Term
| Average Return for inflation |
|
Definition
|
|
Term
| Average Return for Treasury |
|
Definition
|
|
Term
| Average Return for Long Term Goverment |
|
Definition
|
|
Term
| Average Return for Long Term Corporate |
|
Definition
|
|
Term
| Average Return for Small Cap Stocks |
|
Definition
|
|
Term
| Average Return for Large Cap Stocks |
|
Definition
|
|
Term
| Efficient Markets Hypothesis (EMH) |
|
Definition
| the hypothesis that actual capital markets, such as the NYSE, are efficient |
|
|
Term
|
Definition
| all information of every kind is reflected in stock prices. - Does not exist |
|
|
Term
| semistrong form efficiency |
|
Definition
| all public information is reflected in the stock price |
|
|
Term
|
Definition
| the current price of a stock reflects the stock's own past prices. |
|
|
Term
|
Definition
| any gain or loss from an asset |
|
|
Term
| income component of return |
|
Definition
| cash directly while you own the investment |
|
|
Term
| capital gains component of return |
|
Definition
| the change in value of the asset you purchased |
|
|
Term
|
Definition
| dividend income + capital gain (or loss) |
|
|
Term
|
Definition
| debt that is free of any default risk (T-Bills for example) |
|
|
Term
|
Definition
| the excess return required from an investment in a risky asset over that required from a risk-free investment. |
|
|
Term
|
Definition
| the average squared difference between the actual return and the average return |
|
|
Term
|
Definition
the average compound return earned per year over a multiyear period (use for averages over 40+ years)
Will be less than the arithmetic average unless all returns are equal.
[(1 + R1) × (1 + R2) × … × (1 + RT)]1/T – 1
Using a financial calculator PV = 1; FV = product of (1+return)s; N = T |
|
|
Term
| arithmetic average return |
|
Definition
| the return earned in an average year over a multiyear period (use for averages over 15-20 years or less) |
|
|
Term
| Standard Deviation of Large Company Stocks |
|
Definition
|
|
Term
| Standard Deviation of Small Cap Stocks |
|
Definition
|
|
Term
| Standard Deviation of Long Term Corporate Bonds |
|
Definition
|
|
Term
| Standard Deviation of Long-term Goverment Bonds |
|
Definition
|
|
Term
| Standard Deviation of T-Bills |
|
Definition
|
|
Term
| Standard Deviation of Inflation |
|
Definition
|
|
Term
| geometric average approximation |
|
Definition
| arithmetic average - 1/2(variance) |
|
|
Term
|
Definition
| a market in which security prices reflect available information |
|
|
Term
|
Definition
| expected return + systematic portion + unsystematic portion |
|
|
Term
|
Definition
| the amount of systematic risk present in a particular risky asset relative to that in an average risky asset. |
|
|
Term
|
Definition
"reward for bearing risk"
Expected Return - Risk Free Rate |
|
|
Term
|
Definition
| Inflation + Loss of Access to our Capital |
|
|
Term
| Factors Affecting Expected Return |
|
Definition
| Time Value (risk free rate), bearing systematic risk (market risk premium), amount of systematic risk (beta) |
|
|
Term
|
Definition
| a risk that influences a large number of assets. Also, market risk or nondiversifiable risk |
|
|
Term
|
Definition
| a risk that affects at most a small number of assets. Also, unique, diversifiable, or asset-specific risk. |
|
|
Term
| security market line (SML) |
|
Definition
| the relationship between risk and return |
|
|
Term
|
Definition
| a group of assets such as stocks and bonds held by an investor |
|
|
Term
|
Definition
| a percentage of a portfolio's total value that is in a particular asset |
|
|
Term
|
Definition
| the difference between the actual result and the forecast |
|
|
Term
| principle of diversification |
|
Definition
| spreading an investment across a number of assets will eliminate some, but not all, of the risk |
|
|
Term
| systematic risk principle |
|
Definition
| the expected return on a risky asset depends only on that asset's systematic risk |
|
|
Term
|
Definition
|
|
Term
| Security Market Line (SML) |
|
Definition
| a positively sloped straight line displaying the relationship between expected return and beta (second most important concept in modern finance) |
|
|
Term
|
Definition
| Expected Return of market portfolio - Risk free rate |
|
|
Term
|
Definition
| the slope of the SML, the difference between the expected return on a market portfolio and the risk-free rate |
|
|
Term
| Capital Asset Pricing Model (CAPM) |
|
Definition
| the equation of the SML showing the relationship between expected return and beta (Expected Return of an asset = Risk free rate + Beta of an asset X (Expected Return of the market - risk free rate) |
|
|
Term
|
Definition
