Fin310 Ch. 7, Ch. 8, And Ch. 9

Front 1

Non-constant growth

Back 1

A share of common stock which dividends are expected to grow at different rates for a finite length of time and then grow at a constant rate forever.

Front 2

Build cash flows

Back 2

Compute the dividends until growth levels off. Identify the dividends that will grow constant.

Front 3

Board of Directors

Back 3

Body of elected members that jointly oversees the activities of the firm.

Front 4

Cumulative election method

Back 4

Where a shareholder may cast all votes for one member of the board of directors (permit minority participation). Votes = shares*number of Directors. Directors are elected all at once

Front 5

Straight election method

Back 5

Where a shareholder may cast all votes for each member of the board of directors. Votes = shares. Each Director is elected one at a time

Front 6

Proxi

Back 6

A grant of authority by a shareholder allowing other individual to vote that shareholder’s shares

Front 7

Stock market

Back 7

A place in which share are issued and traded

Front 8

Primary market

Back 8

the market in which new securities are originally sold to investors (IPO)

Front 9

Secondary market

Back 9

The market in which previously issued securities are traded among investors. Ex. e-trader.com

Front 10

NASDAQ

Back 10

National Association of Securities Dealers Automated Quotation system

Front 11

Dealers

Back 11

Are those firms who maintains a securities’ inventory and it is ready to buy or sell at any time making a profit from ask-bid spread

Front 12

Brokers

Back 12

Are those firms who arrange security transactions among investors (buyers and sellers) by charging a fee commission

Front 13

Main differences between NASDAQ and NYSE

Back 13

1. NASDAQ online and NYSE is a physical building
2. NASDAQ has a multiple market maker system rather than a specialist one

Front 14

Goal of financial management

Back 14

To increase the value of the firm by maximizing investments while minimizing financing.

Front 15

Capital Budgeting

Back 15

The process in which a firm decides what long-term investment projects are worth pursuing.

Front 16

Net Present Value

Back 16

The difference between an investment’s market value and its cost. Number of years until positive balance – (Cumulative cash flow balance/Year cash flow). A project is acceptable if NPV is positive.

Front 17

Average Accounting Return (ARR)

Back 17

An investment average net income divided by its average book value. ARR = Average net income / Average book value.

Front 18

Payback period

Back 18

The amount of time required for an investment to generate sufficient cash flows to recover its initial cost. Number of years until positive balance – (Cumulative cash flow balance/Year cash flow). An investment is acceptable if its calculated payback period is less than some pre specified number of years.

Front 19

Internal Rate of Return (IRR)

Back 19

The discount rate that makes the NPV of an investment zero. An investment is acceptable if the IRR exceed the required return.

Front 20

Mutually Exclusive Investment

Back 20

The acceptance of one project precludes accepting the other.

Front 21

Modified Internal Rate of Return (MIRR)

Back 21

A modification of IRR that “control” some of its problems, specifically for non-conventional cash flows. An investment is acceptable if the MIRR exceed the required return.

Front 22

Discount approach to the Modified Internal Rate of Return (MIRR)

Back 22

Discount future outflows and add them to CF0.

Front 23

Reinvestment approach to the Modified Internal Rate of Return (MIRR)

Back 23

Compound all CF’s except the first one and add then to CFt

Front 24

Combination approach to the Modified Internal Rate of Return (MIRR)

Back 24

Discount outflows to present, compound inflows to end (MS Excel use this method in its MIRR formula)

Front 25

Profitability Index

Back 25

The present value of an investment’s future cash flows divided by its initial cost. Calculate the PV of all future CF’s, PI = Σt[CFt/(1+r)t] / |CF0|, where t ≧. An investment is acceptable if PI exceed 1.

Front 26

Cash Flows

Back 26

Revenue or expenses that changes a cash account over a given period of time.

Front 27

Incremental cash flows

Back 27

Include relevant cash flows that will only occur as a direct consequence of taking the project

Front 28

The stand-alone principle

Back 28

Assumption that evaluation of a project may be based on the project’s incremental cash flows

Front 29

Relevant Cash Flows

Back 29

Opportunity cost, side effects/erosion, tax effects, net working capital

Front 30

Non-relevant cash flow

Back 30

Financing costs (interest) and sunk costs.

Front 31

Pro Forma Financial Statements

Back 31

Financial statements projected for future year’s operations

Front 32

Operating Cash Flow

Back 32

Refers to the after tax cash flow that results from the firm operations (producing and selling)

Front 33

Book Depreciation

Back 33

(straight line depreciation) irrelevant for capital investments

Front 34

Depreciation

Back 34

is a non cash item in the income statement and it is only relevant for tax purposes

Front 35

Tax depreciation

Back 35

relevant for capital investment decisions

Front 36

MACRS

Back 36

Modified Accelerated Cost Recovery System (MACRS)

Front 37

Net Working Capital

Back 37

Buy inventory/materials to support sales before any cash collected

Front 38

When should sales be recorded?

Back 38

Sales recorded when made, not when cash is received

Front 39

When should COGS be recorded?

Back 39

Cost of goods sold recorded when the corresponding sales are made, whether suppliers paid yet or not

Front 40

Project Capital Spending

Back 40

Refers to the difference between money spend for the purchase and money received from the after tax sale of fixed assets

Front 41

Scenario Analysis

Back 41

Is the determination of what happens to NPV estimates when we ask what-if questions by evaluating different situations.

Front 42

What are the different types of scenario analysis?

Back 42

Worst case (pessimistic scenario), Base case (most likely scenario), and Best case (optimistic scenario).

Front 43

Sensitivity Analysis

Back 43

Investigation of what happens to NPV when we analyze one specific situation. Each variable is fixed except one.

Front 44

Soft rationing

Back 44

happens when the limited resources are temporary, often self-imposed as a consequence of limited financing or budget constrains.

Front 45

Hard rationing

Back 45

happens when the capital will never be available for this project due to problems to obtain financing.