FINA 3332 Exam 2 (Chapters 2, 6, and 7)

Vocabulary practice flashcards covering Chapters 2, 6, and 7 of FINA 3332, including financial ratios, bond valuation, and stock valuation.

Net Debt

Total debt minus cash minus short-term investments.

Accounts Payable Days Increase

An increase that indicates the firm takes longer to pay its suppliers.

Return on Assets (ROA)

A ratio comparing net income to total assets ($\text{ROA} = \text{net income} \div \text{total assets}$).

Debt-Equity Ratio

A financial leverage ratio that can be calculated using either book values or market values.

Inventories

An asset classified on the balance sheet as a current asset.

Fixed Asset Turnover

A turnover metric used instead of total asset turnover because total assets include assets not directly involved in generating sales.

Market Capitalization

The total market value of a firm's equity, calculated as $\text{share price} \times \text{shares outstanding}$.

Current Ratio of 0.8

A liquidity condition indicating that current liabilities exceed current assets.

Quick Ratio

A liquidity ratio that excludes inventory from current assets because inventory may be difficult to convert into cash quickly.

Accounts Receivable

Money customers owe the firm for credit purchases.

Operating Margin

A profitability metric showing operating income earned per dollar of sales, before interest and taxes.

Income Statement

The financial statement that is also called the profit and loss (P&L) statement.

Equity Multiplier (DuPont Analysis)

A leverage component in DuPont analysis where an increase causes ROE to increase, holding other factors constant.

Accounts Payable

Money the firm owes suppliers for credit purchases.

Enterprise Value (Cash Treatment)

The business valuation measure from which the firm's cash is subtracted.

Inventory Turnover (Higher)

A turnover metric where higher values generally indicate that inventory is being sold more quickly.

Interest Coverage (Times Interest Earned) Ratio

A coverage ratio measuring how easily a firm can cover its interest payments.

Notes Payable Due Within One Year

A debt obligation classified on the balance sheet as a current liability.

Market-to-Book Ratio Below 1.0

A condition indicating that a firm's market equity value is below its book equity value.

Growth Stocks

Firms characterized by high market-to-book ratios.

Cash Ratio

The most stringent (conservative) liquidity ratio.

PEG Ratio

A valuation metric that compares a firm's P/E ratio to its expected earnings growth rate.

Equity Multiplier of 1.0

A condition indicating the firm has no liabilities, meaning assets are financed entirely by equity.

EBITDA

An earnings measure frequently evaluated by analysts because it adds back non-cash depreciation and amortization.

Form 10-K

The official form on which public U.S. companies file their annual financial statements with the SEC.

Net Profit Margin

A profitability metric showing net income remaining from each dollar of sales.

Gross Profit

The financial metric calculated as $\text{Sales} - \text{cost of sales}$.

Net Working Capital

The capital measure calculated as $\text{Current assets} - \text{current liabilities}$.

Earnings Per Share (EPS)

A per-share profitability measure calculated as $\text{Net income} \div \text{shares outstanding}$.

Debt-to-Capital Ratio

A financial metric that measures the fraction of the firm financed by debt.

Liquidity Ratios

Financial ratios that mainly help answer whether the firm can meet its current obligations.

Inventory Days Increase

An operational change most likely indicating that inventory is taking longer to sell.

Enterprise Value

A valuation metric measuring the value of the business to debt and equity investors, net of cash.

Enterprise Value to Sales (EV/Sales)

A valuation (market value) ratio comparing enterprise value directly to sales.

Retained Earnings

Cumulative profits kept in the firm rather than paid as dividends.

Ratio Analysis

An analytical method most useful when comparing financial ratios over time and with industry peers.

Balance Sheet

The financial statement that provides a snapshot of a firm's financial position at a given point in time.

Asset Turnover

An efficiency metric measuring how efficiently assets generate sales.

Statement of Financial Position

An alternative formal title for the balance sheet.

Book Value of a Long-Term Asset

The recorded asset value equal to acquisition cost minus accumulated depreciation.

Zero-Coupon Bond Cash Flows

The two cash flows of an investor: the purchase price is paid upfront, and face value is paid at maturity.

U.S. Treasury Bonds

Government securities that have original maturities longer than 10 years.

U.S. Treasury Notes

Government debt securities that have original maturities from 1 to 10 years.

Bond Credit Rating

An assessment reflecting default risk and the claim bondholders have ahead of shareholders.

U.S. Treasury Bills

Short-term government securities with maturities of up to one year.

Yield Curve

A graphical plot of bond yields against time to maturity.

Bond Trader Quotes

Conventions whereby bond traders quote bonds in terms of bond yields, not bond prices.

Interest Rate Risk

The risk that bond prices change when market interest rates change.

Par Bond

A bond whose coupon rate equals its yield to maturity, resulting in a price equal to face value.

Premium Bond

A bond for which the yield to maturity is below the coupon rate.

Term (Maturity) Risk

The risk associated with the time remaining until a bond's repayment date.

BBB Rating

An S&P credit rating classified as investment grade.

