Corporate Finance

Front 1

Prospectus

Back 1

A legal document describing details of the issuing corporation and the proposed offering to potential investors
- given to potential investors by the firm
- contains much of the information put into the registration statement

Front 2

Red Herring

Back 2

a) A preliminary prospectus distributed to prospective investors in a new issue of securities
- Called red herring because bold red letters are printed on the cover

Front 3

Seasoned equity offerings

Back 3

a) New issue for a company with securities that have been previously issued
- Can be made by using a cash offer of a rights offer

Front 4

Green Shoe Provision

Back 4

A contract provision giving the underwriter the option to purchase additional shares from the issuer at the offering price.

Front 5

Shelf Registration

Back 5

a) Registration permitted by SEC Rule 415, which allows a company to register all issues it expect to sell with two years at one time, with subsequent sales any time within those two years
- Can register the issue and sell it anytime during two-year period

Front 6

Cash flow timeline

Back 6

a) Graphical representation of the operating cycle and the cash cycle
Cash cycle is the time between cash disbursement and cash collection
- Operating cycle is the time period between the acquisition of inventory and the collection of cash from receivables

Front 7

Shortage costs

Back 7

a) Costs that fall with increases in the level of investment in current assets
- Opposite of carrying cost: Costs that rise with increases in the level of investment in current assets
- Managing current assets involves a trade-off between costs that rise and costs that fall with the level of investment.

Front 8

Inventory Loans

Back 8

a) A secured short-term loan to purchase inventory
- Three types
(1) Blanket inventory lien: A blanket lien gives the lender a lien against all the borrower’s inventory
(2) Trust receipt: A trust receipt is a device by which the borrower holds specific inventory in “trust” for the lender
(3) Field warehouse financing: In field warehouse financing, a public warehouse company, which is an independent company that specializes in inventory management, acts as a control agent to supervise the inventory for the lender

Front 9

Float

Back 9

a) The difference between the book, or ledger, cash balance and the available, or collected, balance, representing the net effect of checks in the process of clearing
- Book or ledger balance – Available or collected balance
- Two Types
(1) Disbursement float: Checks written by a firm generate disbursement float, causing a decrease in the firm’s book balance but no change to the available balance
(2) Collection float: Checks received by the firm generate collection float, causing an increase to the book balance but no change to the available balance
**Net float is the difference between disbursement float and collection float
(a) If net float is positive, then disbursement float exceeds collection float
(b) If net float is negative, then collection float exceeds disbursement float

Front 10

Credit Cost Curve

Back 10

a) Graphical representation of the sum of the carrying costs and the opportunity costs of a credit policy
- Helps determine the optimal amount of credit
i) If the firm extends more credit that optimal level, the additional net cash flow from new customers will not cover the carrying costs of the investment in receivables. If the level of receivables is below this amount, the firm is forgoing valuable profit opportunities

Front 11

Economic Order Quantity (EOQ)

Back 11

a) The restocking quantity that minimizes the total inventory costs
- Q=Square root of 2TxF/CC
(1) T= firm’s total unit sales per year
(2) CC=carrying cost

- Measure the helps establish the optimal inventory level

Front 12

Material Requirement Planning

Back 12

A set of procedures used to determine inventory levels for demand-dependent inventory types such as work-in-progress and raw materials

Front 13

American Depository Receipt (ADR)

Back 13

a) Security issued in the U.S. representing shares of a foreign stock, allowing that stock to be traded in the U.S.
i) Issued in U.S. dollars
ii) Used by foreign companies to expand the pool of potential U.S. investors
- Two Types:
(1) Company sponsored: listed on an exchange
(2) Unsponsored: Held by investment banks

Front 14

Libor

Back 14

a) The rate most international banks charge one another for overnight Eurodollar loans
i) Cornerstone in the pricing of money market issues and other debt issues by government and corporate borrowers.

Front 15

Purchasing Power Parity (PPP)

Back 15

a) The idea that the exchange rate adjusts to keep purchasing power constant among currencies
- Two Types
(1) Absolute PPP: A commodity costs the same regardless of what currency is used to purchase it or where it is selling, once u take exchange rate into account. Theory might not hold for many goods bec. trade-able goods aren't always perfect substitutes in different countries.
(2) Relative PPP: Tells us what determines the change in the exchange rate over time. (inflation rate). Tells us that the relationship btw the inflation rates of 2 countries over a specified period & the movement of exch rates btw 2 countries determines the exch rates.

Front 16

Interest Rate Parity (IRP)

Back 16

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate
F1/S0 = (1 +Rpc)/(1+Rus)

Front 17

11) What does EOQ model determine for the firm/which cost component of the EOQ does JIT inventory model minimize it?

Back 17

ECQ is the restocking quantity that minimizes the total inventory costs. It is measured by Q=Square root of 2TxF/CC. The ECQ model helps determine the optimal inventory level for a firm. Just in time inventory is a system for managing demand-dependent inventories that minimizes inventory holdings. JIT minimize inventories, which leads to a decrease in carrying costs, a cost component of ECQ, thereby maximizing turnover. The result of the JIT system is that inventories are reordered and restocked frequently.

Front 18

13) What is the IRP - and why do you expect it to hold more closely to than ppp and why

Back 18

Interest rate parity will hold more closely than PPP because IRP plays an essential role in foreign exchange markets, linking interest rates, spot exchange rates and foreign exchange rates.