Cfa Level I 2009

Front 1

Current Ratio

Back 1

Current Assets / Current Liabilities

Front 2

Current Ratio

Back 2

current assets / current liabilities

Front 3

Cash Ratio

Back 3

(cash + marketable securities) / current liabilities

Front 4

Cash Conversion Cycle

Back 4

days sales outstanding + days inventory on hand – days payables

Front 5

Days Sales Outstanding

Back 5

number of days in period (typically 365) / receivables turnover

Front 6

Days Inventory on Hand

Back 6

number of days in period (typically 365) / inventory turnover

Front 7

Days Payables

Back 7

number of days in period (typically 365) / payables turnover

Front 8

Receivables Turnover

Back 8

revenue(sales) / avg. receivables

Front 9

Inventory Turnover

Back 9

COGS / avg. inventory

Front 10

Payables Turnover

Back 10

purchases / avg. trade payables

Front 11

Capitalizing vs. Expensing Costs

Back 11

Capitalizing: increase in assets; investing cash outflow; depreciation expense on income statement (has no impact on cash flow); higher profitability ratios in the first year and lower profitability ratios in subsequent years; lower volatility in net income

Expensing: fully expensed on income statement in period of expenditure; full amount is an operating cash outflow; no effect on future financial statements; lower profitability ratios in first year and higher profitability ratios in later years; higher volatility in net income

Front 12

Basic EPS

Back 12

NI – preferred div / weighted avg. no. shares outstanding

Front 13

Diluted EPS: Convertible Preferred Stock

Back 13

if converted method: what would EPS be if converted at the beginning of period
NI / (weighted avg. no. shrs + new shrs)

Front 14

Diluted EPS: Convertible Debt

Back 14

(NI + after tax interest on convertible debt – preferred div) / (weighted avg. no. shrs + new shrs)

Front 15

Diluted EPS: Options / Warrants / Equivalents

Back 15

treasury stock method: securities are only dilutive if exercise price < avg. price
(NI – preferred div) / (weighted avg. no. shrs + new shrs issued at exercise – shrs repurchased with cash from exercise based on avg. price)

Front 16

Antidilutive Security

Back 16

do not include if inclusion causes basic EPS < diluted EPS

Front 17

Accelerated Depreciation

Back 17

step 1) calculate straight line rate (percentage): 100% / useful life

step 2) determine acceleration factor ex: 1.5x, 2x

step 3) straight line rate x acceleration factor = diminishing balance rate (percentage)

Step 4) net book value (not including residual value) x diminishing balance rate = depreciation expense

Front 18

Avg. Total Useful Life

Back 18

historical cost / annual depreciation expense
where:
historical cost = net PPE + accumulated depreciation

Front 19

Avg. Age of PPE

Back 19

accumulated depreciation / annual depreciation expense

Front 20

Avg. Remaining Useful Life

Back 20

net PPE / annual depreciation expense

Front 21

DuPont Formula (3-Part)

Back 21

ROE = (net income/revenues)(revenues/avg. total assets)(avg. total assets/avg. shareholders’ equity)
or
(net profit margin)(asset turnover)(financial leverage)

Front 22

DuPont Formula (5-Part)

Back 22

ROE = (operating income/revenue)(EBT/operating income)[1 – (taxes/EBT)](revenues/avg. total assets)(avg. total assets/avg. shareholders’ equity)
or
(operating profit margin)(effect of nonoperating items)(tax effect)(total asset turnover)(financial leverage)

Front 23

SML

Back 23

Risk/return relationship for an individual risky asset.
y-axis: E(Ri)
x-axis: βi
E(Ri) = RFR + βi(RM – RFR)

Front 24

CML

Back 24

The straight line with y-intercept RFR and tangent to the efficient frontier.
y-axis: E(Rport)
x-axis: σport

Front 25

Covariance

Back 25

Covij = ∑[Rit – E(Rit)] [Rjt – E(Rjt)]/(n-1)