Default Risk Yield Premium

A condition where a higher YTM may reflect greater default risk, not necessarily a higher expected return.

Credit Spread

The difference between the corporate bond yield and the yield on a comparable Treasury bond.

Yield to Maturity (YTM)

The discount rate that makes the present value of promised payments equal to the bond price.

Newly Issued Bond Purchase

A transaction in which an investor is lending money to the issuer.

Par Bond Return

A return that comes only from coupon payments, which are based on face value and coupon rate.

Coupon Setting at Issuance

The process where most issuers set the coupon rate so that their bonds initially trade at or close to par.

Credit Risk (Default Risk)

The risk that the bond issuer may fail to make promised payments.

Zero-Coupon Bond Pricing (Positive Rates)

A pricing behavior where a zero-coupon bond always trades at a discount when interest rates are positive.

High Default Risk Corporate Yield

A yield condition where higher default risk generally requires a higher yield compared with safer firms.

Discount Bond

A bond whose coupon rate is below its yield to maturity, causing it to trade below face value.

Higher Coupon Payments (Risk Impact)

A characteristic where, all else equal, bonds with higher coupon payments have lower interest rate risk.

Coupon Rate

The interest percentage set by the issuer when the bond is issued.

Bond Issuers

Entities that issue bonds, specifically governments and corporations.

30-Year Bond (Interest Rate Risk)

The bond maturity category that has the greatest interest rate risk, all else equal.

Interest-Only Loans

A debt structure where interest is paid during the bond's life and principal is repaid at maturity.

Bond Price Quotation Convention

The convention where bond prices are stated per $100$ of face value.

Moody's

One of the best-known bond rating agencies.

Pure Discount Bonds

An alternative name for zero-coupon bonds.

Issuing Many New Shares

A corporate action that causes dilution and would not increase a firm's future dividend per share.

Terminal Value ($P_N$)

The estimated value in a nonconstant growth model usually found by applying the constant growth model once dividends grow at a stable rate.

Common Stock Dividend Priority

A priority rule stating that common stock dividends can be paid only after debt interest and preferred dividends are paid.

Equity Cost of Capital

The expected return on investments with equivalent risk, used to discount expected future cash flows.

Market Order

An order to buy or sell a stock that executes immediately at the best available price.

Cumulative Preferred Stock

Preferred stock requiring that unpaid cumulative preferred dividends must be paid before common dividends.

Div1 Calculation

The preliminary calculation $\text{Div}_1 = \text{Div}_0 \times (1 + g)$ required when applying the constant growth model after a firm has just paid $\text{Div}_0$.

Stock Buying Decision Rule

An investment rule stating an investor should consider buying a stock when its market price is below intrinsic value.

Constant Dividend Growth Model

A stock valuation model based on the mathematical formula for a growing perpetuity.

Stock Cash Flow Characteristics

Equity cash flows that are not fixed by contract, making stock valuation more complex than bond valuation.

Preferred Stock (Bond Similarity)

A security similarity based on the fact that preferred stock generally pays fixed dividends.

Nonconstant (Multistage) Growth Model

A stock valuation model most useful when a firm experiences periods of no dividends or unusually high growth before stable growth.

Preferred Stock (Legal/Tax Classification)

The formal classification of preferred stock treated as equity for legal and tax purposes.

Board of Directors

The corporate body that common stockholders vote to elect.

Dividend-Growth Tradeoff

A tradeoff arising because higher dividends leave less cash to reinvest in growth.

Proxy Voting

A mechanism that lets another person vote on a shareholder's behalf.

Preferred Stock (Common Stock Similarity)

A security similarity based on the facts that preferred dividends are not required and preferred stock has no maturity date.

Higher Equity Cost of Capital Impact

An effect where a higher equity cost of capital causes the stock price to decrease, holding other factors constant.

Dividend Yield

A financial ratio calculated as $\text{Dividend yield} = \text{Div}_1 \div P_0$.

Preferred Stock Dividends

Distributions to preferred shareholders that are usually set as a fixed percentage of par value.

Stock Cash Flow Sources

The two sources of return from owning a stock: dividends and the proceeds from selling the stock.

Class A and Class B Common Stock

Different share classes of common stock that usually differ in their voting rights.

Overpaying Relative to DDM

Paying above the dividend discount model value, which results in an expected return below the equity cost of capital.

Div1

The variable in the constant dividend growth model representing the dividend expected next year.

Intrinsic Value

The value a rational investor would pay based on risk and expected cash flows.

Stock Cash Flow Discount Rate

The rate at which expected future cash flows of a stock are discounted, defined as the equity cost of capital.

New York Stock Exchange (NYSE)

A major securities market best described as an auction market.

Higher Expected Dividend Growth Rate ($g$)

A condition in the constant growth model that will cause the stock price to increase, holding other factors constant.

N-Year Stock Valuation

The valuation formula where stock price equals the present value of dividends over $N$ years plus the present value of the expected sale price in year $N$.

Nasdaq

An electronic exchange best described as a dealer market.