Index

American Psycho (Ellis), 271 • A • amortization, 60, 130 accountants, 32 analysts, 31 accounting APT (), 206–207, 209 forecasting with accounting records, 259 arithmetic rate of returns, 252–253 quality of earnings ARR (accounting rate of return), 124–125 cost recognition, 249 ask, 147 depreciation, 249 ask price, 155 inventory accounting, 248–249 asset pool, 217 overview, 247–248 asset-backed securities, 141–142 Accounting For Dummies (Tracy), 3 assets accounting rate of return (ARR), 124–125 bundling accounts payables, 31, 52 multi-asset bundles, 218 accounts receivables, 30, 47 overview, 217 accounts receivables turnover (liquidity pass-through certifi cates, 217–218 metric), 75 unbundling, 218–219 accounts receivables turnover in days current (liquidity metric), 75–76 accounts receivable, 47 accrued compensation, 52 cash, 47 accrued expenses, 52 cash equivalents, 47 accumulated other comprehensive income tax assets, 48 income, 56 inventories, 48 acid test ratio (quick ratio), 80 marketable securities, 47 acquisitions, 275–276 other current assets, 48 active management, 196 prepaid accounts, 48 additional paid-in capital,http://www.pbookshop.com 55 earning, 103 adjusters, 31 intangible, 51 agency problem, 18 liquid algorithms in fi nancial engineering, capital investments, 131–132 221–223 economic capital, 131 AllExperts, 33 inventory, 132 allowances, 47 COPYRIGHTEDlong-term, MATERIAL 46, 48–50 ratio, 254–255 other assets, 51 Altman’s Z-score, calculating, 269–270 overview, 35–36, 46 American Institute of Certifi ed Public total, 103 Accountants (AICPA), 28 auditors, 31

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automated bill pay, 225 nepotism, 309 automotive sector, 162 overview, 305 average rate of returns, 253 prospect theory, 311–312 average, fi nding an, 259–260 rational decisions, limited ability to aversion function, 202 make, 306 satisfi cing, 310–311, 315 • B • Sunk Cost Fallacy, 307 , 308–309 backward integration, 281 benefi ts, 21 balance sheet bias affecting decisions, 312–313 assets, 46–51 bid, 147 categories, 46 bid price, 155 formula for, 45 bid-ask spread, 177 liabilities, 46, 51–53 bills, 15 overview, 45–46 blue chip , 160 owners’ equity, 46, 54–56 bond rates supplemental notes included in, 56 fi xed-rate bonds, 145 using, 56 fl oating-rate bonds, 145–147 bank analytics overview, 145–146 deposits times capital, 105–106 bonds earning assets to total assets ratio, 103 ask, 147 equity to total assets ratio, 105 bearer, 144 loan loss coverage ratio, 104 bid, 147 loans to deposits ratio, 106 callable, 143 net interest , 103–104 catastrophe, 144–145 overview, 102 clean price, 149 Bank of America, 275 convertible, 142–143, 216 banking underwriters, 24 corporate, 138 barter system, 10 coupon, 141 basic , 63 coupon/rate, 147 bear market, 162–163 credit quality ratings, 147–148 bearer bonds, 144 http://www.pbookshop.comdebt, bond issuance as source for raising behavioral fi nance money by acquiring, 37 bias, 312–313 dirty price, 149 cronyism, 309–310 face value/par value, 148 emotional decisions, 308 government ethnocentrism, 314–315 general obligation bonds, 140 favoritism, 309–310 municipal bonds, 140–141 framing, 313–315 overview, 138 Gambler’s Fallacy, 307 revenue bonds, 140 irrationality, 315–316 treasury bonds, 139–140 logical fallacies, 306–307 issuer, 148 junk, 145, 146

332_9781118412794-bindex.indd2_9781118412794-bindex.indd 318318 111/28/121/28/12 8:198:19 AMAM Index 319

maturity/maturity date, 148 municipal, 140–141 • C • overview, 137 CAL (capital allocation line), 207–208 price, 148–149 call options, 171 price change, 149 callable bonds, 143 puttable, 143–144 capital account, 292 registered, 144 capital asset pricing model (CAPM), spread, 147 203–205, 208–209 terminology, 147–150 capital budgeting. See also capital types of, 137–145 investments valuation, 150–151 managing capital allocations, 130–132 volume, 149 net present value (NPV), 127–129 , 149 overview, 122 yield change, 149 payback period, 129–130 yield to maturity (YTM), 150 rate of return, 122–127 zero-coupon, 141 capital effi ciency, 130 bonds payable, 53 capital gains, 18 book value per share, 101 capital investments. See also capital bookkeeping clerks, 31 budgeting broker-dealers securities fi rms, 23 equivalent annual cost of potential brokers, 23 investments, calculating, 130–131 budget metrics liquid assets, 131–132 CP (cost performance ratio), 135 managing capital allocations, 130–132 CV (cost variance), 135 overview, 121–122 EAC (estimate at completion), 135–136 capital lease obligations, 53 overview, 134–135 capital structure assessment TCP (to-complete performance), 136 choosing a capital structure, 233–234 Buffet, Warren (CEO of Berkshire cost of capital, calculating, 228–233 Hathaway), 199–200, 233 debt, calculating cost of, 229–230 bull market, 162–163 policy, 230–232 bundling assets equity, calculating cost of, 230 multi-asset bundles, 218http://www.pbookshop.comoverview, 227–228 overview, 217 WACC (weighted average cost of capital), pass-through certifi cates, 217–218 228–229 unbundling, 218–219 capital, raising. See raising capital business credit institutions, 26 CAPM (capital asset pricing model), business cycle, valuation affected 203–205, 208–209 by, 167 caps, 161 Business Plans For Dummies (Tiffany and captive fi nancing company, 26 Peterson), 37 cash buying , 158 as fi nancing method for M&A, 287 buying on margin, 158 overview, 47 buyouts, 276 paid to suppliers and employees, 67 received from customers, 66

