ease of converting to cash

Liquid firms are less likely to experience financial distress

-Current assets- current liabilities

- Positive when cash received exceeds cash paid out

Interest paid by a firm is _____deductible

Dividends paid by a firm is _____deductible

Interest received by a firm is _______deductible

Dividends received by a firm is _________deductible

Fully

not tax 

not tax

70% tax

Since dividends are taxed by the corporation and then again taxed when the shareholder receives them (as income), they are double taxed

Impact of Activities on Statements

-Operating Activities impact_____________?

-Investing Activities impact________?

-Finance activities impact_____________?

1.Income statment and working capital accounts on balance sheet

2.Long Term assets on balance sheet

3.Long term liabilities and OE on Balance Sheet

Can the firm meet short term obligations using current assets or cash

EX: Current ratio. Quick Ratio, Net Working Capital

Ability to use assets effectively

Includes Turnover ratios and collection ratios

these ratios measure the amount of debt used. Is there the right amount of debt/equity mix?

Examples are:

debt to equity ratio

Debt Ratio

equity Multiplier

Ability to generate profit

Ex:

Gross Proft Margin

ROE

ROA

Relate Market Views to Accounting Value

Ex: Market/Book ratio (Stock Price/Book value per share)

You divide everything by the number of assets you have

Makes it easier to compare companies of different sizes

Divide everything by sales

Makes it easier to compare different sized companies

1.Pay interest on Debt

2.Pay back principal on Debt

3.Pay dividends

4. Buy back stocks

5. Buy nonoperating assets (investments, marketable securities)

A valuation methos used to evaluate the attractiveness of an investment opportunity

It takes future free cash flow projections and discounts them to arrrive at a present value

Can evaluate a project, asset, or company

1. Infation affects a dollar's purchasing power

2. there is uncertainty when promised you'll receive the money in the future

3. If you have a dollar now, you can use it now

Stream of equal cash flows made at the end of each period for a certain number of periods

If the cash flow is repeated, you enter that amount as the "PMT" on your calculator

A series of equal cash flows made at the start of the period for a set length of time

An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:

Consider a stated annual rate of 10%. Compounded yearly, this rate will turn $1000 into $1100. However, if compounding occurs monthly, $1000 would grow to $1104.70 by the end of the year, rendering an effective annual interest rate of 10.47%.

Cash flows that grow at a constant rate forever

PV= Cash flow at time 1 / (discount rate - growth rate)

Debt security created by a firm and sold to investors

Firms can borrow money from investors instead of from banks

Indenture is name of contract

Bills are _____ term

Bonds are _____ term

Notes are _____ term

short term (less than one year)

Long term (over 5  years)

Medium term (between 1-5 years)

• The rate the investor actually earns on the bond if they hold it to maturity.
• This is not the coupon rate.
• Based on Market Demand

Calculating Bonds on a Calculator:

I=

N=

FV=

PMT=

PV=

• Yield To Maturity rate (not coupon)- market rate
• Number of Periods
• Maturity Value
• coupon rate  x 1000 (or maturity rate)
• Price of the Bond now

Yield rate is inversely related to price

As prices rise, yield to maturity falls

Directly related to the relationship between interest rates and present value

Bonds of similar risk and maturity will be priced to yield about the same return (regardless of the coupon rate)

If you know the price of one bond, you can estimate the YTM and use that to find the price of the second bond.

Debt at the state and local government levels

Interest received is tax exempt at the federal level

For a given change in the yield, the price of a LONGER-term bond will change more than a SHORTER term one

For a given change in the yield, the price of a LOWER Coupon bond will change more than a HIGHER coupon bond

Long Term Bonds- Interest rate risk is _______, reinvestment rate is ___________.

Short Term Bonds- Interest rate risk is ________, reinvestment rate is ___________.

1. High

2.Low

3. Low

4. High 

the risk of whether the issuer violates the terms of the bond certificate or not.

Projects must meet or exceed this return to be accepted

The required return is higher for risker projects

A group of 2 or more assets held by an investor

Market Risk

Must measure a security's market risk

The weighted average of all security Betas within that portfolio

This shows how your portfolio is affected by market changes

1. Pure time value of money

2.Reward for bearing market risk (premium)

3.The amount of market risk

____ and ____ force securities to lie on the Security Market Line

________means that no stocks lie above or below the Security Market Line

Fear and Greed

Equilibrium

This is the slope of the security market line (SML)

it = return on market - risk free return

= Rm-Rf