FIN 260 Study Guide
FIN 260 Study Guide FIN 260
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This 19 page Study Guide was uploaded by Rose_Esqui on Monday October 12, 2015. The Study Guide belongs to FIN 260 at Pace University - New York taught by Peter Sperling in Fall 2015. Since its upload, it has received 95 views. For similar materials see Financial Management in Finance at Pace University - New York.
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Date Created: 10/12/15
Midterm Study Guide Income Statement Revenues Cost of Goods Sold Expenses EXCLUDING Interest EBIT Interest EBT Tax X Net Income Statement of Cash Flows Operating Activities Net Income Depreciation Change in AIR Change in Inventory Change in AP Change in Accruals Total Operating Activities Investing Activities 1 Change in Gross PPampE Cash from Investing Activities Financing Activities Increase in Short Term Debt Increase in Long Term Debt Increase in Common Stock Dividends Cash from Financing Activities Interest Rate RrIPDRPMRPLP Balance Sheet Assets Cash Accounts Receivable Inventory Current Assets Gross PPampE Accum Depre Net PPampE Total Assets Liabilities Accounts Payable Accruals Short Term Debt Current Liabilities Long Term Debt Total Liabilities Equity Par Value of a Stock Retained Earnings Total Equity Dividend per Share of Common Share TI Financial Calculator To set to annual payments 2nd PY l Enter To set to semiannual payments 2nd PY 2 Enter To set to quarterly payments 2nd PY 4 Enter Calculate Future Value PV IY 0 PMT N CPT FV Calculate Rate of Return N PV FV Finance Page 1 Important Ratios Current Ratio Current Assets Current Liabilities Quick Ratio Acid Test Current Assets Inventorv Current Liabilities Asset Turnover Revenue or Sales Total Assets Days Sales Outstanding Accounts Receivable Average Day Sales Inventory Turnover Revenue Inventory Or COGS Inventory Debt Ratio Total Liabilities Total Assets Debt Equity Ratio Debt Equity Interest Coverage EBIT Interest Return on Assets EBIT Total Assets Return on Equity W Total Equity Price Earnings Ratio Price Per Share Earnings Per Share Earnings Per Share W Total Shares Market to Book Ratio Stock Price Book Equity Per Share FV 0 PMT CPT IY Calculate Longevity of Interest compounded daily IY 365 PV 0 PMT FV CPT N Finance Page 2 BooK Equlty Per Share Terms Chapter 1 SarbanesOxley Act requires the CEO amp CFO to certify that their firm39s financial statements are accurate Proprietorship an unincorporated businesses owned by one individual Partnership an unincorporated business owned by two or more persons Corporation created by a state separate amp distinct from its owners and managers having unlimited life easy transferability of ownership amp limited liability S Corporation special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation Limited Liability Company LLC a popular organization that is hybrid between a partnership amp a corporation Limited Liability Partnership LLP similar to an LLC for professional firms in accounting law and architecture fields provides personal asset protection from business debts amp liabilities but is taxed as a partnership Intrinsic Value an estimate of a stock39s 39true39 value based on accurate risk amp return data can be estimated but not measured precisely Market Price stock value based on perceived but possibly incorrect information as seen by the marginal investor Corporate Raiders individuals who target corporations for takeover because they are undervalued Hostile Takeover the acquisition of a company over the opposition of its management Stockholder Wealth Maximization the primary goal for managers of publicly owned companies implies that decisions should be made to maximize the longrun value of the firm39s common stock Business Ethics a company39s attitude amp conduct toward its employees customers community amp stockholders Chapter 2 Spot Markets the markets in which assets are bought or sold for onthespot delivery Futures Markets the markets in which participants agree today to buy or sell an asset at some future date Money Markets the financial markets in which funds are borrowed or loaned for short periods less than 1 year Capital Markets the financial markets for stocks and for intermediate or long term debt 1 year or longer Primary Markets markets in which corporations raise capital by issuing new securities Secondary Markets markets in which securities amp other financial assets are traded among investors after they have been issued by corporations Private Markets markets in which transactions are worked out directly between two parties Public Markets markets in which standardized contracts are traded on organized exchanges Derivatives any financial asset whose value is derived from the value of some other underlying asset Investment Banks iBanks an organization that underwrites amp distributes new investment securities amp helps businesses obtain financing Commercial Banks the traditional department store of finance serving a variety of savers amp borrowers Financial Services Corporations a firm that offers a wide range of financial services including investment banking brokerage operations insurance amp commercial banking Mutual Funds organizations that pool investor funds to purchase