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# FAQ2 - Questions and Answers for the Second Exam What are...

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Questions and Answers for the Second Exam What are the main points to know for each chapter? The main points for each chapter are posted on the web site under “Exam Info.” There are separate links to each of the chapters that will be on the second exam. Which equations should be put on my sheet? From Chapter 6: 6-1 – Quoted interest rate (know how this equation applies to short and long term treasury securities, and corporate bonds Finding interest rates using the expectations hypothesis From Chapter 7: 7-1 – bond value 7-1a, bond value for a semi-annual bond Bond/yield relationship From Chapter 8: 8-1 - expected rate of return 8-4 – coefficient of variation 8-5 - expected return on a portfolio 8-6 - portfolio beta 8-8 - security market line equation Notes: portfolio variance equation From Chapter 9: 9-1 – value of stock (note that this is like 2-7, present value of uneven cash flow stream) 9-2 - valuing stock using constant growth model 9-3 - valuing stock using zero growth model 9-4 – expected rate of return (know its components too, dividend yield and capital gains yield) 9-5 – nonconstant growth model. I don’t know if you really need to write out this whole (somewhat confusing) equation. You will have this type of problem on the exam, so if this equation helps include it on your cheat sheet. Think of this kind of problem as an uneven cash flow problem. First, compute dividends each year. Stop the first year you use the constant growth rate. Then compute the value of the dividends from the year the constant growth begins and onward forever into the future. P n = D n+1 /(k-g). Then put this number into your timeline with the non-constant growth dividends you calculated. Then find the present value of this uneven cash flow stream. This is the price of the stock. 9-6 – corporate valuation model 9-8 and 8a – preferred stock price and yield Can we bring old sheets for this test? No, you can only bring one sheet to this test. You should save your sheets from all three exams, and you can bring all three sheets to the final exam.

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If we read and do the review sheet will we be prepared for the exam? Yes, this will help prepare you. You also need to read and understand the material in the textbook and the lectures and do the end of chapter practice problems. Are the book problems similar to the exam problems? The book problems are in general longer and harder than exam problems. A typical book problem requires a lot of calculations to get to the final answer. Exam problems will typically have you do only one or two of the calculations required in the book problems. How do you calculate whether a stock is over or underpriced (or over or undervalued) using CAPM? CAPM gives you a stock’s required return – what it should return. The CAPM equation is r = r rf + (r m – r rf ) β , where krf is the risk free rate or treasury bill or treasury bond rate, km is the expected return on the market and beta is a measure of the firm’s market risk.
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FAQ2 - Questions and Answers for the Second Exam What are...

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