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cash dividend coverage ratio, 102 consumer discretionary sector, 162 cash equivalents, 47 consumer staples sector, 162 cash fl ow conventional evaluations for investment discounted, 119–120 performance, 252–254 sources, 250–251 convertibility risk, 190 cash ratio, 80–81 convertible bonds, 142–143, 216 catastrophe bonds, 144–145 convertible preferred shares, 54, 216 CFO, 34 corporate analysis, 165 CFO (Chief Financial Offi cer), 32 corporate bonds, 138 Chartered Financial Analyst Institute corporate fi nance (CFAI), 28 as intermediary, 12–13 chips, 160 defi ned, 10 claim, 21 government policy infl uenced by, 15 clean price, 149 infl uence of, 14–15 closed-ended loans, 39 interactions between people, analyzing, co-pay, 21 13–14 cognitive bias, 313 overview, 11–12 COGS (cost of goods sold), 59 proactive about, becoming, 15–16 coincident indicators, uniqueness of, 12 affected by, 168 corporations collateralized mortgage obligations, 214 agency problem, 18 commercial banks, 20, 37 capital gains, 18 Commodity Futures Trading Commission disclosure, 19 (CFTC), 28 double taxation, 18 common , 232 goals of, 19 , 41–42, 55 limited liability, 18 Compaq/HP merger, 274 nonprofi t, 19 comparing data, 259 overview, 18–19 competitor elimination as motive for M&A correlations, 265–267 (mergers and acquisitions), 283 cost of capital, calculating, 228–233 compound interest, 117 cost of goods sold (COGS), 59 compounding interest loans,http://www.pbookshop.com 40 cost of inventory, 132 computational fi nance cost recognition, 249 automated bill pay, 225 cost variance (CV), 135 logic programming, 225–226 costs online banking, 225 non-value added, 184 overview, 223–224 rate of return, 123 software packages, fi nancial, 225–226 coupon bonds, 141 trading, computerized, 224 coupon/rate, 147 confi rmation bias, 258, 313 CP (cost performance ratio), 135 conglomerate integration as motive for credit quality ratings, 147–148 M&A (mergers and acquisitions), credit risk, 186–187 282–283 credit unions, 20

332_9781118412794-bindex.indd2_9781118412794-bindex.indd 320320 111/28/121/28/12 8:198:19 AMAM Index 321

cronyism, 309–310 government loans as source for, 37 cross-listing, 298–299 loan terms, 39–40 cultural aspects of international fi nance, long run, making sure loan pays off in, 303–304 38–39 currency, 10–11 overview, 36–37 current account, 292 proposals, 37 current assets where to ask for money, 37–38 accounts receivable, 47 debt analytics cash, 47 debt ratio, 92 cash equivalents, 47 debt to equity ratio, 92–93 income tax assets, 48 debt to tangible net worth, 93 inventories, 48 equity multiplier, 94 marketable securities, 47 fi xed charge coverage, 91–92 other current assets, 48 operating cash fl ows to total debt, 94 prepaid accounts, 48 overview, 90–91 current liabilities debt expenses, 230 accounts payables, 52 debt portfolio, 194 accrued compensation, 52 debt ratio, 92 accrued expenses, 52 debt to equity ratio, 92–93 current portion of long-term debt, 53 debt to tangible net worth, 93 deferred income tax, 52–53 deductible, 21 other current liabilities, 53 default risk, 230 unearned income, 52 deferred income tax, 52–53 current portion of long-term debt, 53 deferred tax, 48 current ratio, 79 defl ation, 115 current yield, 149 depository institutions, 19–20 CV (cost variance), 135 depreciation, 49–50 derivatives • D • forwards, 173–175 futures, 175–176 data collection, 258–259 options, 170–172 days sales in inventory (liquidityhttp://www.pbookshop.com metric), overview, 169–170 76–77 swaps, 177–179 days sales in receivables (liquidity metric), diluted earnings per share, 63 74–75 dirty price, 149 dealers, 23 disclosure, 19 debt discount brokers, 23 calculating cost of, 229–230 discount value. See present value M&A, debt as fi nancing method for, discounted cash fl ows, 119–120 287–288 distribution of data, 260–262 raising money by acquiring diversifi cation bond issuance as source for, 37 as motive for M&A (mergers and commercial banks as source for, 37 acquisitions), 279–280 , 199–200

