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Chapter 1: Business Enterprises in
the Economy
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 2: Understanding Financial Statements
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 3: 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: Valuation
Terms
Short Questions
- What is the right discount rate to use in valuing an asset?
Chapter 6: Valuation of Financial Securities -- Bonds
and Stocks
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
- 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 difference between debt and equity?
- What is the difference between a registered bond and a bearer bond?
- Why is the yield curve not flat?
- 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 8: Capital Budgeting
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 7: Return and Risk
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 9: Capital Structure
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
- 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?
- 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 10: 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?
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