FIN 320F: Exam 3

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FIN 320F
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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
front-end 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
3-4%
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 (1-10 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

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