financial instruments amp thus reduce risks through diversification Money Market Funds mutual funds that invest in shortterm lowrisk securities amp allow investors to write checks against their accounts Physical Location Exchanges formal organizations having tangible physical locations that conduct auction markets in designated listed securities 0vertheCounter OTC Market a large collection of brokers amp dealers connected electronically by telephones amp computers that provides for trading in unlisted securities Dealer Market includes all facilitates that are needed to conduct security transactions not conducted on the physical location exchanges Closely Held Corporation a corporation that is owned by a few individuals who are typically associated with the firm s management Publicly Owned Corporation a corporation that is owned by a relatively large number of individuals who are not actively involved in the firm s management Going Public the act of selling stock to the public at large by a closely held corporation or its principal stockholders Initial Public Offering 1P0 Market the market for stocks of companies that are in the process of going public Efficient Markets Hypothesis EMH asset prices are about equal to their intrinsic values Behavioral Finance a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions Chapter 3 Annual Report a report issued annually by a corporation to its stockholders it contains basic financial statements as well as management s analysis of the firm s past operations amp future prospects Balance Sheet a statement of a firm s financial position at a specific point in time Income Statement a report summarizing a firm s revenues expenses amp profits during a reporting period generally a quarter or a year Statement of Cash Flows a report that shows how items that affect the balance sheet amp income statement affect the firm s cash ows Statement of Stockholders Equity a statement that shows by how much a firm s equity changed during the year amp why this change occurred Stockholders Equity it represents the amount that stockholders paid the company when shares were purchased amp the amount of earnings the company has retained since its origination Retained Earnings they represent the cumulative total of all earnings kept by the company during its life Working Capital current assets Net Working Capital current assets minus current liabilities Net Operating Work Capital NOWC current assets minus noninterestbearing current liabilities Total Debt the sum of a company s short term amp long term debts known as interest bearing liabilities Depreciation the charge to re ect the cost of assets depleted in the production process depreciation is not a cash outlay Amortization a noncash charge similar to depreciation except that it represents a decline in value of intangible assets Operating Income earnings from operations before interest amp taxes ie EBIT EBI T DA earnings before interest taxes depreciation amp amortization Free Cash Flow F CF the amount of cash that could be withdrawn without harming a firm s ability to operate amp to produce future cash ows Net Operating Profit after Taxes NOPA T the profit a company would generate if it had no debt amp held only operating assets Market Value Added M VA the excess of the market value of equity over its book value Economic Value Added EVA an excess of NOPAT over capital costs Progressive Tax a tax system where the tax rate is higher on higher incomes the personal income tax in the United States which ranges 0 on the lowest incomes to 396 on the highest incomes is progressive Marginal Tax Rate the tax rate applicable to the last unit of a person s income Average Tax Rate taxes paid divided by taxable income Tax Loss CarryBack or CarryForward ordinary corporate operating losses can be carried backward for 2 years amp carried forward for 20 years to offset taxable income in a given year Alternative Minimum Tax AMT created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions Capital Gain or Loss the profit loss from the sale of a capital asset for more less than its purchase price S Corporation a small corporation that under Subchapter S of the Internal Revenue Code elects to be taxed as a proprietorship or a partnership yet retains limited liability amp other benefits of the corporate form of organization Chapter 4 Liquid Asset an asset that can be converted to cash quickly Without having to reduce the asset s price very much Liquidity Ratios ratios that show the relationship of a firm s cash amp other current assets to its current liabilities Current Ratio this ratio is calculated by dividing current assets by current liabilities it indicates the extent to Which current liabilities are covered by those assets expected to be converted to cash in the near future Quick Ratio Acid Test this ratio is calculated by deducting inventories from current assets amp then dividing the remainder by current liabilities Asset Management Ratios a set of ratios that measure how effectively a firm is managing its assets Inventory Turnover Ratio this ratio is calculated by dividing sales by inventories Days Sales Outstanding DSO this ratio is calculated by dividing accounts receivable by average sales per day it indicates the average