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divestiture, 278–279 employment dividend payments, 42, 69, 100 forecasting, 258 dividend policy stock valuation affected by, 167 common dividends, 232 energy sector, 162 overview, 230–231 entry-level positions in corporate fi nance, preferred cumulative dividends, 231 30–31 preferred noncumulative dividends, equity 231–232 as fi nancing method for M&A, 288 retained earnings, 232 calculating cost of, 230 Warren Buffett’s explanation, 233 overview, 36 dividend puzzle, 231 raising cash by selling, 40–41 , 100–101 equity multiplier, 88, 94 dividends in arrears, 232 equity to total assets ratio, 105 double taxation, 18 equivalent annual cost of potential DuPont equation, 87–88 investments, calculating, 130–131 estimate at completion (EAC), 135–136 • E • ETC (estimate to complete), 136 ethnocentrism, 314–315 EAC (estimate at completion), 135–136 Eurobonds, 294–295 earned value, 128–129 EVM (earned value management) earned value management. See EVM budget metrics, 134–136 earning assets, 103 overview, 133 earning assets to total assets ratio, 103 schedule metrics, 133–134 earnings before interest and taxes (EBIT), exchange rates, 294, 295–296 61–62 exchanges, 27 earnings per common share, 97 executives, 31–32 earnings per share (EPS), 63 exercise a call option, 171 ECNs (electronic communication exotic fi nancial products networks), 154 loans, 220–221 economic capital, 131 options, 220 economic equilibrium, 196 overview, 219 economies of scale as motivehttp://www.pbookshop.com for M&A swaps, 220 (mergers and acquisitions), 280–281 expiration date for put options, 170 economies of scope as motive for M&A (mergers and acquisitions), 281 • F • economists, 32 EDGAR (SEC database), 33 face value/par value, 148 effi cient frontier, 207–208 factor price equalization, 293 effi cient market hypothesis, 196–197 factoring, 277–278 Ellis, Bret Easton (American Psycho), 271 favoritism, 309–310 embargoes, 302 Federal Deposit Insurance Corporation emotional decisions, 308 (FDIC), 28

332_9781118412794-bindex.indd2_9781118412794-bindex.indd 322322 111/28/121/28/12 8:198:19 AMAM Index 323

federal funds rate, 26 fi nancial leverage, 96 Federal Reserve, 28–30 fi nancial metrics federally subsidized loans, 38 bank analytics, 102–106 FIFO (fi rst-in, fi rst-out) accounting, 59, 248 debt analytics, 90–94 fi ll-or-kill order, 155 analytics, 96–102 fi nance, 12 liquidity metrics, 74–81 Financial Accounting Foundation (FAF), 28 operating assets analytics, 107–109 Financial Accounting Standards Advisory overview, 73–74 Board (FASAB), 28 profi tability metrics, 82–90 Financial Accounting Standards Board fi nancial performance assessment (FASB), 28 cash fl ow sources, 250–251 fi nancial engineering common-size comparisons, 238–243 algorithms, use of, 221–223 investment performance, 251, 252–256 bundling assets overview, 237–238 multi-asset bundles, 218 performance comparatives, 243–247 overview, 217 quality of earnings, 247–249 pass-through certifi cates, 217–218 fi nancial reports. See also balance sheet; unbundling, 218–219 income statement; statement of computational fi nance cash fl ows automated bill pay, 225 as resource, 34 logic programming, 225–226 forecasting, 258 online banking, 225 fi nancial sector, 162 overview, 223–224 fi nancing, 287–288 software packages, fi nancial, 225–226 fi nancing institutions trading, computerized, 224 business credit institutions, 26 exotic fi nancial products loan sharks, 26–27 loans, 220–221 overview, 25 options, 220 personal credit institutions, 26 overview, 219 sales, 25–26 swaps, 220 subprime lenders, 26–27 hybrid fi nancial products fi nished products, 132 indexed-back CDs withhttp://www.pbookshop.com put option, fi scal policy, stock valuation affected by, 167 216–217 fi xed asset turnover (profi tability metric), mixed-interest hybrids, 215–216 88–89 overview, 214–215 fi xed charge coverage, 91–92 single asset hybrids, 216 fi xed rate loans, 39 overview, 212 fi xed rate return, 184 portfolio engineering, 221–223 fi xed rate bonds, 145 securitization, 212–214 fl ash crash, 222 Financial Industry Regulatory Authority fl oating-rate bonds (FINRA), 27–28 indexed bonds, 147 fi nancial institutions, 12–13. See also interest rate fl oat, 146 specifi c fi nancial institutions inverse interest rate fl oat, 146 fi nancial investments, 121 overview, 145

