
Definition
1) created a new agency for consumer protection
2) work to increase the the transparency of derivative transactions
3) force financial institutions to take steps to limit excessive risk taking and to hold more capital. |
|
|
Term
| What is the most active secondary market? |
|
Definition
|
|
Term
| Where are the two places stocks are traded? |
|
Definition
1) Physical Location Exchanges
2) Electronic dealer based markets |
|
|
Term
| What kind of market is NASDAQ? |
|
Definition
| Electronic Dealer Based Market |
|
|
Term
| large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities. |
|
Definition
|
|
Term
| include all facilities that are needed to conduct security transactions not conducted on the physical location exchanges |
|
Definition
|
|
Term
| What are the three components of a dealer market? |
|
Definition
1) Dealers who make a market in securities
2) Brokers that act as agents in bringing dealers together with investors
3) Computers, terminals, and electronic networks that provide a communication link between dealers and brokers. |
|
|
Term
| price at which dealers will pay for the stock |
|
Definition
|
|
Term
| price at which they will sell shares of that stock |
|
Definition
|
|
Term
|
Definition
|
|
Term
| licenses brokers and oversees trading practices. |
|
Definition
| FINRA- Financial Industry Regulatory Authority |
|
|
Term
| corporation that is owned by a few individuals who are typically associated with the firm’s management. |
|
Definition
|
|
Term
| corporation that is owned by a relatively large number of individuals who are not actively involved in the firms management. |
|
Definition
| Publicly Owned Corporation |
|
|
Term
| When stock in a closely held company is offered to the public for the first time. |
|
Definition
| Initial Public Offering (IPO) |
|
|
Term
| demand for IPO shares at the offering price exceeds the number of shares available. |
|
Definition
|
|
Term
| actual transaction price is set at the highest price (clearing price) that causes all the offered shares to be sold. |
|
Definition
|
|
Term
| Can firms go public without raising any additional capital? |
|
Definition
|
|
Term
| A stocks expected return as estimated by investors at the margin is always ______. |
|
Definition
|
|
Term
| total value of all of a companies stock. |
|
Definition
|
|
Term
| Price per share divided by the most recent 12 months earnings. |
|
Definition
|
|
Term
| price that balances buy and sell orders at any given time |
|
Definition
|
|
Term
| market in which prices are close to intrinsic values and stocks seem to be in equilibrium. |
|
Definition
|
|
Term
| On average, how many analysts are following each major stock? |
|
Definition
|
|
Term
| the larger the firm, the more analysts tend to follow it and thus the faster new information is likely to be reflected in the stocks price. |
|
Definition
|
|
Term
| states that asset prices are about equal to their intrinsic values. |
|
Definition
| Efficient Market Hypothesis |
|
|
Term
| can be used to explain differences in EMH. |
|
Definition
|
|
Term
| What are the two key points of behavioral finance? |
|
Definition
1) Difficulty or risky for traders to take advantage of misplaced assets.
2) Investors and managers behave differently in down markets than they do in up markets. |
|
|
Term
| way to measure the market performance. |
|
Definition
|
|
Term
| 30 stocks, blue chip (big and safe) stocks (GE, etc.) (Safer) |
|
Definition
|
|
Term
| When people say "The Market" what are they generally referring to? |
|
Definition
| DOW Jones Industrial Average |
|
|
Term
| making more shares available and making more shares affordable. Makes DOW Jones numbers so high. |
|
Definition
|
|
Term
| (No physical location for exchange, smaller stocks) (Riskier, lots of tech stocks) |
|
Definition
| Over the Counter Market-NASDAQ |
|
|
Term
| NASDAQ and NYSE were very _______ but with advancements in technology they are ______ now. |
|
Definition
|
|
Term
| dealer in one or more stocks. They buy from sellers and sells to buyers. There are several dealers per stock. Trade in secondary market. |
|
Definition
|
|
Term
| Both Bid and ask price are from the perspective of the dealer or buyer? |
|
Definition
|
|
Term
| Low Volume Stocks have a _____ spread. High Volume Stocks have a _____ spread. |
|
Definition
|
|
Term
| computer algorithm that buys and sells based on technical signals. |
|
Definition
|
|
Term
| Is a company raising capital in the secondary market? |
|
Definition
|
|
Term
| What are two incentives of going public? |
|
Definition
1) Raising capital for firm
2) Founders of Firm Gain Money
|
|
|
Term
| What do investment banks give advice on for IPOs? |
|
Definition
1) Price
2) Timing
3) Total Amount of Capital |
|
|
Term
| Way of generating hype for a stock |
|
Definition
|
|
Term
| What are two things the secondary market provides? |
|
Definition
| LIQUIDITY AND MARKETABILITY |
|
|
Term
| Do money market securities pay interest? |
|
Definition
|
|
Term
How is money payed to investors in money market securities?
