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FIN 320F: Exam 3

in the equation, m stands for
number of payments or compounding/discounting periods per year
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in the equation, r stands for
annual rate of return/interest rate
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periodic rate is..
periodic rate is..
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in the equation, n stands for
in the equation, n stands for
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how to get total number of periods/payments
n x m = Big N in financial calculator
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in the equation, PV stands for
present value (the value of lump sum at time zero)
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in the equation, FV stands for
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)
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
ordinary, annuity due, perpetuity
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what is an ordinary annuity
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
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
an ordinary annuity that continues forever. Ex: preferred stock dividend
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what is a loan amortization schedule
shows which portion of each monthly payment is interest, and which portion is principal
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monthly payment amount is..
constant
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interest portion is largest at..
beginning, and gradually gets smaller
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loan to value ratio should be..
equal to or less than 80%
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loan to value ratio determines..
if you need to purchase private mortgage insurance or not
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front-end ratio determines..
the percentage of your gross salary that you are spending on housing costs
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front end ratio should be..
equal to or less than 28%
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back end ratio determines...
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...
equal to or less than 36%
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equal to or less than 36%
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...
weighted average cost of capital (WACC)
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WACC is..
weighted after tax cost of firms debt and equity
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firm's capital structure is..
firm's mix of long term debt and equity. each component has a cost
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wacc is the..
average of all costs
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what represents the future values of a stream of uneven cash flows?
operating and terminal cash flows
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NPV is..
net present value
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if NPV greater than or equal to 0...
accept the project
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2 other methods to use to analyze capital projects
-payback period -internal rate of return (IRR)
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payback period is the..
number of years that it will take to earn back the inital investment in the project
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IRR is..
the discount rate that causes the NPV to equal 0
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by calculating IRR, one can state the...
theoretical percent return that'll be generated by the project
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IRR is not a reliable method to..
select among mutually exclusive projects
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on financial calculators, if future cash flows are unequal lump sums...
must se IRR function (option 8)
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what is cost of debt
rDT
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what is rPS
annual cost of preferred stock
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what is rS/rRF
annual cost of common stock
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if a company is only financed with equity...
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)
-WACC goes down -value of firm rises
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debt has a...
lower risk and return than equity
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beta measures..
the risk of firm's stock relative to the risk of all stocks in market
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as beta rises..
expected return on stock rises
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the point at which wacc is lowest is also..
the point at which wacc is lowest is also..
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"best" debt ratio is one that will...
minimize wacc
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average debt ratio in america is..
40%
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bonds have two cash flows:
-return of the principal (par value) -stream of coupon payments
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to find present value of bond..
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..
rise
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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
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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
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the act of buying shares..
puts upward pressure on the stock's price
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forms of income (3)
-rent from buildings -interest from bonds -dividends from stocks
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capital gains means...
the value of the asset has risen or appreciated
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what are growth stocks
stocks that never/rarely pay dividends
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growth stocks are stocks of companies...
that are growing faster than their indstries
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common growth stock firm
technology firm
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income stocks are..
stocks that pay regular, steadily increasing dividends
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what is an above average dividend yield
3-4%
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appropriate short term investments are..
-savings account -money market accounts at a bank, or money market mutual funds -certificates of deposit (CDs)
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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)
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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
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3 types of investor frauds
-advance fee schemes -pyramid schemes -ponzi schemes
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