Front 26

P/E

Back 26

dividend payout ratio / k-g

Front 27

g

Back 27

ROE x retention rate

Front 28

Premium Bond

Back 28

YTM < Current < Coupon (nominal)

Front 29

Discount

Back 29

YTM > Current > Coupon (nominal)

Front 30

Finance (Capital) Lease vs. Operating Lease: Lessee

Back 30

finance lease: income is lower in early years and higher in later years vs. an op. lease.
CFO is always higher vs. op. lease. CFF is always lower vs. op. lease. total CF is higher in early years and lower in later years vs. op. lease due to lower taxes paid b/c NI is lower in early years. ROE is lower in early years and higher in later years. D/E is higher

Front 31

Finance Lease

Back 31

Purchase of some asset by the buyer (lessee) that is directly financed by the seller (lessor). Lease payments made at beginning of year.

Front 32

Operating Lease

Back 32

Agreement allowing the lessee to use some asset for a period of time, essentially a rental. Lease payments made at beginning of year.

Front 33

Finance Lease Accounting: Lessee

Back 33

Balance Sheet: lessee reports an asset (leased asset) and related debt (lease payable) equal to PV of future lease payments.
Income Statement: report interest expense on the debt and depreciation expense if asset is depreciable. Interest expense in current period = value of liability x interest rate. Value of liability = beg. value – lease payment + accrued interest from prior period. Interest expense is recognized in year accrued.
Cash Flow: interest expense portion of lease payment reduces operating cash flow and portion that reduces liability reduces cash flow from financing. Interest paid is recognized in the year after it is accrued.

Front 34

Finance (Capital) Lease vs. Operating Lease: Lessor

Back 34

ROE is higher in early years for a financing lease than an operating lease.

Front 35

Operating Lease Accounting: Lessee

Back 35

Balance Sheet: no effect. Income Statement: lessee records a lease expense on the income statement during period in which the asset is used. Cash Flow: full lease payment is operating cash outflow.

Front 36

Direct Financing Lease

Back 36

Results when the present value of lease payments (also the amount recorded as a lease receivable) equals the carrying value of the leased asset. No “profit” is made, only interest revenue from providing financing for the asset. Payments made at beginning of year.

Front 37

Sales Type Lease

Back 37

Results when the present value of lease payments (also amount recorded as lease receivable) is greater than the carrying value of the leased asset. Profit is made on the “sale” of the asset. Payments made at beginning of year.

Front 38

Operating Lease Accounting: Lessor

Back 38

Balance sheet: continue to report leased asset on balance sheet. Income statement: report lease revenue when earned. Continue to record depreciation expense on asset. Cash flow: depreciation is added back to net income.

Front 39

Finance Lease Accounting: Lessor, Direct Financing Lease

Back 39

Balance sheet: report lease receivable based on the PV of future lease payments. Reduce assets by the carrying value of the leased asset. Lease receivable is reduced by the value of lease payment less accrued interest from the previous year. Income statement: only source of revenue is interest revenue which is reported in the year accrued. Cash flow: interest received is an operating cash flow and will be recognized as a net change in interest receivable i.e. accrued interest will increase interest receivable and lease payments will reduce accrued interest.

Front 40

Finance Lease Accounting: Lessor, Sales-type Lease

Back 40

See direct financing lease, except that in year of inception, on income statement, report a profit on sale equal to difference between PV of future lease payments and carrying value.

Front 41

Duration

Back 41

V- - V+ / 2V0∆y

Front 42

Approximate Price Change Using Duration

Back 42

-duration x Δy* x 100

Front 43

Effective Duration

Back 43

Duration measure in which recognition is given to the fact that yield changes may change the expected cash flows.