length of time the firm must wait after making a sale before it receives cash Fixed Assets Turnover Ratio the ratio of sales to net fixed assets Sales Net Fixed Assets Total Assets Turnover Ratio this ratio is calculated by dividing sales by total assets Debt Management Ratios a set of ratios that measure how effectively a firm manages its debt Total Debt to Total Capital the ratio of total debt to total ratio to total capital Total Debt Total Debt Equity TimesInterestEarned Ratio TIE the ratio of earnings before interest amp taxes EBIT to interest charges a measure of the firm s ability to meet its annual interest payments EBIT Interest Changes Pro tability Ratios a group of ratios that show the combined effects of liquidity asset management amp debt on operating results Operating Margin the ratio measures operating income or EBIT per dollar of sales it is calculated by dividing operating income by sales EBIT Sales Pro t Margin the ratio measures net income per dollar of sales amp is calculated by dividing net income by sales Net Income Sales Return on Total Assets ROA the ratio of net income to total assets Return on Common Equity ROE the ratio of net income to common equity measures the rate of return on common stockholders investment Return on Invested Capital R01 C the ratio of aftertax operating income to total invested capital it measures the total return that the company has provided for its investors EBIT1 T Total Invested Capital Debt Equity Basic Earning Power Ratio BEP this ratio indicates the ability of the firm s assets to generate operating income it is calculated by dividing EBIT by total assets EBIT Total Assets Market Value Ratios ratios that relate the firm s stock price to its earnings amp book value per share PriceEarnings Ratio PE the ratio of the price per share to earnings per share shows the dollar amount investors will pay 1 of current earnings Market Book Ratio MB the ratio of a stock s market price to its book value DuPont Equation a formula that shows that the rate of return on equity can be found as the product of profit margin total assets turnover amp the equity multiplier it shows the relationships among asset management debt management amp profitability ratios Benchmarking the process of comparing a particular company with a subset of top competitors in their industry Trend Analysis an analysis of a firm s financial ratios over time used to estimate the likelihood of improvement or deterioration in its financial condition Window Dressing Techniques techniques employed by firms to make their financial statements look better than they really are Chapter 5 Time Line an important tool used in time value analysis it is a graphical representation used to show the timing of cash ows Future Value F V the amount to which a cash ow or series of cash ows Will grow over a given period of time When compounded at a given interest rate Present Value PV the value today of a future cash ow or series of cash ows I interest rate earned per year INT interest earned during the year N number of years for a bond to mature FVAN the future value of an annuity over N periods PVAN the present value of an annuity of N periods Compounding the arithmetic process of determining the final value of a cash ow or series of cash ows When compounded interest is applied Discounting the process of finding the present value of a cash ow or a series of cash ows discounting is the reverse of compounding Simple Interest occurs When interest is not earned on interest Compound Interest occurs When interest is earned on prior periods interest Opportunity Cost the rate of return you could earn on an alternative investment of similar risk Annuity a series of equal payments at fixed intervals for a specified number of periods Ordinary Deferred Annuity an annuity Whose payments occur at the end of each period Annuity Due an annuity Whose payments occur at the beginning of each period Perpetuity a stream of equal payments at fixed intervals expected to continue forever Uneven Nonconstant Cash Flow a series of cash ows Where the amount varies from one period to the next Payment PM T this term designates equal cash ows coming at regular intervals Cash Flow CF t this term designates a cash ow that s not part of an annuity Annual Compounding the arithmetic process of determining the final value of a cash ow or cash ows when interest is added once a year Semiannual Compounding the arithmetic process of determining the final value of a cash ow or series of cash ows when interest is added twice a year Nominal Quoted Interest Rate the contracted interest rate Annual Percentage Rate APR the periodic rate times the number of periods per year Effective Equivalent Annual I ate EAR or EFF the annual rate of interest actually being earned as opposed to the quote produces the same future value under annual compounding at a given nominal rate I INOM M M 10 Amortized Loan a loan that is repaid in equal payments either monthly quarterly or annual basis over its life Amortization Schedule a table showing precisely how a loan will be repaid it gives the required payment on each payment date amp a breakdown of the payment showing how much is interest amp how much is repayment of principal Chapter 6 Production Opportunities