Gordon Growth Model
Doesn't consider risk Dividend is expected to grow
CAP M
Allow to determine expected return on stock and incorporates risk
Efficient Frontier
Ratio that maximizes expected return for a given level of risk
Recession and Expansion probability must =
100%
Efficient Market Hypothesis or EMH
Intrinsic value of a stock is the present value of the stock after tax net cash flows
Capital Budgeting
Process used in making investment decisions involving projects that generate cash flows over multi- year time horizon
Initial Outlay
Cost of Asset, Shipping costs and investment in working capital
Differential Annual Cash Flows
incremental cash flow generated every year
Terminal Cash flows
after tax proceeds from the sale of the asset and release of working capital
Depreciation and salvage value
Estimates
N.P.V.
Present value of after tax net cash flows and most commonly used
I.R.R.
Discount rate that results in a zero net present value
NPV and IRR Calculations
Use CF Calculator key
Inflation
lowers value of cash flow
P/ E or Price/Earnings Ratio
used in the comparable method of firm valuation
R.O.E.
Measure of how well a company uses investments to generate earnings growth a higher ROE is better
Degree of Financial Leverage
indicates the reliance of debt. Higher financial leverage = higher debt. A high degree of financial leverage means higher interest payments which negatively affects the company's bottom line earnings per share
Degree of operating leverage
evaluates how a company's operating income changes with respect to a percentage change in sales. A higher % of fixed costs = a Higher D.O.L. D.O.L. magnifies E.B.I.T. An increase of 1% in E.B.I.T and a D.O.L. of 2.5% will lead to a 2.5% change in E.B.I.T
Working Capital Management
Enough Liquidity to pay the bills. Current Ration, Cash ratio and Receivables turnover ratio
Ratio Analysis
Current Ratio is used to measure short term liquidity to pay short term debt obligations
R.O.E. will be greater than R.O.A.
company has debt and uses the interest expense to reduce it's taxes
Market Rate = Coupon Rate
Bonds sell at par value
Market Rate greater than Coupon Rate
Bonds will sell at discount
Market Rate less than Coupon Rate
Bonds will sell at a premium
Market Rate
Interest everyone else is offering
Coupon Rate
Interest your company is offering
Market rate
Yield to Maturity
Coupon Rate
Payment
Par Value
Amount payable on maturity of bond or Future Value
Projected Equity is
Proforma Income and Equity
To the Power of Number
use the y.x. key on calculator above the 9
Cost of Capital
A positive credit rating lowers the cost of capital
Sustainable Growth Rate
Represents how quickly a company can expand using only it's own source of funding
Cash flow from Operating Activities
cash flow generated from sale of products and service
Who has voting rights
Stockholders
Inventory Related Costs
Product costs, storage costs and opportunity costs
What statements must be filed with the S.E.C.
Annual audited financial Statements
Issues with understanding foreign financial statements
Foreign financial statements use international financial reporting standards that are different than U.S. reporting standards
Cash Flow from Investing
Measures investments in long term assets such as building, equipment and machinery
The role of the S.E.C
regulates public disclosures of entities that sell debt and equity to the public
Greater A.P.Y.
in increase in the frequency of compounding, example from annual to monthly compounding
Treasury Bonds are taxed at federal level
municipal bonds are not taxed at federal level
Benefits of unbundling and offshoring
reduces costs and results in higher sales and employment and it allows for sale of immediate and final goods at lower prices and increases employment
Two basic types of financial instruments
Stocks and bonds
Primary Markets
Companies directly sell securities to investors
Secondary Markets
bought and sold from third parties like the new york stock exchange
One role of the S.E.C.
It regulates companies that sell debt and equity to the public
Global Finance
Risks include exchange rate, country and political risks
Hedging
managing exchange rate risk
Devaluation of currency
makes exports cheaper and imports expensive
Managed Exchange Rates
Free Floating, Fixed or pegged floating, Managed or dirty floating
Cost of International Trade
Taxes, tarrifs and currency restrictions
N.A.F.T.A. and T.P.P
U.S. legislation on global trade
Public Companies maximize shareholder value by
maximizing earnings per share
Private companies maximize shareholder value by
keeping control within the company
Regulation S
provides an exclusion from the Section 5 registration requirements of the Securities Act of 1933, for offerings made outside the US by both US and foreign issuers. A securities offering need not be registered under the Securities Act.
