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51 Cards in this Set
- Front
- Back
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Three big corporate finance questions
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1. What long-term investments should you take on?
2. Where will you get the long-term financing to pay for your investment 3. How will you manage your everyday financial activities? |
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capital budgeting
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the process of planning and managing a firm's long-term investments
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capital structure
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the mixture of debt and equity maintained by a firm
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working capital
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a firm's short-term assets and liabilities.
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sole proprietorship
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business owned by a single individual. simplest type, easiest to start
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partnership
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a business formed by two or more owners. general and limited
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limited partnership
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one or more general partners run the business and have unlimited liability, but there will be one or more limited partners who will not actively participate in the business. liability limited to amount of capital contributed
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corporation
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the most important form (in terms of size) in US. a business created as a distinct legal entity composed of one or more individuals or entities.
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significant disadvantage to corporation
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double taxation
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goal of financial management
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maximize the current value per share of the existing stock
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corporate finance
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the study of the relationship between business decisions and the value of the stock in the business
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Sarbanes-Oxley Act
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2002 requires CFO and CEO to verify and declare there are no false statements. personally responsible if there are.
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agency relationship
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the relationship between stockholders and management.
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agency problem
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conflict of interest between stockholders (principals) and managers (agents)
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agency costs
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the costs of the conflict of interest between stockholders and management. indirect & direct.
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managerial compensation
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economic incentive to increase share value - with stock options and possible promotion
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stakeholder
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someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm
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primary financial markets
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the original sale of securities by government and corporations
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secondary financial markets
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market where securities are bought and sold after the original sale
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dealer market
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dealers buy and sell for themselves at their own risk. also referred to as Over- The- Counter (OTC) markets
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auction market
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has a physical location (like Wall Street) most of the buying & selling is done by the broker. dealers play very limited role
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NYSE
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New York Stock Exchange, accounts for more than 85% of all shares traded in auction markets. most stringent requirements for being listed in US. requires mkt value of $100 million
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future value (FV)
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the amount an investment is worth after one or more periods
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compounding
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the process of accumulating interest on an investment over time to earn more interest
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interest on interest
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interest earned on the reinvestment of previous interest payments
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simple interest
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interest is not reinvested, so interest is earned each period on original principal
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compound interest
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interest earned on both the initial principal and the interest reinvested from prior periods
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present value (PV)
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the current value of future cashflows discounted at the appropriate discount rate
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discount
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calculate the present value of some future amount
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discount rate
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the rate used to calculate the present value of future cash flows.
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discounted cash flow (DCF) valuation
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calculating the present value of a future cash flow to determine its value today
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Future value formula
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FV = PV(1+r)^t
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Present Value formula
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PV= FV/[(1+r)^t]
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annuity
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a level stream of cash flows for a fixed period of time.
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perpetuity
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an annuity in which the cash flows continue forever
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annuity due
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an annuity for which the cash flows occur at the beginning of the period
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stated interest rate
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the interest rate expressed in terms of the interest payment made each period. Also known as "quoted interest rate"
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effective annual rate (EAR)
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the interest rate expressed as if it were compounded once per year
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Risk Premia
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the extra return earned by a risky asset relative to a risk-free asset
=Ri-Rf (Ri - return on some asset, Rf return on risk-free asset) |
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weak form efficiency
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market prices reflect all historical information
-discredits technical analysis or "charting" |
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semi-strong form efficiency
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market prices reflect ALL public information
-implies the fundamental analysis is pointless, price already reflects all information contained in financial statements -insider info is the only way to "beat" the market --if the market is semi-strong it MUST ALSO BE weak form This is our market. |
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strong form efficiency
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market prices reflect ALL public AND private info
-- not true, simply provides a benchmark -- i a market is strong, it must ALSO be semi strong and weak. |
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total return
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= expected return + systematic portion + unsystematic portion
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standard deviation
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is the SQUARE ROOT of the variance
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WACC
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WeRe + WdRd (1-t) + WpRp
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WACC is determined by
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the component costs of financing the firm
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Value of the firm =
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equity + debt + preferred stock
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WACC measures
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the MARGINAL cost of capital and the AFTER TAX cost of capital (hence the 1-t)
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pure play approach
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find a firm that specializes in the product or service that your division is considering. calculate their beta.
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subjective approach
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simply adjust the WACC up an arbitrary amount if project is more risky than average, and down if the project is less risky in average.
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flotation costs
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when a firm issues securities to the public, it will incur flotation costs. (bankers, lawyers, regulatory agencies, etc) costs also include opportunity cost
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