FIL 240 Exam 2 Study Guide Lectures 15 24 Lecture 15 March 20 What is the formula for a discount rate DATk dk 1 T What is an example of how this works The bank wants 8 your company is in the 20 marginal tax bracket DAT 8 1 0 20 6 4 What is the discount rate for preferred stock Pp D Kp What is the cost of existing common stock vs new common stock Existing Ks D1 P g New KN D1 P F g What is the Float of a stock How much they ll charge to sell the stock F What is the optimal capital structure The combination of debt equity with the lowest weighted average cost of capital WACC Lecture 16 March 25 How does NPV work As the discount rate increases NPV decreases The discount rate that makes NPV 0 is the internal rate of return You invest 100 in a project that will yield 50 the first year 40 the second and 20 the 3 rd Is this a good idea Assume cash flows are discounted at 8 Find PVs of each amount to solve PV 50 1 0 08 1 1st year PV 40 1 0 08 2 2nd year PV 20 1 0 08 3 3rd year Lecture 17 March 27 What is the breakdown of finding profit Profit revenue costs Revenue price x quantity sold Costs variable fixed costs Variable costs variable cost per unit x quantity sold Profit price x quantity variable cost per unit x quantity FC How do you find the breakeven point Put the profit 0 0 p v QBE FC FC 5000 VC 51 per unit P 175 QBE 5000 9175 51 41 prints Slope p v Lecture 18 April 1 What is the definition of leverage The use of funds to magnify the effect of the money you invest What is the formula for the degree of operating leverage change EBIT change sales What is the formula for the degree of financial leverage change net income change EBIT What is the formula for the degree of combined leverage change net income change sales What 3 amounts do you need to find before figuring the amounts of DOL DOF DCL change sales change EBIT and change NI How else can you find DCL DOL x DOF DCL Lecture 19 April 3 What are bonds A security that represents an obligation by the issuer to pay a certain amount of money to the purchaser lender What is a sinking fund provision When a company is required to put a certain amount of money into a secure bank account over the life of the bond it s usually required that the money is in the account near the beginning of the bond in case something goes wrong with the company What is a serial bond When a company issues a cluster of bonds that stagger when they are paid off 10 yrs 15 yrs 25 yrs etc Whom does inflation hurt and whom does it benefit Inflation benefits borrowers and hurts lenders What is the difference between straight callable putable convertible variable rate index STRIP and yankee bonds Straight bonds are normal bonds callable bonds are when a company can call it back at the call time putable bonds are bonds that the lender can put back to the borrower at a certain time convertible bonds are bonds that a company under certain conditions can convert to stock variable rate bonds have a coupon set according to some accepted base rate index bonds are when the principle is indexed to an agreed upon inflation rate measure protect the lender from inflation STRIP bonds are a cluster of bonds using money from other bonds that make money from a high interest rate for one bond yankee bonds are when they moved gold out of the Americas and into GB What are mortgage bonds Mortgage bonds put an asset on the line have a lower coupon rate than debenture because they re less risky What s the difference between senior and subordinate bonds Senior bonds are classified as senior mortgage and senior debenture Senior receives their money first Subordinate bonds are classified as subordinate mortgage and subordinate debenture Senior mortgage Subordinate mortgage Senior debenture Subordinate debenture Lecture 20 April 8 What are the downsides to selling common stock The firm must pay the broker floatation cost must find other people to be owners and when the price decreases SUP increases What is the difference between Regulation D 504 505 and 506 Regulation D 504 is for regular people freely tradable Regulation D 505 506 generate restricted stock subject to rule 144 not freely tradable for wealthy people What 2 classic ways do you register common stock Form S 1 and Form 10 What is a Form 8K What is a Form 10K Form 8K in between normal reports filed when something important happens Form 10K filed annually management discussion and analysis What is a prospectus What is a red herring What is a tombstone A prospectus is a selling document that you read before you buy stock A red herring is a preliminary version of the prospectus that can t be used to sell with A tombstone is an announcement of a public offering Lecture 21 April 10 What is the payout ratio Dividend yield Date of record Price ex dividend Payout Ratio Dividends Net income Dividend Yield Dividends Price Date of Record When the dividends are actually given out as long as stock is bought before this date you get the dividend Price Exdividend time directly following the date of record when the stock price falls What is the residual theory Firms pay dividends out of earnings that remain after it meets its financing needs Once a company declares dividends shareholders come to expect them all the time What is the clientele theory When some companies want specific clients to buy their stock either they only want Wall Street types or ordinary people Ordinary people want dividends while Wall Street types want the company to reinvest their extra money into the company What is the signaling theory In corporate affairs the non verbal methods a company uses to convey communicate or otherwise share its financial condition What is the bird in hand theory Idea that management in an older tradition will say that the investors if given the choice would choose dividends over the stock price increasing What is a stock dividend Stock split A stock dividend is when stock is given to the investors instead of cash A stock split is when the amount of stock increases above 25 it might be done to lower the price of stock so that ordinary people can afford to buy their stock Lecture 22 April 15 What is working capital Net working capital Working capital is current assets or liquid assets to be used within the year Net working capital current assets current liabilities What s the difference between aggressive conservative and moderate short term debt Aggressive debt is expensive but flexible all of permanent current assets and temporary current assets