3 Important Areas in Finance:
1. Corporate Finance - financial decision making by a firm's management
2. Investments - various types of financial instruments, e.g., stocks, bonds
3. Banking or Financial Institutions
Treasury Securities
generally bonds issued by US Government
Corporate Bonds
private sector equivalent of Treasury bonds
Stocks
shares of ownership in a company
Syndicate
A group temporarily formed to handle a bond or stock issue, generally made up of large investment banks or other types of institutional investors
Competitive Sale
potential underwriters submit bids and firm selects the bid with the highest price and lowest interest rate; selected underwriter sells bonds to investors at a profit
Negotiated Sale
Issuing firm issues a bid and interviews potential underwriters
New Equity Offering
an IPO; IPOs are offered on the primary market
Primary Financial Market
where issuers and buyers engage in exchanges
Secondary Financial Markets
where securities are traded after IPO
Stock Market
Secondary Financial Market for stocks
Auction Market
has a physical location and prices are determined by the highest price an investor will pay
Dealer Market
Does not require a physical location
Dealer Market
Securities are bought and sold through a network of dealers that trade for themselves
Dealer Market
Dealers must compete with one another, thus lowering the cost of transacting
Bid-Ask Spread
The difference between the bid price and the ask price; compensation to the specialist for the risk he bears for his willingness to provide liquidity
Market Orders
Time sensitive orders
Limit Orders
Price sensitive orders
Efficient Markets
Prices reflect all relevant information and prices are not predictable
Inefficient Markets
Respond slowly to information and often have mispriced securities
Dollar Returns
Calculated as the difference between the price of a security during the previous time period and the price of the security at the current time period, plus any additional cash flow that came from the security (e.g., coupons for bonds, dividends for stocks
Percentage Returns
Calculated by dividing the dollar returns by the price of the security at time t-1, or the previous time period
Agency Costs
Costs incurred when management does not act in the best interests of shareholders
Accrual Accounting
GAAP Accounting
Accrual Accounting
Revenues are recognized when the earning process is complete and expenses are matched to recognized revenues
Cash Accounting
Cash in = revenue; Cash out = expense
Matching Principle
Requires that revenue recognized be matched with expenses incurred to generate the revenue
Cash-based Income
Informal metric based on cash in and out of the firm
Income for Tax Purposes
Based on the government's definition of income; the amount that will be taxed
Accounting Income
Income calculated using accrual accounting and the best metric for understanding firm operations
Income Statement Equation
Net Income=Revenue-Expenses
Gross Profit
Gross Profit=Revenue-COGS
Balance Sheet Equation
Balance Sheet Equation
Equity=Assets-Liabilities
Current Assets
Cash; Marketable Securities; A/R; Inventory
Marketable Securities
Short-term, high-quality securities, e.g., US Treasury Bills and CDs
Current Asset
Cash or assets that will be converted into cash within the next year; Listed in order of liquidity
Fixed Assets
Gross PP&E; Net PP&E
Gross PP&E
Original cost of all non-current assets; offset by accumulated depreciation
Net PP&E
Book value; Original price minus accumulated depreciation
Fixed Asset
Depreciation Expense
Depreciation for a specific asset claimed on income statement
Accumulated Depreciation
total of all depreciation claimed against the firm's fixed assets and recorded on the balance sheet
Current Liabilities
A/P, N/P, Accruals
Current Liability
Obligation that requires cash in the next year; Listed in order of maturity (shortest first)
Notes Payable
Accruals
Represent expenses incurred but not yet paid (e.g., wages)
Long-Term Liabilities
Debt obligations with maturity longer than one year
Types of Equity Accounts
Common Stock (CS); Additional Paid-In Capital (APIC); Retained Earnings (RE)
Retained Earnings
Represents the cumulative total of earnings not paid out as dividends to stockholders over the entire history of the entity
2 Things To Do with Net Income
1. Pay it out; 2. Plow it back (RE)
Retained Earnings
Net Income=Dividends+Change in RE
New RE=Old RE+Change in RE=Old RE+Net Income-Dividends
EBIT
Revenue minus expense, excluding tax and interest
EBIT
Operating Income
Operating Income
EBIT
Difference in Core Activities
Categorization may vary based on firm's core activities (e.g., how a lathe is categorized for a carpenter vs. a hardware store)
Cash Flow Management
Categorizing cash flows according to the management goals (e.g., bonus)
Market Pressure
Pressures to manipulate cash flow categorization from the market place
Cash from Operations (CFO)
Includes all cash flows relative to producing and selling the firm's product, e.g., cash in from customers, cash out for raw materials, cash out for operating expenses, cash out for taxes)
Indirect Method of calculating CFO
Bottom up approach that begins with net income and adjusts for differences between net income and CFO
Cash from Investing (CFI)
Any cash in or out due to the investment in or disposal of fixed assets
CFI
0
Cash from Financing (CFF)