| the minimum required return on a new investment |
|
|
Term
|
Definition
| option to buy at a fixed price or time |
|
|
Term
|
Definition
| option to sell at a predetermined price or time |
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
| can sell anytime in the period |
|
|
Term
|
Definition
| can only sell on specific date |
|
|
Term
|
Definition
| a contract that gives its owner the right to buy or sell some asset at a fixed price on or before a given date |
|
|
Term
|
Definition
| the act of buying or selling the underlying asset via the option contract |
|
|
Term
| strike price, striking price, or exercise price |
|
Definition
| the fixed price in the option contract at which the holder can buy or sell the underlying asset. |
|
|
Term
|
Definition
| the last day on which an option may be exercised |
|
|
Term
|
Definition
| the lower bound of an options' value, or what the option would be worth if it were about to expires |
|
|
Term
| factors determining option values |
|
Definition
| stock price, exercise price, time to expiration, risk-free rate, variance |
|
|
Term
| positive influence on calls |
|
Definition
| current value of underlying asset, time to expiration on the option, risk-free rate, variance of return on the underlying asset |
|
|
Term
| positive influence on puts |
|
Definition
| exercise price on the option, time to expiration on the option, variance of return on the underlying asset |
|
|
Term
| employee stock options (ESO) |
|
Definition
| an option granted to an employee by a company giving the employee the right to buy shares of stock in the company at a fixed price for a fixed time |
|
|
Term
|
Definition
| aligns employee interests with stockholder interests and reduces agency problems |
|
|
Term
|
Definition
| an option that involves real assets as opposed to financial assets such as shares of stock (timing or managerial) |
|
|
Term
| investment timing decision |
|
Definition
| the evaluation of the optimal time to begin a project |
|
|
Term
|
Definition
| opportunities that managers can exploit if certain things happen in the future |
|
|
Term
|
Definition
| taking into account the managerial options implicit in a project |
|
|
Term
|
Definition
| the option to expand, the option to abandon, the option to suspend or contract operations |
|
|
Term
|
Definition
| options for future, related business products or strategies |
|
|
Term
|
Definition
| a security that gives the holder the right to purchase shares of stock at a fixed price over a given period of time. Sometimes called sweeteners or equity kickers because they are often issued with privately placed loans or bonds and they are longer lasting then calls. |
|
|
Term
| differences between calls and warrants |
|
Definition
| calls are issued by individuals and warrants are issued by firms. Warrants increase the number of shares outstanding while calls do not |
|
|
Term
|
Definition
| a bond that can be exchanged for a fixed number of shares of stock for a specific amount of time |
|
|
Term
|
Definition
| the dollar amount of a bond's par value that is exchangeable for one share of stock |
|
|
Term
|
Definition
| the number of shares per bond received for conversion into stock |
|
|
Term
|
Definition
| the difference between the conversion price and the current stock price, divided by the current stock price |
|
|
Term
|
Definition
| the value a convertible bond would have if it could not be converted into common stock |
|
|
Term
|
Definition
| the value a convertible bond would have it it were to be immediately converted into common stock |
|
|
Term
| Weighted Average Cost of Capital |
|
Definition
"The weighted average of the cost of equity and the aftertax cost of debt"
Pure Play approach: consider projects that companies that specialize in what we are considering to do do
Subjective approach: consider projects relative to firm. |
|
|
Term
|
Definition
| looking at the variance in the cash flow drivers |
|
|
Term
|
Definition
| the cost of issuing new securities (raising new money) |
|
|
Term
| approaches for Computing Cost of equity |
|
Definition
| Securities market line, Dividend growth model |
|
|
Term
|
Definition
| computing the cost of debt |
|
|
Term
|
Definition
| the minimum required return for investments of similar risk |
|
|
Term
| cost of capital depends primarily on |
|
Definition
|
|
Term
|
Definition
| the return that equity investors require on their investment in the firm |
|
|
Term
|
Definition
| the return that lenders require on the firm's debt |
|
|
Term
|
Definition
| the use of a WACC that is unique to a particular project, based on companies in similar lines of business |
|
|
Term
| characteristics in choosing a vc |
|
Definition
