Finance 3040

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slcdt801
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Finance 3040
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2014-02-20 01:30:37
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Midterm Study Topics
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Midterm study guide
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  1. Difference Between equity and debt
    Equity - allow ownership of customers among other people/investors, if company goes out of business no obligation to pay back. Frees up capital b/c of no payments.

    Debt - Obligations that tie up capital, company does not give up any ownership.
  2. Capital Gains
    profit that results from the sale of a capital asset such as stock ,bond or real estate where the the amount exceeds the purchase price. Gain on sale.
  3. Dividends
    A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  4. Bond - Interest
    Typically paid every six months and is low interest. Principle, loaned amount is paid back at a maturity date.
  5. Bond - capital gain
    When disposed of prior to maturity, for a gain.
  6. Mutual Funds
    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
  7. Markets
    A medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. The price that individuals pay during the transaction may be determined by a number of factors, but price is often determined by the forces of supply and demand.
  8. Indices
    The Standard & Poor's 500 is one of the world's best known indexes, and is the most commonly used benchmark for the stock market. Other prominent indexes include the DJ Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far East) and the Lehman Brothers Aggregate Bond Index (total bond market).Because, technically, you can't actually invest in an index, index mutual funds and exchange-traded funds (based on indexes) allow investors to invest in securities representing broad market segments and/or the total market.
  9. Corporate Financing
    • -One-time: Issue Stock
    • -Long-term: Issue Bonds
    • -Short-term: One year or less, Money Market
    • -VERY short-term:  Credit line at bank
  10. Credit Lines
    Lines of credit that are available to be borrowed against. Incurring fees and interest as used.
  11. Venture Captial
    Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.
  12. How a trade works
    • Primary Market –IPO
    • Secondary Market
    • Dealer - "Market Maker" sets the bid/ask price, creates the market for the stock to be sold.
  13. Bid/Ask/Spread
    • Bid - the price at which it will buy the security
    • Ask - the price at which it will sell the security
    • Spread - Difference b/w Bid & Ask
    •  A type of speculation that involves taking a bet on the price movement of a security. A spread betting company quotes two prices, the bid and offer price (also called the spread), and investors bet whether the price of the underlying stock will be lower than the bid or higher than the offer. The investor does not own the underlying stock in spread betting, they simply speculate on the price movement of the stock.
  14. Broker - Spectrub b/w full service and discount brokers
    Traditionally, only the wealthy could afford a broker and access the stock market. The internet triggered an explosion of discount brokers, which allow investors to trade at a lower cost, but don't provide personalized advice. Because of discount brokers, almost anybody can afford to invest in the market.
  15. Margin Account
    A brokerage account in which the broker lends the customer cash to purchase securities. The loan in the account is collateralized by the securities and cash. If the value of the stock drops sufficiently, the account holder will be required to deposit more cash or sell a portion of the stock.

    In a margin account, you are investing with your broker's money. By using leverage in such a way, you magnify both gains and losses.
  16. Cash Account
    A regular brokerage account in which the customer is required by Regulation T to pay for securities within two days of when a purchase is made.
  17. Short
    The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value.

    For example, an investor who borrows shares of stock from a broker and sells them on the open market is said to have a short position in the stock. The investor must eventually return the borrowed stock by buying it back from the open market. If the stock falls in price, the investor buys it for less than he or she sold it, thus making a profit.
  18. Long
    The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.

    For example, an owner of shares in McDonald's Corp. is said to be "long McDonald's" or "has a long position in McDonald's."
  19. Bull
    A long position in a financial security, such as a stock in the stock market. A bull or long position seeks to profit from rising prices in certain securities. When prices rise, a bull position becomes profitable. If prices fall, the bull position is not profitable. A bull or long position is the most well-known type of position and is what is typically used in "buy and hold" investing. An alternative way to initiate a bull position can include buying call options. 

    A bull position is the opposite of a bear position. A bull position is a trade or investment that is initiated in the hopes that the instrument's price will rise and make a profit. A bull market occurs when prices are rising, and is characterized by investor optimism and confidence that prices will continue to rise.
  20. Bear
    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market. 

    A bear market should not be confused with a correction, which is a short-term trend that has a duration of less than two months. While corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do. Fighting back can be extremely dangerous because it is quite difficult for an investor to make stellar gains during a bear market unless he or she is a short seller.
  21. Market Order
    An order that an investor makes through a broker or brokerage service to buy or sell an investment immediately at the best available current price. A market order is the default option and is likely to be executed because it does not contain restrictions on the buy/sell price or the timeframe in which the order can be executed. A market order is also sometimes referred to as an "unrestricted order."

