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98 Cards in this Set
- Front
- Back
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current ratio
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current assets/current liabilites
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quick ratio
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(current assets-inv)/current liabilities
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inventory turnover
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cost of rev/inventory
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day sales outstanding
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365/(revenue/A/R)
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debt-equity ratio
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total debt/(shares out*price)
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interest coverage ratio
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(EBIT+deprec)/int expense
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profit margin
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net income/sales
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return on assets
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net income/total assets
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return on equity
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net income/total equity
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earnings per share
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net income/shares out
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price-earnings ratio
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mkt price/earnings per share
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tax rate
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tax expense/earnings before taxes
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market to book ratio
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(shares out.* price)/book value
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which of the following is NOT identified as one of the primary areas of concern relative to internal service quality in designing operational objectives?
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consumer satisfaction
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balance sheet
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A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time.
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income statement
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A financial statement that measures a company's financial performance over a specific accounting period.
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statement of cash flows
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An accounting statement called the "statement of cash flows", which shows the amount of cash generated and used by a company in a given period
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4 ways to manipulate earnings
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1) options as compensation
2) reserve accts 3) off-balance sheet items 4) channel stuffing |
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options as compensation
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execs focus on S-T growth to drive up prices then sell options. risk increases as new options are issued
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reserve accounts
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funds set aside for debt service or mainenance
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off-balance sheet items
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Obligations that are contingent liabilities of a bank, and thus do not appear on its balance sheet
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channel stuffing
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A deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public.
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liquidity ratios
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A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations.
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efficiency ratios
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A ratio used to calculate a bank's efficiency.
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leverage ratios
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Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations.
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profitability ratios
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A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.
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marginal tax rate
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The amount of tax paid on an additional dollar of income.
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payout ratio
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The percentage of earnings paid to shareholders in dividends.
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plowback ratio
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A fundamental analysis ratio that measures the amount of earnings retained after dividends have been paid out.
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internal growth rate
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The highest level of growth achievable for a business without obtaining outside financing.
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sustainable growth rate
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The maximum growth rate that a firm can sustain without having to increase financial leverage.
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percentage of sales method
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method of estimating cash requirements by expressing revenues and expenses as a % of sales
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Common size financial statements
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A company financial statement that displays all items as percentages of a common base figure.
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WACC (weighted avg cost of capital) and key components
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calc of a firm's cost of capital in which each category is proportionally weighted
-common/preferred stock, bonds, LT debt |
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when beta and ROR increase, WACC ____, this causes it to ____(+/-) in valuation and to ____(+/-) in risk.
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WACC increases
valuation decreases risk increases |
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yield to maturity
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rate of return if a bond is held to maturity
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yield curve
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plots interest rates at a set point in time with different maturity dates
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credit speads
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difference between treasury securities and non-treasury securities
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credit ratings
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assessment of credit worthiness
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premium v. discount bonds
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p: priced above par value
d: priced below par value |
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bond indenture
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written agreement b/t the issuer of a bond as his/her bondholders
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debendure bond
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debt security issued by govt/large corporations isnt secured by an asset
(carries no collateral) |
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subordinate bond
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bond whose claim on assets and income in case the issuer defaults or goes bankrupt
(paid after other bonds) |
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senior bond
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debt security that has a prior or superior claim on the issuer's assets
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coupon v. zero-coupon bonds
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coupon: debt obligation with semi-annual int. pmts
0-coupon- debt security that doesnt pay int. (traded at a discount) |
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callable bond
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bond you can get prior to maturity date, usually above par value
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yield to call
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yield of a bond if you were to buy and hold until the call date
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convertible bond
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can be converted into a predetermined amt of the company's equity at certain times
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floating rate bond
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bond whose int is pegged to a benchmark, such as the t-bill rate
(adjusted periodically) |
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eurobond v. foreign bond
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euro: issued in a different currancy
foreign: issued in a domestic mkt by a foreign entity |
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money mkt v. capital mkt
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MM: specializes in S-T debt securities
CM: individuals/institutions trade securies |
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commercial paper
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unsecured, S-T debt instruments by a corporation
-usually mature <270 days and issued at discount |
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loan covenants
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a condition where the borrower must comply in order to adhere to the terms in loan agreements
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lines of credit
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agreements b/t a bank and customers that establish a max loan balance
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total return for a stock is made up of ____ and ____ yields.
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dividend and capital gains
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dividend yield
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financial ratio that shows how much a company pays out in dividends per year relative to its share price
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capital gains yield
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used to value stock prices by using predicted dividends and discounting them back to present value
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dividend discount method
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used to value stock prices by using predicted dividends and discounting them back to present value.
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what 3 factors and the formula to determine the value of a stock?