|
|
Definition
| RETURNS ARE MADE DUE TO DIFFERENCE BETWEEN INITIAL DISCOUNT PRICE AND MATURED FACE VALUE. |
|
|
Term
| Investment banks and their syndicates buy the entire original stock at a discount and then sell in primary market for full price. (Difference is how much they make, which is typically _____) |
|
Definition
|
|
Term
| Cooperative associations whose members are supposed to have a common bond. Often the cheapest source of funds available to individual borrowers. |
|
Definition
|
|
Term
| What are the 4 components of the annual report? |
|
Definition
Balance Sheet
Income Statement
Statement of stockholders’ equity
Statement of cash flows |
|
|
Term
| tells us about our investments and where we got the financing for those investments. |
|
Definition
|
|
Term
| can be taxes or wages owed, etc. |
|
Definition
|
|
Term
| money we have earned over the life of the business that we have not paid out to shareholders. |
|
Definition
|
|
Term
| Losses, gains, and dividends are reflected in _______ |
|
Definition
|
|
Term
| Net Income of Firm/Number of Shares Outstanding |
|
Definition
|
|
Term
| If a firm loses money, would they still have to pay a dividend? |
|
Definition
|
|
Term
| Difference between Assets and Liabilities. |
|
Definition
|
|
Term
| Individual statements can reflect changes in _____ value while corporate statements can only report at ______ value. |
|
Definition
|
|
Term
| What are the three sources of funds? |
|
Definition
Increasing liabilities
Increasing Equity
Decreasing Assets |
|
|
Term
| What are the three uses of funds? |
|
Definition
Decreasing liabilities
Decreasing Equity
Increasing Assets |
|
|
Term
| Why is retained earnings not on the cash flow statement? |
|
Definition
| because it is already reflected in Net Income and Dividends |
|
|
Term
| Is cash account included on the statement of cash flows? |
|
Definition
| No, difference between two periods cash balance is the net change in cash you are trying to calculate |
|
|
Term
| Shows what does a business have available to do what it has to do operate. |
|
Definition
|
|
Term
| If net working capital goes up, you are _____ funds. |
|
Definition
|
|
Term
| tells you the essence of the business, tells you what they are capable of without financing. |
|
Definition
|
|
Term
|
Definition
|
|
Term
| = Total Assets-Total Liabilities |
|
Definition
|
|
Term
| = Paid-in Capital + Retained earnings |
|
Definition
|
|
Term
|
Definition
|
|
Term
| Current Assets minus current liabilities |
|
Definition
|
|
Term
| Current Assets minus (Current liabilities - Notes Payable) |
|
Definition
| Net Operating Working Capital- |
|
|
Term
| hybrid between common stock and debt |
|
Definition
|
|
Term
| give bondholders option to change bonds into stock. |
|
Definition
|
|
Term
| Firms often use _______ depreciation for tax purposes but _________ depreciation for stockholder earnings. |
|
Definition
| accelerated, straight-line |
|
|
Term
| also called “the bottom line” |
|
Definition
|
|
Term
| Earning before interest and taxes or Sales Revenue-Operating Costs |
|
Definition
|
|
Term
| Most rapidly growing companies have ______ FCF’s since they are investing so much in new fixed assets and operating a lot. |
|
Definition
|
|
Term
| tax rate on the last dollar of income. |
|
Definition
|
|
Term
| created by congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions. |
|
Definition
|
|
Term
| ____% of dividends received is excluded from taxable income, while the remaining ___% is taxed at the ordinary tax rate. |
|
Definition
|
|
Term
| The corporate tax systems favors _____ financing over _____ financing. |
|
Definition
|
|
Term
| ordinary corporate operating losses can be carried backward for 2 years and carried forward for 20 years to offset taxable income in a given year. |
|
Definition
| Tax Loss Carry-Back or Carry-Forward- |
|
|
Term
| If a corporation owns ____% or more of another corporations stock, it can aggregate income to allow losses of one company to offset the profits of another. |
|
Definition
|
|
Term
| give an idea of the firm’s ability to pay off debts that are maturing within a year. |
|
Definition
|
|
Term
| give an idea of how efficiently the firm is using its assets |
|
Definition
|
|
Term
| give an idea of how the firm has financed its assets as well as the firm’s ability to repay its long-term debts. |
|
Definition
|
|
Term
| give an idea of how profitability the firm is operating and utilizing its assets. |
|
Definition
|
|
Term
| give an idea of what investors think about the firm and its future prospects. |
|
Definition
|
|
Term
What does a high current ratio indicate?
