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62 Cards in this Set

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what is the goal of maximization?
shareholder utility
agency theory
the stockholders appoint the managers to act in there interest so there is a separtion betweween ownership and management
perquisite consumption
things that are fun but not necessarily in the interest of the company
ex. an un needed corporate jet
shirking
generally being a slacker
project selection
choosing whether you want a safe low reurn or a high, risky expected return
management resistance to takeover bids
when the management resists the takeover bid of another company because they feel that their jobs are in jeopardy
appropriate compensation packet
-give CEOs more ownership
-grant stock options
inside director
has a cozy relationship with the CEO, they play golf together, etc, and they are less subjective
outside relationship
no relationship with the CEO, much more objective with the CEO
financial markey
the place where financial assets trade
financial asset
a claim against some other issuer(a bond)
purposes of financial markets
to facilitate the acquisition of and investment of money, and to bring tohetjer those who have capital and those hwo need it.
- to estavlish markey proces and rates of return. Access to reliable proces allows investors to keep track of the market vlaues of their assets. Market prices tell managers how well investors think they are preforming
money markets
short term fiancial markets
characteristics: short maturity, low risk and liquid
3 major money markey instruments
tbills certificates of deposit(issud by banks and thrifts), and commercial paper(issued by corportations)
capital markets, definitiion characeristics and examples
long term financial markets
characteristicsO maturity of one year or more, higher risk, possible illiuidity

common securities:bonds, preferred stock, common stocks and convertible securities
primary market
where new securities are bought and sold
secondary market
where investors trade existing securities
registered exchange
physical marketplace where traders gather to exchange securities (NYSE, AMEX)
Over the counter
firms not listed on a regisered exchange can still have their shares traded, electronically links brokers and dealers
an annual report consists of
managements overveiw,balance sheet, income shtatement, cash flow statement, footnotes, and sometimes next tears statments
book value
identical to stockholder equity on the balance sheet
markey value
the aggregate value of the firms shares. Computed by the # of shares outstanding x the price per share
nominal rate
also called the quoted or stated rate. it is the stated % of interest per year
effective rate
what you money actually earns
probability distribution
the table of probabilities and outcomes
variance
the average squared difference between the actual return and the average return "sigma squared"
standard deviation of x
"sigma". The positive square root of the variance
diversification
one way to reduce the risk of a portfolio. Owning all kinds of stocks in different areas so that losses are offset
systematic risk
risk that cannot be diversified away
Beta
the mesaure of systematic risk that is closely related to the covariance of the asset.
beta=covariance/variance
risk premium
the amount of return above the riskfree rate that investors demand for holding risky stocks
weak form efficient
the stock price impounds all informtion in the stocks past prices, technical anaysis and charting cant be used to make abnormal returns.
semi strong form efficiency
the stock prive already impounds all public information so you cant use public information to make abnormal returns
strong form efficiency
when the stock price already impounds all public and private information, so you cant use public or private information to make abnormal returns. basically no information of any kind can be used to significantly beat the market
what percent of professional money makers lose to the market in a year?
2/3
golden parachute
outside company comes in to take over the company and the management resists.
par value
the amount tha tis promised to the bondholder when the bond matures
coupon rate
the rate that the bond pays
maturity
how long befor ethe issuing company pays the bondholder
market value
the cost you would pay today if you bough th ebond or security
yield to maturity
the bonds required rate of return. The discournt rate which equates the present value of all coupon payments and redemption at par value to the bonds market value.
leverage
the amoud of debt used relative to assets
pecking order
order in which firms tend to get money in order to participate in projects they undertake. They exhaust the 1st step and then go to other steps.
a)internal equity-retained earnings, dont have to sell stocks and bonds to investors and set up accounts because it costs too much money
b) Debt- issue next becuase if they do it costs less to issue a bond than it does to issue equity
c) Sell equity-do it last because the investment bankfees are the highest
bidder
the acquiring firm
target
the firm to be acquired
supermajority position
where 80% of the target firms shareholders must approve the merger
stagggered board
terms of the members of the BOD expire at different times
Standstill agreement
agree to limit holdings in the target firm then the management offers to make a sgnificant cash payment to the bidder
Greenmail
also called a target repurchase: reach an agreement where the management buys a certain amount of stock from the bidder at a premium
poison pill
the management makes the target company indigestible, they put more voting poer in the hands of the friends of the target company
sell crown jewels
sells at the price that the bidder really wants
white knight
agree to be taken over by a friendlier firm
buy back stock
buy back their stock in order to keep the voting power in their own hands
take on debt
to avoid a takeover by issue bonds to bondholders, to make the company look really bad and like its in financial distress
pacman defense
only used if there is one potential bidder
raise antitrust challenge
managment goes to regulators and pleads that the takeover be blocked
efficient capital market
where market securiy prices reflect available informations so there is no reason to believe that the current price is too high or too low
efficient market hypothesis
actual capital markets are efficient
the market is made efficient by competition among investors
risk premium
the reward for bearing risk in an investment
cumulative voting
procedure where the shareholder may cast all of the votes for one memeber of the board of directors
straight voting
where the directrs elect one person at a time the shareholder may cast votes for each member of the board of director.
-freezes out minority shares
proxy
the grant of authority of the shareholder by allowing someoe else to vote their shares