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dividends/share, discount rate, dividend growth rate
(div/share)/(disc-g) |
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implications of the divident discount model include:
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potential errors in determining the dividend to be paid over the next year, or the growth rate, or the required rate of return by investors
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projected capital gains yield
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?? ask christine
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predicted dividends yield
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?? ask christine
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standard deviation
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measure of the dispersion of a set of data from its mean
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diversifiable risk
-definition and synonym |
unique to a certain asset of company
-unsystematic risk |
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non-diversifiable risk
-definition and synonym |
carried by entire sets, industries, or economy
-systematic risk |
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correlation
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how two securities move in relation to each other
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diversification
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technique because different kinds on investments on avg yield higher returns and have less risk in the portfolio
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optimal portfolio
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minimize risk while getting highest returns
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risk-free rate
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theoretical rate of return of an investement with zero risk
(represents the interest an investor would expect from an absolutely risk-free investment) |
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security mkt line
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line that graphs the systematic (mkt) risk v. return of the whole mkt at a certain time and shows all risky securities
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beta
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measures the volatility (systematic risk) or a security in comparison to the mkt as a whole
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CAPM: capital asset pricing model
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model that describes the relationship b/t risk and expected return and that is used in the pricing of risky securities
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risk premium v. return
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return in excess of the risk-free rate of return that an investment is expected to yield
-benefit for taking on risk |
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effects of leverage on firm risk
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helps to invest or operate while increasing risk. it is used to increase shareholder wealth
- can instead + interest expense - credit risk of default destorys shareholder value |
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de-levered beta
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(getting rid of borrowed money)comparing the risk of an unlevered company to the risk of the mkt
-removes the financial effects from leverage (debt) |
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pure play
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a company whose business is restricted to one activity or sector
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MMI: why does capital structure not affect overall value of the firm?
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assets create revenue and capital structure only determines how that revenue is split
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MMI: increasing the proportion of debt will increase the risk to shareholders. why does this not change the value of the firm?
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the tax benefits of debt were underestimated with the tax shield
-debt can create value but only by a small number |
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MMII: what are the implications regarding the comparison of firm betas?
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total cost of capital cannot be decreased by lowering the cost of debt
-as volatility +, do does beta, which will + the cost of equity -+ cost of equity and + CF has no effect on value |
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MM says that capital structure is irrelevant so leverage patterns should be random. however, they are very different across industries but very similar within them. why?
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betas should be similar in the same industry because it is the risk that cannot be eliminated. so if companies eliminate all unsystematic risk, their betas will approach 1.0.
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trade-off theory
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debt is issued to get tax-shields until the marginal benefit of the tax shield = the marginal cost of financial distress
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pecking-order theory
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companies use the cheapest financing first.
1. internal funds 2. debt 3. equity (when highly leveraged) -as debt +, equity becomes cheaper 1. internal funds 2. equity 3. debt -but then debt is paid off so the original order is restored 1. internal funds 2. debt 3. equity |
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how can you use your capital structure to manage agency costs?
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agency costs: issued to constrain management
if free cash is available, managers with spend it and rip off the shareholders. - take out a loan and give to the shareholders -NI will decrease because of the interest expense but shareholders dont mind because of the money they received from the loan. |
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value of a stock
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V=CF/K(WACC)
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information asymmetry
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situation where at least one party in a transaction has more info or better info than the other
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what is adverse election and how is it caused by information asymmetry?
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when price is set, only bad outcomes participate
-ex: lemon model |
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what is an agency problem and how is it caused by information asymmetry?
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decisions to benefit managers instead of shareholds
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what is the agency problem that exsists between managers and shareholders of the firm?
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shareholders: get CF benefits of company's success
managers: paid salary- slack off, steal revenue, empire build |
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how does issuing debt control the agency problem between shareholders and management?
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debt interest is a precommitment that ties up cash to shareholders, leaving less cash for managers to cheat by spending on non-essentials
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what is the agency problem that exists between shareholders and debt-holders of the firm?
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a strategy with increased risk with increased return because the debt-holders must bear the risk but have a fixed return, unlike the shareholders who can benefit from their risk.
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how do creditors of the firm protect themselves?
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debt covenants- hedge against agency problem by issuing convertible debt or debt bundled with warrents
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managerial ownership
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ownership by members of the board of directors
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5% shareholders/blockholders
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own < or = 5% of a company
-more incentives to monitor, easier for proxy vote, easy for voting block and to become efficient |
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institutional ownership
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5% of block holders
-invest more, increase risk, resources to monitor -leads to better and safer managment |
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what is the benefit/downside of firm's issuing stock options to managers as compensation?
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+: motivates employees
-: doesnt help shareholders -: if they steal, they steal from themselves |
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what are the responsibilites of the BOD for a firm? 2 committees?
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1. ensuring finances
2. hire/evaluate managers 3. set strategic direction committees: audit and compensation |
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what is sarbanes-oxley?
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public company acctg reform and inverstor protection act
-set new or enhances standards for public companies for financial reportingbecause of scandals |
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what is the difference between securities lawsuits and derivatives lawsuits filed by a shareholder agains the firm?
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SL:
DL: when shareholders, on behalf of the company, sue the BOD b/c they injured the company |
