Financial Management

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