Question Answer
What is common stock? Common stock is when stockholders ultimately own the firm, and legally directly control the business.
What are common stockholders rights and privileges? They have a residual claim to income but not a legal or enforceable claim to dividends. Rights to vote in election of board of directors, vote on major issues, assign a proxy. Given first option to buy new shares.
What is preferred stock? Preferred stock plays a secondary role in financing the corporate enterprise, it’s a hybrid security which combines features of debt and common stock.
What are preferred stockholders rights and privileges? Preferred stockholders have a priority of claims to dividends, but do not have an ownership interest in the firm. Can only vote if corporate agreement has been violated.
What are some advantages of owning preferred stock? Receive payment of dividends before common stockholders, rights for annual dividends is not mandatory, merely entitled to receive a stipulated dividend.
What is majority voting? In majority voting it is possible for stockholders owning above 50% of common stock to select boardmembers.
What is cumulative voting? In cumulative voting stockholders with less than 50% interest may select some of the board members.
Shares required formula. Shares required =
# of Directors formula number of directors that can be elected =
Who has the first right to purchase new stock? Common stockholders.
What is an ADR? ADRs = American Depository Receipts, certificates that have legal claim on an ownership interest in a foreign company’s common stock. Allows foreign shares to be traded in US like common stock.
What are the advantages of ADRs? annual reports and financial statements in English, dividends in dollars, considered to be more liquid, less expensive, and easier to trade.
What are the disadvantages of ADRs? also traded in own country subjecting investors to currency risk, infrequent reporting of financial results and information lag due to translation of reports into English.
What is a fixed cost? A fixed cost is something a company has to pay no matter what. Even if it didn't produce it would still have to pay property taxes, rent, loan payments, executive compensation, etc.
What is a variable cost? A variable cost is just something a company pays that is linked to production. Say we are a beer company. The hops, barley, yeast, and the factory workers time would be variable costs… because all of those variables are dependent on how much beer you pr
What are financial ratios used for? Used to weight and evaluate the operating performance of a firm, and to compare performance record against other firms in the industry. Analyzing ratios and numerical calculations.
What is a profitability ratio? Shows profit margin, return on assets (investment) and return on equity
What is an asset utilization ratio? Shows receivable turnover, average collection period, inventory turnover, fixed asset turnover, total asset turnover
What is a liquidity ratio? Emphasize the firm’s ability to pay of short term obligations as and when due
What is a debt utilization ratio? Estimates the overall debt position of the firm and evaluates the light of asset base and earning power
What does an income statement measure? Measures accounting profitability to examine the profit or loss after each type of expense item is deducted
What are the limitations of an income statement? Income that is gained or lost during a given period is a function of verifiable transaction, and management can engineer earnings through various rules (less reliability)
How do you calculate net income? Net Income = sales – expenses
How do you calculate earnings per share? Earnings Per Share = (Net Income – Preferred Div)/Shares Outstanding
How do you calculate retained earnings? Retained earnings = last year’s stated retained earnings + (net income – preferred and common stock dividends)
How do you calculate total cash flows? Total cash flows = flows from ops + flows from financing + flows from investments
What does a balance sheet examine? Shows what the firm owns and how these assets are financed in the forms of liabilities and ownership interest. Indicates holdings/obligations, original cost basis rather than current market value at a SINGLE POINT IN TIME.
What are the limitations of a balance sheet? Most of the values are based on historical or original cost price, fASB ruling on disclosure of inflation adjustments no longer in force, purely voluntary act on part of company. The less likely the asset, the more likely the value on the balance sheet i
In what kind of industry is financial leverage dangerous? Lehman went belly up because they couldn't pay back their loans. The management believed that their model was very good and that they could borrow large amount of money to make investments. Unfortunately, when the economy turned they couldn't pay back the
In what kind of industry is financial leverage recommended? Financial leverage is just using debt to replace equity. This increases EPS in good times. Budweiser can do that because they have a very steady business. They produce a lot of cash and people are not going to stop drinking beer because of the economy…
How does financial leverage effect earnings in a good year? positively
How does financial leverage effect earnings in a bad year? negatively
How does profit margin affect ROE according to the Du Pont Analysis? Can lead to a satisfactory return on assets.
How does turnover affect ROE according to the Du Pont Analysis? A rapid turnover of assets (generating more sales per dollar of its assets) might lead to a satisfactory return on assets.
What are the components of stockholder's equity? Preferred stock, common stock, capital paid in excess of par, retained earnings
What is the time frame of an income statement? moving picture
What is the time frame of a balance sheet? picture
How are P/E ratios used? Indicates expectations about the future of the company
What is a P/E ratio? Price/earnings ration = market price of stock/ earnings per share