Rule 144 A Securities Act of 1933
provides a safe harbor from the registration requirements of the Securities Act of 1933 for certain private resales which generally are large institutional investors that own at least 100 million in investable assets.
Dodd- Frank
Regulates the banking industry
Volker Rule or Section 619 of the Dodd Frank
meant to restrict big US banks from making risky speculative bets with funds from their own accounts trough proprietary trading. The intent was to keep banks from the kind of hedging that puts customers in danger
Sabanes Oxley
Requires companies to to have internal controls
Financial Industry Regulatory Authority
largest independent regulator for all securities firms doing business in the US. FINRA's mission is to protect investors by making sure the US Securities Industry operates fairly and honestly. All firms desiring to sell equity to the public should be regi
The Foreign Corrupt Practices Act of 1977
enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.
content and structure of a balance sheet?
It reports the assets, liabilities, and equity at a point in time.
Increase in accounts receivable of $5,000
Decrease cash flows from operations by $5,000.
Recognition of revenues and expenses under accounting income and income for tax purposes?
Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes.
basic equation for a balance sheet?
Assets = Liabilities + Equity
What does free cash flow represent?
Cash available for distribution after funding required reinvestment
A firm has a higher ROE (return on equity) then the industry average
The firm is generating higher returns to owners than the industry. Higher ROE = Higher Returns
Factor considered in purchasing common stock in a company that has average but consistent operating performance.
The current price of the stock is 25% below its intrinsic value.
When market interest rates fluctuate
, the bond coupon rate is unchanged.
A bond that matures in 30 months is sold at a premium. What is the yield to maturity (YTM)?
Lower than the coupon rate
Why does a long term bond resemble an interest only loan?
None of the principle is repaid until the bond matures
Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate (APR)?
Any time the number of compounding periods is greater than annual
What is the difference between a common stock and a preferred stock?
Skipping a declared preferred stock dividend results in dividends in arrears.
Which happens to the risk level in a portfolio as the number of assets in the portfolio increases?
Risk decreases at a slower rate.
What are two primary benefits of the capital asset pricing model (CAPM)?
CAPM provides a way to determine the expected return for stocks and CAPM provides a way to estimate the required return.
What is the acceptance criteria when using internal rate of return to evaluate a project?
Accept when the project return is greater than the required return
Why do companies strive for a lower cost of capital?
Less money dedicated to financing means more money is available for production and operations
Data needed to perform a capital budget analysis?
Annual cash flows for the life of the new project, Cash Flow when the firm terminates the project The initial cost of the product
What are two examples of sunk costs?
The cost of a market study conducted prior to the decision. The cost of feasibility consulting incurred before the decision point
Company A has a lower degree of operating leverage then Company B
Company ABC has lower risk than Company XYZ. Lower Degree of Operating Leverage is lower risk
A person needs to determine the cost to replace a company's property, plant, and equipment using the replacement cost method. Which value does this person need to consider in order to make this determination?
Market value
Which type of investment will a risk-averse investor most likely invest in?
Index funds
Higher Degree of Financial Risk
Results in a greater percentage decrease in pre- tax profit.
Why would a company prefer to raise capital by issuing debt instead of issuing new equity?
Debt financing provides interest tax benefits.
How does the anticipation of bankruptcy affect a firm's capital structure?
A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs.
Which hybrid security has special claims on a corporation's profits or, in case of liquidation, corporate assets?
Preferred stock
Increase in corporate tax rates
Decrease the cost of debt
Accounts receivable turnover
used to measure a company's effectiveness in extending credit as well as collecting debts
What is the reason for holding cash and cash equivalents?
To provide liquidity
What describes the amount of cash a firm needs in order to pay its immediate bills?
Operating balance
How does the Securities Exchange Commission (SEC) regulate the financial industry?
By requiring public disclosure of information about entities that sell public equity or debt
Which company control is required by the Sarbanes- Oxley Act?
Disclosure of off- balance sheet debts
Which document is required to be made available prior to a firm going public, according to the Securities Act of 1933?
Prospectus
What does the Financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with rules of FINRA and Securities and Exchange Commission (SEC)?
Prospectus
What did the Dodd- Frank Act seek to prevent?
