Finance cheat sheet

Reasons for US firms to invest in foreign countries:
1. Fear of import tariffs (in foreign countries)
2. Lower production costs particularly with regards to labor costs
3. Ease of entry because of advanced American technology
4. Tax advantages
5. Strategic considerations->competition
6. International Diversification. In addition to normal business risks, the multinational corporation is faced with foreign exchange risk and political risk.

Difficulties faced in foreign countries:

Complex laws, customs and economic environment, Rates of inflation, Tax rules, Structure and operation of financial institutions, Financial policies and practices, Work habits and wages of laborers
Approximately 60% to 75% of total sales for multinational companies such as IBM, coca cola come from foreign sales (overseas markets)

NAFTA
1. Stands for-> The North American Free Trade Association
2. The goal of NAFTA was to eliminate barriers to trade and investment between the USA, Canada and Mexico.
3. The implementation of NAFTA on January 1, 1994, brought the immediate elimination of tariffs on more than one half of US imports from Mexico and more than one third of US exports to Mexico.
4. NAFTA also seeks to eliminate non-tariff trade barriers.

Synergy -
1. It is the most important nonfinancial motive for a merger
2. Synergy is said to occur when the whole is greater than the sum of the parts. 3. “2+2=5” means Synergy

Why companies selling…Motives of selling stockholders
1. Desire to receive acquiring firm’s stock which may have greater acceptability in the market.
2. Provides opportunity to diversify their holdings.
3Gain on sale of stock at an attractive price
4. Attractive post-merger management contracts as well as directorships 5. Bias against smaller businesses

Mergers-
1. A Merger is a combination of two or more companies in which the resulting firm maintains the identity of the acquiring company. On the other hand a Consolidation is a two or more companies form an entirely new entity. So do not get confused and think that Merger and Consolidation or same.
2. Motives of Mergers. Financial Motives-risk reduction as a result of portfolio effect, improved financing posture, obtain a tax loss carryforward, higher value of the firm, strengthen cash position and/or improve debt/equity ratio, greater access to financial markets to raise debt and equity capital, lower required rate of return by investors. Non Financial Motives- Expand management and marketing capabilities, acquire new products, synergism.

Mergers – two types –Horizontal Integration => the acquisition of competitors Vertical integration => the acquisition of buyers or sellers of goods and services to the company.

Merger is mentioned in accounting books in two ways: Pooling of interests => In this scenario, the financial statements of the firms are combined and no goodwill is created. Purchase of assets => In this scenario, the offer is in cash, bonds, preferred stock or common stock and goodwill is created.

A warrant is an option to buy a stated number of shares of stock at a specified price over a given period. They are attached to debt securities because of the following reasons:
1. Sweetens or enhances a debt issue.
2. Usually detachable
3.Speculative; value depended on market movement of stock 3. Add-on in a merger or acquisition
4. Equity base expands when warrants are exercised but the underlying debt remains 5. Cannot be forced with a call, but the exercise price is sometimes “stepped-up”

Convertible Bonds-
1. At issue, investors pay a conversion premium, and the price of the convertible exceeds both the pure bond value and the conversion value
2. The convertible bond’s value is limited on the downside by its pure bond value. 3. The value of the convertible bond as a straight bond is called pure bond value 4. If the market price of the common stock exceeds the conversion price, the market value of the bond will rise above its par value to the conversion value or higher. 5. Convertibles are usually subject to a call provision
6. Interest rates on convertibles are less than on nonconvertible straight bonds of the same risk.
7. The pure bond value will fall if interest rates rise.

Conversion Premium
1. It is the market value of convertible bond minus the larger of conversion value or pure bond value.
If Conversion value > pure bond value then

Conversion Premium = Market Value of the convertible bond – Conversion Value
If Pure bond value > Conversion Value then

Conversion Premium = Market Value of the convertible bond – Pure Bond Value

Maturity Stage of a firm:
1.Mature firms follow a relatively high payout policy.
2. Maturity stage is the fourth and final stage in the life cycle growth and dividends process.
3. In the maturity stage the firm maintains a stable sales growth rate and cash dividends tend to be 35%-50% of earnings.
4. Moderate to high cash dividends in this stage.
5. When risk premiums are considered, its returns on assets level out to those of industry and the economy.

Investors choices-
1. Investors in high marginal tax brackets usually prefer companies that reinvest most of their earnings.
2. Investors in lower marginal tax brackets will have a greater preference for dividend, since the tax penalty is less at lower marginal tax rates