332_9781118412794-bindex.indd2_9781118412794-bindex.indd 323323 111/28/121/28/12 8:198:19 AMAM 324 Corporate Finance For Dummies

forecasting Altman’s Z-score, calculating, 269–270 • G • average, fi nding an, 259–260 Gambler’s Fallacy, 307 confi rmation bias, avoiding, 258 GDP (gross domestic product), 167 data collection, 258–259 general and administrative (G&A) costs, 60 distribution of data, 260–262 general obligation bonds, 140 historical data review, 264–267 geographic expansion as motive for M&A overview, 257–258 (mergers and acquisitions), 280 predicting movements, 269 Global Finance, 34 probability theory, 262–264 goals of corporations, 19 reference class, 270 Gordon’s Model, 233 statistics and probability, using, Government Accounting Standards Board 268–270 (GASB), 28 foreign exchange risk government bonds convertibility risk, 190 general obligation bonds, 140 international fi nance, 298 municipal bonds, 140–141 overview, 188 overview, 138 repatriation risk, 190 revenue bonds, 140 transaction risk, 188–189 treasury bonds, 139–140 translation risk, 189–190 government loans as source for raising foreign regulations, 298 money by acquiring debt, 37 forensic accounting, 31 government policy infl uenced by corporate forward integration, 281 fi nance, 15 forwards Graebner, David (anthropologist), 10 international fi nance, 297 green chip stocks, 160 overview, 173 gross domestic product (GDP), 167 revenue generation, 174 gross income. See net sales risk management, 173–174 gross margin, 59–60 valuation, 174–175 gross profi t framing, 313–315 cost of goods sold (COGS), 59 funds gross margin, 59–60 hedge, 24–25 http://www.pbookshop.comnet sales, 58–59 mutual, 24–25 overview, 58 overview, 24–25 gross profi t margin (profi tability metric), 90 types of, 24–25 group health insurance, 22 future value of money, 116–117 futures international fi nance, 297 • H • overview, 175 health insurance companies, 21–22 revenue generation, 176 health maintenance organizations risk management, 175–176 (HMOs), 22 valuation, 176 healthcare sector, 162

332_9781118412794-bindex.indd2_9781118412794-bindex.indd 324324 111/28/121/28/12 8:198:19 AMAM Index 325

hedge funds, 24–25 overview, 57–58 hedge portfolio, 194 single-step, 58 historical data review supplemental notes, 63 correlations, 265–267 using, 64 overview, 264 income tax assets, 48 regression, looking at, 265–267 income tax expense, 62 trends and patterns, fi nding, 264–265 income taxes paid, 67 horizontal common-size comparisons, indemnify, 21 240–241 indexed bonds, 147 horizontal integration as motive for M&A indexed-back CDs with put option, 216–217 (mergers and acquisitions), 282 industrial sector, 162 hospitality sector, 162 industry hostile takeovers, 277 performance comparatives, 245–247 hybrid fi nancial products stocks valuation, industry performance indexed-back CDs with put option, affecting, 166 216–217 industry averages, 246 mixed-interest hybrids, 215–216 infl ation overview, 214–215 overview, 114–115 single asset hybrids, 216 stock valuation affected by, 167 infl ationary risk, 185 • I • infl uence of corporate fi nance, 14–15 infrastructure sector, 162 IAS (international accounting standards), 28 initial (IPO), 41, 55 IFE (International Fisher Effect), 295–296 insolvency, 143–144, 192 income from sales. See net sales insurance companies. See also income statement underwriters earnings before interest and taxes (EBIT), health, 21–22 61–62 life, 22 earnings per share (EPS), 63 overview, 21–22 gross profi t, 58–60 property-casualty, 22 net income terminology, 21 calculating, 62–63 http://www.pbookshop.comintangible assets, 51 income tax expense, 62 interactions between people, analyzing, interest expense, 62 13–14 interest income, 62 interest, 38 overview, 62–63 interest expense, 62 operating income interest income, 62 calculating, 61 interest paid, 67 depreciation and amortization, 60 interest rate fl oat, 146 general and administrative (G&A) interest rate risk, 184–185 costs, 60 interest rates overview, 60–61 compound interest, 117 selling expense, 60 overview, 115

332_9781118412794-bindex.indd2_9781118412794-bindex.indd 325325 111/28/121/28/12 8:198:19 AMAM 326 Corporate Finance For Dummies