Net cash impact from financing; includes cash flows resulting form increased borrowing, debt repayment, stock issuance, stock repurchase, or dividend payment
Dividend Calculation
Calculated by comparing the change in RE to net income
Divdends
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Free Cash Flow (FCF)
Distributable cash left after funding required reinvestment in PP&E and increased working capital
Free Cash Flow to the Firm (FCFF)
Cash distributable to all the providers of capital (i.e., debt and equity holders
FCFF
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NOPAT
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Net Operating Profit After Taxes (NOPAT)
measure of profit that excludes the costs and tax benefits of debt financing
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Free Cash Flow to Equity (FCFE)
Cash distributable to the equity holders after satisfying obligations to debt holders; Cash distribuatble to stockholders after funding required reinvestment
FCFE
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Increases in Debt
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CAPEX
funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment
Capital Expenditure
CAPEX
Liquidity Ratios
Speak to a firm's ability to meet short term obligations
Current Ratio
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Quick Ratio
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AR Turnover
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Average Collection Period (ACP)
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Efficiency Ratios
Measure how effectively assets are used to generate sales or profits
Interest-Bearing Debt to Total Capital (IBDTC)
Operating Margin
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Net Margin
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DuPont Decomposition
Decomposes ROE into component parts to show that ROE is a function of operating efficiency as measured by net margin, asset efficiency as measured by TAT, and financing policy as measured by FLR
DuPont Equation
Trend Analysis
Examines a firm's ratios over time, essentially comparing the current year to previous years (usually 5 years)
Cross-Sectional Analysis
Compares a firm's ratios to a peer group
Internal Goal Monitoring
Measures progress relative to specific goals set for the firm
Recasting
Scrubbing data to ensure a firm's financial statements are comparable to the peer group; must address timing differences and accounting differences
4 Steps in Ratio Analysis
1. Basic Data; 2. Differences; 3. Deepen Analysis; 4. Report Cause & Cure
Earnings Management
Using accrual accounting to increase net income
Time Value of Money (TVM)
A dollar today is worth more than a dollar tomorrow
3 Reasons to Value a Dollar Today
1. Ensures its receipt; 2. Provides the option to use today; 3. Inflation causes purchasing power to decrease
Interest Rate
Rate at which a dollar changes in value due to the passage of time
Discount Rate
Interest Rate
Hurdle Rate
Interest Rate
Cost of Capital
Interest Rate
Opportunity Cost of Capital
Interest Rate
Interest Rate
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Real Risk-Free Rate
Rate earned on riskless investments with 0% inflation
Inflation
Annual decay in the purchasing power of money
Risk Premium
Compensation for bearing the risk of a particular investment
Single Sum
A single cash flow at one point in time
Present Value
Calculation that takes a sum in the future and finds a time-adjusted equivalent value at a closer point in time
Future Value
Calculation that moves cash flows farther into the future
Ordinary Annuity
Equally spaced series of cash flows all of the same magnitude; Assumes payment at the end of a period
Annuity Due
Assumes the payment occurs at the beginning of a period
Perpetuity
Unending series of equal payments
PVperpetuity
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Deferred Annuity
Equal series of payments that starts sometime in the future
2 Steps for Calculating Deferred Annuities
1. Find the amount needed in the future (PV)
2. Solve for PV using PV from Step 1 as FV in Step 2
Mixed Stream Cash Flow
Series of payments of different magnitude and/or unequally spaced
Effective Yield
Annual Percentage Yield (APY); How much you earn on a deposit over a year, accounting for compound interest
Sensitivity Analysis
Used to assess the present value of projects under different input assumptions
Debt Security
Any type of loan
Secured Loan
Some type of asset is used as collateral to back the loan
Unsecured Loan
Loan that is not backed by a specific asset
Fixed-Income Securities
Loans that pay a fixed interest payment each year
Par Value
Sum of money that a firm promises to apy at a bond's expiration
Face Value
Par Value
Coupon Rate
Coupon yield
Coupon Rate
Bond Maturity
When a bond has reached its expiration, or maturity, date
Yield to maturity
Rate of return investors receive on a bield
Annual Paymetns
Interest payments are made annually and the amount of the payment is equal to the coupon rate times the par value of the bond
Covenants
Outlines things the company obligates itself to do or not do to protect bond holders
Affirmative Covenant
Describes things a firm pledges to do
Negative Covenant
Describes things a company pledges not to do
Bond Future Value
Face value paid at maturity
Bond Value
Price you would be willing to pay; calculated as the present value of its future cash flows and includes any coupon payments it may have and its future value
