Finan midterm
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Opportunity Cost of Capital: Expected rate of return given up by investing in a project.
NPV: Present value of cash flows minus investments
Payback period: Time until cash flows recover the initial investment in the project.
IRR: Discount rate at which project NPV = 0
Profitability Index: Ratio of net present value to initial investment
Opportunity Cost: Benefit or cash flow as a result of an action
Net Working Capital: Current assets minus liabilities
Depreciation Tax Shield: Reduction in taxes attributable to depreciation
Operating Leverage: Degree to which costs are fixed
Market Index: Measure of the investment performance of the overall market
Maturity Premium: Extra avg. return from investing long vs. short- term treasury securities
Risk Premium: Expected return in excess of risk-free return as compensation for risk
Variance: Avg. value of sq. deviations from mean. A measure of volatility
Unique Risk: risk factors affecting only that firm. Also called diversifiable risk
Market Risk: Economy wide(marco0 sources of risk that affect the overall stock market. Also called systematic risk.
Market Portfolio: Assets in the economy. A broad stock market index used to represent the market.
Beta: Sensitivity of a stock’s return to the return on the market portfolio.
Market Risk Premium: Difference between market return and return on risk-free treasury bills
CAPM: Relationship between risk and return which states that the expected risk premium on any security equals its beta X market risk premium.
Security Market Line: Relationships between expected return and beta
Company Cost of Capital: Expected rate of return demanded by investors in a company. determined by the average risk of the company securities
Project Cost of Capital: MIN. acceptable expected rate of return on project given its risk
PV: PV Annuity: FV Annuity:
Find Real: Nominal Inflation:
WACC: CAPM: Expected Return:
Market Rate of Return Cash Flow:
If a project's expected return is 20%, which represents a 40% return in a booming economy and a10% return in a stagnant economy, what is the probability of a booming economy?
How much will a firm need in cash flow before tax and interest to satisfy debtholders and equityholders if: the tax rate is 40%, there is $15 million in common stock requiring a 20% return, and $20 million in bonds requiring a 10% return?
What is the WACC for a firm with equal amounts of debt and equity financing, a 18% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value?
What should you expect to receive in coupon payments for a bond priced at $1,200 that has 3 years remaining until maturity, and an 8% coupon, with semiannual payments? Remember, at $1,200 the discount rate must be less than the coupon rate.
Calculate the NPV for a project costing $200,000 and providing $20,000 annually for 40 years. The discount rate is 9%. By how much would the NPV change if the inflows were reduced to 30 years?
What proportion of a firm is equity financed if the WACC is 14%, the before-tax cost of debt is 10.77%, the tax rate is 35%, and the required return on equity is 18%?
What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 8%
Stock A has a current price of $30.00, a beta of 1.75, and a dividend yield of 6%. If the Treasury bill yield is 5% and the market portfolio is expected to return 16%, what should Stock A sell for at the end of an investor's two year investment horizon?
Your classmate, Josh S. offers to buy your car with five, equal annual payments of $2,000, beginning five years from today. Assuming you think he is a good guy and the current discount rate is 10%, what is the present value of Josh’s offer ?
A stock sells now for $80, pays an annual dividend of $6.00, and experienced a 20% return on investment over the past year. Its price one year ago was?
A common stock is held for three years, during which time it receives an annual dividend of $10. The stock was sold for $100 and generated an average annual return of 16%. What price was paid for the stock?
What is the standard deviation of a portfolio’s returns if the mean return is 15%, the inflation rate is 6.5%, the variance of returns is 264, with a real rate of return of 13.8%, and there are three stocks in the portfolio?
Jay's Jams Inc. was just established with an investment of $5 million into stereo equipment. Jay expects his company to generate $900,000 a year for the next 10 years, followed by $1 million a year for the following 10 years. If Jay's cost of capital is 15%, find the market value of his company.
What is the after-tax cost to a corporation in the 40% tax bracket of paying $30,000 in preferred-stock dividends?
Calculate the real return for the following corporate bond investment: Purchased for $840 one year ago, 4% coupon rate, sold for $894. The inflation rate was 5.0% during the year. Would you consider this an appropriate investment if Treasury bills had yielded 6.0% over the same period?
A firm has an opportunity to invest in a project that will generate $55,000 per year for the next 10 years and requires an initial investment of $300,000. The firm will need to raise equity to pay for the project, but the flotation costs are 10% of the funds raised. If the firms discount rate is 11%, what is the NPV and should they
invest in the project?
The salesperson offers, "Buy this new car for $25,000 cash or, with appropriate down payment, pay $500 per month for 48 months at 6% interest." Assuming that the salesperson does not offer a free lunch, calculate the "appropriate" down payment.
Your car loan requires payments of $200 per month for the first year and payments of $400 per month duringthe second year. The annual interest rate is 10% and payments begin in one month. What is the present value of this two-year loan?
What is the present value of a five period annuity of $3,000 if the interest rate is 12% and the first payment is made today?
$3,000 is deposited into an account paying 10% annually, to provide three annual withdrawals of $1,206.34 beginning in one year. How much remains in the account after the second payment has been withdrawn?
How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 8% interest compounded annually for 40 years?
If Treasury bills are yielding 10% at a time when the market risk premium is 8%, your beta is .75, then the market portfolio should yield?
The capital structure for the CR Corporation is the following: bonds $5,500, and common stock $11,000. If CR has an after-tax cost of debt of 6%, and a 16% cost of common stock, what is its WACC?
Determine the beta for Stock A based on the following set of returns. Of course, the reliability of a beta calculated with only four data points may be low. Interpret the beta that you have calculated.
If equity investors require a 25% rate of return, what is the maximum acceptable amount of equity financing for a project with $3 million annual cash flows before tax and interest, $5 million in debt with a 12% coupon, and a 40% tax rate?
