FIL 240Exam # 2 Study Guide Lectures: 15 - 24Lecture 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/KpWhat is the cost of existing common stock vs. new common stock?Existing – Ks = (D1/P) + gNew – KN = (D1/(P-F)) + gWhat 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 3rd. 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 yearPV = 40/ (1+0.08)2 – 2nd yearPV = 20/ (1+0.08)3 – 3rd yearLecture 17 (March 27)What is the breakdown of finding profit?Profit = revenue – costsRevenue = price x quantity soldCosts = variable + fixed costsVariable costs = variable cost per unit x quantity soldProfit = (price x quantity) – (variable cost per unit x quantity) – FCHow do you find the breakeven point?Put the profit = 0. 0 = (p-v) QBE – FCFC = $5000; VC = $51 per unit; P = $175QBE = 5000/9175-51) = 41 printsSlope = 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 salesWhat is the formula for the degree of financial leverage?%change net income/%change EBITWhat is the formula for the degree of combined leverage?%change net income/%change salesWhat 3 amounts do you need to find before figuring the amounts of DOL, DOF, & DCL?% change sales, % change EBIT, and % change NIHow else can you find DCL?DOL x DOF = DCLLecture 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 ofthe bond in case something goes wrong with the companyWhat is a serial bond?When a company issues a cluster of bonds that stagger when they are paid off (10 yrs, 15 yrs, 25yrs, etc)Whom does inflation hurt and whom does it benefit?Inflation benefits borrowers and hurts lendersWhat 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 mortgageSubordinate mortgageSenior debentureSubordinate debentureLecture 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 increasesWhat 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 peopleWhat 2 classic ways do you register common stock?Form S-1 and Form 10What is a Form 8K? What is a Form 10K?Form 8K – in between normal reports, filed when something important happensForm 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 incomeDividend Yield = Dividends/PriceDate of Record = When the dividends are actually given out, as long as stock is bought before this date, you get the dividendPrice Exdividend – time directly following the date of record when the stock price fallsWhat 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 increasingWhat is a stock dividend? Stock split?A stock dividend is when stock is given to the investors instead of cashA 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