Midterm_Exam_Review

Real Assets

Assets used in the production or sale of products/services, either tangible or intangible

Financial Assets

Claims on the income generated by real assets, such as stocks or bonds.

Agency Problems

arise from conflicts of interest between managers and shareholders. Kept in check by financial controls, compensation packages, and corporate governance

Market Value

The current price of an asset or liability, typically greater than book value.

Fixed Assets

Long-term assets such as plant and machinery that are not expected to be turned into cash quickly.

Net Present Value (NPV)

measures difference between value and cost of a project; accept projects with positive NPV to maximize shareholder wealth.

Internal Rate of Return (IRR)

Discount rate where NPV = 0; attractive if exceeds the opportunity cost of capital.

Payback Rule

A project is acceptable if it recovers its initial investment within a specified period.

Depreciation Tax Shield

The reduction in tax payment due to depreciation, which lowers taxable income.

Profitability Index

A measure used to choose projects offering the highest NPV per dollar of investment when funds are limited.

Opportunity Cost

The return that shareholders can earn for themselves when investing elsewhere.

Double Taxation

Corporations pay taxes on profits, and shareholders are taxed again on dividends.

Real Value

accounts for inflation in cash flows

nominal value

refers to the face value of cash flows without adjusting for inflation.

Perpetuity

A stream of cash payments that continues indefinitely.

Annuity

A stream of cash payments that lasts for a limited number of years.

Liquidity

The ease with which an asset can be converted into cash.

Dividend

A portion of a company's earnings distributed to shareholders.

Capital Structure

The mix of debt and equity financing a company uses to fund its operations.

Risk Management

The process of identifying, assessing, and controlling financial risks.

Weight Average Cost of Capital (WACC)

The average rate of return a company is expected to pay to its security holders.

Asset Allocation

The strategy of dividing investments among different asset categories.

Market Capitalization

The total market value of a company's outstanding shares of stock.

Hedging

A strategy used to offset potential losses in investments by taking an opposite position.

Yield

The income return on an investment, typically expressed as a percentage.

Investments, Financing

What are the 2 major desisions by financial managers

distinct legal entities, separation between ownership and control, limited liability for owners

Advantages of corporations

high management costs, double taxation

disadvantges of corporations

Treasurer

Responsible for raising capital (getting money from outside sources) and maintaining financial relationships.

Controller

Prepares financial statements, and manages budgets.

CFO

Oversees both treasurer and controller, involved in policy and planning

value maximizaztion

natural financial goal to avoid displacement by more efficient firms.

induvidual’s savings flowing into firm

where does financing for corporations come from

financial markets

channels savings into corporate investment and provide liquidity and diversification opportunities for investors

bonds

Long-term debt of government or corporation; you receive fixed annual coupon payment based on face value.

Bond Coupon Rate

annual coupon payment expressed as a fraction of face value

YTM

the total return anticipated on a bond if held until maturity, expressed as an annual rate.

Interest Rate Risk

Bond prices are subject to _____ rising when market rates fall; long-term bonds = higher risk.

Credit Risk

the possibility that a bond issuer may fail to make the required payments on their debt, leading to potential losses for investors.

Default Premium

additional yield investors require for bearing their credit risk

Balance Sheet

a financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.

income statement

a financial statement that reports a company's financial performance over a specific accounting period, detailing revenues, expenses, and profits or losses.

Cash flow statement

financial statement that Tracks sources and uses of cash.

Book value

Historical costs minus depreciation

shareholders equity

measures the cash shareholders have previously contributed to a company

accoutning income

Investment in fixed assets spreads across years (spread as depreciation)

Corporate Income Taxation

Marginal tax rate of 21%; deductions for depreciation and interest, not dividends

stock trading reports

Include price, price change, trading volume, dividend yield, and P/E ratio.