Front 44

Modified Duration

Back 44

Duration measure in which it is assumed that yield changes do not change the expected cash flows.
Macaulay duration / (1 + YTM/k)
where:
k = no. periods per year

Front 45

Macaulay Duration

Back 45

[(PVCF1) + 2( PVCF2) + … + n(PVCFn)]/kPrice
where:
k = no. periods per year

Front 46

Convexity Adjustment

Back 46

C x (Δy*)^2 x 100
where:
C = (V- + V+ - 2V0)/ 2V0(∆y)^2

Front 47

Quantity Theory of Money

Back 47

MV = PY
where:
M = money supply
V = velocity
P = price level
Y = real GDP

Front 48

Percentage of Completeion

Back 48

For use when project’s costs and revenue can be reliably estimated. Revenue, expense and profit are recognized as the work is performed. Measured by: total to date / total expected cost. Any expected loss is recognized immediately. Cash flow is the same under both methods.

Front 49

Completed Contract Method

Back 49

For use when outcome of project cannot be reliably measured or project is short term. Revenue, expense, and profit are only recognized after project is complete. Any expected loss is recognized immediately. Cash flow is the same under both methods.

Front 50

Installment Method

Back 50

For use when proceeds from sale are to be paid in installments over an extended period. The portion of the total profit of the sale that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash.

Front 51

Cost Recovery Method

Back 51

For use when proceeds from sale are to be paid in installments over an extended period. Seller does not record profit until cash amounts paid by the buyer – including principal and interest on any financing from the seller – are greater than all the seller’s costs.

Front 52

Additions to Net Income Using Indirect Method: Operating CF

Back 52

Noncash items
depreciation expense
amortization expense
depletion expense of natural
resources
amortization of bond discount
Nonoperating losses
loss on sale or write down of
assets
loss on retirement of debt
loss on investments
accounted for under equity
method
Inc. on deferred income tax
liability
Inc. in accounts payable
Dec. in accounts receivable
Dec. in inventory
Dec. in prepaid expenses
Inc. in salary and wage
payable
Inc. interest payable
Inc. in income tax payable
Inc in other accrued liabilities

Front 53

Free Cash Flow to the Firm (FCFF)

Back 53

NI + noncach charges + interest exp(1 – tax rate) – fixed capital inv. – working capital inv. or CFO + interest exp.(1 – tax rate) – fixed capital inv.

Front 54

Free Cash Flow to Equity FCFE

Back 54

CFO – fixed capital inv. + net borrowing

Front 55

Confidence Interval

Back 55

point estimate ± reliability factor x std error
where:
point estimate = sample
statistic
reliability factor = a number
based on the assumed
distribution of the point
estimate and the degree of
confidence (1 – α) for the
confidence interval

Front 56

Z-Statistics for Normal Distribution: 90, 95, 99 Percent Confidence

Back 56

90 percent: 1.65
95 percent: 1.96
99 percent: 2.58

Front 57

Confidence Interval for Population Mean w/ Known Variance

Back 57

Xbar ± zα/2(σ/√n)

Front 58

Confidence Interval for Population Mean w/Unknown Variance

Back 58

Xbar ± zα/2(s/√n)

Front 59

Test Statistic

Back 59

(sample statistic – value of the population parameter under H0)/std error

Front 60

Power of Test

Back 60

Probability of correctly rejecting the null (aka β). Also, 1 minus probability of a Type II error

Front 61

p-Value

Back 61

The smallest level of significance at which the null hypothesis can be rejected. Also, the probability of obtaining a result at least as extreme as the one that was actually observed. If p-value < level of significance, reject null.