interest rates (continued) inventory reports, 258 setting, 29 inventory turnover (liquidity metric), 77 simple interest, 116–117 inventory turnover in days (liquidity value of money, 115 metric), 77–78 interest received, 67 inverse interest rate fl oat, 146 interest-only loans, 220–221 investment banks securities fi rms, 23 intermediary, corporate fi nance as, 12–13 investment performance internal rate of return (IRR), 126 conventional evaluations Internal Revenue Service (IRS), 27 arithmetic rate of returns, 252–253 international accounting standards (IAS), 28 average rate of returns, 253 international fi nance overview, 252 capital account, 292 risk adjusted return on capital, 254 cross-listing, 298–299 time-weighted rate of returns, 253 cultural aspects, 303–304 fi nancial performance assessment current account, 292 conventional evaluations, 252–254 embargoes, 302 overview, 251 Eurobonds, 294–295 portfolio manager evaluations, 254–256 exchange rates, 294, 295–296 overview, 252 factor price equalization, 293 portfolio manager evaluations foreign exchange risk, 298 alpha ratio, 254–255 foreign regulations, 298 overview, 254 forwards, 297 , 255 futures, 297 Sterling ratio, 255 IFE (International Fisher Effect), 295–296 V2 ratio, 256 options, 297 investment portfolio, 194 outsourcing, 300–301 investments, 13, 49 political instability, 298 Investopedia, 33 politics, 301–303 investor analytics purchasing power, 293–294 book value per share, 101 purchasing power parity (PPP), 293–294 cash dividend coverage ratio, 102 quotas, 302 dividend payout, 100 risk management, 297–298http://www.pbookshop.comdividend yield, 100–101 spot rate, 296 earnings per common share, 97 swaps, currency, 297 fi nancial leverage, 96 tariffs, 302 operating cash fl ows per share, 97–98 trade imbalance, lack of, 291–292 overview, 96 International Fisher Effect (IFE), 295–296 percentage of earnings retained, 99–100 Internet price to earnings ratio (P/E), 98–99 forecasting, 259 IPO (), 41, 55 resources, 33 IRR (internal rate of return), 126 interquartile range, 261 irrationality in decision making, 315–316 invention of money, 10 IRS (Internal Revenue Service), 27 inventory, 48, 132 Islamic Banking & Finance, 34 inventory accounting, 248–249 issuer, bonds, 148

332_9781118412794-bindex.indd2_9781118412794-bindex.indd 326326 111/28/121/28/12 8:198:19 AMAM Index 327

liquidity metrics • J • accounts receivables turnover, 75 JIT (just-in-time) inventory management, 132 accounts receivables turnover in days, joint ventures and partnerships, 278 75–76 journals as resource, 34 acid test ratio (quick ratio), 80 junk bonds, 145, 146 cash ratio, 80–81 current ratio, 79 days sales in inventory, 76–77 • K • days sales in receivables, 74–75 inventory turnover, 77 Kedl, Kent (Technomic Asia), 277 inventory turnover in days, 77–78 Kiplinger, 34 operating cash fl ows to current maturities, 82 • L • operating cycle, 78 overview, 74 lagging indicators, stock valuation affected sales to working capital, 81 by, 168 working capital, 78–79 large cap stocks, 161 liquidity risk, 192 leading indicators, stock valuation affected loan loss coverage ratio, 104 by, 167 loan sharks, 26–27 legal issues for M&A (mergers and loan terms, 39–40 acquisitions), 273 loans leveraged buyout, 276 closed-ended, 39 liabilities compounding interest, 40 current exotic fi nancial products, 220–221 accounts payables, 52 federally subsidized, 38 accrued compensation, 52 fi xed rate, 39 accrued expenses, 52 interest-only, 220–221 current portion of long-term debt, 53 negative-amortization, 221 deferred income tax, 52–53 open-ended, 39 other current liabilities, 53 secured, 39 unearned income, 52http://www.pbookshop.comsimple interest, 39–40 long-term, 51, 53 teaser-rates, 39 overview, 36, 46 types of, 39–40 LIBOR (London Interbank Offered Rate), 26 unsecured, 39 life insurance companies, 22 variable rate, 39 LIFO (last-in, fi rst-out) accounting, 59, 248 loans collected, 69 limit order, 156–157 loans received, 69 limited liability, 18 loans to deposits ratio, 106 liquid assets logic programming, 225–226 capital investments, 131–132 logical fallacies, 306–307 economic capital, 131 London Interbank Offered Rate (LIBOR), 26 inventory, 132 long run, making sure loan pays off in, liquidation, 42 38–39

332_9781118412794-bindex.indd2_9781118412794-bindex.indd 327327 111/28/121/28/12 8:198:19 AMAM 328 Corporate Finance For Dummies

long-term assets micro cap stocks, 161 depreciation, 49–50 mid cap stocks, 161 investments, 49 MIRR (modifi ed internal rate of return), property, plant, and equipment (PPE), 49 125–127 long-term debt to operating property mixed-interest hybrids, 215–216 ratio, 109 modern portfolio theory. See also portfolio long-term liabilities, 51, 53 management effi cient market hypothesis, 196–197 • M • overview, 193, 195 risk management, 197–209 M&A (mergers and acquisitions) Modigliani-Miller Theorem, 231 acquisitions, 275–276 monetary policy, stock valuation affected buyouts, 276 by, 167 divestiture, 278–279 Money, 34 factoring, 277–278 money, history of, 10–11 fi nancing, 287–288 Moody’s bond credit ratings, 147–148 hostile takeovers, 277 mortgage-backed securities, 142 joint ventures and partnerships, 278 mortgage-backed security (MBS), 213–214 legal issues, 273 moving averages, 260 mergers, 273–274 multi-asset bundles, 218 motives for, 279–284 municipal bonds, 140–141 overview, 272–273 mutual cooperatives, 20 purchase price, determining, 284–287 mutual funds, 24–25, 218 macroeconomics affecting stocks valuation, 167–168 • N • magazines as resource, 34 manager compensation as motive for M&A nano cap stocks, 161 (mergers and acquisitions), 283 National Credit Union Administration managers, 31–32 (NCUA), 28 managing capital allocations, 130–132 negative SV (schedule variation), 133–134 margin. See gross margin negative-amortization loans, 221 margin accounts, 157 http://www.pbookshop.comnepotism, 309 , 161 net cash provided by fi nancing activities, market fl uctuations, 166 calculating, 69 market order, 156 net cash provided by investing activities, market risk, 185–186 calculating, 68 market value, 101 net cash provided by operations, marketable securities, 47 calculating, 67 mature bonds, 139 net change in cash, combining the three maturity/maturity date, bonds, 148 types of operations to get, 70 MBS (mortgage-backed security), 213–214 net income mean average, 259–260 calculating, 62–63 mergers. See M&A income tax expense, 62 Merrill Lynch, 275 interest expense, 62

