MGT-181 Midterm 1 [UCSD Buchanan]

Capital Budgeting

Process of planning and managing a firm's long-term investments

Capital Structure

The mixture of deb and equity maintained by a firm

Working Capital

A firm's short-Term assets and liabilities.

Sole Proprietor

Owned by single individual

Partnership

Owned by 2+ individuals

Corporation

Distinct legal entity composed of one or more individual or entities

Agency Problem

The possibility of conflict of interest between the stockholders and management of a firm.

Stakeholder

Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm

Balance Sheet

Financial statement showing a firm's accounting value on a particular date.

Net Working Capital

Current assets less current liabilities

Liquidity

Refers to speed and easy with which an asset can be converted to cash.

GAAP - Generally Accepted Accounting Principles

The common set of standards and procedures by which audited financial statements are prepared.

Income Statement

Financial statement summarizing a firm's performance over a period of time

Noncash Items

Expense charged against revenue that do not directly affect cash flow, such as depreciation

Average Tax Rate

Total Taxes divided by total taxable income

Marginal Tax Rate

Amount of tax payable on the next dollar earned

Cash flow from assets

The total cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, and change in net working capital

Operating cash flow

Cash generate from a firm's normal business activities

Free Cash Flow

Another name for cash flow from assets

Cash flow to creditors

A firm's interest payments to creditors less new new borrowing

Cash flow to stockholders

Dividends paid out by a firm less net new equity raised.

Sources of Cash

A firm's activites that generate cash

User of cash

A firm's activities in which cash is spent AKA applications of cash

Statement of Cash Flows

A firm's financial statement that summarizes its sources and uses of cash over a specified period

Common-Size Statement

A standard financial statement presenting all items in percentage term. Balance sheet items are shown as percent of assets and income statement items are percent of sales.

Common-base year statement

A standardized financial statement presenting all items relative to a certain base year amount

Financial Ratios

Relationships determined from a firm's financial information and used for comparison purposes.

DuPont Identity

Popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage

Standard Industrial Classificiation

A US government code used to classify a firm by its type of business operations

Future Value

The amount an investment is worth after one or more periods

Compounding

Process of accumulating interest on an investment over time to earn more interest

Interst on Interest

Interest earned on the reinvestment of previus interst paments

Compound interst

interest earned on both the initial principal and interest reinvested from prior periods

Simple Interest

Interst earned only on the original principal amount invested

Present Value

Current value of future cash flows discounted at the appropriate discount rate

Discount

Calculate the present value or some future amount

Discount Rate

The rate used to calculate the present value of future cash flows

Discounted cash flow valuation

Calculating the present value of a future cash flow to determine its value today

Annuity

A level stream of cash flows for a fixed period of time

Annuity Due

An annuity for which the cash flows occur at the beginning of the period

Perpetuity

An annuity in which the cash flows continue forever

Consol

A type of perpetuity

Stated interest rate

The interest rate expressed in terms of the interst payment made each period

Effective Annual Rate(EAR)

The interest rate expressed as if it were compounded once a year

Annual Percentage Rate(APR)

The interest rate charged per period multiplied by the number of periods per year

Coupon

The stated interest payment made on a bond

Face Value

The principal amount of a bond that is repaid at the end of a term aKA par value

Coupon Rate

The annual coupon divided by the face value of a bond

Maturity

The specified date on which the principal amount of a bond is paid

Yield to Maturity

The rate required in the market on a bond

Current Yield

A bond's annual coupon divided by it's price

Indenture

The written agreement between the corporation and the lender detailing terms of the debt issue

Registered Form

The form of bond issue in which the registrar of the company records owndership r each bond, payment is maee directly to owner of record

Bearer Form

Bond issue in which the bond is issued without record of the owner's name; payment is made to whomever holds the bond

Debenture

An unsecured debt, usually with a maturity of ten years or more

Note

An unsecured debt, usually with a less than 10 year maturity

Call provision

Agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity

Call premium

The amount by which the call price exceeds the pay calue of a bond

Deferred call provision

A call provision prohibiting the company from redeeming a bond prior to a certain date

Call-protected bond

Bond that, during a certain period, cannot be redeemed by issuer

Protective covenant

Part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest

Zero Coupon Bond

A bond that makes no coupon payments and is thus intially priced at a deep discount

Bid price

The price a dealer is willing to apy for a security

Asked price

the price a dealer is willing to take for a security

Bid-ask spread

The diff between the bid price and the asked price

Clean price

Price of a bond of accrued interst; this is the price that is typicall quoted

Dirty price

The price of a bond including accrued interest also known as the full or invoice price. This is the prince the buyer actually pays

Real Rates

interest rates or rates of return that have been adjusted for inflation

Nominal Rates

Interest rates or rates of return that have not been adjusted for inflation

Fisher effect

The relationship between nominal returns, real returns, and inflation

Term structure of interst rates

The relationship btween nominal interst rates on default free pure discount securities and time to maturity, that is the pure time value of shmoney

inflation premium

portion of a nominal interst rate that represents compensation for expected future inflation

Interest rate risk premium

the compensation investors demand for bearing interest rate risk

Treasury yiel curve

a prot of the yirlds on treasury notes and bonds relative to maturity

Default risk premium

the portion of a nominal interest rate or bond yirld that represents compensation for the possibility of default

taxability

The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status

liquidity premium

the portion of a nominal interst rate or bond yield that represents compensation for lack of liquidity