Front 62

Chebyshev’s Inequality

Back 62

The proportion of observations within k std deviations of the mean is at least:
1 – 1/k^2 for all k>1

Front 63

Standard Error

Back 63

Known variance:
σxbar = σ/√n
Unknown variance:
sxbar = s/√n
where:
σ = population std deviation
s = sample std deviation

Front 64

t-test

Back 64

Uses t-distribution which has a std deviation > 1 and fatter tails.
tn-1 = (Xbar - µ0)/(s/√n)

Front 65

Coefficient of Variation

Back 65

CV = s/Xbar

Front 66

Probability of Type I Error

Back 66

α or level of significance

Front 67

z-test

Back 67

Uses normal distribution. Must have known variance.
Large sample: Z = (Xbar - µ0)/(σ/√n)
Small sample: z = (Xbar - µ0)/(s/√n)

Front 68

Bank Discount Yield

Back 68

Used for T-bills
(D/F)(360/t)
where:
D = dollar discount (face
value – purchase price)
F = face value
t = number of days until
maturity

Front 69

Money Market Yield

Back 69

Compared to bank discount, money market is computed based on purchase price
RBD(F/P0)
or
360RBD/(360 – (t)RBD)
or
HPY(360/t)

Front 70

Effective Annual Yield

Back 70

(1 + HPY)^(365/t) – 1

Front 71

Bond Equivalent Yield

Back 71

2(semiannual YTM)

Front 72

Permutation

Back 72

The number of ways to choose r objects from a total of n objects when the order does matter
n!/(n – r)!

Front 73

Combination

Back 73

The number of ways to choose r objects from a total of n objects when the order does not matter
n!/(n – r)!r!

Front 74

Absolute Frequency

Back 74

The number of observations in a given interval

Front 75

Relative Frequency

Back 75

The number of observations in a given interval divided by the total number of observations in the data set. Essentially the percentage of the total number of observations found within a given interval.

Front 76

Cumulative Frequency

Back 76

Adds up the absolute frequencies as we move from the first to the last interval.

Front 77

Cumulative Relative Frequency

Back 77

Adds up the relative frequencies as we move from the first to the last interval.

Front 78

Time Weighted Return

Back 78

Measures the compound rate of growth of $1 initially invested in the portfolio over a stated period.

Front 79

Histogram

Back 79

A bar chart of data that have been grouped into a frequency distribution. Each bar represents the number of observations in the interval.

Front 80

Frequency Polygon

Back 80

Plot the midpoint of each interval on the x-axis and the absolute frequency for that interval on the y-axis. Essentially a line graph.

Front 81

Position of a Percentile

Back 81

Ly = (n + 1)(y/100)
where:
Ly = location of the
observation if observations
are in ascending order
n = number of observations
y = percentage point at which
we divide the distribution

Front 82

Mean Absolute Deviation

Back 82

∑|Xi – Xbar|/n

Front 83

Population/Sample Variance

Back 83

∑(Xi - µ)^2/N
and
∑(Xi - µ)^2/(n – 1)

Front 84

Population/Sample Standard Deviation

Back 84

√[∑(Xi - µ)^2/N]
and
√[∑(Xi - µ)^2/(n – 1)]

Front 85

Sample Skewness

Back 85

≈(1/n)∑(Xi – Xbar)^3/s^3

Front 86

Sample Excess Kurtosis

Back 86

≈ [(1/n) ∑(Xi – Xbar)^4/s^4] – 3
Leptokurtic (more peaked than normal, fat tails): excess kurtosis > 0
Platykurtic (less peaked than norma, skinny tails): excess kurtosis < 0

Front 87

Odds for E Give Probability of E

Back 87

P(E)/[1 – P(E)]
Ex: probability E = 1/8; odds = (1/8)/[1 – (1/8)] = (1/8)(8/7) = 1/7

Front 88

Probability of E Given Odds for E

Back 88

Given odds “a to b”
P(E) = a/(a + b)

Front 89

Odds against E Given Probability of E

Back 89

Reciprocal of odds for E
[1 – P(E)]/ P(E)
Ex: probability E = 1/8; odds = [1 – (1/8)]/(1/8) = (7/8)(8) = 7/1

Front 90

Probability of E Given Odds against E

Back 90

Given odds “a to b”
P(E) = b/(a + b)

Front 91

Joint Probability/Multiplication Rule, P(A and B)

Back 91

P(AB) = P(A|B)P(B) = P(BA) = P(B|A)P(A)

