# 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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