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FIN 320F: Exam 3
in the equation, m stands for
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number of payments or compounding/discounting periods per year
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in the equation, r stands for
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annual rate of return/interest rate
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periodic rate is..
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periodic rate is..
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in the equation, n stands for
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in the equation, n stands for
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how to get total number of periods/payments
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n x m = Big N in financial calculator
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in the equation, PV stands for
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present value (the value of lump sum at time zero)
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in the equation, FV stands for
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future value (value of lump sum at the end of n x m periods)
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future value (value of lump sum at the end of n x m periods)
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streams of equal payments equally spaced in time (mortgage loan payments on the 1st of every month)
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different types of annuitites
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ordinary, annuity due, perpetuity
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what is an ordinary annuity
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has its first payment at the end of the period. Most common. All loans are this.
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what is an annuity due
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first payment at the beginning of the period. used in insurance/leases. for calculator, set payment period to begin
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what is a perpetuity
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an ordinary annuity that continues forever. Ex: preferred stock dividend
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what is a loan amortization schedule
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shows which portion of each monthly payment is interest, and which portion is principal
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monthly payment amount is..
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constant |
interest portion is largest at..
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beginning, and gradually gets smaller
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loan to value ratio should be..
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equal to or less than 80%
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loan to value ratio determines..
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if you need to purchase private mortgage insurance or not
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front-end ratio determines..
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the percentage of your gross salary that you are spending on housing costs
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front end ratio should be..
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equal to or less than 28%
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back end ratio determines...
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percentage of your gross salary that you spend on housing costs and other debt payments. most important ratio
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back end ratio should be...
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equal to or less than 36%
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equal to or less than 36%
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situations where either the cash flow amount/timing precludes it from being an annuity
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the appropriate discount rate for projects of average risk is...
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weighted average cost of capital (WACC)
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WACC is..
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weighted after tax cost of firms debt and equity
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firm's capital structure is..
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firm's mix of long term debt and equity. each component has a cost
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wacc is the..
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average of all costs
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what represents the future values of a stream of uneven cash flows?
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operating and terminal cash flows
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NPV is..
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net present value
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if NPV greater than or equal to 0...
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accept the project
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2 other methods to use to analyze capital projects
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-payback period
-internal rate of return (IRR) |
payback period is the..
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number of years that it will take to earn back the inital investment in the project
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IRR is..
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the discount rate that causes the NPV to equal 0
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by calculating IRR, one can state the...
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theoretical percent return that'll be generated by the project
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IRR is not a reliable method to..
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select among mutually exclusive projects
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on financial calculators, if future cash flows are unequal lump sums...
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must se IRR function (option 8)
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what is cost of debt
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rDT |
what is rPS
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annual cost of preferred stock
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what is rS/rRF
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annual cost of common stock
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if a company is only financed with equity...
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its WACC is the same as its cost of equity
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as we add debt to our capital structure (increase the debt ratio)... (2)
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-WACC goes down
-value of firm rises |
debt has a...
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lower risk and return than equity
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beta measures..
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the risk of firm's stock relative to the risk of all stocks in market
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as beta rises..
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expected return on stock rises
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the point at which wacc is lowest is also..
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the point at which wacc is lowest is also..
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"best" debt ratio is one that will...
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minimize wacc
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average debt ratio in america is..
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40%
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bonds have two cash flows:
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-return of the principal (par value)
-stream of coupon payments |
to find present value of bond..
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find present value of principal (lump sum) + find present value of coupon payments (an annuity)
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when interest rates fall, bond rates..
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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
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-advance fee schemes
-pyramid schemes
-ponzi schemes |