332_9781118412794-bindex.indd2_9781118412794-bindex.indd 328328 111/28/121/28/12 8:198:19 AMAM Index 329

interest income, 62 operating income margin (profi tability overview, 62–63 metric), 85 net interest margin, 103–104 operating ratio, 107 net present value (NPV) operating revenue to operating property managing project’s value, 128–129 ratio, 108–109 over time, calculating, 128 operating risk, 191 overview, 120, 127–128 opportunity cost, 115 net profi t margin (profi tability metric), 83 optimizing portfolio risk, 207–210 net sales, 58–59 options Newton, Isaac, 221 call, 171 nominal value, 114 exotic fi nancial products, 220 non-value added costs, 184 international fi nance, 297 nonprofi t corporations, 19 overview, 170–171 notes payable, 53 put, 170 notes receivable, 49 revenue generation, 171 risk management, 171 • O • valuation, 172 orders (stocks) off-balance-sheet risk, 187–188 fi ll-or-kill, 155 Offi ce of the Comptroller of Currency limit order, 156–157 (OCC), 28 market order, 156 online banking, 225 overview, 154–155 open-ended loans, 39 pegged order, 157 operating asset turnover (profi tability stop order, 156–157 metric), 85–86 time-contingent order, 157 operating assets analytics organizational sovereignty, 276 long-term debt to operating property OTC (over-the-counter) markets, 154 ratio, 109 other assets, 51 operating ratio, 107 other current assets, 48 operating revenue to operating property other current liabilities, 53 ratio, 108–109 other expenses, 61 overview, 107 http://www.pbookshop.comother income, 61 percent earned on operating property, 108 other long-term liabilities, 53 operating cash fl ows per share, 97–98 outsourcing and international fi nance, operating cash fl ows to current maturities 300–301 (liquidity metric), 82 owners’ equity operating cash fl ows to total debt, 94 accumulated other comprehensive operating cycle, 78 income, 56 operating income additional paid-in capital, 55 calculating, 61 common shares, 55 depreciation and amortization, 60 overview, 46, 54 general and administrative (G&A) costs, 60 preferred shares, 54 overview, 60–61 retained earnings, 55 selling expense, 60 treasury shares, 55

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positions in corporate fi nance • P • adjusters, 31 P chip stocks, 160 analysts, 31 par value, 55 auditors, 31 pass-through certifi cates, 217–218 entry-level, 30–31 passive portfolio management, 195 executives, 31–32 Patient Protection and Affordable Care managers, 31–32 Act, 22 traders, 32 patterns and trends treasurers, 32 fi nding, 264–265 PPE (property, plant, and equipment), following, 308–309 49, 68 payback period, 129–130 predicting movements, 269 payday loan, 26 preexisting conditions, 22 payroll, 30 preferred cumulative dividends, 231 pegged order, 157 preferred noncumulative dividends, penny stock, 161 231–232 people as resources, 34 preferred shareholders, 97 percent earned on operating property, 108 , 42, 54 percentage of earnings retained, 99–100 premium, 21 performance comparatives prepaid accounts, 48 against industry, 245–247 present value, 117–120 over time, 243–245 price of bonds, 148–149 overview, 243 price to earnings ratio (P/E), 98–99 personal credit institutions, 26 pricing Peterson, Steven D. (Business Plans For stocks, 155 Dummies), 37 transfer, 125 pharmaceutical sector, 162 primary industry, 162 pink sheets, 154 , 41 pit (trading fl oor), 27 prime rate, 26 political instability and international print resources, 34 fi nance, 298 proactive about corporate fi nance, politics and internationalhttp://www.pbookshop.com fi nance, 301–303 becoming, 15–16 portfolio engineering, 221–223 probability theory, 262–264 portfolio management. See also modern proceeds from sale of investments, 68 portfolio theory proceeds from sale of PPE, 68 active, 196 production reports, 258 debt portfolio, 194 profi t/loss for discontinued operations, 61 hedge portfolio, 194 profi tability metrics overview, 194–195 DuPont equation, 87–88 passive, 195 fi xed asset turnover, 88–89 slush fund/petty cash portfolio, 194 gross profi t margin, 90 strategies for, 194 net profi t margin, 83 portfolio manager evaluations, 254–256 operating asset turnover, 85–86 operating income margin, 85

