A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value.

Free Cash Flow = EBIT(1-Tax Rate) + Depreciation - Capital Exp. - Increases in Net Working Capital 

A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the fundsfor a defined period of time at a fixed interest rate. The three variables that characterize a bond include: 

1) par value -the amount of money the holder will receive on the bond's maturity date

2) its coupon rate - the percentage of par value the issuer promises to pay the investor annually (usually in two semiannual payments) as interest income

3) maturity date 

1) if interest rates fall, the firm can pay off its existing bonds and issue new ones at a lower interest cost. 

2) gives the firm flexibility when market conditions change and/or when the a firm's new strategy requires management to rearrange its capital structure. 

1) preferred shareholders have priority over common shareholders with respect to dividend payments. 

2) virtually all preferred stocks are cumulative (if a firm passes a preferred dividend, the arrearage accumulates and must be paid in full before the firm can resume common dividend payments. 

1) the absence of reserve requirements on international bank deposits

2) the ability to issue bonds in bearer form 

Weak-Form: current prices fully reflect all information about past prices

Semi-Strong Form: current prices fully reflect all publicly available information

Strong-Form: current prices fully reflect all information public or private. 

1) publicly available information is not helpful in forecasting future prices

2) without private information, the best forecast of future price is the current price 

3) without private information,a firm cannot improve the terms on which it sells securities by trying to select the optimal time to sell

4) without private information or the willingness to accept above-average risk, investors should not expect to consistently earn above the market-average rate of return

1) the asset creating the risk must be traded in financial markets 

2) the amount and timing of the foreign cash flow must be known with reasonable certainty 

1) current price of the underlying asset

2) the option's time to maturity

3) the option's strike price

4) the interest rate

5) the expected volatility of return on the underlying asset (the more volatility the better)

1) decide how much external capital is required

2) Design the instrument to be sold

1) maintain a convervative leverage ratio with ample unused borrowing capacity to ensure continuous access to financial markets

2) adopt a modest dividend payout policy that enables the firm to finance most of its growth internally.

3) use cash, marketable securitites, and unused borrowing capacity as temporary liquidity buffers to provide financing in years when investment needs exceed internal sources.

4) if external financing is necessary, raise debt, but only to the point where the leverage ratio begins to threaten financial flexibility

5) Sell equity rather than restrict access to financial markets, and reduce growth only as a last resort after all other alternatives have been exhausted.

1) working capital investments usually rise and fall with new product's sales volume. 

2) they are reversible in the sense that at the end of the investments's life, the liquidation of working capital items usually generates cash inflows approximately as large as the original outflows

3) many investments requiring working capital increases also generate spontaneous sources of cash that arise in the natural course of the business and have no explicit cost (increases in almost all non-interest bearing short term liabilities).

1) risk customarlily increases with the futurity of an event

2) inflation reduces the purchasing power of future cash flows

3) waiting for future cash flows involves a lost of opportunity to make interim investments. 

The price at which an asset would trade between two rational individuals, each in command of all the information necessary to value the asset and neither under any pressure to trade.

FMV = PV(Free Cash Flows Years 1-10 + Terminal Value at Year 10) 

1) the debt has been regraded since issue

2) the debt is fixed rate and interest rates have changed significantly since issue.