Corporate Finance and Financial Markets Flashcards

Flashcards covering core financial principles including corporate structure, accounting statements, risk and return metrics, and valuation models based on lecture notes.

Corporation

A legal entity often chosen for firms requiring large amounts of capital because it can raise funds efficiently by issuing stock, offers limited liability, and is suited for large-scale operations.

OTC (Over-The-Counter) Market

A decentralized market where securities are traded directly between parties, often through dealers, rather than on a centralized exchange.

Designated Market Makers

Human specialists who remain on the NYSE physical trading floor to support price discovery, manage auctions, and maintain orderly markets.

S Corporation

A corporate structure for federal tax purposes that allows income, losses, deductions, and credits to pass through directly to shareholders, avoiding double taxation.

Free Cash Flow (FCF)

The cash a company generates after operating expenses and capital expenditures ($\text{CapEx}$), available for debt repayment, dividends, or reinvestment.

Balance Sheet

A financial statement that represents a snapshot in time showing a company's financial position.

Income Statement

A financial report covering a period of time that details revenues, expenses, and profit.

Interest Expense

A tax-deductible operating expense for corporations that decreases the firm’s taxes, unlike dividends which are paid from after-tax income.

Depreciation

A non-cash charge deducted from revenue for accounting purposes that must be added back to net income to estimate cash flow from operations.

Inventory Turnover Ratio

A ratio used to assess how effectively a firm is managing its current assets by measuring how quickly inventory is sold and replaced.

Days Sales Outstanding (DSO)

A metric used to assess asset management efficiency by measuring how quickly a firm collects cash from credit sales.

Floating-rate Debt

Debt where interest rates move up if market rates rise, shifting price risk to companies but offering advantages such as lower initial interest costs.

Beta (Stock)

A measure of systematic risk—the portion of risk that cannot be diversified away—which is the most relevant measure for a well-diversified investor.

Coefficient of Variation (CV)

A measure of risk per unit of return, considered better than standard deviation for comparing securities with significantly different expected returns.

Security Market Line (SML)

A line representing the relationship between risk and return; its slope flattens if investors become less risk-averse, as the market risk premium decreases.

Preemptive Right

A provision giving current stockholders the right to purchase new shares on a pro rata basis, protecting them from dilution of control and value.

Marginal Investor

An investor who is indifferent between buying and selling a stock at its current price and whose actions ultimately determine the market equilibrium price.

Corporate Valuation Model

Also called the free cash flow valuation model, it values a firm by discounting free cash flows at the $\text{WACC}$, regardless of whether the company pays dividends.

After-tax Cost of Debt

The effective cost of borrowing for a firm, calculated as $r_d \times (1 - T)$ where $r_d$ is the interest rate and $T$ is the marginal tax rate.

Flotation Cost

The underwriting, legal, and administrative costs incurred when a firm issues new securities such as preferred stock or common equity.

Internal Rate of Return (IRR)

The discount rate that equates the present value of cash inflows with the present value of cash outflows, setting the project's $\text{NPV}$ to zero.

Primary Market

A market where corporations raise new capital by issuing and selling securities directly to investors.

Operating Income (EBIT)

Calculated as $\text{Sales} - \text{Operating costs} - \text{Depreciation}$; it represents the earnings of a firm before interest and taxes.

Market Value Added (MVA)

The difference between the total market value of equity and the book value of common equity reported on the balance sheet.

Real Risk-free Rate ($r^*$)

The base interest rate that would exist in the absence of inflation, found by subtracting the inflation premium ($\text{IP}$) and maturity risk premium ($\text{MRP}$) from the Treasury bond yield.

CAPM (Capital Asset Pricing Model)

A model used to estimate the cost of equity from retained earnings ($r_s$) using the formula $r_s = r_{RF} + \beta(r_M - r_{RF})$.

WACC (Weighted Average Cost of Capital)

The marginal, after-tax cost of capital used in capital budgeting to evaluate new firm projects.