332_9781118412794-bindex.indd2_9781118412794-bindex.indd 330330 111/28/121/28/12 8:198:19 AMAM Index 331

overview, 82–83 range, 260–261 return on assets, 84 rate of return return on common equity, 87 ARR, calculating, 124–125 return on investment (ROI), 89–90 costs, 123 return on operating assets, 86 IRR, 126 return on total equity, 86–87 MIRR, 125–127 total asset turnover, 83–84 overview, 122–123 Project Express, 224 revenue, calculating, 124 Project Finance, 34 rate-of-change cross comparisons, 241–242 project management, 133 rational decisions, limited ability to projections, 37 make, 306 property, plant, and equipment (PPE), 49, 68 raw materials, 132 property-casualty insurance companies, 22 real value, 114 proposals, 37 receivables, 74 prospect theory, 311–312 reconciliation of net earnings and assets Public Finance, 34 to cash by operating activities, 70 public, selling stock to, 40–41 red chip stocks, 160 publisher websites as resource, 33 reference class forecasting, 270 purchase of treasury shares, 69 registered bonds, 144 purchase price, determining, 284–287 regression, looking at, 265–267 purchases of investments, 68 regulatory bodies purchasing power and international American Institute of Certifi ed Public fi nance, 293–294 Accountants (AICPA), 28 purchasing power parity and international Chartered Financial Analyst Institute fi nance, 293–294 (CFAI), 28 purple chip stocks, 160 Commodity Futures Trading Commission put options, 170 (CFTC), 28 puttable bonds, 143–144 Federal Deposit Insurance Corporation (FDIC), 28 • Q • Financial Accounting Foundation (FAF), 28 quality of earnings http://www.pbookshop.comFinancial Accounting Standards Advisory accounting methods, 247–249 Board (FASAB), 28 fi nancial performance assessment, Financial Accounting Standards Board 247–249 (FASB), 28 quick ratio, 80 Financial Industry Regulatory Authority quotas and international fi nance, 302 (FINRA), 27–28 Government Accounting Standards Board (GASB), 28 • R • Internal Revenue Service (IRS), 27 raising capital National Credit Union Administration by acquiring debt, 36–40 (NCUA), 28 by selling equity, 40–42 Offi ce of the Comptroller of Currency overview, 35–36 (OCC), 28

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regulatory bodies (continued) overview, 27–28 • S • Securities and Exchange Commission S chip stocks, 160 (SEC), 27 sale of securities, 69 repatriation risk, 190 sales, 25–26 resources sales to working capital (liquidity Internet, 33 metric), 81 people as, 34 Samuelson, Paul (economist), 269 print, 34 satisfi cing, 310–311, 315 retained earnings, 55, 232 savings institutions, 20 return on assets (profi tability metric), 84 schedule metrics return on common equity (profi tability overview, 133 metric), 87 SP (schedule performance), 134 return on investment (ROI) (profi tability SV (schedule variation), 133–134 metric), 89–90 schedule performance (SP), 134 return on operating assets (profi tability , 41 metric), 86 sector rotation, 166 return on total equity (profi tability metric), sectors, stock, 162 86–87 secured loans, 39 revenue bonds, 140 securities revenue generation asset-backed, 141–142 forwards, 174 mortgage-backed, 142 futures, 176 Securities and Exchange Commission options, 171 (SEC), 27, 40 swaps, 178–179 securities fi rms risk adjusted return on capital, 254 broker-dealers, 23 risk aversion, 200–203 investment banks, 23 risk management overview, 22–23 credit risk, 186–187 types of, 23 foreign exchange risk, 188–190 securities underwriters, 24 forwards, 173–174 securitization futures, 175–176 http://www.pbookshop.comMBS (mortgage-backed security), 213–214 infl ationary risk, 185 overview, 212–214 interest rate risk, 184–185 tranches, dividing securities into, 214 international fi nance, 297–298 self-serving bias affecting decisions, 313 liquidity risk, 192 selling , stocks, 159 market risk, 185–186 sentiment indices, stock valuation affected modern portfolio theory, 197–209 by, 168 off-balance-sheet risk, 187–188 Separate Trading of Registered Interest operating risk, 191 and Principal Securities (STRIPS), 140 options, 171 Series EE bonds, 139 overview, 183–184 Series I bonds, 139 swaps, 177–178 Shareholder Wealth Maximization model, 19 types of risk, 184 shareholders, 96 role of money in the world, 10–11 shares, 25

