FIN 432 Test #2

a contract that gives its holder the right, but not the obligation, to buy or sell an asset at some predetermined price within a specified period of time

allows the holder the right to buy the asset at some predetermined price witin a specified period of time; works to your advantage when stock prices go up

allows the holder the right to sell the asset at some predetermined price within a specified period of time

the one stated in the option contract at which the security can be bought or sold

a call option whose current stock price is greater than the strike (exercise) price

a call option whose current stock price is less than the strike (exercise) price

option price - exercise value; additional value because the option has remaining time before it expires; represents extra amount over the option's immediate exercise value that a purchaser will pay for the chance the stock price will appreciate over time

the simultaneous buying & selling of the same commodity or security in 2 different markets at different prices, thus yielding a risk-free return; you invested none of your own money; the replicating portfolio's payoffs exactly equal the payoffs you will owe because you wrote the option

issued annually by a corp. to its stockholders; contains basic financial statements (balance sheet, income statement, statement of shareholder’s equity, & statement of cash flows), mgmt’s opinion of the past year’s operations & the firm’s future prospects

statement of the firm’s financial position at a specific point in time; assets (company owned) listed on the left-hand side; liabilities & equity (claims against assets) on the right-hand side

summarizes the firm’s revenues & expenses over an accounting period (reflect performance); net sales at the top, then costs (income taxes) are subtracted to obtain NI available to common stockholders; bottom reports earnings & dividends per share

shows the beginning, any changes due to stock issues/repurchases, the amount of NI that is retained, & the ending

reports the impact of a firm’s operating, investing, & financing activities on cash flows over an accounting period

the cash flow actually available for distribution to all investors after the company has made all investments in fixed assets & working capital necessary to sustain ongoing operations; value of operations depends on this

amount of profit a company would generate if it had no debt & no financial assets

used to support normal operations; cash, AR, & Inventory; does NOT include short-term investments

are a natural consequence of the firm's operations; AP & Accurals; does NOT include NP or any other short-term debt that charges interest

NOWC + operating long-term assests (net plant & equipment); equal to the net amount of capital raised by investors; the amount of interest-bearing debt (NP & long-term bonds) + preferred stock + common equity - short-term investments

on the last unit of income

system in which the higher one's income, the larger the percentage paid on taxes

issued by state & local governments; the interest earned on these is exempt from federal taxes & also from state taxes if the holder is a resident of the issuing state

the extent to which fixed-income securities (debt & PS) are used in a firm's capital structure; high amounts of debt & PS then this is high; debt financing

required from external sources to increase the firm's assets to support a sales increase (which normally require an increase in assets); usually offset by a spontaneous increase in liabities as well as by RE in the firm

the $ amount of assets required to produce a $ of sales; current year; A₀*/S₀*

circularity created when additional debt causes additional interest expense (lowers NI), which reduces the addition to RE, which in turn requires a higher level of debt (more financing is needed), which causes still more interest expense, causing the cycle to be repeated