the investment opportunities in productive cashgenerating assets Time Preferences for Consumption the preferences of consumers for current consumption as opposed to saving for future consumption Risk in a financial market context the chance that an investment will provide a low or negative return In ation the amount by which prices increase over time Real RiskFree Rate of Interest r the rate of interest that would exist on defaultfree US Treasury securities if no in ation were expected Nominal Quoted RiskFree Rate of Interest rRF the rate of interest on a security that is free of all risk rRF is proxied by the Tbill rate or the Tbond rate rRF includes an in ation premium In ation Premium IP a premium equal to expected in ation that investors add to the real riskfree rate of return Default Risk Premium DRP the differences between the interest rate on a US Treasury bond amp a corporate bond of equal maturity amp marketability Liquidity Premium LP a premium added to the equilibrium interest rate on a security if that security cannot be converted to cash on short notice amp at close to its fair market value Maturity Risk Premium MRP a premium that re ects interest rate risk Interest Rate Risk the risk capital losses to which investors are exposed because of changing interest rates Reinvestment Rate Risk the risk that a decline in interest rates will lead to lower income when bonds mature amp funds are reinvested Term Structure of Interest Rates the relationship between bond yields amp maturities Yield Curve a graph showing the relationship between bond yields amp maturities Normal Yield Curve an upwardsloping yield curve Inverted Abnormal Yield Curve a downwardsloping yield curve Humped Yield Curve a yield curve where interest rates on intermediateterm maturities are higher than rates on both short amp longterm maturities Pure Expectations Theory a theory that states that the shape of the yield curve depends on investors expectations about future interest rates Foreign Trade De cit the situation that exists when a country imports more than it exports uted interest rate r r IF IDHP e LFquot MHP 39 51 Where 39 r the qnetedy er neminal rate ef interest en a given security r real rate ef interest r preneuncecl I restar and it is rate that weuld exist en a in a werlcl in atien expected rm r illJ It is the queted rate en a riske ee such as a US whicl39r is quotvery and is Eree ef mest ef risk Nete that the premitun fer expected inflatienf HP is included in IRE IF inflatien premiere II is equal te the average expected rate ef infla tien ever the life ef the The expected future inflatien rate is net te the current in atien rater se IP is net neces te current as strewn in Figure 63 DEF default premium that the issuer will net par the premised er principal at the stated time is fer U5 but it as the ef LP 2 er marketability premium a premium charged by lenders te re ect the fact that seme earmet he centrerted te en shert netice at a quotreasenahlei price LIP is very lets1r fer and fer by large stating but it is relativelyr high en issued by slmall privately temd mne maturity we will explain later lengereterm bends even Treasury bends are expesed te a signi cant ef price declines clue te in in atien and interest rates and a matu te reflect BUICK GUESTIDN s Q U E 5 T If lil An analyst malnaung securities has mined the tullewing infennatien The realll rate at interest ts 2 and ts expected te remain constant ter the nest 3 years lllntin ts eapected te he 3 next yearr 35 the tnlllewtng and 4 the thtrd year the maturity rislll prerntuni is esiilmiated te he Uni s t it39iis where t nurnlher at years tn maturity The ltqutdity premium on relevant 3year securities is 125 and the default rislllr premium en relevant 3year securities is a What is the yield an a t yealr T hillllt h What is the yield an a 3 year T laend c What is the yield an a 3 year cerpntate bend c a F W 1 Iii 5 W E H a it Treasury seuzuritjir has nu default risk premium or Itemitiitjir risii premium Therefore rm t l Ipn MHlP rm 2e 3 U1i ij rm 5 b it Treasury selizuritjir has nu default risk premium or Itlutriitnr risii premium Therefore rm t39 IP MHlP rm 2st 13 I 35 453 1113 use rm 2 35 12 rm 2 53 tinliiire Treasuryr seeuurtties temperate hummus have both a default risk premium and a ltrquitiitjil tisilir pretntum r3r lip I MHlP DEF UP Realize iiith the first three terms in this equatipn are idemttieal to the terms in the Putt in equation 50 we an rewrite this equation as futlpws 3 r1 New we an insert the known 1talttes far these variables 3 2 see u 195 3 655 Chapter 7 Bond a longterm debt instrument Treasury Bond bonds issued by the federal government sometimes referred to as government bonds Corporate Bond bonds issued by corporations Municipal Bond bonds issued by state amp local governments Foreign Bond bonds issued by foreign governments or by foreign corporations Par Value the face value of a bond Maturity Date a specified date on which the par value of a bond must be repaid Original Maturity the number of years to maturity at the time a bond is issued Coupon Payment the specified number of dollars of interest paid each year Coupon Interest Rate the stated annual interest rate on a bond F ixedRate Bond bonds Whose interest rate is fixed