FIN 432 Test #2

  1. option
    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
  2. call option
    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
  3. put option
    allows the holder the right to sell the asset at some predetermined price within a specified period of time
  4. stirke (exercise price)
    the one stated in the option contract at which the security can be bought or sold
  5. in-the-money
    a call option whose current stock price is greater than the strike (exercise) price
  6. out-of-the-money
    a call option whose current stock price is less than the strike (exercise) price
  7. time value
    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
  8. arbitrage
    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
  9. annual report
    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
  10. balance sheet
    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
  11. income statement
    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
  12. statement of stockholders’ equity
    shows the beginning, any changes due to stock issues/repurchases, the amount of NI that is retained, & the ending
  13. statement of cash flows
    reports the impact of a firm’s operating, investing, & financing activities on cash flows over an accounting period
  14. free cash flow (FCF)
    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
  15. net operating profit after taxes (NOPAT)
    amount of profit a company would generate if it had no debt & no financial assets
  16. operating current assets (CA)
    used to support normal operations; cash, AR, & Inventory; does NOT include short-term investments
  17. operating current liabilities (CL)
    are a natural consequence of the firm's operations; AP & Accurals; does NOT include NP or any other short-term debt that charges interest
  18. total net operating capital or just operating capital
    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
  19. marginal tax rate
    on the last unit of income
  20. progressive tax
    system in which the higher one's income, the larger the percentage paid on taxes
  21. municipal bonds
    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
  22. financial leverage
    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
  23. additional funds needed (AFN)
    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
  24. capital intensity ratio
    the $ amount of assets required to produce a $ of sales; current year; A0*/S0*
  25. financing feedback
    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
Card Set
FIN 432 Test #2
Chapters 6-9