Question: Concepts you need to know for Midterm #1 Chapter 1 Advantages and disadvantages of a corporation Primary goal of a corporation Agency relationship Different types
Concepts you need to know for Midterm #1
Chapter 1
Advantages and disadvantages of a corporation
Primary goal of a corporation
Agency relationship
Different types of corporate securities explained as options
Primary vs secondary markets
Spot vs futures markets
Forward vs. futures Derivative securities
Capital vs money markets
Chapter 2
Financial Cash Flow
Cash Flow from Assets = Cash Flow to Debt-holders + Cash Flow to Stockholders
CF (Assets) = OCF - Capital Spending - Increase in NWC
OCF = EBIT + Dep. - Tax
CF(A) = CF(B) + CF(S)
Statement of Cash Flows
Source of Fund | Use of Fund |
Decrease in Assets | Increase in Assets |
Increase in Claims | decrease in Claims |
Chapter 3
Current ratio, Quick ratio
TA turnover is high. Efficient asset management
Inventory conversion period is long. Inefficient inventory management
TA Turnover, FA Turnover, AR Turnover, Inventory Turnover
CCC = time between payments made for materials and labor and payments received from sales = ICP + DSO - PDP
TIE
Cash Coverage Ratio
ROA = PM x TA Turnover
ROE = PM x TA Turnover x EM = ROA x EM
PE multiple
Market-to-Book Ratio
Growth stocks versus Value stocks
Market capitalization
Enterprise value
EV multiple
External Financing Needed (EFN)
(EFN)/g > 0
(EFN)/(A/S) > 0
(EFN)/d > 0
(EFN)/PM < 0
Capital Intensity ratio = Assets / Sales = 1 / (TA Turnover)
Internal growth rate
Sustainable growth rate
Chapter 5
Objective of the Capital Budgeting is to maximize stock price by maximizing PVGO
Most popular primary decision technique - IRR and NPV
Most popular secondary decision technique -- Payback
NPV profile
IRR is the discount rate that makes NPV zero.
IRR rule could be misleading. When?
NPV > 0 <==> IRR > r <==> PI > 1
Chapter 6
Capital budgeting cash flow estimation rules
Change in NWC
Sunk Costs/ Opportunity Costs/ Side Effects
Effect of MACRS on NPV
Equivalent Annuity Cash Flow
Chapter 7
Sensitivity analysis
Scenario analysis
Real options in Capital Budgeting
Accounting break-even point vs. Present Value break-even point
Chapters 10 and 11
Risk-return trade-off
Standard Deviation, Covariance, and Correlation Coefficient
Sharpe ratio = Reward/Variability
Capital Market Line:
Slope = (E(RM) - RF) /sM = the equilibrium price of risk in terms of expected return,
Diversification
Beta = measure of systematic risk
bM = 1, bF = 0
Two-fund separation
Security Market Line (SML):
| Above SML | Positive | Buy security | Accept project |
| Below SML | Negative | Sell security | Reject project |
Chapter 13
Adjusted Beta = (1/3) Historical Beta + (2/3) (1.0)
Determinants of Beta
Operating Leverage vs Financial Leverage
Industry Beta
Adjusted Beta = (1/3) Historical Beta + (2/3) (1.0)
g = b (r)
After-tax cost of debt = Before-tax cost of debt x (1 -TC)
Weighted Average Cost of Capital (WACC)
Chapter 16
M-M Proposition without Taxes I : VL = VU .
M-M Proposition without Taxes II : rS= ra + (B / S) (ra - rB )
M-M Proposition without Taxes: Higher EPS + (Higher Beta Higher RS) = Same Stock price
M-M with Corporate Taxes: VL = VU+ Tc B
rS = ra + (B / S) (1 - Tc ) (ra - rB )
bS = ba + (B / S)(ba -bB )(1 - Tc )
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