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109 Cards in this Set
- Front
- Back
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Net Capital Spending (2 sides)
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Ending Fixed Assets - Beginning Fixed Assets + Depreciation
Assets purchased - Assets Sold |
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Operating Cash Flows (OCF)
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EBIT + Depreciation - Taxes
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Cash Flows from Assets
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CF(A) = OCF - Change in NWC - Net Capital Spending
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Cash Flows to Creditors
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CF(C) = Interest - Net New Borrowing
Net New Borrowing = (Ending LT Debt - Beginning LT Debt) |
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Cash Flows to Shareholders =...
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CF(S) = Dividends Paid - Net new equity raised
New Equity Raised = Shares sold - Shares Repurchased |
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Sustainable Growth Rate
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(ROE x b)/(1 - ROE x b)
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External Financing Needed
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EFN = Assets/Sales x ∆Sales - Spont. Liabilities/Sales x ∆Sales - PM x Projected Sales x (1 - d)
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d
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Dividend payout
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b
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plowBack
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Effective Annual Rate
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(1 + r/m)^m - 1
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Coupon Rate
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Coupon / Face value
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Face Value
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Amount repaid at end of the loan
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YTM
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Interest rate required in the market
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Current Yield
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Coupon / Price
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Relationship b/t YTM and Coupon Rate (and Current Yield) for Discounted bonds and Premium bonds
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YTM is lower than Coupon Rate (and Current Yield) for Premium Bonds, higher than Coupon Rate for Discounted Bonds
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Fisher Effect
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The rate of inflation causes the nominal rate to rise just enough so that the real rate of interest is unaffected
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Real Rate
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Percentage change in how much you can buy with your dollars
Real Rate = Nominal Rate - Inflation Rate |
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Nominal Rate
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R = r + h
or... percentage change in number of dollars you have |
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% Change in Price
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(New Price - Original Price)/Original Price
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Relationship b/t price and coupons for discount and premium bonds
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discounted bonds -- low coupons and more price appreciation with maturity
premium bonds -- high coupons, but price depreciates with maturity |
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Zero Growth Stock
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Div/R
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Constant Growth Stock
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Div/(R - g)
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g
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Retention Ratio x ROE
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P₀
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P₀ = Div/(R - g)
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Dividend Yield
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Cash Dividend / Price
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Capital gains yield
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rate at which value of investment grows
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Dividend Growth Model (R)
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Dividend yield + Growth rate
(Div / Price) + g |
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Retention Ratio
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Retained Earnings / Earnings
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Balance Sheet, Financial manager should be aware of...
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Liquidity, Debt - to - equity, Value vs. Cost
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Why standardize fin statements?
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Compare companies in same industry
Account for different time periods and size. |
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5 groups of financial ratios
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Liquidity, leverage, profitability, turnover, market value
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Break even Bond Tax Rate
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Taxable rate x (1 - t) = corporate rate
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R (nominal rate)
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r + h + r x h
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Five core principles of Finance
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1. Time Value of Money
2. Compensation for Risk 3. Diversification 4. Markets are Smart 5. Arbitrage is rare |
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Corporate Finance concerns...
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Selecting the best assets, funding long-term assets, funding and managing short-term assets
Capital budgeting, structure and short term asset management |
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Corporate Finance Concerns
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Capital Budgeting
Capital Structure Short-term Asset Management Corporate Governance Risk Management |
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Why focus on Cash Flows?
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At some point, cash inflows must exceed cash outflows if the firm is to survive
Successful firms generate cash flows that exceed cash inflows from the financial markets |
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Goal of financial managers
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Maximize stockholder wealth
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What can arise in a principal agent relationship?
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Agency Costs
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Why do agency costs arise?
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Conflict of interests b/t principal and the agent
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How can you reduce agency costs?
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Compensation: align the incentives of managers with those of the stockholders
Threaten a change of corporate control |
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What type of numbers do we use?
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Market values
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Assets are a measure of...
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operations -- how funds are employed in the firm
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Liabilities and equity are a measure of...
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how operations are financed -- show where the funds come from
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Operating Cash Flows involve...
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the production and sale of goods
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Investment Cash flows involve...
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purchasing and selling fixed assets and business equity
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Financing cash flows involve...
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Debt and equity financing
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Value vs. Cost, what determines the price of the output?
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market price, not the price of the inputs
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Costs vs. short-run
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firm can vary some of its inputs, like materials and labor
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Costs vs. long run
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all costs are variable
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Which tax rate is used to make financial decisions?
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Marginal tax rate
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Do financial accountants distinguish b/t variable costs and fixed costs?
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NO!
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Use of standardized statements...