Bond Price
The price one pays to buy a bond; usually represented as a percentage of the par value (e.g., fi a bond with a par of $1000 is sold for $900, then the price is published as 90%)
Bond Yield
Amount of return an investor will realize on a bond
Current Yield
Yield measure calculated by dividing the annual coupon rate by the current price of the bond
Nominal Yield
Current Yield
Debentures
Unsecured bonds
Subordinated Debentrues
Unsecured debentures with a lower claim than normal debentures to a firm's assets in the event of liquidation
Mortgage Bonds
Has specific collateral
Zeros
Zero coupon bonds
Eurobonds
Payable in currency not native to the country of issue
Foreign Bonds
Issued in the domestic market by a foreign firm in domestic currency
Municipal Bonds
Floated by local governments, usually to fund infrastructure improvements, and almost always exempt from Federal taxes
Treasury Bonds
Issued by Federal government to support deficit spending; often used as risk-free investment vehicle
Convertible Bond
Feature of a bond that allows the ability to convert the bond into equity securities (usually common stock) when investor chooses
Junk Bond
Bonds with a rating of BB or lower
Investment Grade Bond
Bond rated BBB and above; considered to be fairly low risk
High Yield Debt
Junk Bond
Speculative Debt
Junk Bond
Duration
Measure that captures the volatility of a bond's price based on interest rate movements used to compare the impact of interest rate changes on any bond
Weighted Average Time to Maturity
Duration
Inverse Price-Yield Relationship
When YTM (market rates) rise, the price of existing bonds decrease and existing bonds pay a coupon interest rate below what new bonds pay for the same amount of risk.
When the YTM drops, the price of existing bonds increase.
Interest Rate Sensitivity
The sensitivity of a bond price to changes in interest rates
Price Sensitivity
Interest Rate Sensitivity
Continuous Compounding
Interest instantaneously compounds resulting in the largest difference between APY and APR
Residual Claim
After a firm pays for operations and pays creditors (or is liquidated), residual earnings belong to shareholders
Common Stock
Represents ownership in a firm and usually comes with voting rights but has the lowest position in the claim hierarchy
Corporate Governance
Control issues involved in running a company as a collective
Value of an Asset
Present value of the stream of expected future cash flows discounted at an appropriate rate of return
Basic Model
States that to know the value of a share of common stock today, we must estimate future dividends forever and discount all back to present
Preferred Stock
Hybrid security with elements that resemble equity and elements that resemble debt
Dividends in Arrears
Firms can skip payment of preferred stock dividends without defaulting, but cannot make payments to common shareholders until preferred stock dividends are satisfied
Two-Stage Growth Approach
Gordon Growth Model is limited by the assumption that dividends grow at a constant rate. Two-Stage Growth approach solves this problem by allowng a firm to grow at different rates at different times; Divides firm's future into two stages, high-growth or s
Multi-Stage Growth Models
Broad class of models that encompass multiple stages to correctly model a firm's expected growth
Order of Operations
Parentheses - Exponents - Multiplication - Division - Addition - Subtraction
PEMDAS
Order of Operations
Statistical Moment
Measure of the shape of the distribution of a particular point, e.g., mean
Expected Return
Equal to the weighted average of returns in the jth economic state, where the weights are the probabilities of that state occurring
Economic State Probabilites
1. If the probability of an EXPANSIONARY state INCREASES, the expected return is expected to increase.
2. If the probability of a RECESSIONARY state increases, then the expected return is expected to DECREASE.
3. If returns are higher for an expansionary
Diversification
Spreading wealth across many assets to offset the possibility that a large negative return in one asset will destroy a large portion of wealth; a well-diversified portfolio should have a lower Standard Deviation of Expected Returns than an undiversified p
Standard Deviation of Expected Returns
Measure of risk
Idiosyncratic risk
Systematic Risk
Undiversifiable risk
Capital Asset Pricing Model (CAPM)
Market Risk Premium
Difference between the expected return for the market and the risk free rate
Beta
Measures a firms systematic risk; Risky firm = 1, riskier than market > 1, less risky then market < 1
Regression Analysis
Uses historical data to estimate a linear equation and to fit a line through the data point that minimizes the squared differences from each point to the line
Ordinary Least Squares
Most common type of regression analysis
Slope of Regression Line
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Weighted Average Cost of Capital (WACC)
Cost of capital in rate of return terms; rate a firm is expected to pay on average to all its security holders to finance assets
Cost of Debt
Calculated as the interest rate on a firm's bonds
After-Tax Cost of Debt
Not the yield to maturity because of tax benefits associated with debt; total cost of capital will equal the yield to maturity multiplied by 1 minus marginal tax rate
= Rd * (1-?)