Front 92

Conditional Probability, P(A given B)

Back 92

P(A|B) = P(AB)/P(B)

Front 93

Addition Rule , P(A or B)

Back 93

P(A or B) = P(A) + P(B) – P(AB)

Front 94

Definition of Independent Event

Back 94

Two events A and B are independent if and only if:
P(A|B) = P(A) or P(B|A) = P(B)

Front 95

Multiplication Rule for Independent Events

Back 95

P(AB) = P(A)P(B)

Front 96

Total Probability Rule/Unconditional Probability of an Event

Back 96

P(A) = P(AS) + P(ASc) = P(A|S)P(S) + P(A|Sc)P(Sc)
where:
S = event S
Sc = complement of s, event not-S
P(S) + P(Sc) = 1

Front 97

Bayes' Formula

Back 97

Updated probability of an event given new information.
(probability of the new information given the event)/(unconditional probability of new information) x prior probability of event

Front 98

Correlation

Back 98

Cov(Ri,Rj)/σ(Ri)σ(Rj)

Front 99

Calculate Margin Call Price

Back 99

D/(1 - MR)
where:
D = debt
MR = maintenance req

Front 100

Univariate Distribution

Back 100

Describes a single random variable. Ex: return on a single stock.

Front 101

Multivariate Distribution

Back 101

Specifies the probabilities for a group of related random variables. Ex: return on a group of stocks.

Front 102

Standard Normal Distribution

Back 102

mean = 0
std deviation = 1

Front 103

Z

Back 103

Standard normal random variable, aka standardized.
(X - µ)/σ

Front 104

Price Relative

Back 104

(ending price)/(beg price)
or
1 + HPY

Front 105

Continuos Compounding

Back 105

e^rN
where:
r = annual rate
N = number of periods

Front 106

Unbiasedness

Back 106

An unbiased estimator is one whose expected value equals the parameter it is intended to estimate.

Front 107

Eifficiancy

Back 107

An unbiased estimator is efficient if no other unbiased estimators of the same parameter has a sampling distribution with smaller variance.

Front 108

Consistency

Back 108

A consistent estimator is one for which the probability of estimates close to the value of the population parameter increases as the sample size increases.

Front 109

Tests Concerning Mean Differences

Back 109

Essentially same formulas used for tests concerning a single mean, except sub Xbar for di (difference between two means).

Front 110

Chi-square

Back 110

Test concerning a single variance (normal population.
Χ^2 = [(n - 1)s^2]/σ0^2
where:
s^2 = sample variance
σ0^2 = variance given in null hypothesis

Front 111

F

Back 111

Test concerning differences between variances of two populations (normal population).
F = s1^2/s2^2*
*convention is to use the larger of the two ratios, s1^2/s2^2 or s2^2/s1^2, thus F≥1

Front 112

Nonparametric test

Back 112

Test that is not concerned with a parameter as are the t, z, X^2, and F tests.

Front 113

Barron's Confidence Index

Back 113

Ratio of Barron's average yield on 10 top-grade corporate bonds to the yield on the Dow Jones average of 40 bonds. The larger the ratio the more confidence investors have as this singles that investors are moving from high grade to lower grade bonds thereby reducing the spread.

Front 114

T-Bill-Eurodollar (TED) Spread

Back 114

Spread between T-bill and Eurodollar rates. A large spread indicates fears over conterparty risk as money flows away from lending between banks to safe-haven US T-bills. As spread widens ratio decreases. Thus, a larger ratio indicates increased confidence.

Front 115

Elasticity Along Straight Line Demand Curve

Back 115

Elastic at top of curve (low quantity demanded). Unit elastic in the middle of curve. Inelastic at bottom of curve (high quantity demanded).

