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74 Cards in this Set

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Financial management is used to make key decisions involving _____, _____, choice of _____, and many others.
Financial management is used to make key decisions involving EXPANSION, RENOVATION, choice of LOCATION, and many others.
Financial management is used to make what 3 major decisions?
1. INVESTMENT (Which assets should we invest in?)

2. FINANCING (How will we pay for these assets?)

3. DIVIDEND (What should we do with the earning generated by the assets?)
What sets Finance apart from Accounting?
Finance is/involves...

* Completion of accounting cycle
* Compilation of financial statements

* stock valuation
* bond valuation
* asset diversification
* property appraisal and valuation
* working capital management
What is a "majority shareholder"?
the shareholder with the most shares (NOT the majority or >50% of shares)
Which type of stock is more risky -- common or preferred?
common
What is the order order of payment for corporate securities?
1. Bonds
2. Preferred stock
3. Common stock
Explain the voting rights for common stock holders. What about preferred stock holders?
(Board of Directors) - 1 vote for every share held
Preferred stockholders do not get to vote.
Compare/contrasts dividends of common and preferred stock.
Common stockholders CAN receive dividends...they may change year-to-year, and they may not receive any at all. Common stock is more risky than preferred stock because preferred stockholders always receive dividends, and they do not change, good or bad -- this is called a fixed dividend Preferred stock is often callable (repurchased by the company for a certain price).
What is the main difference between stocks and bonds?
The par value of a bond must be paid back to the buyer at the end of its maturity (life of the bond). The par value of a bond is the ACTUAL value of the bond.
What are coupons (bonds)?
A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures.
Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and dividing by the bond's face value. Bondholders receive interest payments every six months, and they also receive the original amount the company borrowed from them when the note matures.

For example, if a bond has a face value of $1000 and a coupon rate of 5%, then it pays total coupons of $50 per year. For the typical bond, this will consist of two semi-annual payments of $25 each.
Explain the steps (3) of the stock market.
1. The SEC authorizes the number of shares and the par value of them, which is based on past performance and financial history of the company. The par value does NOT have to be the price at which the share is sold.

2. The company enters the PRIMARY MARKET when they sell shares. Their initial public offering is also known as the IPO.

3. Shareholders then enter the SECONDARY MARKET when they (not the company) sell their shares to other people.

* client calls broker
* broker calls brokerage house at the stock exchange
* the broker's broker makes a bid price to the market specialist who has an asking price (the difference between these 2 prices is called the difference spread)
What is the main goal for the Hospitality Financial Manager?
*To maximize the wealth of the owners*

For a corporation, this means increasing the stock price to its highest possible level.

Remember: maximizing revenues for not necessarily mean maximizing profits! Revenues by themselves don't matter when they are not shown with costs...what really matters is PROFIT/NET INCOME.
What affects the price of a stock?
*Dividends are very important to determine stock value.*

The stock price is the sum of present and future dividends.

Future dividends are affected by three major factors:
1. the amount of the dividends
2. when the dividends are received
3. the risk associated with the dividends

a "lack of confidence" in the market causes stock prices to fall. Remember to ask yourself: How bad is the situation? Will the price go back up? Is this just "panic in the market"?
Who likes to see more debt/borrowing: owners or lenders?
OWNERS like to see more debt/borrowing.
LENDERS like to see less debt because debt makes them think, "Will they be able to pay me back?"
What is an agency relationship? Give 3 examples.
Involve a principle and an agent.

Examples:
1. owners-managers
2. franchisee-franchisor
3. owners-lenders
What is financial leverage?
Using borrowed money to make more money
What is shirking?
An agency problem between manager and owner when the manager loses work ethic due to a high/fixed salary
Owners and lenders can also be referred to as _____ and _____.
stockholders and bondholders
Who likes to see more debt/borrowing: owners or lenders?
OWNERS like to see more debt/borrowing.
LENDERS like to see less debt because debt makes them think, "Will they be able to pay me back?"
What is an agency relationship? Give 3 examples.
Involve a principle and an agent.

