FIN 320F: Exam 3
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in the equation, m stands for

number of payments or compounding/discounting periods per year

in the equation, r stands for

annual rate of return/interest rate

periodic rate is..

periodic rate is..

in the equation, n stands for

in the equation, n stands for

how to get total number of periods/payments

n x m = Big N in financial calculator

in the equation, PV stands for

present value (the value of lump sum at time zero)

in the equation, FV stands for

future value (value of lump sum at the end of n x m periods)

future value (value of lump sum at the end of n x m periods)

streams of equal payments equally spaced in time (mortgage loan payments on the 1st of every month)

different types of annuitites

ordinary, annuity due, perpetuity

what is an ordinary annuity

has its first payment at the end of the period. Most common. All loans are this.

what is an annuity due

first payment at the beginning of the period. used in insurance/leases. for calculator, set payment period to begin

what is a perpetuity

an ordinary annuity that continues forever. Ex: preferred stock dividend

what is a loan amortization schedule

shows which portion of each monthly payment is interest, and which portion is principal

monthly payment amount is..

constant

interest portion is largest at..

beginning, and gradually gets smaller

loan to value ratio should be..

equal to or less than 80%

loan to value ratio determines..

if you need to purchase private mortgage insurance or not

frontend ratio determines..

the percentage of your gross salary that you are spending on housing costs

front end ratio should be..

equal to or less than 28%

back end ratio determines...

percentage of your gross salary that you spend on housing costs and other debt payments. most important ratio

back end ratio should be...

equal to or less than 36%

equal to or less than 36%

situations where either the cash flow amount/timing precludes it from being an annuity

the appropriate discount rate for projects of average risk is...

weighted average cost of capital (WACC)

WACC is..

weighted after tax cost of firms debt and equity

firm's capital structure is..

firm's mix of long term debt and equity. each component has a cost

wacc is the..

average of all costs

what represents the future values of a stream of uneven cash flows?

operating and terminal cash flows

NPV is..

net present value

if NPV greater than or equal to 0...

accept the project

2 other methods to use to analyze capital projects

payback period
internal rate of return (IRR)

payback period is the..

number of years that it will take to earn back the inital investment in the project

IRR is..

the discount rate that causes the NPV to equal 0

by calculating IRR, one can state the...

theoretical percent return that'll be generated by the project

IRR is not a reliable method to..

select among mutually exclusive projects

on financial calculators, if future cash flows are unequal lump sums...

must se IRR function (option 8)

what is cost of debt

rDT

what is rPS

annual cost of preferred stock

what is rS/rRF

annual cost of common stock

if a company is only financed with equity...

its WACC is the same as its cost of equity

as we add debt to our capital structure (increase the debt ratio)... (2)

WACC goes down
value of firm rises

debt has a...

lower risk and return than equity

beta measures..

the risk of firm's stock relative to the risk of all stocks in market

as beta rises..

expected return on stock rises

the point at which wacc is lowest is also..

the point at which wacc is lowest is also..

"best" debt ratio is one that will...

minimize wacc

average debt ratio in america is..

40%

bonds have two cash flows:

return of the principal (par value)
stream of coupon payments

to find present value of bond..

find present value of principal (lump sum) + find present value of coupon payments (an annuity)

when interest rates fall, bond rates..

rise

options of what to do with extra positive cash flow (3)

pay down their debts
invest in capital projects to make the company grow
give money back to stockholders

If companies repurchase their outstanding shares...

# of shares outstanding goes down, which means EPS goes up
also, cash goes down and equity goes down, which means ROE goes up

the act of buying shares..

puts upward pressure on the stock's price

forms of income (3)

rent from buildings
interest from bonds
dividends from stocks

capital gains means...

the value of the asset has risen or appreciated

what are growth stocks

stocks that never/rarely pay dividends

growth stocks are stocks of companies...

that are growing faster than their indstries

common growth stock firm

technology firm

income stocks are..

stocks that pay regular, steadily increasing dividends

what is an above average dividend yield

34%

appropriate short term investments are..

savings account
money market accounts at a bank, or money market mutual funds
certificates of deposit (CDs)

what are medium risk investments (3)

intermediate term (110 year maturities) bonds and bond mutual funds
conservative stock mutual funds (large cap stock funds)
individual blue chip stocks (ESPP)

what are higher risk investments (5)

mutual funds that invest in stocks
intermediate term bonds
intermediate and long term bond funds (not individual long term bonds)
individual stocks
real estate

3 types of investor frauds

advance fee schemes
pyramid schemes
ponzi schemes
