8.3. Payback Period. Concerning payback:
a. Payback period is simply the break-even point of a series of cash flows. To actually compute
the payback period, it is assumed that any cash flow occurring during a given period is realized
continuously througho
14. Problems with Profitability Index.
a. The profitability index is defined as the PV of the future cash flows divided by the initial
investment. The equation for the profitability index for each project is:
PII = ($28,300 / 1.11 + $34,800 / 1.112 + $43,
10. NPV versus IRR.
a. The IRR is the interest rate that makes the NPV of the project equal to zero. The equation for
the IRR of Project A is:
0 = $78,500 + $43,000 / (1 + IRR) + $29,000 / (1 + IRR)2 + $23,000 / (1 + IRR)3
+ $21,000 / (1 + IRR)4
Using a s
8.4. Average Accounting Return. Concerning AAR:
a. The average accounting return is interpreted as an average measure of the accounting
performance of a project over time, computed as some average profit measure due to the project
divided by some average
3.
Calculate Payback. Project A has cash flows of:
Cash flows = $23,000 + 28,000
Cash flows = $51,000
during the first two years. The cash flows are still short by $9,000 of recapturing the initial
investment, so the payback for Project A is:
Payback = 2
7.
The average return is the sum of the returns, divided by the number of returns. The average return for each
stock was:
.16 .17 .13 .15 .24 .1020, or 10.20%
N
X xi N
5
i 1
N
.36 .08 .21 .15 .39 .1460, or 14.60%
Y yi N
5
i 1
Remembering back to
1.
The return of any asset is the increase in price, plus any dividends or cash flows, all divided by the
initial price. The return of this stock is:
R = [($85 72) + 1.65] / $72
R = .2035, or 20.35%
The dividend yield is the dividend divided by price at t
Problem Set 2, Due September 29
FI 312, Fall 2016
Prof. Sophia Zhengzi Li
1. Suppose that there are many stocks in the security market and that the characteristics
of stocks A and B are given as follows:
Stock Expected Return
A
10%
B
20%
Correlation=-1
St
Problem Set 2, Due September 29
FI 312, Fall 2016
Prof. Sophia Zhengzi Li
1. Suppose that there are many stocks in the security market and that the characteristics
of stocks A and B are given as follows:
Stock Expected Return
A
10%
B
20%
Correlation=-1
St
Formulas for Exam 1, FI 312, Fall 2016
The mean or expected value of an random variable X is the weighted average of all possible outcomes, where the weights are the probabilities of those outcomes:
= E(X) = x1 P r(x1 ) + . + xn P r(xn ) =
n
X
xi P r(xi
INTROCUCTION
This unit is the pivotal one in our course. It is what we've been building up to, and it will be the
foundation for all of the work in the subsequent units. We've established a goal for ourselves, both
personally and professionally, in our w
LESSON 1
One of the most important aspects of running any organization is having sufficient liquidity.
In the book: Chapter 3, section 3.1, 3.2
Our first information system is accounting. Accounting looks back at what has
happened and records it in a f
Finance 320F Foundations of Finance
Appendix B: Key Equations
Ross, Westerfield, Jaffe, Essentials of Corporate Finance
Chapter 2
1
1
1
where
1
Cash flow from assets = Operating cash flow (OCF) Net capital spending Change in net working
capital (NWC)
o
(1
1/30/08 Video Info - SEC Kow what the SEC is all about - Short Selling - Margin Trades (most important factor in the crash of 29) - Bulls think stock prices will rise - Bears think stock prices wil fall - DOW Jones Industrial Average = index of th
Problem Set 3, Due October 18
FI 312, Fall 2016
Prof. Sophia Zhengzi Li
1. What is the key underlying assumption of the single index model?
Solution: The co-movements between different assets are driven by the aggregate
market.
2. The betas and variances
Problem Set 1, Due September 15
FI 312, Fall 2016
Prof. Sophia Zhengzi Li
Properties of Random Variables
The mean or expected value of an random variable X is the weighted average of all
possible outcomes, where the weights P
are the probabilities of tho
1.3. Corporations do have some disadvantages.
Double taxation. Corporations, as separate legal entities from their owners, are taxed. Any
profits distributed to their ownersshareholdersare then taxed as personal income.
Agency problems: The corporate stru