Examples:
1. owners-managers
2. franchisee-franchisor
3. owners-lenders
What is financial leverage?
Using borrowed money to make more money
What is shirking?
An agency problem between manager and owner when the manager loses work ethic due to a high/fixed salary
Owners and lenders can also be referred to as _____ and _____.
stockholders and bondholders
Explain the conflict of Marriott in the late 80s/early 90s.
In the late 80s, Marriott began making diverse brands, which caused a lot of debt. They made Host Marriott take on all of the debt so their numbers looked better. This caused a conflict between owners & lenders, and led to a split in 1992:
1. Marriott International (hotel management)
2. Host Marriott (real estate)
What 4 things do hospitality managers do to create value?
1. increase revenues (example: extending hours)

2. lower expenses (example: decrease turnover or control food/beverage/labor costs)

3. sell stocks

4. sell bonds
What is the "formula" for value creation?
incremental benefits
- incremental costs
= net benefits

**If a project's benefits exceed its costs, value is created for the owners.**
Uncertainty or potential for outcomes to be different from expectations is called _____.
Uncertainty or potential for outcomes to be different from expectations is called RISK.
What does SEC stand for?
Securities & Exchange Commission
What is a stock split?
When a stock gets to a high point & selling slows down, it can be split into parts by the company. Example: One $100 stock splits into four $25 stocks. This stimulates buying/creates demand. *Disney is notorious for this)
Why would a company make a buy-back?
1. To take control of the company (make it private)

2. To re-issue the shares, make the price higher, then sell back again when the market has improved.
What is a "Bear Market"? What is a "Bull Market"?
Bear: depressed; low numbers; low values traded

Bull: aggressive; volumes and shares are high
What are the 2 ways to make money off of a stock?
1. dividends received from the company

2. capital gain: selling stocks for a higher price
What is a company's monetary cost of having/selling stocks?
dividends
What is a "raider"?
a person or entity taking over a company
What is it called when a raider takes over a company that doesn't want to be taken over?
a hostile takeover
What is a "tender offer"?
what you will offer stockholders to buy the company;
usually based on break-up value if the buyer is intending on breaking up the company
What is a "vote in absence" called?
proxy
What is a White Knight?
a friendly company who will buy not and break-up another company to keep them from going under and help them succeed
When a stock is being is active and being traded a lot, it is said to be _____ _____.
When a stock is being is active and being traded a lot, it is said to be IN PLAY.
What is it called when you sell a stock at a sacrificed price?
dumping it
What is the break-up value of
(1) a company?
(2) a stock?
1. company: if you sell off everything, how much you will have.

2. stock: how much per share (company break-up value divided by how many shares there are).
What is it called when a company trades off of information the public doesn't have access to yet?
insider trading
What are offshore accounts?
bank accounts not in the U.S. made by companies to avoid taxes
What is "power of attorney"?
giving decision-making rights over to someone else (this is fairly abnormal in the stock-world)
What is DK?
"didn't know" - when an investor claims (lying) he/she didn't know about something
What do we call long-term, stable, solid stocks that we use to base other numbers (like the Dow Jones Industrial Average) off of?
Blue Chip Stocks
What is a leveraged buy-out?
buying out a company in much debt
What are poison pills? Give examples.
Things a company does to ward off a hostile takeover...

golden parachutes: increase for executives because the new company that takes over will have to pay these off

immediate repayment of debt upon acquisition: the new company must pay off all debt at take-over

defensive mergers: (friendly) trying to make a company too big to buy by another company

convertible preferred stock for each share of common: common stocks become preferred at take-over )the buying company must pay the dividends)

leveraged buy-out/junk bonds: buying junk bonds that carry a high interest rate, and making it a leveraged buy-out so the new company has to pay off all of the debt from the junk bonds

selling off assets: selling off everything so there is nothing to buy (this is the last resort!)
The intermediary in the stock mart is known as a _____.
stockbroker
What is the term for falsifying accounting records?
"cooking the books"
What is the term for a friendly marriage of 2 companies?
merger
Upping a price in a bid to cause the other party to do something they don't want to is an example of _____.
greenmail
What is mezzanine financing?
topping-up a loan, taking it to the next level, adding more interest
When a broker/representative uses his/her own money to create a buzz/market for a company to encourage trading on a stock, it is called _____ a _____. This is risky, but can seriously pay off.
When a broker/representative uses his/her own money to create a buzz/market for a company to encourage trading on a stock, it is called MAKING a MARKET. This is risky, but can seriously pay off.
What is EBIT?
earnings before income and taxes

