Roy Moore Lost

Allocation of funds between those with extra to those who need it

Finance

exchanges, brokerages- match borrowers with lenders

Market intermediary

Banks

Finanacial Intermediary

negotiable financial instrument that is evidence of indebtedness

Security

short term, less than one year

money market security

long term, more than one year

capital market security

represents ownership of a company

Equity

Issues new securities, IPOs

Primary market

buying and selling existing securities

Secondary market

number of shares*share price

Market price

one owner
business income taxed once
unlimited liability

Sole proprietorship

two owners
business income taxed once
unlimited liability

Partnership

separate legal entity
limited liability
double taxation

Corporation

separate legal entity
income taxed once

LLC

limited to 100 shareholders
taxed as a partnership

S corporation

maximize the market value of the equity interest or, alternatively, maximize owners' value

Primary goal of financial mangement

conflict of interest between management and owners

Principal-agent problem

summary of a company's transactions in a way that outsiders can understand

accounting

Unqualified-good
Qualified-some errors
Adverse- major issues
Disclaimer of opinion-unable to complete audit

GAAP opinions

shows company's financial position at a given time

Balance sheet

Liquidity (most first)

Asset order on the balance sheet

current assets-current liabilities

Net working capital

non-cash expense

Depreciation

cash flow from day to day operations

Cash flow from operations

cash flow from buying/selling long term assets

Cash flow from investing

cash flow from obtaining funding from external sources as well as repaying claimholders

Cash flow from financing

money that can be withdrawn without harming firm's ability to operate

Free cash flow

tax paid on the final dollar earned

Marginal tax rate

received and fully deductible when paid

Interest is fully taxable when

no

Are dividends tax deductible

lowers the tax expense

What does higher depreciation do to tax expense

length of time between investment of cash in inventory and when money is returned in the form of cash from customers

operating cycle

return provided to sharholders

return on equity

contract between two parties; a lender (the investor) and a borrower (the company or the government)

bond

money paid when bond matures ( usually 1000)

face value

regular interest payment (coupon*face)

Coupon

No coupon, only payment is when bond matures

Zero coupon bond

bond value is greater than face value
coupon rate is greater than discount

premium bond

bond value is less than face value
coupon rate is less than discount

discount bond

inverses

discount rate and present value changes are

default risk

what does a bond rating represent

past returns

ex post returns

expected returns

ex ante returns

probability that the actual return from an investment is less than the expected return

risk

degree to which two securities move together (correlation coefficient is essentially the same thing)

covariance

set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return

efficient frontier

greater

required return must be___________than the dividend growth rate

mix of debt sources for a company

capital structure

cost of raising one more dollar

marginal cost of capital

common stock

retained earnings have the same cost as

process of planning and evaluating expenditures on assets whose cash flows are expected to extend beyond one year

capital budgeting

one change of signs
-----++++++

normal cash flow stream

two or more changes of signs
--+++++---

non normal cash stream

npv(interest rate, initial investment, {CF1,CF2,...,CFn})

NPV in calculator

discount rate that will yield a NPV of 0

internal rate of return

irr(initial investment, {CF1,CF2,...,CFn})

irr in calculator

where IRR=NPV

crossover point

USE NPV

If there is a conflict between NPV and IRR

similar to IRR but uses a reinvestment rate determined by the evaluator

MIRR

measures the benefit per unit cost of a project

profitability index

no

are sunk costs a relevant cash flow

total initial cost - accumulated depreciation

book value

one variable is changed at a time

sensitivity analysis

multiple variables are changes to create specific scenario

scenario analysis

nonsense

monte carlo simulation

tax deductibility

benefits of using debt

affect many or all assets
also called non diversifiable

systematic risk

limited to a number of assets
also called asset specific

unsystematic risk

shows how an asset moves with the overall market
1=same risk as market
<1=less systematic risk
>1=more systematic risk
0=risk free asset

beta coefficient

market where prices of all assets accurately reflect all relevant and available information about the assets

efficient market

weak
semi-strong
strong

forms of market efficiency