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| What is a financial security? |
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Definition
| A security or financial instrument is a tradable asset of any kind. |
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Term
| What are we asking when we calculate a project's NPV? |
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Definition
| Whether the poject is worth more than its costs. |
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| The Capital Asset Pricing Model |
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| Efficient Capital Markets |
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| Value Additivity and the Law of Conservation of Value |
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| What determines project risk and Present Value? |
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| Risk and return - what have we missed? |
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| How important are the exceptions to the efficient-market theory? |
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Term
| Is management an off-balance-sheet liability? |
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Term
| How can we explain the success of new securties and new markets? |
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| How can we resolve the dividend controversy? |
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| What risks should a firm take? |
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Term
| what is the value of liqudity? |
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| How can we explain merger waves? |
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| How can we explain international differences in financial architecture? |
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| In finance, the financial system the system that allows the transfer of money between savers and borrowers. |
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Definition
| The part of a financial system concerned with raising capital by dealing in stocks, bonds, and other long-term investments. |
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Term
| what are we asking when we calculate a project's NPV? |
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Definition
| Whether the project is worth more than its costs |
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Term
| What is the simple idea behind NPV? |
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Definition
| When we wish to know the value of something we look at prices in the second-hand market i.e. those highly paid investment bankers are just secondhand cash-flow dealers) |
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Term
| What are we estimating when we calculate a project's NPV? How? |
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Definition
| Estimating its value by calculating what its cash flows would be worth if a claim on them were offered separately to investors and traded in the capital markets. |
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Term
| Why do we calculate NPV by discounting future cash flows at the opportunity cost of capital (i.e. at the expected rate of return offered by securities having the same degree of risk as the project)? |
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Definition
| By discounting at the opportunity cost of capital, we calculate the price at whcih investors in the project could expect to earn that rate of return. |
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Term
| Why is their an attraction to the capital asset pricing model? |
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Definition
| It gives us a manageable way of thinking about the required return on a risky investment. |
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Term
| What did the Modigliani–Miller theorem (1958), propose? |
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Definition
| the irrelevance of debt-equity structure. |
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Term
| Security prices accurately reflect what? |
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Definition
| Available information and resopnd rapidly to new information as soon as it becomes available. |
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Term
| What do the different flavors of the Efficient-Market Theory say? What do they correspond to? |
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Definition
The flavors correspond to different definitions of "available information"
Weak form (random-walk theory) says prices reflect all the info in past prices,
Semistrong form says prices reflect all publicly available info,
Strong form says prices reflect all acquirable info |
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Term
| What does efficient-market idea imply? |
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Definition
| That competition in capital markets is very tough - there are no money machines, and security prices reflect the true underlying value of assets. |
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Term
| The principle of value additivity (law of the conservation of value) states what? |
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Definition
That the value of the whole is equal the sum of the values of the parts. I.e., when we appraise a project that produces a succession of cash flows, we always assume that values add up.
PV(project)=PV(c1)+PV(c2)+PV(c3)+..
=c1/(1+r)+c2/(1+r)+.. |
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Term
| Similar to value additivity, what is assumed about the sum of the present values of two projects A and B? But what else does value additivity mean? |
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Definition
| That it the sum equals the present value of a composite project AB. Value additivity also means that you can't increase value by putting two whole companies together unless you thereby increase the total cash flow (there are no benefits to mergers solely for diversification!) |
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Term
| What is the basic idea behind Modigliani and Miller's famous proposition? |
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Definition
| In perfect markets changes in capital structure do not affect value. As long as the total cash flow generated by the firm's assets is unchanged by capital structure, value is independent of capital structure. The value of the whol e pie doesnt depent on how it is sliced. |
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Term
| In finance, what does capital structure refer to? |
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Definition
| the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. |
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Term
| What is equity (aka. stock)? |
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Definition
| the residual assets of the company that would be due to stockholders after discharge of all senior claims such as secured and unsecured debt. Stockholders' equity cannot be withdrawn from the company in a way that is intended to be detrimental to the company's creditors |
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Definition
| an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value. |
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Term
| What are hybrid securities? |
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Definition
| a broad group of securities that combine the elements of the two broader groups of securities, debt and equity. |
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Term
| In finance, what is an option? |
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Definition
| Specifically to the opportunity to trade in the future on terms that are fixed today. Smart managers know that it is often worth paying today for the option to buy or sell an asset to tomorrow. |
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Term
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Definition
| the difficulties in motivating one party (the "agent"), to act in the best interests of another (the "principal") rather than in his or her own interests. |
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Term
| What are the two kinds of risk? |
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Definition
| Risks that you can diversify away and those you can't. |
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Term
| Which type of risk can you measure? To what extent? What is this called? |
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Definition
| You can measure the nondiversifiable, or market, risk of an investment by the extent to which the value of the investment is affected by a change in the aggregate value of all the assets in the economy. Called the beta of the investment. |
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Term
| What is the only risk people care about? What does this explain about the required on assets? |
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Definition
| The ones they can't get rid of - the nondiversifiable ones. This is why the required return on an assets increases in line with its beta. |
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Term
| What is the main idea underlying the capital asset pricing model? The crucial |
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Definition
| distinction between diversifiable and nondiversifiable risks. |
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Term
| what is The Farm Credit System (FCS)? |
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Definition
| a nationwide network of borrower-owned lending institutions and specialized service organizations |
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Term
| How was the FCS established? What is it now? |
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Definition
| Congress established the Farm Credit System in 1916 to provide a reliable source of credit for the nation's farmers and ranchers. Today, the Farm Credit System provides more than one-third of the credit needed by those who live and work in rural America. |
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Term
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Definition
1. a framework of light wooden or metal bars, chiefly used as a support for fruit trees or climbing plants.
synonyms: lattice, framework, espalier, arbor;
2. to provide with or enclose in a trelis |
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