("operating income" for restaurants)
("net operating income" for hotels)
How do you create less interest on debt?
change short-term debt into long-term
What re the 3 major sections of the Statement of Cash Flows?
1. operating activities
2. investing activities
3. financing activities
Why is the Statement of Cash Flows so important as opposed to the Income Statement and the Balance Sheet?
the balance sheet uses estimates and debt can be hidden; the income statement is completed on accrual basis; the cash flows represents the actual flows of cash and is more difficult to "invent"
_____ is responsible for the accounting and financial reporting systems.
MANAGEMENT is responsible for the accounting and financial reporting systems.
Would you, as a manager, rather be evaluated on Profit Margin or Gross Operating Profit Margin? Why?
Gross Operating Profit Margin because you have more control over it (you do not have control over income taxes or depreciation)
The Dow Jones Industrial Average shows overall _____ of the stock market. It started out as an average of 11 companies (called _____ _____ companies), but now it is a highly complex calculation of _____ companies.
The Dow Jones Industrial Average shows overall MOVEMENT of the stock market. It started out as an average of 11 companies (called BLUE CHIP companies), but now it is a highly complex calculation of THIRTY companies.
The Dow and the S&P 500 are _____ correlated
highly positively
Enron's stock started at $_____ per share and ended at $_____ per share, all within 12 months.
Enron's stock started at $90.75 per share and ended at $0.26 per share, all within 12 months.
Enron filed for Chapter _____ bankruptcy. It was the largest bankruptcy in history up to that date and added up to $_____ billion.
Enron filed for Chapter 11 bankruptcy. It was the largest bankruptcy in history up to that date and added up to $62 billion.
Who was the President and CEO (post-2001) of Enron who gained infamy as orchestrating the largest corporate fraud in history?
Jeff Skilling
Who was the Chief Financial Operator/CFO of Enron whose prison sentence was reduced because of his plea agreement to testify against other involved?
Andrew Fastow
Who was the Chairman and CEO (pre-2001) whose conviction was erased after his heart attack?
Kenneth Lay
What was the name of the accounting firm who shredded the Enron Documents? Who ordered the shredding?
Arthur Anderson Accounting Firm;
David Duncan
What was the act passed by congress regarding Enron?
Sarbanes-Oxley Act
Who were the "Guys with Spikes" involved with Enron?
J. Clifford Baxter and Lou Pai
What is the type of accounting used by Enron where potential profits are recorded immediately after deals are signed?
Mark-to-Market accounting
What does it mean when a stock trades on the Pink Sheets or OTCBB?
When a company isn't listed, it often will trade on the Pink Sheets or Over the Counter Bulletin Board.\

A stock that doesn't trade on a major exchange is said to trade over the counter (OTC). This means that the stock is dealt between individuals connected by telephone and computer networks.

Companies will typically be listed on the OTCBB for one of two reasons:
(1) The company has been delisted from a major exchange.
(2) Because the company is unable to meet the initial listing requirements of the Nasdaq or NYSE.

Companies on the Pink Sheets are not required to meet minimum requirements or file with the SEC.
Typically, companies are on the Pink Sheets because either they are too small to be listed on a national exchange or they do not wish to make their budgets and accounting statements public.

The companies on the Pink Sheets are usually penny stocks and are often targets of price manipulation. They should only be purchased with extreme caution.
_____ _____ is being criticized for its involvement in the 2010 European sovereign debt crisis and is reported to have systematically helped the Greek government mask the true facts concerning its national debt between the years 1998 and 2009.
Goldman Sachs
Unemployment data supports the notion that the less-_____ would be more negatively impacted by an economic downturn.
Unemployment data supports the notion that the less-EDUCATED would be more negatively impacted by an economic downturn.