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ACFM 203 Exam 1
| Term | Definition |
|---|---|
| Financial Manager & Financial Market/Institution | What is Corporate Finance? |
| Financial Manager | Manage capital within firm and decide when to raise money (internal) |
| Financial Market/Institution | Raise money outside firm (external: lenders, banks, investors, etc) |
| Make a Net Profit | What is the goal of a corporation? |
| Sole Proprietorship | Most risk, full personal liability, one owner, easiest structure, & taxed at personal income rate |
| Partnership | Full personal liability, each person has complete responsibility, & taxed at personal income rate |
| Limited Liability Partnership | Limited Partner has no personal liability, money person, and has no management. General Partner has full personal responsibility. Taxed at personal income rate |
| Limited Liability Company | Everyone has limited liability, and taxed at the personal income rate |
| S Corporation | No personal liability (limited liability), and taxed at personal income rate |
| C Corporation | No personal liability (limited liability), taxed at corporate rate, and investors get double taxation |
| Family/Friends, Angel Investor, Venture Capitalist | What are the tiers of raising capital? |
| Angel Investor | Smaller, believes in business and does not care if it fails, do not help run it, in return they receive shares, and are personally liable. |
| Venture Capitalist | Has money and expertise (Shark Tank), and wants to get paid first |
| Par Value | Has no value until you get on the market exchange, arbitrary amount companies assign to shares when they start out for accounting values |
| Preferred Shares | Get paid first, guaranteed, cumulative (if they cannot receive full value one year, it gets added to the next year), and aligns owners and financers |
| Convertible Preferred Shares | Can be converted into partnership equity (common equity) and shares in the profits with the founders, and this can only be done once |
| Post-Money Valuation | Value of the whole firm (old plus new shares) at the funding round price; (Latest Share Price/Shares)(Shares Outstanding) |
| Principal | People that have the money |
| Agent | People that have knowledge |
| Knowledge | What trumps money every time in the principal agent relationship? |
| Passive Investors | People just giving money |
| Initial Public Offering (IPO) | All preferred shares convert to newly issued shares, investment bankers bring in passive investors, roadshows (founders travel and talk about the company), founders hire investment bankers |
| Oversubscribe | More demand than shares available, want 2-3x |
| Floatation Costs | Fees paid to investment bankers to bring in passive investors |
| Primary Transaction | When investors get shares directly from the company |
| Secondary Transaction | Shares and money traded/exchanged between investors, company has nothing to do with it directly |
| Market Capitalization | What investors think the company is worth; (number of shares)(share price) |
| Lenders will not give any money | When sales are volatile... |
| 10K (annual reports) & 10Q (quarter reports) | What are the 2 reports required by the SEC that tell investors how the company performed? |
| Revolving Loan (Revolver) | When sales trend up and become consistent, company will get a short-term loan that is very risky, more like a line of credit. Positive signal to market, first step to receiving debt |
| Wealth Maximization & Long-Term Returns | Investors want ________________ & the company wants ______________ |
| Through P/A Mitigation | How can we get the investors and company aligned? |
| Board of Directors, Threat of Firing, Stock Options, Threat of Takeover | What are the 4 P/A Mitigation techniques? |
| Board of Directors | Represent shareholder interests, ensures C-Suite is doing good for shareholders, want independent directors, CEO always on board, and want separation between chairman & CEO |
| Threat of Firing | Voting is found in the proxy, this is achieved through proxy ballot voting, and shareholders can pick a board that will fire management |
| Stock Options | Ties management's performance to their compensation by issuing salary as stock options, issuing shares at a discount if stock hits a set target, and potentially increases level of risk |
| Threat of Takeover | Investors buy stock at premium price to takeover company either to sell off company or manage it more effectively, could also just oust board members, usually a wake up call, and hostile |
| Debt | Tax deductible, gets paid first, fixed payment, passive investors, have lowest interest, least risky |
| Return on Capital | Interest payment |
| Return of Capital | Wants loan principal repaid |
| Nuclear Option | Creditor can put company into bankruptcy, only do this if they really believe company is going under |
| Preferred Shares | Not tax deductible, hybrid of debt & equity, paid second, fixed dividend payment (cumulative), passive investors, & gets return on capital but not return of capital. |
| Common Shares | Not tax deductible, most risky, highest rate of return, paid last, active ownership (gets say in how company is run), and participates in the profits of the company |
| Operational Risk | Revolving loan; can we keep the company afloat during volatile sales |
| Financial Risk | Debt; once the company has steady shares |
| Earnings Before Interest & Taxes (EBIT) | Most basic form of figuring out how much cash flow there is, debt cares about this because equity is about debt; Revenue - COGS - Operating Expenses |
| Net Income (NI) | Shareholders care about this, equity owners own net income; EBIT - Interest - Taxes |
| Dividends | Retain some net income, but pay out some net income as _________ |
| Dividends & Retained Earnings | Shareholders own both: |
| Positive/Favorable Leverage | Rd < ROA |
| Negative/Unfavorable Leverage | Rd > ROA, not even breaking even |
| Standardize numbers & facilitate comparisons, used to highlight strengths & weaknesses | Why are ratios useful? |
| Trend Analysis | Across time; internal comparison across time |
| Benchmark Analysis | Compare with other companies (at least 2), is the most valuable |
| Liquidity Ratios | Can the company make required payments in the short-run? |
| Asset Management | Does the company have the right amount of assets vs. sales? |
| Debt Management | Does the company have the right mix of debt & equity? |
| Profitability | Do sale prices exceed unit costs & are sales high enough? |
| Market Value | Do investors like what they see & are they willing to pay for the activities of the company? Future-focused |
| Enterprise Value | Market Capitalization + Total Debt - Cash |
| NI / Average Total Assets | ROA Equation |
| NI / Average Total Equity | ROE Equation |
| ROA = ROE | Where there is no debt... |
| Start-Up, Growth, Maturity, Death | What are the 4 stages of the Company Life Cycle? |
| Start-Up | Rapid growth in demand, opportunities may attract other firms, difficult to identify survivors, liquidity & sales growth ratios are the most important |
| Growth | Firm operations more stable & dependable, considerable investment funds attracted, financial policies firmly established, dividends become payable at the end of this stage |
| Maturity | Growth begins to moderate, marketplace full of competitors, costs are more stable, company should be maximizing its leverage effect, at the end of this stage dividends are suspended |
| Death | Company with products which are in less demand, reductio of leverage effect due to loss of profits, declining dividends and shares prices |
| Capital Stack | Reward increases as risk increases, all elements have to add up to 100% or 1 |
| Debt, Preferred Stock, and Equity | What are the 3 components of the capital stack (from lowest to highest)? |
| Weighted Average Cost of Capital (WACC) | Wd * Rd * (1-T) + Wps * Rps + We * Re |
| Hurdle Rate | WACC is the company's _________________________ |
| Meet or Exceed | ROA has to ________ or __________ WACC in order to make everyone happy |
| Opportunity Cost | For every source of financing, there is a separate ______________________ |
| Positive & Negative | When ROA = WACC, a _______ future value means that we have to make that amount to achieve WACC & a ________ future value means that we have a buffer |
| ROA | The interest portion in the TVM represents what? |
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MOWGaming04
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