T1 Primary financial markets
the markets in which securities (stocks and bonds) are first issued. This is where the issuers (the firms) and the buyers
... [Show More] (the investors) will engage in an exchange.
T1 Syndicate
When a company wants to issue stock, bonds, or other publicly traded securities, it hires an underwriter to manage what is often a long and complex process.
After determining the offering structure, the underwriter usually assembles what is called a syndicate to get help manage the minutiae (and risk) of large offerings. A syndicate is a group of investment banks and brokerage firms that commit to sell a certain percentage of the offering.
A group of intermediaries that is used to oversee the issuance of stocks and bonds. Syndicates are generally made up of large investment banks or other types of institutional investors.
Competitive sale
those wishing to underwrite the bond issue will submit bids (on the bond's prices and interest rate) to the issuing firm. The firm will then select the underwriter that offered the highest price and lowest interest rate. The underwriter will then sell the bonds to various investors at (hopefully) a slightly higher price than that at which the bonds were purchased
Negotiated sale
is the process of underwriters submitting proposals including bids. involves a more thorough interview process with the underwriters. The issuing firm will carefully select the management team that will place these bonds.
Secondary Financial Markets
Where securities after they are sold for the first time are traded.
Auction Market
A market with a physical location and prices are set by the investors willingness to pay. (New york Stock Exchange)
Dealer Market
No physical location made up of multiple dealers who take inventory of stocks and prices (NASDAQ)
The bid Ask spread
the difference between the bid price and the ask price
Limit orders
orders that are price contingent - orders are only executed if the value of the market reaches the price of the limit.
Market Orders
Orders that are time contingent - First come first serve
Friedmans three roles of prices.
1. Prices convey information to consumers.
2. prices affect incentives
3. prices affect the distribution of income
Price Efficiency
whether prices fully reflect all of the available information about a particular security
Dollar Returns
calculated by taking the difference between the price of the security during the previous time period and the price of the security at the current time period, plus any additional cash flow that came from the security
Percentage Returns
Percentage returns are calculated by simply dividing the dollar returns by the price of the security at time t-1, or the previous time period.
Agency Cost
costs that are incurred when management does not act in the best interests of shareholders
2 issues that effect profit maximization
1. Agency Costs
2. Potential effect of focusing solely on profits (Ethics)
Cash Flow Statement
Cash flows from operations, investing and financing activities
Cash accounting
counts cash out as expense and cash in as revenue
Accrual accounting
Revenue is recognized when the earnings process is complete.
Revenue Recognition
Timing of recognition of sales or income based on certain rules.
Gross Profit
Revenue - Cost of goods sold (COGS)
EBIT
Earnings before Interest and Taxes (AKA Operating Income)
COGS
Cost of goods sold = direct labor and materials.
Gross Fixed Assets
the original cost of the firm's fixed assets before accumulated depreciation
Net PP&E
original purchase price (historical cost) minus accumulated depreciation
Historical Cost
What the asset was originally purchased for not the current value. Used in accrual accounting.
(most assets are stated at the original cost less depreciation)
Retained Earnings
money put back into the company from prior net income.
Net Income =
Dividends + Change in retained Earnings
there are only two things a company can do with net income
1) pay it out as dividends to shareholders, or 2) retain it within the firm.
New Retained Earnings =
Old Retained Earnings + Net Income - Dividends
Free cash flow (FCF)
the cash that can be distributed after funding required reinvestment in PP&E as well as increased working capital.
Gross Cash Flows
the sum of CFO, CFI, and CFF
Things that cause managers to move cash from one category to another
Core activities
Cash flow management
Market pressure
Difference between CFO and Net income
...
indirect method
start with net income and adjust for differences between net income and CFO.
CFO=
Net Income + depreciation expenses + Change in Operating accounts
CFI =
Changes in PPE End Gross PPE - Begining Gross PPE
Net PPE
Gross PPE- Accumulated Depreciation.
Gross PPE
Net PPE+ Accumulated Depreciation
FCFF
the cash distributable to all the providers of capital (i.e., to both debt and equity holders) and is most commonly used in financial analysis
FCFE
the cash distributable to the equity holders after satisfying all obligations to debt holders
Dividends
the cash actually distributed to stockholders;
CAPEX
Capital Expenditures How much the firm spends on fixed assets.
Ratio
one number from a financial statement and divide it by another so that you can analyze the health of a firm or compare two firms.
4 categories of ratios
liquidity
asset use efficiency
financing
profitability
Benefits of Ratios
Standardization
flexibility
focus
Current Ratio
A liquidity tool
Current assets/ current liabilities
Higher number is better
number of assets the firm has for every liability
Current liability
Debt requiring payment within the next 12 months
Current assets
Assets that will earn revenue within the next year.
Quick Ratio
A liquidity tool
(Current assets - inventory)/current liabilities
High number is better
number of assets the firm has minus the inventory for every liability. Inventory is the least liquid of assets.
Accounts receivable turnover
A liquidity tool
Credit sales / Accounts receivable
AR turnover and ACP provide the same information
Average collection period (ACP)
Liquidity tool
365/Accounts receivable turnover
AR turnover and ACP provide the same information
number of times a year that AR turns over.
inventory turnover
liquidity tool
COGS/INVENTORY
Days on hand (DOH)
Liquidity tool
365/inventory turnover
conclusion will tell how much inventory the firm has on hand in number of days.
Efficiency Ratios
Used to determine how well a company uses assets to generate sales and profits.
Total Asset Turnover (TAT)
An efficiency ratio tool
Sales / Total Assets
Tells how many dollars in sales the company generates from every dollar of assets.
Fixed Asset Turnover (FAT)
An efficiency ratio tool
Sales/Fixed Assets
Calculates sales generated per dollar of fixed assets.
Fixed assets
all non current assets
Operating Income Return on Investment (OIROI)
An efficiency ratio tool
EBIT / Total Assets
the relationship between operating profit (aka EBIT) and the company's asset base
Financing ratios
describe in what proportions the firm uses equity and/or debt to finance assets.
Debt Ratio
A financing ratio
Total Liabilities / Total Assets
portion of the firms assets that are financed with debt
Interest-Bearing Debt to Total Capital (IBDTC)
A financing Ratio
Interest-Bearing Debt / (Interest-Bearing Debt + Owners' Equity)
The Times Interest Earned Ratio (TIE)
A financing Ratio
EBIT / Interest Expense
this ratio tells us how many times a company covers (or can pay) interest expense given operating profit [Show Less]