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66 Cards in this Set
- Front
- Back
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How do you value a bond?
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Present value of the expected cash flows from the bond (discounted values of the coupon payments and the par value)
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How is the interest rate of a bond determined?
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It depends on teh default risk of the bond
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How are rates assigned to bonds?
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Rating agencies like Standard & Poor's
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IRR for a bond
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the rate at which the present value of the coupons and face value is equal to the market price
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What is preferred stock?
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Provides equity stake in the company but also pays dividends. Frequently has a conversion option to allow someone to trade in teh security for common stock
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Which is more senior, preferred stock or common stock?
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preferred stock
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What pays higher yields, the preferred stock of a risky company or the preferred stock of a relatively unrisky company?
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The risky company
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What is disintermediation?
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Cutting out the middle man
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What is an example of disntermediation?
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eBay
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What is an example of disintermediation in the financial industry?
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People using TD Ameritrade
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Give examples of high betas.
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1. Tech companies
2. Smaller firms 3. Highly cyclical industries |
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Give examples of low betas
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Grocery store chains or tobacco companies
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What is a good prediction for equity risk premium?
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4.5%
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What is liquidity?
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The ability to move into and out of an asset class quickly
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Tell me about the P/E ratio of a defensive stock?
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Relatvely low
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Does a defensive stock outperform the market during economic growth?
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No
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What do you call the value of debt?
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Book value
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What is a company's annual financial report called?
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10Ks
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Where is accounts payable on a balance sheet?
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Current liability
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What does CAPM measure?
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our expected return on an investment
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Why is the income statement not sufficient?
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A company can be profitable on its income statement but go bankrupt if it doesnt have sufficient cash flows to pay off creditors
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Where is cash from operations derived from?
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Changes in balance sheet accounts
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What is working capital?
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Our short term liquidity--our ability to cover short term liabilities
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What is the equation for working capital?
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Current assets - current liabilities
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What is free cash flow (conceptually)?
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Cash a frm has after operations that it can use after it has maintained its asset base
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Why are P/E multiples sometimes different across countries?
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Different countries may record earnings differently
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How can a firm raise cash?
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1. Selling stock
2. Issuing debt 3. Selling off assets |
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How would you calculate debt for a private company?
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Look for comparable companies
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Why might you unlever beta?
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You're interested in the risk of the business, not the risk of the financing, so you unlever to cancel out the risk of the financing.
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How do you calculate a discount rate?
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Use CAPM
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Why mght high-tech stocks have high prices even though they have little or no earnings?
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Analysts expecting growth
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Why is a DCF for a high growth/low earning stock bad?
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1. Distributions of important variables are bimodially distributed
2. Risk is very high, so it's hard to find an appropriate discount rate 3. Difficult to determine how long the growth will occur |
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How would you value a company with no earnings?
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Can't use DCF. Need to use multiples/comparables. Important to choose right comparables.
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What is the name of the terminal value calculation that I normally use?
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Perpetuity growth methodology
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Why do you project out FCF?
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This is hypothetically the amount of cash that could be paid out to lenders and investors
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What is a way to think of net working capital?
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Cash that is tied up running the business
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What are the main links between teh balance sheet and the income statement?
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1. Net income goes under retained earnings under shareholders' equity
2. Debt determines interest expense 3. PP&E determines depreciation on income statement |
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What are the links between the balance sheet and the statement of cash flow?
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1. Beginning cash comes from previous year's balance sheet
2. Cash from operations is calculated from change in current assets and liabilities 3. Depreciation comes from PP&E (except remember it is added back n in this case!) 4. investments n pp&e come from balance sheet and go under cash from investing 5. Ending cash goes back onto balance sheet |
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What are some common reasons for an IPO?
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1. Raise capital to grow the business
2. Cashing out to original owners and investors 3. Employee compensation |
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What are some negatives of an IPO?
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1. Sharing future earnings
2. loss of confidentiality 3. loss of control 4. IPO expenses 5. legal liabilities |
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Give examples of primary and secondary markets for an IPO?
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1. Primary- institutional investors
2. Secondary- NYSE, Nasdaq |
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What usually is the risk free rate?
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The yield on the 10 year treasury note
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Give five examples of companies with low betas
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1. Consumer staples
2. Healthcare 3. Utilities 4. Tobacco 5. Petroleum production |
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How would you calculate the discount rate for an all equity firm?
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Take CAPM and that would be the discount rate for the whole firm since it's all equity
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What is the market risk premium?
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The required return that investors require for investing in stocks rather than "risk free" securities
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How do you calculate market risk premium
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Average return on the market - risk free rate
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What kind of investment has a negative beta?
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Gold. As the stock market goes up, people flee away from gold to buy stock. Vice versa.
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Why might a company issue stock rather than debt to fund its operations?
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1. Thinks stock price is overpriced
2. If the project it is raising money for may not generate consistent cash flows (so that we don't have to deal with coupon payments) 3. to adjust capital structure |
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Why should an investor buy preferred stock?
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Upside of equity but with coupon payments to hedge against risk
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What is operating leverage?
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The percentage of costs that are fixed
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If you have two identical companies except one is public and one is private, which would have the higher priced shares?
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The public one.
1. liquidity premium an investor would pay for the ability to quickly buy and sell stock on exchanges 2. Transparency premium |
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What could a company do with excess cash?
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1. Pay out dividend to shareholders
2. Reinvest cash into operations 3. buying out a competitor 4. stock repurchase 5. expand into new markets 6. pay off debt |
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Give examples of goodwill
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1. Brand name
2. Customer relations3. Intellectual property |
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Where did the Nasdaq close yesterday?
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3131
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Where did the S&P 500 close yesterday?
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1495
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Where did the DJIA close yesterday?
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13880
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Company XYZ released increased quarterly earnings yesterday, but their stock price dropped. Why could this have happened?
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1. Industry/market as a whole dropped
2. Results didn't meet analyst expectations |
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What is short selling a stock?
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Selling a stock you don't actually own with the belief that they will be able to pay a lower price in the future to buy the stock
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Liquidity
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how freely an asset or security can be bought or sold on the open markets by an investor
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How can a company raise its stock price?
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1. Raise earnings
2. Buy back stocks 3. Announce a change to organizational structure like cost cutting 4. accretive merger/acquisition |
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If we're given two stocks, how do we determine which has higher growth potential?
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whichever has lower market cap
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What is the equation for the return on a stock?
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Sale price - return price + dividends
/ purchase price |
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Correlation
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how two investments move together in relation to one another
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If you add a risky stock to your portfolio, what happens to the risk of the portfolio?
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depends on correlation wth the portfolio.
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When should a company buy back stock?
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1. Believes stock is undervalued
2. Has extra cash 3. it can make money by investing in itself 4. wants to raise its price |
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Describe an investment grade bond
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1. good credit rating
2. low risk of bankruptcy 3. low interest rate |
