Characteristics of preferred stock includes
-dividends in arrears
-dividends are cumulative
-higher payoff claim in a BK (has first dibs in a
... [Show More] BK)
-considered "hybrid" (part stock/part bond)
-no fixed maturity date
-no voting rights
-can skip dividend payments
-dividends don't change year-after-year
-used in start ups (IPO)
Preferred stock dividends
can go without payment and pay in arrears the following year
Characteristics of common stock are
-voting rights
-no maturity date
-corporate governance
-lower payoff claim in BK
-variable returns
-unlimited earnings potential
-earnings are in dividends & the increase in price of stock
New start up ventures often issue
preferred stock (in an IPO)
What stock is considered a hybrid
preferred stock
One thing common stock and preferred stock have in common is
both have no maturity date
Which type of security has voting rights
common stock
Debt covenants and restrictions help to ensure that
management is meeting bond and shareholder expectations
NOTE: covenants are promises meant to be kept
What is true regarding bonds
-when bond matures, bondholder gets lump sum back
-coupon rate doesn't change
-maturity is in years
-PAR value is typically $1000
-Future value (same as PAR) is typically $1000
Bond sells at face value when
required rate of return is equal to the coupon rate
Why are bonds the primary method for raising capital
because bonds remove the intermediary costs
NOTE: IPO's require an intermediary known as a syndicate - a group of banks underwriting the security issue
What type of bond can be traded for stock
convertible bonds
What is the interest rate for annual payments of a bond known as
the coupon rate
NOTE: coupon rate is the established interest rate for the life of the bond and will remain unchanged
Coupon rate is the established rate of the bond and should
never change
Debentures are
secured bonds
NOTE: debentures are a debt instrument (bond) issued to raise cash, secured against a company's assets and backed by credit, transferable by the holder, and may also be unsecured
Secured loan
has collateral like a mortgage
The amount repaid at the expiration date of a bond is
PAR value
NOTE: expiration date is also known as maturity date PAR (or Face Value) is typically $1000
Duration measures
the market risk of a bond and is the percentage drop in price caused by a 1% increase in yield (rate)
NOTE: measurement of the drop in price after a rate increase
Maturity of bonds is calculated in
years
A bond premium occurs when
bonds are issued for an amount greater than their face or maturity amount; caused by the bonds having a stated interest rate that is higher than the market interest rate for similar bonds
Junk Bonds are
high yield bonds without any stability
"Leveraged" results in
having more debt (bonds) than equity (stock) and lower stock prices
NOTE: recall that debt is safer and levels out risk in a portfolio
In current assets, inventory is the
LEAST liquid of current assets
NOTE: current assets take less than 12 months to make liquid
Net fixed assets are
long term assets such as buildings, land, equipment, machinery
NOTE: assets that are not current
A/P represents money paid to
suppliers for what is bought on credit and amount owed by a business to suppliers by agreement
NOTE: A/P is supplies, inventory, or PP&E
Notes payable involves
an explicit interest bearing arrangement with the lender at interest cost
NOTE: notes payable is a long-term liability
Current liabilities are listed in order of
maturity
NOTE: current liabilities are to be paid within 12 months
Two things you can do with net income
pay out as dividends or retain (plow back into the firm)
On the Statement of Cash Flows, CFO's include
-cash receipts from customers (inflow)
-cash paid for inventory (outflow)
-cash paid for wages (outflow)
NOTE: receipts of cash is inflow & what is paid out is outflow
Which is NOT considered an operating expense
interest expense is NOT considered an operating expense
On the Statement of Cash Flows, CFI includes
cash receipts from sale of property and equipment (inflow), cash paid for purchase of equipment (outflow)
NOTE: receipts of cash is inflow & what is paid out is outflow
Which of the following is true with respect to CFO
an increase in inventory indicates a reduction in CFO
NOTE: there is a cost (reduction) to purchasing (increasing) inventory
The Statement of Cash Flows is not useful when addressing the financial health of a firm due to the impact of accrual accounting
FALSE - the impact of accrual accounting is seen as MOST useful in relation to net income
Which is true with respect to CFF
an increase in notes payable indicates an increase in CFF