NPV: Present value of cash flows minus investments
Payback period: Time until cash flows recover the initial investment in the project.
IRR: Discount rate at which project NPV = 0
Profitability Index: Ratio of net present value to initial investment
Opportunity Cost: Benefit or cash flow as a result of an action
Net Working Capital: Current assets minus liabilities
Depreciation Tax Shield: Reduction in taxes attributable to depreciation
Operating Leverage: Degree to which costs are fixed
Market Index: Measure of the investment performance of the overall market
Maturity Premium: Extra avg. return from investing long vs. short- term treasury securities
Risk Premium: Expected return in excess of risk-free return as compensation for risk
Variance: Avg. value of sq. deviations from mean. A measure of volatility
Unique Risk: risk factors affecting only that firm. Also called diversifiable risk
Market Risk: Economy wide(marco0 sources of risk that affect the overall stock market. Also called systematic risk.
Market Portfolio: Assets in the economy. A broad stock market index used to represent the market.
Beta: Sensitivity of a stock’s return to the return on the market portfolio.
Market Risk Premium: Difference between market return and return on risk-free treasury bills
CAPM: Relationship between risk and return which states that the expected risk premium on any security equals its beta X market risk premium.
Security Market Line: Relationships between expected return and beta
Company Cost of Capital: Expected rate of return demanded by investors in a company. determined by the average risk of the company securities
Project Cost of Capital: MIN. acceptable expected rate of return on project given its risk
PV: PV Annuity: FV Annuity:
Find Real: Nominal Inflation:
WACC: CAPM: Expected Return:
Market Rate of Return Cash Flow:
If a project's expected return is 20%, which represents a 40% return in a booming economy and a10% return in a stagnant economy, what is the probability of a booming economy?
How much will a firm need in cash flow before tax and interest to satisfy debtholders and equityholders if: the tax rate is 40%, there is $15 million in common stock requiring a 20% return, and $20 million in bonds requiring a 10% return?
What is the WACC for a firm with equal amounts of debt and equity financing, a 18% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value?
What should you expect to receive in coupon payments for a bond priced at $1,200 that has 3 years remaining until maturity, and an 8% coupon, with semiannual payments? Remember, at $1,200 the discount rate must be less than the coupon rate.
Calculate the NPV for a project costing $200,000 and providing $20,000 annually for 40 years. The discount rate is 9%. By how much would the NPV change if the inflows were reduced to 30 years?
What proportion of a firm is equity financed if the WACC is 14%, the before-tax cost of debt is 10.77%, the tax rate is 35%, and the required return on equity is 18%?
What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 8%
Stock A has a current price of $30.00, a beta of 1.75, and a dividend yield of 6%. If the Treasury bill yield is 5% and the market portfolio is expected to return 16%, what should Stock A sell for at the end of an investor's two year investment horizon?
Your classmate, Josh S. offers to buy your car with five, equal annual payments of $2,000, beginning five years from today. Assuming you think he is a good guy and the current discount rate is 10%, what is the present value of Josh’s offer ?
A stock sells now for $80, pays an annual dividend of $6.00, and experienced a 20% return on investment over the past year. Its price one year ago was?
A common stock is held for three years, during which time it receives an annual dividend of $10. The stock was sold for $100 and generated an average annual return of 16%. What price was paid for the stock?
What is the standard deviation of a portfolio’s returns if the mean return is 15%, the inflation rate is 6.5%, the variance of returns is 264, with a real rate of return of 13.8%, and there are three stocks in the portfolio?
Jay's Jams Inc. was just established with an investment of $5 million into stereo equipment. Jay expects his company to generate $900,000 a year for the next 10 years, followed by $1 million a year for the following 10 years. If Jay's cost of capital is 15%, find the market value of his company.
What is the after-tax cost to a corporation in the 40% tax bracket of paying $30,000 in preferred-stock dividends?
Calculate the real return for the following corporate bond investment: Purchased for $840 one year ago, 4% coupon rate, sold for $894. The inflation rate was 5.0% during the year. Would you consider this an appropriate investment if Treasury bills had yielded 6.0% over the same period?
A firm has an opportunity to invest in a project that will generate $55,000 per year for the next 10 years and requires an initial investment of $300,000. The firm will need to raise equity to pay for the project, but the flotation costs are 10% of the funds raised. If the firms discount rate is 11%, what is the NPV and should they
invest in the project?
The salesperson offers, "Buy this new car for $25,000 cash or, with appropriate down payment, pay $500 per month for 48 months at 6% interest." Assuming that the salesperson does not offer a free lunch, calculate the "appropriate" down payment.
Your car loan requires payments of $200 per month for the first year and payments of $400 per month duringthe second year. The annual interest rate is 10% and payments begin in one month. What is the present value of this two-year loan?
What is the present value of a five period annuity of $3,000 if the interest rate is 12% and the first payment is made today?
$3,000 is deposited into an account paying 10% annually, to provide three annual withdrawals of $1,206.34 beginning in one year. How much remains in the account after the second payment has been withdrawn?
How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 8% interest compounded annually for 40 years?
If Treasury bills are yielding 10% at a time when the market risk premium is 8%, your beta is .75, then the market portfolio should yield?
The capital structure for the CR Corporation is the following: bonds $5,500, and common stock $11,000. If CR has an after-tax cost of debt of 6%, and a 16% cost of common stock, what is its WACC?
Determine the beta for Stock A based on the following set of returns. Of course, the reliability of a beta calculated with only four data points may be low. Interpret the beta that you have calculated.
If equity investors require a 25% rate of return, what is the maximum acceptable amount of equity financing for a project with $3 million annual cash flows before tax and interest, $5 million in debt with a 12% coupon, and a 40% tax rate?