Financial institutions becoming too big to fail
Gordon Growth Model
Doesn't consider risk Dividend is expected to grow
CAP M
Allow to determine expected return on stock and incorporates risk
Efficient Frontier
Ratio that maximizes expected return for a given level of risk
Recession and Expansion probability must =
100%
Efficient Market Hypothesis or EMH
Intrinsic value of a stock is the present value of the stock after tax net cash flows
Capital Budgeting
Process used in making investment decisions involving projects that generate cash flows over multi- year time horizon
Initial Outlay
Cost of Asset, Shipping costs and investment in working capital
Differential Annual Cash Flows
incremental cash flow generated every year
Terminal Cash flows
after tax proceeds from the sale of the asset and release of working capital
Depreciation and salvage value
Estimates
N.P.V.
Present value of after tax net cash flows and most commonly used
I.R.R.
Discount rate that results in a zero net present value
NPV and IRR Calculations
Use CF Calculator key
Inflation
lowers value of cash flow
P/ E or Price/Earnings Ratio
used in the comparable method of firm valuation
R.O.E.
Measure of how well a company uses investments to generate earnings growth a higher ROE is better
Degree of Financial Leverage
indicates the reliance of debt. Higher financial leverage = higher debt. A high degree of financial leverage means higher interest payments which negatively affects the company's bottom line earnings per share
Degree of operating leverage
evaluates how a company's operating income changes with respect to a percentage change in sales. A higher % of fixed costs = a Higher D.O.L. D.O.L. magnifies E.B.I.T. An increase of 1% in E.B.I.T and a D.O.L. of 2.5% will lead to a 2.5% change in E.B.I.T
Working Capital Management
Enough Liquidity to pay the bills. Current Ration, Cash ratio and Receivables turnover ratio
Ratio Analysis
Current Ratio is used to measure short term liquidity to pay short term debt obligations
R.O.E. will be greater than R.O.A.
company has debt and uses the interest expense to reduce it's taxes
Market Rate = Coupon Rate
Bonds sell at par value
Market Rate greater than Coupon Rate
Bonds will sell at discount
Market Rate less than Coupon Rate
Bonds will sell at a premium
Market Rate
Interest everyone else is offering
Coupon Rate
Interest your company is offering
Market rate
Yield to Maturity
Coupon Rate
Payment
Par Value
Amount payable on maturity of bond or Future Value
Projected Equity is
Proforma Income and Equity
To the Power of Number
use the y.x. key on calculator above the 9
Cost of Capital
A positive credit rating lowers the cost of capital
Sustainable Growth Rate
Represents how quickly a company can expand using only it's own source of funding
Cash flow from Operating Activities
cash flow generated from sale of products and service
Who has voting rights
Stockholders
Inventory Related Costs
Product costs, storage costs and opportunity costs
What statements must be filed with the S.E.C.
Annual audited financial Statements
Issues with understanding foreign financial statements
Foreign financial statements use international financial reporting standards that are different than U.S. reporting standards
Cash Flow from Investing
Measures investments in long term assets such as building, equipment and machinery
The role of the S.E.C
regulates public disclosures of entities that sell debt and equity to the public
Greater A.P.Y.
in increase in the frequency of compounding, example from annual to monthly compounding
Treasury Bonds are taxed at federal level
municipal bonds are not taxed at federal level
Benefits of unbundling and offshoring
reduces costs and results in higher sales and employment and it allows for sale of immediate and final goods at lower prices and increases employment
Two basic types of financial instruments
Stocks and bonds
Primary Markets
Companies directly sell securities to investors
Secondary Markets
bought and sold from third parties like the new york stock exchange
One role of the S.E.C.
It regulates companies that sell debt and equity to the public
Global Finance
Risks include exchange rate, country and political risks
Hedging
managing exchange rate risk
Devaluation of currency
makes exports cheaper and imports expensive
Managed Exchange Rates
Free Floating, Fixed or pegged floating, Managed or dirty floating
Cost of International Trade
Taxes, tarrifs and currency restrictions
N.A.F.T.A. and T.P.P
U.S. legislation on global trade
Public Companies maximize shareholder value by
maximizing earnings per share
Private companies maximize shareholder value by
keeping control within the company
Regulation S
provides an exclusion from the Section 5 registration requirements of the Securities Act of 1933, for offerings made outside the US by both US and foreign issuers. A securities offering need not be registered under the Securities Act.
