Dr. P.V. Viswanath

 

pviswanath@pace.edu

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Important Terms and Concepts

Based on Brealey, Myers and Marcus, Fundamentals of Corporate Finance, 4th edition

 

 
   
 
 
 

Chapter 1: The Firm and the Financial Manager
Chapter 2: The Financial Environment

Terms

  • agency costs: costs incurred by the firm due to the conflicts referred to above -- conflicts between management and shareholders, conflicts between shareholders and bondholders, etc.
  • agency problem
  • auction markets
  • Capital Budgeting
  • capital market
  • Capital Structure
  • Chief Financial Officer
  • corporation
  • dealer markets
  • financial market
  • Financial Institutions
  • financial intermediary: an organization that raises money from investors and provides financing for individuals, companies and other organizations.
  • financial assets
  • limited liability
  • liquidity
  • money market
  • mutual funds
  • partnership
  • pension fund
  • primary markets
  • real assets
  • secondary markets
  • sole proprietorship
  • stakeholders
  • Working Capital

Short Questions

  • What are some examples of financial institutions? What are their functions, in brief?
  • What are the functions of a chief financial officer (CFO)?
  • What are the primary characteristics and advantages of the corporate form of organization?
  • What should the objective of the firm's managers be? Justify your answer.
  • If you were coming up with a new form of business organization, how would you go about it? What principles would you have in mind?
  • What are some of the conflicts between managers and stockholders? How might they be resolved?
  • What are some of the conflicts of interest between stockholders and bondholders? How might stockholders exploit bondholders? How can this conflict be resolved?
  • Why should a firm's manager worry about the impact of his firm's activities on the environment, or on society, in general? (For the purpose of this question, assume that the manager is amoral and does not care about ethics.)
  • What does a real asset mean?

 

Chapter 3: Accounting and Finance

Terms

  • Accounts Receivable
  • Accounts Payable
  • balance sheet
  • Book Value
  • Cash flow to creditors
  • Cash flow to stockholders
  • Cash flow from assets
  • income statement
  • net working capital
  • liquidity
  • GAAP: General Accepted Accounting Principles -- the common set of standards and procedures by which audited financial statements are prepared.
  • financial leverage: the use of debt in a firm's capitall structure.
  • average tax rate
  • marginal tax rate
  • Operating cash flow: Cash flow that results from teh firm's day-to-day activities of producing and selling.
  • Capital Spending
  • Free Cash flow: Cash that the firm is free to distribute to creditors and stockholders because it is not needed for working capital or fixed asset investments.
  • Statement of Cashflows

Short Questions

  • What is the difference between the average tax rate and the marginal tax rate? Which is more important for decision-making and why?
  • Why is it that the revenue and cost figures shown on a standard income statement may not be representative of the actual cash inflows and outflows that occurred during a period?
  • End-of-chapter questions.

 

Chapter 17: Financial Statement Analysis

Terms

  • common-size statements
  • current ratio
  • quick ratio
  • cash ratio
  • times-interest-earned ratio
  • cash coverage ratio
  • inventory turnover
  • Day's sales in inventory
  • receivables turnover
  • Day's Sales in Receivables
  • profit margin
  • return on assets
  • return on equity
  • total asset turnover
  • earnings per share
  • P/E ratio
  • The Dupont identity
  • Market-to-book ratio
  • internal growth rate
  • sustainable growth rate

 

Short Questions

  • What is the purpose of creating common-size statements? Give an example.
  • What does the market-to-book ratio tell you?
  • What sorts of firms are likely to pay out more of their earnings in dividends?
  • What are the three components into which the Dupont identity decomposes return on equity?
  • What are SIC codes and why are they useful?
  • All questions from "Critical Thinking and Concepts Review" (p. 77) except 3.10
  • All questions from "Questions and Problems" (p. 79)

 

Chapter 4: The Time Value of Money

Terms

  • discount factor
  • annuity
  • perpetuity
  • inflation
  • real value
  • nominal interest rate
  • real interest rate
  • effective interest rate
  • annual percentage rate

Short Questions

  • What is the difference between real and nominal cashflows?
  • What is the difference between real and nominal interest rates?
  • How can we compare interest rates quoted over different time intervals?

 

Chapter 5: Valuing Bonds

Terms

  • coupon
  • face value/par value
  • coupon rate
  • maturity
  • yield to maturity/yield
  • discount bond
  • premium bond
  • bond indenture/ deed of trust
  • unfunded debt
  • collateral
  • note
  • seniority
  • sinking fund: an account managed by the bond trustee for the purpose of repaying the bonds. The company makes annual payments to the trustee, who then uses the funds to retire a portion of the debt.
  • call provision
  • call premium
  • call protection
  • protective covenant
  • bond rating
  • zeroes
  • collar
  • floating-rate bond
  • bid price
  • ask price
  • bid-ask spread
  • real rate of interest
  • nominal rate of interest
  • The Fisher Equation (Effect)
  • term structure of interest rates
  • yield curve
  • inflation premium
  • interest rate risk premium
  • default risk premium

Short Questions

  • What is the difference between debt and equity?
  • What is the difference between a registered bond and a bearer bond?
  • Why is the yield curve not flat?