Front 116

Total Revenue Test

Back 116

If price cut increases revenue, demand is elastic.
If price cut decreases revenue, demand is inelastic

Front 117

Elasticity of Demand

Back 117

%ΔQ/%ΔP
or
(ΔQ/Qave)/(ΔP/Pave)
where:
Ex: P goes from $10 to $5. Avg.= (10 + 5)/2 = 7.5

Front 118

Underproduction and Overproduction

Back 118

Create deadweight loss

Front 119

Subsidy

Back 119

Creates deadweight loss from overproduction.

Front 120

Technological Efficiency

Back 120

Occurs when the firm produces a given output by using the least amount of inputs.

Front 121

Economic Efficiency

Back 121

Occurs when the firm produces a given output at the least cost.

Front 122

Four-firm Consentration Ratio

Back 122

The percentage of the value of sale accounted for by the four largest firms in an industry.

Front 123

Herfindahl-Hirschman Index (HHI)

Back 123

(percentage mkt share X 100)^2

Front 124

Long Run Equilibrium

Back 124

Firms produce at the point where long run average total cost is minimized. If this point equals marginal revenue, the firm and the industry are at long run equilibrium.

Front 125

Regulation of Natural Monopoly

Back 125

Marginal cost pricing rule: Set P = MC. Often results in economic loss for the firm.

Average cost pricing rule: Set P = LRAC. Allows firm to earn 0 economic profit.

Front 126

Nash Equilibrium

Back 126

Player A takes the best possible action given the action of player B and player B takes the best possible action given the action of player A.

Front 127

Marginal Revenue Product

Back 127

Change in total revenue that results from employing one more unit of labor.

Front 128

Two Conditions for Max Profit

Back 128

MC = MR
MRP = W

Front 129

Elasticity of Demand for Labor

Back 129

Labor intensity: the greater the degree of labor intensity, the more elastic is the demand for labor.
Demand for good: the greater the elasticity for the good, the larger is the elasticity of demand for labor.
Substitutability of capitial: the more easily capital can be used instead of labor, the more elastic is the long-run demand for labor.

Front 130

FRA

Back 130

[(notional principal)(floating - forward)(d/360)]/[1 + floating(d/360)

Front 131

P/B

Back 131

market value of equity / book value of equity
where:
book value of equity = (total assets − total liabilities) − preferred stock

Front 132

P/CF

Back 132

market value of equity / cash flow
where:
cash flow = adjusted CFO, FCFE, or EBITDA

Front 133

P/S

Back 133

market value of equity / total sales
or
price/sales per share

Front 134

Yield Curve Risk

Back 134

The risk of decreases in portfolio value from changes in the shape of the yield curve (i.e., from non-parallel shifts in the yield curve)

Front 135

Default Risk

Back 135

The possibility that the issuer will fail to meet its obligations under the indenture.

Front 136

Credit Spread Risk

Back 136

Refers to the fact that the default risk premium required in the market for a given rating can increase, even while the yield on Treasury securities of similar maturity remains unchanged.

Front 137

Downgrade Risk

Back 137

The risk that a credit rating agency will lower a bond’s rating.

Front 138

Event Risk

Back 138

Include the possibilty of disasters, corporate restructurings, regulatory issues

Front 139

Pure Expectations Theory

Back 139

States that the yield for a particular maturity is an average (not a simple average) of the short term rates that are expected in the future.

Front 140

Liquidity Preference Theory

Back 140

States that, in addition to expectations about future short term rates, investors require a risk premium for holding longer term bonds. This is consistent with the fact that interest rate risk is greater for longer maturity bonds.

Front 141

Market Segmentation Theory

Back 141

Based on the idea that investors and borrowers have preferences for different maturity ranges. Under this theory, the supply of bonds (desire to borrow) and the demand for bonds (desire to lend) determine equilibrium yields for the various maturity ranges.

Front 142

Absolute Yield Spread

Back 142

The difference between yields on two bonds.