Rule 144 A Securities Act of 1933
provides a safe harbor from the registration requirements of the Securities Act of 1933 for certain private resales which generally are large institutional investors that own at least 100 million in investable assets.
Dodd- Frank
Regulates the banking industry
Volker Rule or Section 619 of the Dodd Frank
meant to restrict big US banks from making risky speculative bets with funds from their own accounts trough proprietary trading. The intent was to keep banks from the kind of hedging that puts customers in danger
Sabanes Oxley
Requires companies to to have internal controls
Financial Industry Regulatory Authority
largest independent regulator for all securities firms doing business in the US. FINRA's mission is to protect investors by making sure the US Securities Industry operates fairly and honestly. All firms desiring to sell equity to the public should be regi
The Foreign Corrupt Practices Act of 1977
enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.
content and structure of a balance sheet?
It reports the assets, liabilities, and equity at a point in time.
Increase in accounts receivable of $5,000
Decrease cash flows from operations by $5,000.
Recognition of revenues and expenses under accounting income and income for tax purposes?
Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes.
basic equation for a balance sheet?
Assets = Liabilities + Equity
What does free cash flow represent?
Cash available for distribution after funding required reinvestment
A firm has a higher ROE (return on equity) then the industry average
The firm is generating higher returns to owners than the industry. Higher ROE = Higher Returns
Factor considered in purchasing common stock in a company that has average but consistent operating performance.
The current price of the stock is 25% below its intrinsic value.
When market interest rates fluctuate
, the bond coupon rate is unchanged.
A bond that matures in 30 months is sold at a premium. What is the yield to maturity (YTM)?
Lower than the coupon rate
Why does a long term bond resemble an interest only loan?
None of the principle is repaid until the bond matures
Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate (APR)?
Any time the number of compounding periods is greater than annual
What is the difference between a common stock and a preferred stock?
Skipping a declared preferred stock dividend results in dividends in arrears.
Which happens to the risk level in a portfolio as the number of assets in the portfolio increases?
Risk decreases at a slower rate.
What are two primary benefits of the capital asset pricing model (CAPM)?
CAPM provides a way to determine the expected return for stocks and CAPM provides a way to estimate the required return.
What is the acceptance criteria when using internal rate of return to evaluate a project?
Accept when the project return is greater than the required return
Why do companies strive for a lower cost of capital?
Less money dedicated to financing means more money is available for production and operations
Data needed to perform a capital budget analysis?
Annual cash flows for the life of the new project, Cash Flow when the firm terminates the project The initial cost of the product
What are two examples of sunk costs?
The cost of a market study conducted prior to the decision. The cost of feasibility consulting incurred before the decision point
Company A has a lower degree of operating leverage then Company B
Company ABC has lower risk than Company XYZ. Lower Degree of Operating Leverage is lower risk
A person needs to determine the cost to replace a company's property, plant, and equipment using the replacement cost method. Which value does this person need to consider in order to make this determination?
Market value
Which type of investment will a risk-averse investor most likely invest in?
Index funds
Higher Degree of Financial Risk
Results in a greater percentage decrease in pre- tax profit.
Why would a company prefer to raise capital by issuing debt instead of issuing new equity?
Debt financing provides interest tax benefits.
How does the anticipation of bankruptcy affect a firm's capital structure?
A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs.
Which hybrid security has special claims on a corporation's profits or, in case of liquidation, corporate assets?
Preferred stock
Increase in corporate tax rates
Decrease the cost of debt
Accounts receivable turnover
used to measure a company's effectiveness in extending credit as well as collecting debts
What is the reason for holding cash and cash equivalents?
To provide liquidity
What describes the amount of cash a firm needs in order to pay its immediate bills?
Operating balance
How does the Securities Exchange Commission (SEC) regulate the financial industry?
By requiring public disclosure of information about entities that sell public equity or debt
Which company control is required by the Sarbanes- Oxley Act?
Disclosure of off- balance sheet debts
Which document is required to be made available prior to a firm going public, according to the Securities Act of 1933?
Prospectus
What does the Financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with rules of FINRA and Securities and Exchange Commission (SEC)?
Prospectus
What did the Dodd- Frank Act seek to prevent?
Financial institutions becoming too big to fail