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ACFM 203 Final
| 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? |
| Sunk Costs | Paid for regardless of if we go through with the project or not |
| Book | Incremental Earnings represent what? |
| Bank | Incremental Free Cash Flows represent what? |
| Maturity Matching | Match loan period to actual project period |
| Cannibalization | Stealing from own sales |
| Complimentary | Bring out due to existing product |
| APR | Does not take into account compounding |
| EAR | Amount we are earning, brick wall (never get more) |
| Compounded Annually | APR = EAR when |
| Compounded Monthly | APR < EAR when |
| Interest Rate Default Liquidity | What are the 3 types of risk associated with debt? |
| Interest Rate | What kind of risk do treasuries have? |
| Corporate Specific | Default Risk & Liquidity Risk are? |
| Banks! | Who set the treasury yield curves? |
| Treasury Auctions | Government takes the lowest bids until filled, and closes at whatever interest ending bid is at |
| Down | When market yields go up, bond prices go __________ |
| Up | When market yields go down, bond prices go _____________ |
| Coupon Rates | Perfectly reflect market conditions at the time of the issue |
| Callable Bonds | Gives company the right but not the obligation to call (buy back) their bonds early; company not lender, will do it when interest rates go down and can retire expensive debt and reissue at the lower market yields |
| Call Premium | Little added to par to make calling more attractive, either dollar amount or % of face/par |
| Additional Funds Needed (AFN) | Upfront cost for us to produce new things to add value to the company |
| Flotation Costs | Whenever a firm needs to raise capital in a primary market transaction, an investment banker will get involved; investment bankers provide essential services and they know potential buyers so the firm needs to pay for that service |
| Dividends Price Appreciation | What are the 2 ways to make money in equities? |
| Weak Form | Efficient Market Hypothesis: All public info (past) is priced into stock |
| Semi-Strong Form | Efficient Market Hypothesis: All public info (past & present) is priced into the stock |
| Strong Form | Efficient Market Hypothesis: All info is everywhere, includes companies, results in insider trading, do NOT want |
| D1 / P0 + g = Re | What is the equation for DDM? |
| Capital Gains Growth | What does g represent? |
| Total Growth in Company | What does D1 & g represent? |
| Dividend Yield | What does D1 / P0 represent? |
| D1 = D0 * (1 + g) | How to calculate D1 if given D0? |
| D0 | If the statement says, "just paid" or "last dividends paid", is it D0 or D1? |
| D1 | If the statement says, "announced future dividend" or "expected dividend", is it D0 or D1? |
| No | For preferred shares is g added into the DDM equation? |
| Debt & Preferred Shares | Which two items in the WACC always have flotation costs? |
| Common Equity | Which item in the WACC only takes into account flotation costs if the company needs to issue new shares? |
| Beta | Slope of the fitted line in the regression, represents volatility of the risk |
| Positively Correlated | Moves in the same direction |
| Negatively Correlated | Moves in the opposite direction |
| Re = Rm | When beta is equal to 1 |
| Re < Rm, less volatile | When beta is less than 1 |
| Re > Rm, more volatile | When beta is more than 1 |
| Risk | You do not get what you want when you need it |
| By calculating DDM, CAPM, & BY + RP, and then averaging them | How do we calculate the Re in the WACC? |
| Only issuing new debt, increasing dividends, buyback shares, stock split | What are some positive signals? |
| Retained Earnings | Dividends are great, but they are really about ________________________! |
| Declaring dividends since they are forever | What is the most powerful signal? |
| Increases | Cost of capital ______________ when P0 decreases |
| Modkliani & Miller (M&M) | Say dividends should not matter, dividend irrelevance, still pay taxes on dividends |
| No transaction costs | What does this theory assume? |
| Firm does not pay dividends & investor does not want Firm does not pay dividends & investor wants...investors sell to create dividends. Firm pays dividends & investor wants dividends Firm pays dividends & investor does not want dividends, reinvest | What are the 4 sides to this theory that makes everyone happy no matter what? |
| Bird in Hand | Prefer cash over uncertain circumstances in future, TVM, capital gains uncertain, much more risk-averse strategy |
| Tax Preference Clientele | Do not want dividends want to defer taxes, want to invest in growth stocks, want capital gains growth, younger people, willing to take more risk |
| Dividend Reinvestment Policy (DRIP) | Targets tax preference clientele, discount shares, automatically reinvesting them, no flotation costs, prevents a larger dropoff |
| Lower | If stock price increases by a lot, Re will become ____________ |
| NPV = 0 | IRR is the WACC at which the ____________________ |
| NPV | How much richer I am for undertaking this |
| Uneven cash flows Multiple Solutions Uneven Initial Investment, Length of Investment, Load or Total Size of Investment | Issues with IRR |
| Crossover Point | When are we ambivalent? |
| Reinvestment Rate | Most important problem is ______________________ as it always overstates returns |
| Pendulum Effect | Equity on one side and debt on the other side, want to keep balanced, if one side increases you may want to see what you can do to the opposite side to rebalance it back out |
| Issue more debt | A firm has been able to manage its capital requirements in tune with the “pendulum effect”. It has just raised its dividend. What would be the next thing the firm will/should do? |
Created by:
MOWGaming04
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