Corporate Finance Final

Front 1

Contract between the company and the bondholders

Back 1

indenture agreement

Front 2

what does an indenture agreement include

Back 2

basic terms and total amount of the bonds, description of property, sinking fund and call provisions

Front 3

what are the bond issuers and their amounts

Back 3

US Treasury $1,000
Corporations $1,000
Municipalities $5,000

Front 4

No interest payments
Pays par value at maturity

Back 4

zero coupon bond

Front 5

annual coupon / price

Back 5

current yield

Front 6

Discount rate that equates the present value of future cash flows with current bond price

Back 6

yield to maturity

Front 7

Decentralized, over-the-counter trading
Most trades occur between bond dealers and large institutions
Bond prices have inverse relationship to interest rates

Back 7

bond markets

Front 8

list stocks on the DOW

Back 8

3M, IBM, AT&T, McDonald's, Merck, Wal-mart, Walt Disney, Coca-Cola

Front 9

Includes capital gain or loss as well as income

Back 9

dollar return

Front 10

Returns across different investments are more easily compared because they are standardized

Back 10

percentage return

Front 11

higher standard deviation =

Back 11

higher risk

Front 12

what are the risks of the 3 asset classes

Back 12

Stocks = most volatile LT Treasury bonds = avg T-Bills = least volatile

Front 13

average cost per dollar of capital raised

Back 13

WACC

Front 14

Measures the sensitivity of a stock or portfolio to market risk

Back 14

beta

Front 15

Beta greater than 1 =

Back 15

more risky than market (higher risk premium)

Front 16

section 179 deductions are expensed when?

Back 16

immediately

Front 17

Total PV of future project CF’s less the Initial Investment

Back 17

net present value

Front 18

number of years to recover initial costs

Back 18

payback period

Front 19

Why Use Net Present Value?

Back 19

Accepting positive NPV projects benefits shareholders

Front 20

the discount rate that sets NPV to zero

Back 20

internal rate of return

Front 21

NPV vs. IRR

Back 21

will generally yield same decisions; exceptions = Non-conventional cash flows – cash flow signs change more than once and Mutually exclusive projects

Front 22

Process of estimating expected cash flows of project

Back 22

proforma analysis

Front 23

waht is the formula for operating cash flow

Back 23

sales (var cost) (fixed cost) (deprec) = EBIT (taxes) = net income + deprec = OCF

Front 24

These provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds

Back 24

primary markets

Front 25

In the U.S., these financial institutions arrange most primary market transactions for businesses.

Back 25

investment banks

Front 26

Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in

Back 26

secondary markets

Front 27

These feature debt securities or instruments with maturities of one year or less

Back 27

money markets

Front 28

These money market instruments are short-term funds transferred between financial institutions, usually for no more than one day

Back 28

Federal funds

Front 29

These markets trade currencies for immediate or for some future stated delivery.

Back 29

foreign exchange markets

Front 30

This is the ease with which an asset can be converted into cash

Back 30

liquidity

Front 31

This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments

Back 31

default risk

Front 32

This is the continual increase in the price level of a basket of goods and services

Back 32

inflation

Front 33

The higher the default risk, the_____the interest rate that security buyers will demand

Back 33

higher

Front 34

This is the expected or "implied" rate on a short-term security that will originate at some point in the future

Back 34

Forward rate

Front 35

This index tracks 500 companies which allows for a great deal of diversification

Back 35

S&P 500

Front 36

This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification

Back 36

firm specific risk

Front 37

This is the reward for taking systematic stock market risk

Back 37

market risk premium

Front 38

Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices

Back 38

stock market bubble

Front 39

This is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements

Back 39

pro forma analysis

Front 40

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is

Back 40

sunk cost

Front 41

Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as

Back 41

complementary effects

Front 42

Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as

Back 42

substitutionary effects

Front 43

A decrease in net working capital (NWC) is treated as a

Back 43

cash inflow