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98 Cards in this Set

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current ratio
current assets/current liabilites
quick ratio
(current assets-inv)/current liabilities
inventory turnover
cost of rev/inventory
day sales outstanding
365/(revenue/A/R)
debt-equity ratio
total debt/(shares out*price)
interest coverage ratio
(EBIT+deprec)/int expense
profit margin
net income/sales
return on assets
net income/total assets
return on equity
net income/total equity
earnings per share
net income/shares out
price-earnings ratio
mkt price/earnings per share
tax rate
tax expense/earnings before taxes
market to book ratio
(shares out.* price)/book value
which of the following is NOT identified as one of the primary areas of concern relative to internal service quality in designing operational objectives?
consumer satisfaction
balance sheet
A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time.
income statement
A financial statement that measures a company's financial performance over a specific accounting period.
statement of cash flows
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
4 ways to manipulate earnings
1) options as compensation
2) reserve accts
3) off-balance sheet items
4) channel stuffing
options as compensation
execs focus on S-T growth to drive up prices then sell options. risk increases as new options are issued
reserve accounts
funds set aside for debt service or mainenance
off-balance sheet items
Obligations that are contingent liabilities of a bank, and thus do not appear on its balance sheet
channel stuffing
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.
liquidity ratios
A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations.
efficiency ratios
A ratio used to calculate a bank's efficiency.
leverage ratios
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.
profitability ratios
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.
marginal tax rate
The amount of tax paid on an additional dollar of income.
payout ratio
The percentage of earnings paid to shareholders in dividends.
plowback ratio
A fundamental analysis ratio that measures the amount of earnings retained after dividends have been paid out.
internal growth rate
The highest level of growth achievable for a business without obtaining outside financing.
sustainable growth rate
The maximum growth rate that a firm can sustain without having to increase financial leverage.
percentage of sales method
method of estimating cash requirements by expressing revenues and expenses as a % of sales
Common size financial statements
A company financial statement that displays all items as percentages of a common base figure.
WACC (weighted avg cost of capital) and key components
calc of a firm's cost of capital in which each category is proportionally weighted
-common/preferred stock, bonds, LT debt
when beta and ROR increase, WACC ____, this causes it to ____(+/-) in valuation and to ____(+/-) in risk.
WACC increases
valuation decreases
risk increases
yield to maturity
rate of return if a bond is held to maturity
yield curve
plots interest rates at a set point in time with different maturity dates
credit speads
difference between treasury securities and non-treasury securities
credit ratings
assessment of credit worthiness
premium v. discount bonds
p: priced above par value
d: priced below par value
bond indenture
written agreement b/t the issuer of a bond as his/her bondholders
debendure bond
debt security issued by govt/large corporations isnt secured by an asset
(carries no collateral)
subordinate bond
bond whose claim on assets and income in case the issuer defaults or goes bankrupt
(paid after other bonds)
senior bond
debt security that has a prior or superior claim on the issuer's assets
coupon v. zero-coupon bonds
coupon: debt obligation with semi-annual int. pmts
0-coupon- debt security that doesnt pay int. (traded at a discount)
callable bond
bond you can get prior to maturity date, usually above par value
yield to call
yield of a bond if you were to buy and hold until the call date
convertible bond
can be converted into a predetermined amt of the company's equity at certain times
floating rate bond
bond whose int is pegged to a benchmark, such as the t-bill rate
(adjusted periodically)
eurobond v. foreign bond
euro: issued in a different currancy
foreign: issued in a domestic mkt by a foreign entity
money mkt v. capital mkt
MM: specializes in S-T debt securities
CM: individuals/institutions trade securies
commercial paper
unsecured, S-T debt instruments by a corporation
-usually mature <270 days and issued at discount
loan covenants
a condition where the borrower must comply in order to adhere to the terms in loan agreements
lines of credit
agreements b/t a bank and customers that establish a max loan balance
total return for a stock is made up of ____ and ____ yields.
dividend and capital gains
dividend yield
financial ratio that shows how much a company pays out in dividends per year relative to its share price
capital gains yield
used to value stock prices by using predicted dividends and discounting them back to present value
dividend discount method
used to value stock prices by using predicted dividends and discounting them back to present value.
what 3 factors and the formula to determine the value of a stock?
dividends/share, discount rate, dividend growth rate

