Cheat - Long term = 10 30 4. Beta B=1, risky as much as...

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1. Income Statement Net Sales – Operating costs except Depr = EBITDA EBITDA – Depr = EBIT EBIT – Less Interest = EBT EBT – Taxes = Net Income Balance Sheet Assets Cash & equivalents, AR, Inv, Total CA,PPE, Total assets AP, NP, Accruals, Total CL, LT bonds, Total debt ROE = Net Income / Common Equity Debt/Asset Ratio = Total Debt/Total Assets or Current Liabilities + LT Debt/ Total Assets Equity/Asset Ratio = Shareholder Equity/Total Assets or 1 – Debt/Asset 2. Maturity Risk IP 1 = 5% / 1 = 5% IP 10 = [5% + 6% + 8%(8)]/10 = 7.5% MRP 1 = 0.1% * (1-1) = 0% MRP 10 = 0.1% * (10-1) = .9% Rrf = r* + IP + MRP So, assume r* = 3%, then Rrf = 8% for one year 3. Yield Curve Humped – Curves up then down Normal – Upward sloping Inverted – Downward sloping T-Bond yield = r*(t) + IP(t) + MRP(t) Corporate bond yield = r*(t) + IP(t) + MRP(t) + DRP(t) + LP(t) Short term = 1 – 3 yrs, Intermediate = 3 - 10
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Unformatted text preview: Long term = 10 30 4. Beta B=1, risky as much as average stock B>1, more risky B<1, less risky B=0, no risk Most stock 0.5 to 1.5 Rate of return (ROR) rRF + (rM rRF)B--------------------------------------------------------------------------Risk-free rate of return (%) 5 Market rate of return (%) 13 Market risk premium (%) 8 A's required rate of return (%) 15 B's required rate of return (%) 11 A is riskier due to higher beta (1.25 vs. 0.75) and higher required ROR (15% vs. 11%) A is undervalued as expected ROR is higher than required ROR (16% vs. 15%) B is overvalued as expected ROR is lower than required ROR (10% vs. 11%) Intercept of Security Market Line (SML) 5 Slope of Security Market Line (SML) 8 Maturity (years to maturity, bought today) 1 2 3 4 5 Calculated Forward Rates Security Maturities bought at 1-Year 2-Year 3-Year end of year Security Security Security 1 2.00 2.00 1.80 2 2.00 1.70 1.47 3 1.40 1.20 4 1.00...
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