Which is not a part of the Statement of Cash Flows
cash flows from liquidating activities
NOTE: cash flows are operating, investing, and financing
The sum of CFO + CFI + CFF is equal to
the change in cash during the period
Depreciation expense is a significant source of difference between net income and CFO because
depreciation is a non-cash expense on the Income Statement associated with the acquisition of long-term assets
Subordinated bonds
are bonds not backed by collateral
For visualization purposes, CFI accounts are generally non-current assets on the bottom of the asset side of the Balance Sheet
TRUE
NOTE: CFI is investing in PP&E and is considered long-term assets shown as assets on the Balance Sheet
Increases in operating assets and decreases in operating liabilities will
decrease CFO
NOTE: an increase in PP&E (assets) consumes operating cash; decreases in equipment (liabilities) also consumes operating cash (CFO)
Unsecured loan
has no collateral
NOTE: a credit card is an example
Assuming no asset disposals, CFI is
the change in Gross PP&E -or- CFI is the change in NET PP&E plus depreciation expense
Assuming no asset disposals, depreciation expense is equal to
the change in ACCUMULATED depreciation
Assets are financed by
other people's money or equity
Dividends are considered
CFF (financing section)
A firm with positive CFO should be considered healthy
FALSE
NOTE: a positive CFO can still be detrimental to the firm depending on other factors
The increase in yield (rate) causes
the bond prices to decrease (and vice-versa)
NOTE: when interest rates increase, bond prices decrease
A working capital increase caused by an increase in inventory will be
a cash outflow
NOTE: capital increase is inventory purchased so money goes out
A firm can sustain negative CFO indefinitely by borrowing, selling equity, and/or by selling assets
FALSE
NOTE: a firm can NOT sustain negative CFO forever
Which should NOT be included in the calculation of CFF
a change in retained earnings
Dividing CFO among the owners of a firm is a sustainable policy
FALSE
NOTE: CFO doesn't allow for required reinvestment
Dividing CFO among owners of a firm is NOT a sustainable policy
TRUE
NOTE: CFO doesn't allow for required reinvestment
A firm reports the following cash flow data CFO 1 million, CFI 750K, and CFF -100K. Is the firm sustainable
Yes, the firm is sustainable. CFF may be due to paying down debt, buying back stock, or paying dividends
When calculating CFO, an increase in an operating liability such as A/P or accrued wages represents
an inflow to the firm
NOTE: if the firm owes to suppliers, more inventory is purchased and on hand (inflow)
NOTE: Operating liability accounts are:
Increases: an inflow of cash
Decreases: an outflow of cash
CFO can be dramatically impacted by managerial discretion in the financial reporting process
TRUE
NOTE: management has discretion which is why financial statements can be misleading
Management of cash flow from operations
is dramatically impacted by managerial decisions
The impact of accrual accounting is seen as
MOST useful in relation to net income
A change in notes payable (bank loans) will
impact CFF
NOTE: A/P and A/R impacts CFO; while notes payable (bank loans) are considered long-term and affect CFF
Which will decrease CFO
an increase in A/R & a decrease in A/P
NOTE:
-when A/R is increased, product has been sold
-when A/P is decreased, suppliers have been paid
These actions decrease CFO
Which represents assets in CFO
A/R and inventory
Depreciation expense is added back in FCF because
depreciation expense is a non-cash expense
FCFF can sustainably be distributed
to the providers of capital
A company that increases A/R by $5000 in the recent period but expects to collect half in the next period, will see the change in A/R affect cash flows from the operating section as
an inflow of cash
a decrease of cash flows by $5000
NOTE: the $5000 received is an expected inflow of cash; however receiving $5000 indicates that the firm is down $5000 in inventory which is shown as a decrease
Retained Earnings (RE) are
the earnings plowed back to finance the firm's asset base and is NOT cash
The evolution of retained earnings is
retained earnings left over is either retained in the company -or- paid out in dividends
How do you calculate the change in retained earnings (RE)
RE = Net Income - Dividends
NOTE: this equation can be inverted from formula sheet)
What is the equation for FCFF
FCFF = EBIT * (1-tax rate) + depreciation - capital expenditures - increase in net working capital (NWC)
NOTE: this equation can be easily located on the provided formula sheet [Show Less]