    A market order guarantees execution, and it often has low commissions due to the minimal work brokers need to do. Be wary of using market orders on stocks with a low average daily volume: in such market conditions the ask price can be a lot higher than the current market price (resulting in a large spread). In other words, you may end up paying a whole lot more than you originally anticipated! It is much safer to use a market order on high-volume stocks.
  22. Limit Order
    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Because the limit order is not a market order, it may not be executed if the price set by the investor cannot be met during the period of time in which the order is left open. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.

    Limit orders can have specific conditions added to them. An investor may indicate that the order must be executed immediately or canceled, which is called a fill or kill (FOK) order. They may also require that all desired shares be bought or sold at the same time if the trade is to be executed, which is called an all or none order.

    Limit orders typically cost more than market orders because they can be more difficult to fill. Despite this, limit orders let investors get their specified purchase or sell price. Limit orders are especially useful on a low-volume or highly volatile stock.
  23. Stop Order
    An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order.Also referred to as a "stop" and/or "stop-loss order."

    Stops are not a 100% guarantee of getting the desired entry/exit points. For instance, if a stock gaps down, the trader's stop order will be triggered (or filled) at a price significantly lower than expected.
  24. liquidity
    Ability to sell an asset on short notice at close to the market price.

    Alayna's Definition - Be able to recop the principle.
  25. Marketability
    Fit to be offered for sale, as in a market
  26. corporate liability
    • LLC
    • Stock Holders - not liable
    • Partnerships
  27. Financial Jobs
    • CFO - oversees the work of financial staff
    • Treasurer - looks after firm's cash, raises new capital, and maintains relationships with banks & other investors that hold securities.
    • Controller - Prepares the financials, manages firm's budgets & accounting, & looks after its tax affairs
  28. Management incentives
    stock based compensation is best way to maximize efforts & outcomes
  29. Shareholders
    Main concern not to get the most money right away, rather the desire should be to maximize share value. Balance of reinvestment and dividends.
  30. Opportunity Cost of Capital (Hurdle Rate)
    • Minimum rate of return on an investment
    • Investor should seek to invest else where if hurdle rate cannot be realized.
  31. Retirement Accounts (4 types)
    • 401k - Before tax deductions, taxed when disbursed
    • IRA - Tax account whose cointributions are tax-deductible, disbusements are taxed
    • Roth IRA - Disbursements are tax-free, contributions are after tax, higher contribution limits than 401k and no forced disbursements unlike Roth 401k
    • Roth 401k - Disbursements are tax-free, contributions are after tax, employer match is possible with Roth 401k
  32. Intermediaries
    • Medium between investor and market, borkerage and investment banks example of intermediaries.
    • Organziation that raises money from investors & provides financiing for individuals, companies, and other organizations. Corp. view intermediaries as important sources of funding
  33. Balance Sheet
    • Current Assets                 Current Liabilities
    • Fixed Assets                     Long-term debt
    • Intangible                         Total liabilities
    • Long-term investments   Shareholders Equity
    • Other Assets                    Total Liab. + S.H.E
    • Total Assets
  34. Net Working Capital
    • CA-CL
    • The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt
  35. Book value vs. Market Value
    • BV - Thew historic price of the item
    • MV - The current market price for the item in question
  36. EBIT
    • Earnings before interest and taxes
    • total revenues-costs-depreciation
  37. EBITDA
    • Earnings Before Interest, Taxes, Depreciation and Amortization
    •  
    • EBITDA=Revenue-expenses(exclding tax,interest,depreciation & ammortization)
  38. Income Statement (setup)
    • Net Sales
    • COGS
    • SG&A expenses
    • Depreciation
    • EBIT
    • Interest Expense
    • Taxable Income
    • Taxes
    • Net Income
    • Dividends & retianed earnings
  39. Statement of Cash Flows
  40. Free Cash Flow
    =EBIT-taxes+deprecation-change in net working captial-capital expenditures
  41. Corporate & Personal taxes
    • corporate tax rate is 35% for excess of 18.3333 million
    • personal - marginal and average tax rate (everything in excess of threshold is taxes at appropriate rate) - calculated by dividing total tax bill by total income.
  42. Market Capitalization
    shares multiplied by market share price
  43. Market Value Added
    difference between market value of firm shares and amt. of money that shareholder have invested in the firm
  44. Book Values
    current value of company, Shareholders Equity/outstanding shares

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