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57 Cards in this Set
- Front
- Back
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What is Corporate Finance
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The study of what investments to take on, how to finance these investments, and how to manage day to day operations.
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three areas of the Financial Management Function
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Investments, financing, payouts
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What is Capital Budgeting
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(Investing) identifying investment opportunities
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Capital Structure:
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Financing) The mixture of debt and equity a company has
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How is an S-Corporation tested
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like a partnership
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How many owners can an S-Corporation have?
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100
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What 3 things affect capital budgeting decisions
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Timing, Risk, SIze
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3 ways companies proceed after successful investments
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1) dividends
2) repurchase stock 3) Reinvest |
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What liability to general partners have after the company fails
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unlimited
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What liability do limited partners have after company fails
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limited
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What is the goal of financial Managements?
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to maximize the current stock price(shareholder's wealth)
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Continuous Compounding Equation
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(e^Q)-1
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What is an Indenture
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a statement that explains the bondholder's their rights
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What is the key risks that bonds have
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Credit Risk- the risk of default
(Bond Ratings solve this) |
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What are the 2 objects of value in a fixed coupon bond
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PV of Bond and PV of all future coupon payments
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What are the four well known credit rating agencies?
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1) Moody's
2) S & P 3) Fitch 4) Duff & Phelps |
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Investment Grade Bonds
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Baa or better
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Speculative Grade Bonds
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Baa or Worse
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What types of Bonds are banks allowed to invest in?
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Investment Grade
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What are the 6 methods of assesing capital Budgeting
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1) NPV
2) IRR 3) Payback 4) Discounted Payback 5) Profitability Index 6) Average Account Return |
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When are projects accepted under the profitability index
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if it is greater than 1
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When projects are mutually exclusive what decision making tool will lead to the right decision and what wont
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NPV will. but, PI won't
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When is the profitability index useful
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when investment capital is limited
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When should a project be accepted under the IRR rule
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When the IRR is greater than the required return
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When do NPV and IRR agree?
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When projects are conventional and independent
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What does it mean to have a mutually exclusive project
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Accepting one prevents you from accepting another
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Advantages of the Payback method
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adjust for extra riskiness of long-term projects and favor investments that free up cash quicker
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Disadvantages of the Payback method
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biased against long-term projects
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What is the average accounting return
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Average net income/ Average Total Assets
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What are the disadvantages of the Average Accounting Return Method?
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1) does not consider the time value of money
2)requires an arbitrary cutoff 3) it is based on book values instead of cash flows or market values |
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Can flawed project evaluation methods help?
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only if it helps confirm that NPv is right
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Which of the following cash flows are included in a DCF
1) Sunk Costs 2) Opportunity Costs 3) Side/ Spillover effect (changes in the future cash flow of another project) 4) NWC Costs 5) Financing Costs |
Are:
1) Opportunity Costs 2) Spillover costs 3) NWC Are not: 1) Sunk Costs 2) Financing Costs |
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What does MACRS stand for
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Modified Accelerated Cost Recovery System
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What are the 3 types of classes of MACRS Depreciation
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3, 5, 7 years
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What is the implicit Assumption for MACRS Depreciation?
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that the first and last year are .5 years. So, the objects are actually depreciated over 4,6,or 8 years.
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What are the 3 types of stock valuation models
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1) Zero growth
2) Constant Growth 3) Non-Constant growth |
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What is the terminal Value
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PV of the future cash flows during constant growth period
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What Firm valuation method is valuable for companies that don't pay dividends
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Free Cash flow Approach
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What is FCFF
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Free Cash flow to the Firm
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What is FCFE
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Free Cash Flow to Equity Holders
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If the capital structure of a firm will be changing in the future, should you used FCFE or FCFF
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FCFF
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What is the discount rate for FCFF
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WACC
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What is the market Value of Equity
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Firm value- market value of debt
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What does Equity value per share equal
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Market Value of Equity/ Number of Shares
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What are the 4 important shareholder rights
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1) right to vote for directors and on shareholder amtters
2) receive dividends 3) receive residual assets after liquidation 4) Premptive Right |
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What are the 4 rights of preferred Stockholders
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1.Receive dividends before shareholders
2.Dividends are cumulative if not paid 3.Has stated liquidation value 4.Pays a fixed dividend |
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what is a bearer bond
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whoever physically has coupon slip gets payments
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what is a registered form bond
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the registered person gets the coupon payments
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Bonds that fall to junk bond status are called what?
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fallen angels
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what is the dividend yield
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dividend/ current price
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What is the capital Gains Yield?
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rate at which the invest grows
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What does FCFF stand for?
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Free Cash flow to the firm- (Bondholders and shareholders)
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WHat does FCFE stand for?
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Free Cash Flow to Equity Holders
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If capital structure will be changing in the future, do you use FCFE or FCFF
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FCFF
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equation for market value of equity
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Equity Value-market value of debt
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In the FCFE Approach, specifically for calculating the monthly cash flow, do you use per share numbers or firm wide numbers
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firm wide
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R and D is an example of what kind of cost
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sunk cost
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