FIN 3320 Final Exam- Bobby-TTU

CEO purpose

make decisions for the business

COO

responsible for daily operations

CFO

is responsible for financial activities

Board of Directs

monitors executive on behalf of shareholders

Whats is the goal of a buiness

To maximize the value of a company

Balance sheet

assets, liabilities, equity

Income statement

Income, Expenses, profit

Statment of Cash flows

Operating, Investing, and Financing

Profitability Analysis

the methods and techniques we use to measure how profitable the company has been, to understand why the firm was profitable, and to estimate how profitable we expect the company to be in the future

Risk analysis

the methods and techniques we use to measure uncertainties that could impact a company's financial health

Valuation

the process of determining the true, economic value of a business

5 categories:

profitability valuation

minimizing expenses (ability to generate profit)

efficiency valuation

maximizing sales of business (how well a company is using its resources to generate sales)

Mutual Funds

collects money from multiple investors to invest in a diversified portfolio

Liquidity

how well the company can pay its bills in the Short-term

Solvency

Long term Risk how well the company can pay its bills in Long-term

Market Valuation

how valuable investors perceive the company to be; the value of the company relative to the price that investors are willing to pay

Time Value of Money

a rate of return you need to make you indifferent between money today or receiving money in the future. Based on Delay and uncertainty

What does compouding mean

moving money $ into the future

What is discounting mean

Moving money $ into the past

Valuation and Investing

the process of estimating what an asset is worth today based on the cash u expect the asset to distribute in the future the value of anything is based on the cash that that investment can produce

What is Market Price based on

based on supply and demand (what you like/don't like) Subjective

What is Intrinsic Value based on

the cash that the investment produces in the future (CF) Objective

What is a Bond

a contract, a piece of paper, that represents a loan made by an investor to a borrower

Who is the bond Issuer

the person borrowing the money

What is a bond holder

the person lending the money

Coupon Rate

the interest rate that a bond issuer will pay to a bondholder

Coupon Payment

the intrest payment

Coupon Frequency

the number of coupon payments made in an annual period

What does it mean when a bond hits its maturity date

the date when the loan will be repaid at the orginal amount

Yield of Maturity

the expected return on a bond

held until it matures

if all intrest payment are reinvested at the same rate

Stocks

an investment that represents ownership in a company, entitling the holder to a share of the company's profits

Dividends

: a payment made to stockholders as a way to divide the company’s profit amongst the owners of the company

Market Capitalization

the total value of a company's shares of stock; calculated as the market price times the # of shares outstanding (also known as market equity or market value)

Why do stock prices increase

Over long periods of time. Because the cash profit they distributed goes up (Dividends)

Financial Asset

a contract that derives its value from a claim to cash produced by a different asset (contracts, intangibles)

Financial Intrument

a contract that represents an asset to one person and a liability or equity to another person - each asset class is composed of multiple financial instruments for every fi there is a financial asset ot the investor and a financial liability or financial equity to the issuer

All financial assets in the economy equal the sum of all financial liabilities and financial equity

Money Market

the place where financial assets mature in less than one year are brought and sold

Capital Market

the place where financial assets that mature in more than one year are brought and sold

Security Market

the place where financial securities are issued to investors and traded between investors, the sum of the primary and secondary market : emphasize what is being traded (the financial instrument) whereas securities market emphasize how trade occurs

Financial Security

a tradeable financial asset that holds monetary value; usually distinguished with a ticker

Primary Market (how securities are issued)

the place where financial securities are issued to investors; known for providing capital to companies; transactions usually facilitated by investment banks

Secondary Market (how securities are traded)

the place where financial securities are traded between investors; known for providing liquidity to investors; transactions usually facilitated by brokers

Initial Public Offering

The process by which a privately held company 1) raises capital 2) becomes a publicly traded company by issuing shares of common stock to the public for the first time

Commercial Bank

: a financial institution that accepts deposits, makes loan, and offers savings, checking, and other financial accounts to businesses

Investment Bank

a company that helps other companies raise capital by underwriting new securities, amongst other services the UNDERWRITER between companies and investors in IPO

Asset Managment company

a financial institution that collects money ( or funds) from multiple clients and invests their money into a variety of securities on their behalf

exchange-traded fund

a diversified portfolio that trades on an exchange, just like an individual security

wealth management company

a financial institution that provides personalized advice based on individual needs

What is Risk

the possibility that the actual return could be different from the return you expect: the higher this uncertainty the greater the return Uncertainty in both directions

Standard Deviation

the measurment of risk

annualizing return

expressing a return on a per year basis

Geometric average return

the average rate of return per period calculated by compounding the holding period returns ( past time weighted average) (historical performance) (backwards looking)

Diversification

the process of purchasing a wide variety of investments in a portfolio

Systematic Risk

risk from general economic conditions (macroeconomic factors)

Common to the whole economy affects ALL investments

unsystematic risk

Risk from investment-specific influences

Risk of the investment itself, Unique to the investment

Modern Portofolio Theory

set of principles we use to pick a portfolio in particular max return minimize risk how to best combine investments to increase return and lower risk simultaneaously

Sharpe Ratio

measures the trade-off between reward (return) to risk (uncertainty); higher ratios indicate more reward (more return) per unit of risk (uncertainty) ( you want this at the max)

Correlation

focusing on eliminating risk ( do you want this small)

CAPM

any stock's required rate of return is equal to the risk free rate of return which compensates for delay plus a risk premium which compensates for only the risk remaining after diversification (systematic risk)

Beta

sensitivity of stock price to changes the macroeconomy

Security Market Line

graphical version of CAPM

Market Risk Premium

the amount of additional return i would need to give you to take your money out of an investment with a guaranteed returns nd invest it in a risky portfolio (market)

What is Weak efficent market theory

market prices already reflect all information contained in the history of past trading. Meaning it often can predict the future

What is semi-strong efficent market theory

market prices already reflect all publicly available information

What is strong Efficent market theory

market prices already reflect all relevant information including inside information (private)

Effcient market hypothesis

prices fully reflect all information so that marker prices represent good estimates of intrinsic value

What is corporate finance

Set of principles of how we run a business

An investment decision is

how a company chooses which project to undertake

Capital Budgeting

process of how companies budget their capital limited money so we have to choose most profitable resources

Hurdle Rate

minimal rate of return that a project needs to earn =( cost of capital) sometimes may be above because the manager may set it above

Cost of Capital

cash from debt and equity

What is the WACC

Weighted Average cost of capital. Often seen as the hurdle rate

Free Cash Flow

how mmuch of cash can i actual return to investors

Pro Forma financial Statment

forecasted financial statement used to estimated free cash flow to caculate npv, irr.

Robustness

making sure analysis are solids no matter diff conditions

Consumer price index

how we measure inflation

Short sellings

selling borrowed stock

Buying at the margin

purchasing stock w borrowed money from broker

Market order

buy/sell immediately at the best price

Price-Contingent Order

buy/sell at specified price or better trade depends on the price and investor defined rules

Passive Investing

buying a diversified portfolio of securities and holding that portfolio for a long time

Active investing

frequent buying and selling of securities in an attempt to outperform a specific benchmark or market index

Revolving credit

A long arrangmetn where you can borrow, repay, and borrow again up to a cetain limit.

Credit Bureau

an organization that collects, maintains & disseminates info about your credit history to lenders to help them evaluate how likely you are to repay them

Insurance Premium

the amount of money taken out of your paycheck each month cost of having insurance regardless if needed

Insurance deductible

the amount you pay before your insurance company shares in cost

CFA exam

it's a professional exam to license professional financial analyst