Sample Midterm
Q1 A well-known insurance company offers a policy known as the Estate Creator Six Pay. Typically, a parent or grandparent buys a policy for a child at the childs birth. The details of the policy are as follows. The purchaser (say, the paren
End of Chapter Solutions Corporate Finance 8th edition Ross, Westerfield, and Jaffe Updated 11-21-2006
CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE
Answers to Concept Questions 1. In the corporate form of ownership, the shareholders are the owners of the f
Capital Structure
Franco Modigliani and Merton Miller
Neither a borrower nor a lender be
1
Relevant issues:
Is there an optimal capital structure, i.e., an optimal combination of debt and equity? Can management create shareholder value by following a goo
Risk and Return II
Portfolio Theory
1
MIT
Example
2
3
Another Example
4
Generalizing to a portfolio of n stocks:
E(R ) = w r + w r + w r + . + w r p 11 22 33 nn n E(R ) = " w r p ii i=1 note w may be negative i Portfolio weights sum to 1 nn Var(R ) = # 2
Risk and Return
The historical record
1
The risk return trade-off
Rates of Return: stock holding
2
Rates of return:a general denition
Expected returns
3
AAR vs GA
Holding Period Returns
4
Historical rates of return
5
Calculating holding period return, ari
134aF09 Note: For Babar, check out the more detailed problem and solution in RWJ 17.13, Neon Corporation. We will cover these concepts in the next few weeks. Q1. On January 1, A.B. University had an endowment worth $100M. Of this amount, $25M was invested
Financial Leverage & Systematic Risk Reading: RWJ chp 12,17 Review 12.8, 12.16, 17.10, 17.15. Two key questions of corporate financial decisions: Valuation: How to distinguish between good investment projects and bad ones? Expand existing operations? Dive
SYLLABUS
134A : Corporate Finance Fall 2009
N. Mehra
Complex problem solving requires abstraction from the many details that clutter untrained thought processes; and the practice of abstraction is itself a highly difficult and extremely valuable skill. P
Formula Sheet
Time Value of Money
PV (Cn ) =
Cn (1 + r) n
C# 1& 1" % ( = C * PVIFAr,n r $ (1 + r) n '
!
PV ( An ) =
!
PV ( A" ) =
C r
!
FV ( An ) =
C [(1 + r)n " 1] r
!
C # (1 + g) n & PV ( An ,g ) = %1 " ( r " g $ (1 + r) n ' C r"g
PV ( A),g ) =
!
Valu
Discounting Future Cash Flows
Daniel K. Saunders
1
1.1
Geometric Series
Perpetuity (Innitely Many Terms)
For a geometric series, let 0 < x < 1. Then the following is true xn =
n=0
1 1x
With this fact we can show that .9999. = 1. First, notice that 0.9999.
Discounting Future Cash Flows
Daniel K. Saunders
1
1.1
Geometric Series
Perpetuity (Innitely Many Terms)
For a geometric series, let 0 < x < 1. Then the following is true xn =
n=0
1 1x
With this fact we can show that .9999. = 1. First, notice that 0.9999.
Economics 134A: Fall 2009 ADMINISTRATIVE INFORMATION Instructor: Office: Phone: e-mail: Office Hours: N. Mehra North Hall 3020 (805) 893-2492 [email protected] T,Th, 12 1 and 3:30 4:30
Teaching Assistants: Christopher C. Goodwin Office: e-mail: Office
Capital Budgeting:alternative criteria
Net Present Value (NPV) Definition: Advantages:
! 1. Explicitly incorporates the time value of money.
2. Uses forecasted project cash ows and a risk adjusted discount rate. Does not rely on accounting methods, manage
CAPITAL BUDGETING
The Capital budgeting decision
1
CAPITAL BUDGETING
Criteria to evaluate and choose among alternative investments. A project/investment can be characterized as a series of cash flows:
cfw_CF0 , CF1 , ., CFt
Net Present Value (NPV)
!
Defi
Lecture 2: Asset Valuation:Bonds
Bond Valuation
The value of any asset is the present value of all the future income that the owner of the asset will receive. Price/Intrinsic Value=
" Income in Period t #$ t t=1 &1+ appropriate discount' )
& %
rate in per
Stock Valuation
Stock Valuation
1
What is Stock?
> a security that pays an uncertain cash flow > that implies ownership of the corporation > has limited liability
Stock valuation:
Price/Intrinsic Value=
2
The Dividend Discount Model :
Div1 + P1 Div1 + P1
L ecture 1
Introduction
FINANCE IS THE INTERACTION OF : TIME MONEY and UNCERTAINTY
All nancial decisions can be mapped onto
% X1
0 1
% X2
2 3 .
X0
% X3
1
Our focus in this course is on:
corporate nancial decisions the central role of the nancial manager i
Question 1 (1a)
Expected Return: E (Rp ) = wa E (Ra ) + wf Rf E (Rp ) = (0:75)(0:14) + (0:25)(0:08) E (Rp ) = 0:105 + 0:02 E(Rp ) = 0:125 Variance and Standard Deviation: 2 22 22 p = wa p + wb p + 2wa wb a;b Treasury bills are considered risk free, and th