Chapter 6: Valuing Stocks

Terms

  • dividend growth model
  • dividend yield
  • capital gains yield
  • common stock
  • cumulative voting
  • straight voting
  • proxy
  • preemptive right
  • dividend
  • preferred stock
  • cumulative dividend
  • non-cumulative dividend
  • arrearage
  • dealer
  • broker
  • primary market
  • secondary market
  • exchange member
  • seat
  • commission broker
  • specialist
  • floor broker
  • superDOT system
  • floor trader
  • order flow
  • specialist
  • inside quote
  • bid
  • ask
  • ECNs

Short Questions

  • What is the Dividend Growth Model?
  • What is the Gordon Growth Model?
  • Recent newspaper articles have accused the specialist of "front-running," i.e. using the information that they have on limit orders in the order book and using it for trading decisions. How might this happen?

 

Chapter 7: Net Present Value and Other Investment Criteria

Terms

  • DCF valuation
  • net present value
  • payback period
  • average accounting return
  • internal rate of return

Short Questions

  • How might you justify the payback rule?

 

Chapter 8: Using Discounted Cash-Flow Analysis to Make Investment Decisions

Terms

  • stand-alone principle
  • incremental cashflows
  • erosion
  • sunk cost
  • opportunity cost
  • depreciation tax shield
  • ACRS/MACRS
  • forecasting risk
  • scenario analysis
  • sensitivity analysis
  • managerial options/real options
  • contingency planning
  • capital rationing

Short Questions

  • Is there a connection between managerial options and stock options?

 

Chapter 10: Introduction to Risk, Return and the Opportunity Cost of Capital

Terms

  • risk premium
  • variance
  • standard deviation
  • normal distribution
  • frequency distribution
  • efficient capital market

Short Questions

  • What are the different forms of the Efficient Markets Hypothesis?

 

Chapter 11: Risk, Return and Capital Budgeting

Terms

  • expected return
  • portfolio
  • portfolio weight
  • systematic risk
  • unsystematic risk
  • diversification
  • beta coefficient
  • security market line
  • market risk premium
  • Capital Asset Pricing Model
  • cost of capital

Short Questions

  • What are some examples of diversifiable risks?
  • What are some examples of non-diversifiable risks?

 

Chapter 12: The Cost of Capital

Terms

  • Capital Structure
  • weighted-average cost of capital

Short Questions

  • When can you use the firm's weighted average cost of capital to evaluate projects? Explain.

 

Chapter 13: An Overview of Corporate Financing

Terms

  • treasury stock -- shares repurchased by the company and held in the company's treasury.
  • authorized share capital -- the maximum number of shares that a company can issue.
  • par value -- the price at which each share is recorded in the company's books. Par value has little economic significance.
  • additional paid-in capital or capital surplus -- the difference between the price at which shares are sold to investors and par value.
  • retained earnings -- earnings that are not paid out to shareholders as dividends.
  • majority voting
  • cumulative voting
  • proxy contest
  • preferred stock
  • net worth
  • keiretsu -- a group of industrial and financial companies linked together through interlocking shareholdings
  • chaebol -- a group of interlinked companies in Korea, similar to a keiretsu
  • preferred stock
  • net worth -- the sum of a company's common equity and preferred stock
  • floating-rate preferred
  • prime rate -- the benchmark interest rate charged by banks to large customers with good to excellent credit.
  • LIBOR -- London Interbacnk Offered Rate -- the rate at which international banks lend to one another.
  • Funded debt -- debt repayable in more than 1 year from the date of issue.
  • sinking fund
  • callable bond
  • subordinated debt
  • secured debt
  • collateral
  • default risk
  • eurodollars
  • euroyen
  • private placement -- sale of securities to a limited number of investors without a public offering
  • protective covenant
  • lease
  • indexed bonds
  • asset backed bonds
  • reverse floaters
  • warrant
  • convertible bond
  • internally generated funds -- depreciation plus earnings that are not paid out as dividends
  • financial deficit -- difference between cash a company needs and the amount generated internally
  • investment grade debt/junk debt

Short Questions

  • Does it make sense for managers to assume that the securitites that they issue are fairly priced by the market? In other words, is it possible for managers to time their security issuances profitably? Why or why not?

 

Chapter 14: How Corporations Issue Securities

Terms

  • venture capital
  • IPO (Initial Public Offering)
  • firm commitment
  • underwriter
  • spread
  • best efforts basis
  • prospectus
  • red herring
  • underpricing
  • flotation costs
  • seasoned offering
  • rights offering
  • general cash offer
  • shelf registration

Short Questions

  • How do venture capital firms design successful deals? (see text for answer)
  • How do firms make initial public offerings and what are the costs of such offerings? (see text for answer)
  • What are some of the significant issues that arise when established rfirms make a general cash offer or a private placement of securities? (see text for answer)
  • What is the role of an underwriter in an issue of securities? (see text for answer)

 

Chapter 15: Debt Policy

Terms

  • financial restructuring
  • financial leverage
  • business risk
  • operating risk
  • tax shield
  • financial distress
  • pecking order theory of capital structure
  • trade-off theory of capital structure
  • financial slack

Short Questions

  • When is financial slack not desirable?
  • If interest tax shields are valuable, whey don't all tax-paying firms borrow as much as possible?

 

Chapter 16: Dividend Policy

Terms

  • cash dividend
  • ex-dividend date
  • stock dividend
  • stock split
  • stock repurchase
  • dividend payout ratio
  • information content of dividends

Short Questions

  • How might differences in the tax treatment of dividends and capital gains affect optimal dividend policy?