Chapter 14 Flashcards

1
Q

How do firms raise money for investment? (2)

A
  • external financing

- plow back profits and reinvest them rather than paying them out as dividends

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2
Q

Two types of external financing, and what they are?

A

1) Debt: involves borrowing money to be repaid (+interest)

2) Equity: involves raising money by selling interests in the company

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3
Q

See

A

Note on figure 14.2 top of side 1

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4
Q

See

A

14.1: balance sheet (and practice it)

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5
Q

What are the two ways to calculate the debt ratio?

A

1) Total debt to total assets (debt/assets)

2) Total LT liabilities to total capitalization (LT liabilities/LT liabilites+equity)

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6
Q

What do common stock/ordinary share in the UK represent?

A

Ownership in a corporation

This ownership is exercised by voting in appointment of board of directors and voting on corporate policy

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7
Q

What does it mean that common stock is a residual claim?

A

Means if the firm is liquidized, holders get paid only after BHs, preferred shareholders, debt holders and workers

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8
Q

2 ways banks protect their claim on debt?

A
  • Borrowing allowances

- Dividend sizes

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9
Q

In practice, SHs only really vote on boards and key firm decisions such as mergers; if many don’t vote…?

A

Can lead to management getting a ‘free hand’

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10
Q

Explain the voting procedures wrt board of directors? And exception?

A

Come up for re-election every year
UNLESS classified BofD
then only 1/3 will come up each year - this has been found to increase firm value

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11
Q

What is the difference between book and market value?

A
  • BV tells how much capital a firm has raised from SHs in the PAST
  • MV depends on future dividends SHs expect to receive (and tf share price)
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12
Q

What are DCSs? Give an example of dual class shares?

A

Dual class shares are when there are different dividend/voting rights attached to two different types of share
They often sell at a premium (sometimes have private benefits attached eg. seat on BofD)
eg. Google when first made public, founders got 10 votes/share

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13
Q

What is tunnelling?

A

Exploitation of minority shareholders

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14
Q

What is preferred stock?

A

Stock that takes priority over common stock in regards to dividends (ie. they get paid first)

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15
Q

Define net worth?

A

Bookvalue of common shareholder’s equity + Preferred stock

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16
Q

What are floating-rate preferred stock?

A

Preferred stock paying dividends that vary with ST interest rates

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17
Q

Advantage of partnerships?

A

They avoid corporate income tax tf losses/profits are passed straight through to partners’ (investors)n tax returns

18
Q

Example of a limitation to partnerships?

A

Limited life span (search why?)

19
Q

What is a trust? Give an example of them and explain?

A

A trust, the owners of ‘units’ have passive ownership tf no voting rights (tf firms rarely set up like this)

Example:
REITS = Real estate investment trusts (avoid taxes as long as they pay 95% of earnings to REITS owners, but are limited to real estate) (created to encourage public investment in commercial real estate)

20
Q

What does debt allow for that equity doesn’t?

A

Allows borrowers to walk away from obligations in exchange for assets of company

21
Q

Define default risk?

A

Likelihood a firm will walk away from its obligations

22
Q

What are bond ratings used for?

A

They are issued on debt instruments to help investors assess the default risk of a firm

23
Q

5 questions a debt financial manager should ask?

A

1) LT or ST borrowing? (depends on I length)
2) Should debt be fixed/floating rate?
3) Borrow in own/other currency?
4) What promises should be made to lender?
5) Should you issue straight or convertible bonds?
See pages 357-358 for full discussion

24
Q

LEARN ALL DEFINITIONS PAGE 2 SIDE 1 OF NOTES!!!

A

now

25
Q

What is meant by ‘accounts payable’?

A

Obligations to pay for goods that have already been delivered (ST debt)
Method used by accountants to make the debt levels seem less/hide debt

26
Q

4 types of ‘hidden’ debt?

A

Accounts payable
Lease payments (may have a stream of payments for foreseeable future if paying for something slowly)
Unfunded obligations (eg. senior debt such as pensions)
SPEs

27
Q

Example of unfunded obligations in real world?

A

2011 American Airlines promised 18.5bn to pensions but only actually had 8.3bn tf 10.2bn unfunded debt

28
Q

What are special purpose entities? (SPEs)

A

Set up to raise mixture of equity and debt, uses funds to help parent company (doesn’t show up on balance sheet!)

29
Q

See

A

figure 14.5 is slides

30
Q

What are financial markets, and what are their 3 main functions?

A

Market where financial assets are issued and traded
They:
-raise money through primary issues
-allow investors to trade amongst themselves
-help firms to manage risks

31
Q

What do financial intermediaries do?

A

They raise money from investors, then provide financing to firms and make a return of it (eg. banks, insurance firms, pension funds, investment funds)

32
Q

How do mutual funds work? What does their share price depend on?

A

They raise money by selling their shares to investors, money is then pooled and invested
Depends on Net Asset Value (NAV) of firm
They attempt to beat the market

33
Q

What is a money-market fund?

A

Type of mutual fund, invests on in ST, safe securities (eg. US treasury bill)

34
Q

Difference between an open-end and a closed-end fund?

A

An open end fund will buy back/issue shares as it sees fit

A closed-end fund has a fixed number of shares that are traded

35
Q

What is an exchange traded fund? (ETF)`

A

A portfolio of stocks that can be bought/sold in a single trade

36
Q

3 points defining hedge funds?

A
  • restricted access (private investors, not any old who)
  • investors are limited partners and general partner is in ‘limited partnership’
  • performance related fees
37
Q

Role of commercial banks? (2)

A

Provide loans and safe money storage

38
Q

2 roles of investment banks?

A
  • assist firms in raising finance (don’t accept deposits/make loans) by eg. underwriting stock offerings at an IPO (see book page 363)
  • offer advice on takeovers, mergers and acquisitions
39
Q

What do insurance companies do?

A

They invest in corporate stocks and bonds (LT financing) using money raised via insurance policies

40
Q

4 main roles of the FM and Intermediaries?

A

1) Payment mechanism (allows people to pay/get paid safely and quickly over long distances)
2) Borrowing/Lending (channels savings towards those who can best use them)
3) Pooling risk (allows individual’s to share/transfer risk to those most equipped to bear it)
4) Information (allows estimation on rates of return and helps firms to summarize their success and value)