(div/share)/(disc-g)
implications of the divident discount model include:
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
projected capital gains yield
?? ask christine
predicted dividends yield
?? ask christine
standard deviation
measure of the dispersion of a set of data from its mean
diversifiable risk
-definition and synonym
unique to a certain asset of company
-unsystematic risk
non-diversifiable risk
-definition and synonym
carried by entire sets, industries, or economy
-systematic risk
correlation
how two securities move in relation to each other
diversification
technique because different kinds on investments on avg yield higher returns and have less risk in the portfolio
optimal portfolio
minimize risk while getting highest returns
risk-free rate
theoretical rate of return of an investement with zero risk
(represents the interest an investor would expect from an absolutely risk-free investment)
security mkt line
line that graphs the systematic (mkt) risk v. return of the whole mkt at a certain time and shows all risky securities
beta
measures the volatility (systematic risk) or a security in comparison to the mkt as a whole
CAPM: capital asset pricing model
model that describes the relationship b/t risk and expected return and that is used in the pricing of risky securities
risk premium v. return
return in excess of the risk-free rate of return that an investment is expected to yield
-benefit for taking on risk
effects of leverage on firm risk
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
de-levered beta
(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)
pure play
a company whose business is restricted to one activity or sector
MMI: why does capital structure not affect overall value of the firm?
assets create revenue and capital structure only determines how that revenue is split
MMI: increasing the proportion of debt will increase the risk to shareholders. why does this not change the value of the firm?
the tax benefits of debt were underestimated with the tax shield
-debt can create value but only by a small number
MMII: what are the implications regarding the comparison of firm betas?
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
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?
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.
trade-off theory
debt is issued to get tax-shields until the marginal benefit of the tax shield = the marginal cost of financial distress
pecking-order theory
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
how can you use your capital structure to manage agency costs?
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.
value of a stock
V=CF/K(WACC)
information asymmetry
situation where at least one party in a transaction has more info or better info than the other
what is adverse election and how is it caused by information asymmetry?
when price is set, only bad outcomes participate
-ex: lemon model
what is an agency problem and how is it caused by information asymmetry?
decisions to benefit managers instead of shareholds
what is the agency problem that exsists between managers and shareholders of the firm?
shareholders: get CF benefits of company's success

managers: paid salary- slack off, steal revenue, empire build
how does issuing debt control the agency problem between shareholders and management?
debt interest is a precommitment that ties up cash to shareholders, leaving less cash for managers to cheat by spending on non-essentials
what is the agency problem that exists between shareholders and debt-holders of the firm?
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.
how do creditors of the firm protect themselves?
debt covenants- hedge against agency problem by issuing convertible debt or debt bundled with warrents
managerial ownership
ownership by members of the board of directors
5% shareholders/blockholders
own < or = 5% of a company
-more incentives to monitor, easier for proxy vote, easy for voting block and to become efficient
institutional ownership
5% of block holders
-invest more, increase risk, resources to monitor
-leads to better and safer managment
what is the benefit/downside of firm's issuing stock options to managers as compensation?
+: motivates employees
-: doesnt help shareholders
-: if they steal, they steal from themselves
what are the responsibilites of the BOD for a firm? 2 committees?
1. ensuring finances
2. hire/evaluate managers
3. set strategic direction

committees: audit and compensation
what is sarbanes-oxley?
public company acctg reform and inverstor protection act

-set new or enhances standards for public companies for financial reportingbecause of scandals
what is the difference between securities lawsuits and derivatives lawsuits filed by a shareholder agains the firm?
SL:

DL: when shareholders, on behalf of the company, sue the BOD b/c they injured the company