|
|
Definition
| High current ratio indicates that you have a very liquid set of assets unless those assets are not valuable any more. |
|
|
Term
| Turnover ratios divide ____ by _____ |
|
Definition
|
|
Term
|
Definition
| Gives the average length of time a firm must wait after making a sale before receiving cash. |
|
|
Term
| What does a fixed asset turnover ratio measure? |
|
Definition
| measures how effectively the firm uses its equipment. |
|
|
Term
| What's the major problem with the fixed assets ratio? |
|
Definition
| Older assets have been depreciated more and are undervalued due to inflation when compared to newer assets. This gives older firms an advantage over newer firms since this a lower net fixed assets gives a higher fixed assets turnover ratio. |
|
|
Term
| The use of debt will increase, or leverage up, a firm’s ROE if the firm does what? |
|
Definition
| Earns more on its assets than the interest rate it pays on debts. |
|
|
Term
| What does total debt to total capital measure? |
|
Definition
| measures the percentage of the firm’s capital provided by debtholders. |
|
|
Term
| Creditors prefer a ____ Total debt to total capital ratio. The____ the ratio, the greater the cushion against creditor’s losses in the event of liquidation. |
|
Definition
|
|
Term
| How do you interpret a ratio? |
|
Definition
| Numerator per unit of denominator. |
|
|
Term
| TOTAL DEBTS/TOTAL Assets is the way Preece wants us to calculate what? |
|
Definition
| The total debt to total capital ratio. |
|
|
Term
Net Income divided by Sales equals what?
|
|
Definition
|
|
Term
| Gross Profit equals what? |
|
Definition
|
|
Term
| Measures the total return that the company has provided for its investors. |
|
Definition
| Return on Invested Capital |
|
|
Term
| What does the BEP Ratio show? |
|
Definition
| shows the raw earning power of the firm’s assets before the influence of taxes and debt, |
|
|
Term
| Whats the purpose of market value ratios? |
|
Definition
| relate the stock price to earnings and book value price. To help better interpret ROE. |
|
|
Term
| shows how much investors are willing to pay per dollar of reported profits. |
|
Definition
|
|
Term
| formula that shows that the rate of return on equity can be found as the product of profit margin, total assets turnover, and the equity multiplier. Shows the relationship among asset management, debt management, and profitability ratios. |
|
Definition
|
|
Term
| What is the Dupont Formula? |
|
Definition
Profit Margin X Total Assets Turnover X Equity Multipliers |
|
|
Term
| process of comparing a particular company with a subset of top competitors in their industry. |
|
Definition
|
|
Term
| analysis of a firms ratios over time. Used to estimate the likelihood of improvement or deterioration in its financial condition. |
|
Definition
|
|
Term
| Maximizing ROE does “not necessarily” maximize shareholder wealth because of 3 reasons. What are they? |
|
Definition
1) ROE does NOT consider risk.
2) ROE does NOT consider the amount of invested capital.
3) A focus on ROE causes managers to turn down profitable projects. |
|
|
Term
| techniques employed by firms to make their financial statements look better than they really are. |
|
Definition
| Window Dressing Techniques |
|
|
Term
| What are 8 problems with ratio analysis? |
|
Definition
1) Many firms have operations in different industries. Analysis is more useful for narrowly focused firms.
2) Attaining average is not necessarily good
3) Inflation makes interpretation more tricky.
4) Seasonal Factors
5) Window Dressing Techniques- techniques employed by firms to make their financial statements look better than they really are.
6) Different accounting practices can distort comparisons
7) Difficult to generalize whether a ratio is good or bad.
8) Determining net effects of ratios is often tough (Comparing good with bad) |
|
|
Term
| What are things that individuals have to pay taxes on? |
|
Definition
Wages and Salaries
Investment Income (dividends, interest, profits from sale of securities)
Profits of propietorships and partnerships |
|
|
Term
| Why are dividends taxed at a lower rate than ordinary income? |
|
Definition
| Corporate income is taxed first, reducing dividends, then they are taxed at the individual rate again, further reducing the amount payed out to shareholders. |
|
|
Term
| When the investor is a corporation, is more favorable to for stock investments or bonds? |
|
Definition
|
|
Term
| Which (Interest or Divdends) can reduce taxable income and which can't? |
|
Definition
Interest can reduce taxable income
Dividends Can't |
|
|
Term
| What effects does depreciation have on financial statements? |
|
Definition
| Lower taxable income, lower tax bill, higher operating cash flow |
|
|
Term
| What are the qualitative factors to be considered for ratio analysis? |
|
Definition
1) Are the company's revenues tied to one key customer
2) To what extent are the company's revenues tide to one key product
3) To what extent does the company rely on a single supplier?
4) What percentage of the company's business is generated overseas?
5) How much competition does the firm face?
6) Is it necessary for the company to continually invest in R&D.
7) Are changes in laws and regulations likely to have important implications for the firm?
|
|
|
Term
| Who is the principal and who is the agent in the agency relationship? |
|
Definition
Principal= Shareholder
Management= Agent |
|
|
Term
| Why are investment banks called underwriters? |
|
Definition
| Because they guarantee for firms that they will raise the necessary capital |
|
|