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sharia law, 20 buying on margin, 158 Sharpe ratio, 255 caps, 161 short-selling stocks, 159 chips, 160 simple interest, 116–117 common, 41–42, 55 simple interest loans, 39–40 dividend payments, 42 single asset hybrids, 216 exchanging, 154 single-step, 58 IPOs, 41 slush fund/petty cash portfolio, 194 margin accounts, 157 small cap stocks, 161 orders, 154–157 Smith, Adam (economist), 10 overview, 40 software packages, fi nancial, 225–226 par value, 55 SP (schedule performance), 134 preferred, 42, 54 specifi c risk, 200 pricing, 155 speculating, 179 primary market, 41 spot analysis, 243 public, selling stock to, 40–41 spot rate, 296 secondary market, 41 spread, 102, 147, 155 sectors, 162 Standard & Poor’s (S&P) bond credit selling short, 159 ratings, 147–148 short-selling, 159 standard deviation, 261–262 treasury, 42, 55 standard preferred shares, 54 types of, 41–42 standard T-bonds, 139 valuation, 164–168 start-up, 14 stop order, 156–157 statement of cash fl ows straddle, 172 fi nancing activities cash fl ows, 68–69 straight-line depreciation, 49–50 investing activities cash fl ows, 67–68 Strategic Finance, 34 net change in cash, combining the three strike price, 170 types of operations to get, 70 STRIPS (Separate Trading of Registered operating activities cash fl ows, 66–67 Interest and Principal Securities), 140 overview, 65–66 subprime lenders, 26–27 reconciliation of net earnings and assets sum of years depreciation, 50 to cash by operatinghttp://www.pbookshop.com activities, 70 Sunk Cost Fallacy, 307 using, 70–71 supplemental notes statistical bias affecting decisions, 313 in balance sheet, 56 statistics and probability, using, 268–270 in income statement, 63 status quo bias affecting decisions, 313 SV (schedule variation), 133–134 Sterling ratio, 255 swap broker, 177 stochastic calculus, 221 swaps stock exchanges, 154 bid-ask spread, 177 stock index, 163–164 exotic fi nancial products, 220 , 42 international fi nance, 297 stocks overview, 177 bear market, 162–163 revenue generation, 178–179 bull market, 162–163 risk management, 177–178 buying long, 158 valuation, 179

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synergistic sperations as motive for M&A Series I bonds, 139 (mergers and acquisitions), 283–284 standard T-bonds, 139 systematic risk, 200–201 STRIPS (Separate Trading of Registered Interest and Principal Securities), 140 • T • TIPS (Treasury Infl ation-Protected Securities), 140, 146 tariffs, 302 treasury bills (T-bills), 139–140, 201 tax returns, 48 treasury notes (T-notes), 139 TCP (to-complete performance), 136 , 42, 55 teaser rates, 39, 215 trends and patterns tech sector, 162 fi nding, 264–265 telecom sector, 162 following, 308–309 temporary transactions and fi nancial turnover, 75, 77 performance assessment, 250 Tutor2U, 33 term life insurance, 22 Tiffany, Paul (Business Plans For • U • Dummies), 37 time-contingent order, 157 U.S. Treasury, 28, 30 time-distribution cross comparisons, unbundling, 218–219 242–243 underwriters time-weighted rate of returns, 253 banking, 24 TIPS (Treasury Infl ation-Protected overview, 23–24 Securities), 140, 146 securities, 24 total asset turnover (profi tability metric), unearned income, 52 83–84 uniqueness of corporate fi nance, 12 total assets, 103 unit-of-production depreciation, 50 Toys “R” Us, 277 university websites as resource, 33 Tracy, John A. (Accounting For Dummies), 3 unsecured loans, 39 trade imbalance, lack of, 291–292 trade-off between risk and return, 198–199 • V • traders, 32 trading, computerized, 224http://www.pbookshop.comV2 ratio, 256 tranches, dividing securities into, 214 valuation transaction risk, 188–189 bonds, 150–151 transfer pricing, 125, 300 forwards, 174–175 translation risk, 189–190 futures, 176 treasurers, 32 options, 172 Treasury. See U.S. Treasury stocks treasury bills (T-bills), 139–140, 201 absolute models, 164–165 treasury bonds (T-bonds) corporate analysis, 165 mature bonds, 139 extrinsic (relative) models, 165 overview, 139 hybrid models, 165 Series EE bonds, 139 industry performance, 166

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intrinsic (absolute) models, 164–165 macroeconomics affecting, 167–168 • W • market fl uctuations, 166 WACC (weighted average cost of capital), models, 164–165 228–229 overview, 164 Wall Street (fi lm), 271 relative models, 165 Walter’s Model, 233 swaps, 179 weighted average, 260 value , 205 whole life insurance, 22 value of money work-in-process products, 132 future value, 116–117 working capital, 78–79 infl ation affecting, 114–115 interest rate affecting, 115 measuring, 114 • Y • nominal value, 114 yield, 149 overview, 114 yield change, 149 present value, 117–120 yield to maturity (YTM), 150 real value, 114 variable rate loans, 39 variance strike, 220 • Z • vertical common-size comparisons, 239–240 zero-coupon bonds, 141 vertical integration as motive for M&A (mergers and acquisitions), 281–282 volatile income sources, 250–251 volume, bonds, 149

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332_9781118412794-bindex.indd2_9781118412794-bindex.indd 335335 111/28/121/28/12 8:198:19 AMAM Notes ______http://www.pbookshop.com ______

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