Rd = YTM (I/Y)
Examples of Short-Term Debt Financing
Trade credit, bank loans, bankers' acceptances, commercial paper
Bankers' Acceptances
Debt instruments used for short term and guaranteed by a commercial bank
Commercial Paper
Not backed by collateral; interest rate reflects the cost of debt
Cost of Preferred Equity (kps)
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Cost of Common Equity (kcs)
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Flotation Costs
Cost incurred by a firm when it issues new securities; negotiated between underwriters and firms issuing new securities and paid by the firm
If a credit rating agency downgrades a firm's debt...
... then the cost of debt will increase, which will increase the cost of capital.
If a company recapitalizes its dept and extends the length until maturity...
... then the cost of debt will increase, which will increase the cost of capital.
If market interest rates increase...
... then the tax shield offered by debt will increase, which will decrease the cost of capital.
If a company has substantially increased debt levels recently...
... then the new debt may have higher interest rates, which will increase the cost of capital.
According to the Gordon Growth Model, increases in dividends...
... will increase the return required by shareholders, which may increase the cost of capital.
Increases in the growth rate of the firm (or of dividends)...
... will increase the return required by shareholders according to the Gordon Growth Model, which may increase the cost of capital.
Increase in a firm's exposure to systemic risk...
... will increase the expected return according to CAPM, which may increase the cost of capital.
Higher idiosyncratic risk...
... will increase the expected return and will increase the cost of capital.
GIGO
Garbage In, Garbage Out
Discretionary Funding Needed (DFN)
Negative DFN
Indicates adequate financing to fund projected growth
DFN
0
6 Steps of the Percent Sales Method
1. Project sales revenues and expenses
2. Forecast change in spontaneous balance sheet accounts
3. Deal with discretionary accounts
4. Calculate RE
5. Determine total financing need/assets
6. Calculate DFN
Spontaneous Accounts
Vary with sales
Discretionary Accounts
Non-spontaneous accounts that do not automatically increase with sales
Plowback Ratio
Retention Ratio
Plug
Account adjusted to make the pro forma balance sheet balance when DFN is negative
4 Ways to Decrease DFN
1. Slow sales growth
2. Examine capacity constraints
3. Lower dividend payout
4. Increase net margin
Steady State Growth
Level of growth where the following four financial ratios are constant and firm does not need to issue new equity:
1. Profitability
2. Asset Utilization
3. Leverage
4. Payout
Sustainable Growth Rate (SGR)
ROE
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Capital Budgeting Decisions
Decisions regarding long-lived investments
Capital Budgeting
Process of selecting long-lived projects that will enhance firm value
Initial Outlay
Start up or acquisition cost for a project
Net Initial Outlay
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Differential Cash FLow (DiffCF)
Cash flow associated with using the asset each year during the life of the project
DiffCF
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Incremental EBT
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Terminal Cash Flow (TCF)
Cash flow associated with the unwinding of the project at the end of its useful life; includes cash from the disposal of the asset (including taxes) and recapture of working capital
TCF
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Incidental Cash Flows
Cash flows not directly from the project but attributable to the project
Modified Accelerated Cost Recovery System (MACRS)
Most appropriate method for depreciation expense in the US
MACRS: Expense
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Straight Line: Expense
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Factors
Different for each year of an asset's useful life; comes from tax code
Tax on Operating Income
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Tax on Asset Disposals
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Working Capital Investment (WCinv)
Increase in working capital required by a project
Depreciable Base
The depreciable asset
Incremental Revenue
Revenue attributable to the project
Differential Depreciation
Change in depreciation expense; for replacement projects, the difference between the depreciation on the old and new asset
Incremental EBT
Change in taxable income for the year
Incremental Earnings
Project's net income (accounting concept, not a cash flow)
Depreciation Reversal
Primary reason incremental earnings are not a cash flow; depreciation is a non-cash expense subtracted to accurately estimate tax liability and thus must be added back in
Realizable Salvage Value (RSV)
Estimated sale proceeds for the new asset at the end of its life; not the same as salvage value, which is an accounting decision
If Sales Proceeds are greater than the Book Value...