for their entire life F loatingRate Bond bonds Whose interest rate uctuates With shifts in the general level of interest rates Zero Coupon Bond bonds that pay no annual interest but are sold at a discount below par thus compensating investors in the form of capital appreciation Original Issue Discount Bond 01D any bond originally offered at a price below its par value Call Provision a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date Sinking Fund Provision a provision in a bond contract that requires the issuer to retire a portion of the bond issue each year Convertible Bond bonds that are exchangeable at the option of the holder for the issuing firm s common stock Warrant longterm options to buy a stated number of shares of common stock at a specified price Putable Bond bonds with a provision that allows investors to sell them back to the company prior to maturity at a prearranged price Income Bond a bond that pays interest only if it is earned Indexed or Purchasing Power Bond a bond that has interest payments based on an in ation index so as to protect the holder from in ation Discount Bond a bond that sells below its par value occurs whenever the going rate of interest is above the coupon rate Premium Bond a bond that sells above its par value occurs whenever the going rate of interest is below the coupon rate Yield to Maturity YT M the rate of return earned on a bond if it is held to maturity Yield to Call YT C the rate of return earned on a bond when it is called before its maturity Current Yield the percentage of the purchase price for a bond that the investor receives as interest during the current year Capital Gains Yield The price change portion of a stock39s return Total Return all the financial benefit including income and appreciation of capital that somebody gets from an investment Price Interest Rate Risk the risk of decline in a bond s price due to an increase in interest rates Reinvestment Risk the risk that a decline in interest rates will lead to a decline in income from a bond portfolio Investment Horizon the period of time an investor plans to hold a particular investment Default Risk if the issuer defaults investors Will receive less than the promised return Duration the weighted average of the time it takes to receive each of the bond s cash ows Mortgage Bond a bond backed by fixed assets 1st mortgage bonds are senior in priority to claims of 2rld mortgage bonds Indenture a formal agreement between the issuer amp the bondholders a bond contract Debenture a longterm bond that is not secured by a mortgage on specific property Subordinated Debenture bonds having a claim on assets only after the senior debt has been paid in full in the event of liquidation InvestmentGrade Bond bonds rated tripleB or higher Junk Bond highrisk highyield bonds 33 755 71 EMID HALUATIDM Eallagha u Maturequot hencla have it years remaining tci maturity litter eat ia plaicl ahhually they have a 10m par value the ceupen iritereat rate ia a arrcl the yield in maturity ia 9 What ia he c lia current market rice 1iIquotlElJ39 quotI39 MATHEW irt FUTURE PRICE a hmtcl has a 1900 par value 112 years te maturity and a Tit armual ceuperl aricl aelle icnr 955 a What ie its yielcl tcr maturity W h Aaatuue that the yielci tcr maturity remama ccatataiit far the heat 3 yeara What will the price he yeara tram teclay MID 1tillLlalr iliTlil39lIii Hungeaaer Ceiyimiatien e eutatariclihg hmtcla have a Mimi par value a 9 aemiaiuiual ceuperir E yeare tci rriaturityr arr 35 What ia the herrcl a price WELD TD MATUHIW a iirm a hericle have a maturity cut it yeara with a 1IIiIIiII iace value have 5 aemiarlrlual cupem are callahle E yeara at 11050 cm39reiitly EE39ll at a price at 1100 What are their ricnmirial yield tci maturity and their emirial yielcl ta call What returrl aheuld myeatura expect te earrl err he cla hill UALUHTIN rim tweeter haa tare hencia l partielici that have a face value at 110113 and pay a ma ammal E up Emtcl L matures lt i yeara while Henri S maturee in 1 year a What will the value at each huerid he ii the geirrg iritereat rate ia are Sit and 12 Aaaume that cine mere intereat payment is tics he macle err Ee cl at ita maturity artcl that 3915 mere paymeiita are tea he macie cart Baird L h Why deea leugeruterm hrld a price y ary mere than the price cut the Shatterterm hand when iritereet ratee mange PMT 1000 X 08 8 80 80 I PMT 1000 I FV 9lIY 10N CPT I PV 9358234 I 93582 72 A YTM PMT 1000 X 07 7 70 70 I PMT 985 I PV 1000 I FV 10 I N CPT I IY 72157 3 yrs price 71257 I IY 3 I N 985 I PV 70 I PMT CPT I FV 9884622 I 98846 73 Keep calculator set annually Just cut PM T amp IY in 12 And multiply N by 2 PMT 1000 X 09 9 902 45 45 I PMT 1000 I FV 425 I IY 16 I N CPT I PV 10286008 I 102860 74 PMT 1000 x 08 8 802 40 40 D PMT 1100 D PV 1000 D FV 10 D N CPT D IY 28374 75 A BondL 5 100 I PMT 5 I IY 15 I N 1000 I FV CPT I PV 15189829 I 151898 8 100 IPMT 8 IIY 15 IN 1000FV CPT I PV 11711896 I 117119 12 100 I PMT B 12 I IY 15 I N 1000 I FV CPT I PV 8637827 I 86378 Bond S 5 100 I PMT 5 I IY 1 I N 1000 I FV CPT I PV 10476190 I 104762 8 100 I PMT 8 I IY 1 I N 1000 I FV CPT I PV 10185185 I 101852 12 100 I PMT 12 I IY 1 n N 1000 I FV CPT n PV 9821429 D 98214
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