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to compare different companies in a similar industry, to compare one company at different times, and to compare differently sized companies
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Common size balance sheets
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Everything over assets
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Common sized income statements
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everything over sales
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Advantages of financial ratios
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Allow for better comparison through time or between companies
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Limitations of financial ratios
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Not helpful by themselves: need to be compared to something
Difficult to benchmark diversified firms No underlying theory Different international accounting regulations makes comparison difficult Firms use different accounting procedures Firms have different FY |
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Short-term solvency/ Liquidity ratios
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Current ratio: CA/CL
Quick: (CA - Inventory)/ CL Cash: Cash/CL |
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L/T solvency/ Leverage ratios
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Total Debt: (Assets - Equity)/Equity
Debt-Equity: Debt/Equity Equity Multiplier: Assets/Equity TIE: EBIT/Interest Cash Coverage: EBITDA/Interest |
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Turnover (Asset management) ratios
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Inventory Turnover: (COGS)/(Inventory)
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Profitability Ratios
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Profit Margin: Net Income/Sales
ROA: Net Income/Assets ROE: Net Income/Equity |
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Market Value Ratios
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EPS: Earnings/Shares outstanding
P/E: Price/Earnings Market Cap: Shares outstanding x price Enterprise Value: Market Cap + Debt - Cash |
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Dupont Identity
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PM x TAT x Equity multiplier
(NI/Sales) x (Sales/Assets) x (Assets/Equity) |
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What does the Dupont Identity get to?
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ROE by multiplying measures of operating efficiency, asset use efficiency and leverage
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What are the parts of financial models?
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Investment in new Assets (Capital Budgeting)
Degrees of financial leverage (Capital Structure) Cash paid to shareholders (dividend policy) Liquidity Requirements (net working capital) |
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Sales Forecast
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Bottom-up
Top-Down |
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Pro forma statements
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forecasted statements
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What are the key parts needed for a pro forma statement?
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percent of sales
dividend payout ratio retention ratio |
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What does growth in sales entail?
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additional assets, the increase in assets must be financed through debt or equity
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EFN...
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retained earnings are insufficient to meet asset needs
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Internal Growth rate
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Max growth rate achievable with no external financing:
ROA x b/ (1 - ROA x b) |
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Sustainable Growth rate
(description) |
Max growth rate achievable with no external equity financing and holding a constant debt-equity ratio
ALWAYS EXCEEDS INTERNAL GROWTH RATE!!!! |
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Why use discounted cash flows analysis?
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simplifies projects
allows comparison across projects illustrates the importance of quantifying costs and expected benefits of projects |
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Things involved in TVM
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Present value
Future value Compounding Discounting |
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Simple rate
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rate without compounding
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Annual percentage rate
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SAIC, the rate that is used in TVM calculations reflected annually
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EAR
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(1 + r/m)^m -1
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Financial innovations
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Seem complex, but can be broken down into basic securities
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Four basic securities
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Zero-Coupon bonds
Options Forward contracts Equity (ZOFE) |
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Shadow Securities
(give examples) |
Value derived from another security
options and forward contracts |
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Spot markets
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Immediate delivery and payment
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derivative markets
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future delivery and payment
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Basic securities can be "snapped on" a _______ to create more complex securities.
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Time vector.
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Name some securities that can be created using zero coupon bonds on a time vector...
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perpetuity
ordinary annuity or annuity due deferred annuity coupon bond floating rate note dual currency bond increasing annuity |
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Implications of financial innovation
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- securities limited by imagination
- complex securities can be understood - securities and potential securities linked through |
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How do you price a bond?
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You need a benchmark
Treasuries that benchmark are on-the-run-bonds, most recently issued in each maturity class; all others are off-the-run |
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Maturity as a measure of risk
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poor, assumes that you receive all cash flows at maturity, true for zero coupon bonds
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Risk is not ____ related to maturity
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linearly
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Primary principle:
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value of financial securities = PV of expected future cash flows
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Bond value =
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PV of coupons + PV of face/par value
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Interest rates are ______ related to present values
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inversely
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When the YTM < coupon, the bond trades at a _____
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Premium
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When YTM ___ coupon, the bond trades at par.
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equals (=)
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Bond prices and market interest rates move in (the) _____ directions
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different
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coupon rate = YTM, price ___ par value
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=
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coupon rate > YTM, price ___ par value
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> (premium bond)
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coupon rate < YTM, price ___ par value
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< (discount bond)
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Price risk or Interest rate risk
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change in price due to changes in interest rates
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Long term bonds have ____ price risk than short term bonds
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more
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low coupon rate bonds have ____ price risk than high coupon rate bonds
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more
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Reinvestment Rate Risk
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Uncertainty concerning rates at which cash flows can be reinvested
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Short term bonds have ____ reinvestment rate risk than long-term bonds
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more
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High coupon rate bonds have ___ reinvestment rate risk than low coupon rate bonds
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more
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Identical bonds, the long-maturity bond will have much ____ volatility with respect to changes in the discount rate
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more
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Value of any asset is the...
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present value of its expected future cash flows
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stock ownership produces cash flows from:
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dividends
capital gains |
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Valuation of different types of stocks includes...
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zero growth
constant growth differential growth |
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Current price of the stock factors in the ___, ____, and ___ of all future cash flows
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risk, timing, magnitude
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Constant Dividend Growth Model
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Pt = Do x (1 + g)^t/(R - g)
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