... then the cash Outflow = ($Sale - BF) * Tax Rate
If Sales Proceeds are less than the Book Value...
... then the cash Inflow = ($Sale - BF) * Tax Rate
Payback Period
Number of years required to recoup the initial outlay
Payback Period
0
Net Present Value
Sum (or net) of the present values of all cash flows
If NPV is positive...
... accept the project.
If NPV is negative...
... reject the project.
Internal Rate of Return (IRR)
Mutually Exclusive Projects
Acceptance of one project precludes acceptance of the other
Capital Rationing
Value-adding projects must be ranked since there is insufficient capital to accept them all
Simulation Analysis
Uses multiple "cases" of variables; best and worst case analysis
Staged Investment
Investments in stages or phases
Partnering
Sharing risks and rewards of a project with a partner
Capital Structure
Firm's mixture of debt level and equity level
3 Reasons to Issue Debt instead of Equity
1. Debt is cheaper than equity.
2. Debt offers tax breaks.
3. Issuing equity decreases ownership.
Reason to Issue Equity instead of Debt
Debt could decrease shareholder value when a firm is put at greater risk for insolvency.
Business Risk
Risk a firm faces because of variability in Operating Income
Operating Risk
Business Risk
Degree of Operating Leverage (DOL)
Measures business risk as a ratio of the percentage change in operating income to the percent change in sales
DOL
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Financial Risk
Risk firms face when unable to meet debt obligations
Insolvency Risk
Financial Risk
Bankruptcy Risk
Financial Risk
Degree of Financial Leverage (DFL)
Measures financial risks as the percentage change in pre-tax profit relative to a percentage change in operating income (EBIT)
DFL
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Combined Leverage
Combined effect of DOL and DFL on earnings per share
Degree of Combined Leverage (DCL)
Measures how much pre-tax profit increases for a given increase in sales
DCL
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DCL
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According to the Modigliana and Miller Irrelevance Hypothesis...
... An unlevered firm should have the same as a levered firm.
3 Assumptions of the Modigliana and Miller Irrelevance Hypothesis
1. Firms do not pay taxes
2. Firms do not face transaction costs
3. Firms do not face bankruptcy costs
Myers and Majluf Theory
Signaling model that combines investment and financing decision; shows capital structure can affect the value of a firm
Jensen and Meckling Theory
Agency costs, which can affect firm value, can be potentially mitigated based on capital structure
Masulis' Test of Irrelevance Theory
If capital structure doesn't affect firm value, then announcements of changes should not affect prices, but Masulis showed statistically significant changes in stock prices around announcements, meaning shareholder value is affected by capital structure;
Titman and Wessels
Used empirical test to find that transaction costs affect capital structure of a firm
Castanias
Examined data of industries with high failure (bankruptcy) rates and found that firms usually carry a low amount of debt, suggesting firms are aware of costs associated with bankruptcy and choose to carry less debt to avoid the costs
Recapitalization
Reorganization of capital structure
Leveraged Recapitalization
Occurs when a firm issues new debt and uses proceeds to buy back some outstanding shares or to pay large cash dividends; increases debt-to-equity ratio
Leveraged Buyouts (LBOs)
Leveraged recaps from an outside party; almost entirely debt-financed acquisitions; acquiring firm may use acquired firm's assets as collateral
Nationalization
Process in which the nation purchases a controlling number of shares of the company (bailout)
Receivables Turnover
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Days' Sales in Receivables
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Quick Ratio
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Cash Ratio
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Cash Cycle
Length of time between when inventory is paid for and the time when the company is paid for the finished product; directly related to level of working capital and amount of cash needed to meet day-to-day operations (firms with longer cash cycles will have
Operating Cycle
Length of time between when the receipt of raw materials and the time when payment is received for the finished product
Cash Discounts
Discounts offered when a purchaser pays within an agreed period of time
Float
Delay between payment from customers and actual receipt of payments
Collection Float
Time it takes for firm to be able to use payments (deposited and made available)
Disbursement Float
Time it takes for a company's payment to become an actual cash flow
Operating Balance
Amount of cash firm requires to pay immediate bills
Reserve Balance
Amount of cash firm must hold as a safety net that will counter future unforeseen expenses
4 Considerations when Establishing Collection Policies
1. How to handle nonpayment
2. Late payments
3. Late fees
4. Collection agencies
Inventory