Front 143

Relative Yield Spread

Back 143

The absolute yield spread expressed as a percentage of the yield on the lower-yield bond.

absolute yield spread/yield on benchmark bond

Front 144

Yield Ratio

Back 144

subject bond yield/benchmark bond yield

Front 145

1f0

Back 145

1 year forward rate 0 periods from now

Front 146

European/American Call

Back 146

Min:
ct ≥ max [0, St − X / (1 + RFR)^(T − t)]

Max:
St

Front 147

European Put

Back 147

Min:
pt ≥ max [0, X / (1 + RFR)^(T − t) − St]

Max:
X / (1 + RFR)^(T − t)

Front 148

American Put

Back 148

Min:
Pt ≥ max [0, X − St]

Max:
X

Front 149

Put-Call Parity w/ Cash Flow Adjustment

Back 149

C + X / (1 + RFR)T = (S0 – PVCF) + P

Front 150

Currency Swap

Back 150

In a currency swap, the notional principal is exchanged, and each party makes interest payments to the other, but in different currencies. At the end of the swap, the notional principal is once again exchanged.

Front 151

Plain Vanilla Swap

Back 151

A "basic" interest rate swap - one party pays a fixed rate and the other party pays a floating rate, and at the end, the party owing the greater amount pays the next difference.

Front 152

Equity Swap

Back 152

The return on a stock, a portfolio, or a stock index is paid each period by one party in return for a fixed-rate or floating-rate payment. The return can be the capital appreciation or the total return including dividends on the stock, portfolio, or index. Note that the party that makes the fixed-rate payment may also have to make a variable payment if the equity return is negative.

Front 153

NOI

Back 153

Net operating income of real estate property. Calculated as the income generated from the property after deducting vacancy expense, manitenence, incurance, and property taxes from gross income. NOI does not consider income taxes, financing charges, or depreciation.

Front 154

Income Approach (Real Estate)

Back 154

NOI/cap rate

Front 155

Sales Comparison Approach

Back 155

Based on sales prices of comparable properties. Valuation can then be done relative to a specific similar property or relative to a benchmark such as the median home price in the area. Then additions/subtractions (e.g., size, location, vacancy) are made to estimate the value of the subject property. Another approach under the general heading of sales comparison methods is hedonic price estimation.

Front 156

Stages of Venture Capital Investing

Back 156

Seed Stage: Investors are providing capital in the earliest stage of the business and may help fund research and development of product ideas.
Early Stage: Early stage financing includes:
Start-up financing, which typically refers to capital used to complete product development and fund initial markets.
First stage financing, which refers to the funding of the transition to commercial production and sales of the product.
Formative Stage: Broad category which encompasses the seed stage and early stage.
Later Stage: Marketable goods are in production and sales efforts are underway, but the company is still privately held. Within the later stage period, second-stage investing describes investments in a company that is producing and selling a product but is not yet generating income. Third-stage financing would fund a major expansion of the company. Mezzanine or bridge financing would enable a company to take the steps necessary to go public.

Front 157

Valuation of Closely Held Companies

Back 157

The cost approach: What is the cost today to replace the company’s assets in their present state?
The comparables approach: What is the value relative to an appropriate benchmark value? The benchmark would be based upon market prices of similar companies, adjusted for unique characteristics. The benchmark may be difficult to establish if no comparable companies have been sold recently.
The income approach: What is the net present value of the company based upon discounted future cash flows?

Front 158

Collateralized Commodities Futures Position

Back 158

Requires simultaneously purchasing a specific futures contract and purchasing government securities equal to the value (not the purchase price) of the futures contract. The total return will equal the change in price of the futures contract plus the interest earned on the government securities.

Front 159

Short-run Phillips Curve

Back 159

Constructed by holding expected inflation and the natural rate of unemployment constant, and illustrates the negative relationship between unexpected inflation and unemployment.

Front 160

Long-run Phillips Curve

Back 160

The curve is vertical at the natural rate of unemployment, which can be affected by the size and makeup of the labor force, changes that affect labor mobility, and advances in technology that replace some jobs and create new ones.