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Unformatted text preview: Review Sessions • Reviews of Basic Concepts and Problems • Wednesday, May 13th, 46 PM Glenda • Sunday, May 17th, 13 PM, Adam • Reviews of General Concepts and Problems • Sunday, May 17th, 35 PM, Ziemek • Monday, May 18th, 57 PM, Javed 2 Big Ideas ❚ Time Value of Money ❚ Law of One Price ❚ Diversification ❚ Risk is Covariance, not Variance ❚ ModiglianiMiller ❚ Law of One Price ❚ Diversification ❚ Risk is Covariance, not Variance ❚ ModiglianiMiller ❚ Diversification ❚ Risk is Covariance, not Variance ❚ ModiglianiMiller ❚ Risk is Covariance, not Variance ❚ ModiglianiMiller ❚ ModiglianiMiller ❚ NPV ❚ Diversification ❚ Risk is Covariance, not Variance ❚ ModiglianiMiller 3 r E = ρ Υ + ∆ Ε ρ Υ ρ ∆ ( 29 ρ Ε = 9.5% + .5 .5 9.5%  6% ( 29 = 13% ΩΑΧΧ = .5 13.% + .5 6% 1  .4 ( 29 = 8.3% Into to Financial Statement Analysis • The balance sheet shows the current financial position (assets, liabilities, and stockholders’ equity) of the firm. • Assets = Liabilities + Shareholder’s equity • Enterprise Value = Market Capitalization + Debt  Cash • The income statement reportst the firm’s revenues and expenses, and computes the firm’s bottom line of net income or earnings. • The statement of cash flows reports the sources and uses of the firm’s cash. It shows the adjustments to net income for noncash expenses and changes to net working capital and cash used or provided from investing and financing activities. Arbitrage and Financial Decision Making • To compare costs and benefits that occur at different times, in different currencies, or with different risks, we must put all costs and benefits in common terms. Typically, we convert costs and benefits into cash today. • A competitive market is one in which a good can be bought & sold at the same price. • The time value of money is the difference in the value between money today and money in the future. The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate. The riskfree interest rate is the rate at which money can be borrowed or lent without risk. • The present value (PV) of a cash flow is its value in terms of cash today. • The net present value (NPV) of a project is PV(Benefits)  PV(Costs). • A good project is one with a positive net present value. The NPV decision rule states that when choosing from among a set of alternatives, choose the one with the highest NPV. The NPV of a Arbitrage and Financial Decision Making (cont) • Arbitrage is the process of trading to take advantage of equivalent...
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This note was uploaded on 11/13/2009 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at Berkeley.
 Spring '07
 Kasa

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