Any materials held and used to make the finished product
3 Types of Inventory
1. Raw Materials
2. Works in Progress
3. Finished Goods
4 Costs of Holding Inventory
1. Actual purchase of inventory
2. Storage costs
3. Holding costs
4. Opportunity costs
3 Ways to Value a Firm
1. Replacement Cost
2. Comparable Multiples
3. Discounted Cash Flows
Comparable Multiples Method
Find a comparable firm's Price/Earnings ratio and multiply it by your firm's earnings; divide price to determine earnings or price per share
Comparable Multiples: Firm's Price
Earnings Yield
Price/Earnings ratio inverted as Earnings/Price
FCFE Market Value of a Firm
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5 Steps for Calculating Market Value using Discounted Cash Flows
1. Forecast as far as you can
2. Compute FCF for each of the forecasted
3. Calculate the terminal value and add it to the last year's FCF
4. Compute an appropriate discount rate
5. Use TVM to discount cash flows back to present value
National Banking Act of 1863
One of the first cases of government regulation in the US
Federal Reserve Act of 1913
Designed to curb a series of bank runs and recessions
McFadden Act of 1927
Designed to provide greater accessibility for customers; prohibited banks from establishing branches across state lines to deter customers
Glass-Steagall Banking Act of 1933
Designed to decrease number of failing banks; significantly limited banks by prohibiting banks from underwriting risky securities, paying interest on checking accounts, or holding corporate debt or equity; created a wall between investment banking and com
Securities Act of 1933
Requires investors receive financial and other significant information regarding securities being offered for public sale; Prohibits deceit, misrepresentations, and other fraud in the sale of securities
Truth in Securities Law
Securities Act of 1933
Securities Act of 1934
Created the SEC
Trust Indenture Act of 1939
Requires a variety of market participants to register with the SEC, including exchanges, brokers and dealers, transfer agents, and clearing agencies
Investment Company Act of 1940
Applies to debt securities such as bonds, debentures, and notes offered for public sale; may not be offered for sale to the public unless a formal agreement between the bond issuer and bondholder conforms to standards of the Act.
Trust Indenture
Formal agreement between a bond issuer and a bond holder
Investment Advisers Act of 1940
Regulates investment advisors; requires firms or sole practitioners compensated for advising others to register with the SEC and conform to regulations designed to protect investors
Bank Holding Company Act of 1956
Designed to further protect banking industry from competition
Depository Institutions Deregulation and Monetary Control Act of 1980
Beginning of a deregulation trend intended to help spur financial institutions and the economy
Garn-St. Germaine Act of 1982
Loosened restrictions on what financial institutions could do in the U.S. with regard to products they could offer; allowed banks to offer adjustable rate mortgages, money market deposit accounts, to invest in government bonds, and to acquire failing inst
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
Dealt with capital requirements
Federal Institutions Reform, Recover, and Enforcement Act of 1991
Established risk-based insurance premiums for banks
CAMELS
Scores used to determine risk-based insurance premiums; based on Capital adequacy, Asset quality, Management quality, Earnings, Liquidity, and Sensitivity to market risk
Reigle-Neal Interstate Branching and Banking Efficiency Act of 1994
Allowed banks to transact business across state lines
Gramm-Leach-Bliley Financial Services Modernization Act of 1999
A deregulating measure; repealed Glass-Steagall
Dodd-Frank Act of 2010
Attempt to regain control of the financial institutions; established the Financial Stability Oversight Council to monitor how systemic risk could impact the industry; expanded government authority to force liquidation of financial institutions, increase r
Volcker Rule
Limits bank investments in hedge funds and proprietary trading
Jumpstart Our Business Startups (JOBS) Act of 2012
Aims to help businesses raise funds in public capital markets by minimizing regulatory requirements
Financial Industry Regulatory Authority (FINRA)
Non-Profit government organization that acts as a self-regulating organization; licenses individuals and admits firms to the industry; writes rules to govern individual and firm behavior; examines individuals and firms for compliance; disciplines register
International Bank for Reconstruction and Development (IBRD)
Created in 1944 to help Europe rebuild after WWII; provides loans and other assistance to middle income countries; original World Bank institution
Psychology of Losses
Investors hate losses; "If you have a taxable account and have one stock way up and one way down, the proper thing to do is sell the loser because the government will subsidize at least part of your lost. Behavioralists found that people do exactly the op
Tax deductible
Financial leverage
Degree of Operating Leverage
Business Risk
Par Value