Corporate Finance and Capital Markets Flashcards
7 cards from real AAFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Corporate Finance and Capital Markets flashcards as text
What is the Dividend Discount Model (DDM) primarily used to estimate?
Answer: The intrinsic value of a stock based on the present value of expected future dividends
The DDM values a stock by discounting all expected future dividends back to their present value, resting on the premise that a stock is worth the sum of its future income stream.
Which financial ratio is most directly used to assess a company's degree of financial leverage?
Answer: Debt-to-Equity (D/E) ratio
The debt-to-equity ratio directly measures the proportion of financing from creditors relative to shareholders' equity, quantifying how much financial leverage a company employs.
What is an Initial Public Offering (IPO)?
Answer: The first time a private company sells shares to the general public
An IPO is the process by which a privately held company first offers shares for sale to the general public, transitioning from private to public ownership.
What does the term 'capital structure' refer to in corporate finance?
Answer: The specific mix of debt and equity used to finance a company's assets and operations
Capital structure refers to the combination of debt, equity, and other financing instruments a company uses to fund its assets, operations, and growth initiatives.
In the context of corporate bond agreements, what is a 'covenant'?
Answer: A contractual restriction or requirement imposed on the borrower to protect lenders
Bond covenants are contractual clauses in a loan agreement that either restrict certain borrower actions (negative covenants) or require specific borrower actions (positive covenants) to protect lenders.
What is 'dilution' in the context of corporate equity financing?
Answer: A decrease in existing shareholders' ownership percentage caused by the issuance of new shares
Dilution occurs when a company issues new shares, reducing each existing shareholder's proportional ownership stake and potentially decreasing earnings per share.
What is the primary financial purpose of a stock buyback (share repurchase program)?
Answer: To return capital to shareholders while potentially increasing earnings per share
Share repurchases return excess capital to shareholders by reducing shares outstanding, which typically boosts earnings per share and can signal management's confidence in the company's value.