Ch. 10

Front 1

A claim against the income or assets of an individual, business, or government.

Back 1

Financial Asset

Front 2

Shares of stock, home mortgage and car loans are examples of what?

Back 2

Financial Assets

Front 3

Selling shares (external equity), issue debt (bonds), funds can be raised privately or publicly

Back 3

In addition to retained earnings, these are ways businesses can raise funds.

Front 4

Internal/external financing varies over what?

Back 4

The business cycle

Front 5

______ is a major source of external liquidity

Back 5

Common stock

Front 6

______ are a major source of long-term external financing

Back 6

Bonds

Front 7

What are some positive aspects of bonds?

Back 7

Bonds are cheaper than equity and they mature.

Front 8

______ has become more prevalent overseas for U.S. based firms

Back 8

Real assets

Front 9

What are some benefits of overseas financing

Back 9

No SEC processes and large issue capability

Front 10

A contract between borrower/lender
Bankruptcy/reorganization threat if contract is violated
Priority claim on assets, cash flow
Less return potential than equity
Little/no voice in management

Back 10

Aspects of debt capital

Front 11

Bonds
Bank loans
Commerical finance company loans

Back 11

Forms of debt capital

Front 12

coupon rate x par value = _____

Back 12

Annual coupon

Front 13

Impose restrictions or extra duties on the firm
Protect bondholder stake in the firm
Indenture and the role of the trustees

Back 13

Aspects of bond covenants

Front 14

Measure likelihood of default; influenced by level of issuer’s cash flow, investor protection in the covenants

Back 14

Bond ratings

Front 15

Lower rating > Higher risk > Higher coupon rate on new issues

Back 15

Bond rating implications

Front 16

Equipment Trust Certificate
Debentures
Subordinated Debentures

Back 16

Mortgage Bond

Front 17

Collateralized Bond (e.g., CMO)
Home mortgages
Credit card receivables
Auto loans
Royalties for music/film/TV rights

Back 17

Securitizations

Front 18

U.S. time to maturity

Back 18

10-to-30 years (typical)

Front 19

How often is there a bond income

Back 19

Semiannual

Front 20

Represents ownership
Certificate versus street name

Back 20

Corporate equity capital

Front 21

Owners of the firm
Select Directors
Dividends: when declared

Back 21

Common stock

Front 22

Lowest priority in bankruptcy
Par value--meaningless
Different classes to protect control

Back 22

Common stock

Front 23

“Preferred” over common stock with a senior claim on earnings, assets

Back 23

Preferred stock

Front 24

Fixed dividend; par value is important!
Usually non-voting

Back 24

Preferred stock

Front 25

Ability of firm to generate cash to sustain level of dividends
Legal/contractual considerations (par value, bond indenture)

Back 25

Factors in paying dividends

Front 26

Growth opportunities facing firm
Cost of other financing sources
Tax rates on dividend income

Back 26

Factors in paying dividends

Front 27

Dividend paid with shares of stock rather than cash

Back 27

Stock dividend

Front 28

Has no net effect on shareholder wealth

Back 28

Stock dividend

Front 29

Firm distributes extra shares for every share owned

Back 29

Stock split

Front 30

Share price adjusts so no change in wealth

Back 30

Stock split

Front 31

Both involve accounting entries, no impact on shareholder wealth

Back 31

Stock dividend and stock split

Front 32

Distribution over 5-4 is a _____

Back 32

Split

Front 33

Distribution under 5-4 is a ____

Back 33

Dividend

Front 34

Investors believe they are getting more and the illusion of wealth raising are why _____ are offered.

Back 34

dividend and split stocks

Front 35

Can there be an optimal price range for stocks?

Back 35

Yes

Front 36

Reward long-term shareholders as less shares should increase stock price over time;
Firm sees stock as overvalued and as a good investment of excess funds

Back 36

Reasons to buy back stock (share repurchases)

Front 37

The present value of future expected cash flows

Back 37

Price of an asset

Front 38

[(CF1)/(1+r)1] + [(CF2)/(1+r)2] + ...
CF = cash flow

Back 38

Stock valuation

Front 39

[C1/(1+rb)1] + [C2/(1+rb)2] + ... [Parn/(1+rb)n]

Back 39

Bond valuation

Front 40

EAR = YTM = (1 + r)2 – 1 then
r = (1 + YTM)1/2 – 1

Back 40

Paying coupons semiannually

Front 41

Required rate of return is inverse to bonds (i.e. rate raises bonds fallys

Back 41

Seesaw effect

Front 42

Annual interest + (par – price) / n(par + price/2)

Back 42

Approximate yield to maturity

Front 43

Higher coupons, more frequent coupons and lowered required rate of return r

Back 43

Factors for higher bond value

Front 44

Credit risk (default risk)
Interest rate risk (seesaw effect)
Reinvestment rate risk

Back 44

Risks in bond investing

Front 45

Present Value of expected future cash flows

Back 45

valuation of stocks and bonds

Front 46

indefinite life
cash flows (dividends) uncertain
discount rate hard to determine

Back 46

Why present value of stocks is more difficult to determine

Front 47

Quality of management’s ethics, decisions
Uncertainty over future dividend changes, growth changes
Changing market/investor expectations for firms, the economy
Changing interest rates

Back 47

Risks in stock valuation

Front 48

Inflation and risk premium

Back 48

Required rates of return

Front 49

Fiscal policy: affects consumers’ disposable income
Monetary policy: affects interest rates, inflation expectations

Back 49

Government's domestic economic influences

Front 50

______ are affected differently by changes in economic variables (cyclicals versus consumer staples)

Back 50

Industries

Front 51

Income received + price change = _____

Back 51

Dollar return

Front 52

Dollar return/initial price = ____

Back 52

Percent return

Front 53

(1 + percent return)1/(n - 1)

Back 53

Annualized return