| financial strength, style, references, contacts, exit |
|
|
Term
|
Definition
| obtain approval from board of directors, prepare registration statement, 20 day waiting period for SEC to examine reg statement, Oral offers can be accepted during waiting period, prospectus must accompany security delvery or sale confirmation |
|
|
Term
|
Definition
| an sec regulation that exempts public issues of less than $5million from most registration requirements |
|
|
Term
|
Definition
| a legal document describing details of the issuing corporation and the proposed offering to potential investors |
|
|
Term
|
Definition
|
|
Term
|
Definition
| an advertisement announcing a public offering |
|
|
Term
|
Definition
| an issue of securities offered for sale to the general public on a cash basis |
|
|
Term
|
Definition
| a public issue of securities in which securities are first offered to existing shareholders (rare in the US) |
|
|
Term
|
Definition
|
|
Term
| methods of issuing new securities |
|
Definition
| priviledged (existing shareholders), nontraditional (shelf companies), private (private investments in public equity) |
|
|
Term
|
Definition
| investment bankers that take the risk in issuing securities |
|
|
Term
| green shoe provision (or overallotment option) |
|
Definition
| additional stock offerings after an IPO |
|
|
Term
|
Definition
| insiders agree not to sell over a pre-determined amount of time (usually 180 days) |
|
|
Term
|
Definition
| pre-planned selling by execs |
|
|
Term
|
Definition
| some investors have more info than others |
|
|
Term
|
Definition
| financing for new, often high-risk ventures |
|
|
Term
|
Definition
| a statement filed with the SEC that discloses all material information concerning the corporation making a public offering |
|
|
Term
| Seasoned equity offering (SEO) |
|
Definition
| a new equity issue of securities by a company that has previously issued securities to the public. |
|
|
Term
|
Definition
| a group of underwriters formed to share the risk and to help sell an issue |
|
|
Term
|
Definition
| compensation to the underwriter, determined by the difference between the underwriter's buying price and offering price |
|
|
Term
| firm commitment underwriting |
|
Definition
| the type of underwriting in which the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares |
|
|
Term
| best efforts underwriting |
|
Definition
| the type of underwriting in which the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility. |
|
|
Term
| dutch auction underwriting |
|
Definition
| the type of underwriting in whcih the offer price is set based on competitive bidding by investors. also known as a uniform price auction |
|
|
Term
|
Definition
| the period after a new issue is initially sold to the public |
|
|
Term
| why does underpricing exist? |
|
Definition
| to attract investors, to reward investors for truthfully revealing worth |
|
|
Term
| the cost of issuing new securities |
|
Definition
| gross spread, other direct expenses, indirect expenses, abnormal returns, underpricing, green shoe option |
|
|
Term
| the percentage spread for over half of IPOs |
|
Definition
|
|
Term
|
Definition
| loss inexisting shareholder's value, interms of either ownership, market value, book value, or EPS |
|
|
Term
|
Definition
| direct businesss loans of, typically, one to five years |
|
|
Term
|
Definition
| loans, usually long-tmer in nature, provided directly by a limited number of investors |
|
|
Term
| differences between direct priveate long-term financing and public issues of debt |
|
Definition
| direct long-term loan avoaids SEC registration costs, more restrictive covanents, easier to renegotiate a private term loan, bond distribution costs are lower in private markets |
|
|
Term
|
Definition
| registration permitted by SEC rule 415 which allows a company to register all issues it expects to sell within two years at one time, whith subsequent sales at any time within those two years |
|
|
Term
| shelf registration qualifications |
|
Definition
| investment grade, no defaults or violations of the Securities act of 1934 in last 3 years, market value of outstanding stock must be more than $150 million, |
|
|
Term
| arguments against shelf registrations |
|
Definition
| expense of selling issues might increase because of repeated offerings, and "market overhang" |
|
|
Term
|
Definition
| how capital structures change value in the firm |
|
|
Term
|
Definition
| buy back shares and issue debt |
|
|
Term
|
Definition
| the debt to equity ratio which results in the lowest possible waac |
|
|
Term
|
Definition
| the extent that a firm relies on debt. (more debt = more leverage) magnifies gains & losses to shareholders |
|
|
