Chapter 16: Capital Structure: Basic Concepts
A table outlining the income statement for the three possible states of the economy is shown
below. The EPS is the net income divided by the 5,000 shares outstanding. The last row shows
Chapter 7: Net Present Value and Other Investment Rules
The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the
Cumulative cash flows Year 1 = $6,500
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
To calculate the accounting breakeven, we first need to find the depreciation for each year. The depreciation is:
Depreciation = $724,000/8
Depreciation = $90,500 per year
And the accoun
Review: Time Value of Money
Valuation of stocks and bonds
Time value of money - review
Price: Zeros, Coupon, Consol
Holding period return
Stocks and the dividend discount model
D / r, D / ( r-g), Two stage growth
g = ROE * retentio
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
The maximum price that the company should be willing to pay for the fleet of cars with all-equity
funding is the price that makes the NPV of the transaction equal to zero. The NPV eq
Chapter 7: Net Present Value and Other Investment Rules 7.1 a. The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the initial investment. Project A: Cumulative cash flows Year 1 = $6,500 = $6,500 Cumulative
Chapter 6: How to Value Bonds and Stocks
6.1 The price of a pure discount (zero coupon) bond is the present value of the par. Remember, even though
there are no coupon payments, the periods are semiannual to stay consistent with coupon bond payments.
FINA 395/1 AA Theory of finance 2
Classroom: MB S2-115
Date Due: Thursday, May 16 at 15:00
Directives: This assignment may be done individually or
in teams of maximum 3 students.
It is not necessary to type your
Net present value of growth opportunities (standard form) one year
before first investment
r (1 + r ) T
Dividend discount model with two growth rates (standard form)
Div N +1
Div1 (1 + g1 ) r g 2
Financial planning is concerned with the basic
policy elements of:
B. the method of raising capital, investment decisions, and
C. investment decisions, degree of financial leverage, and
payments to shareholder
The duration of a bond is a function of the bond's
A. coupon rate.
B. yield to maturity.
C. time to maturity.
D. all of these.
E. none of these.
Ceteris paribus, the duration of a bond is positively correlated with the bond's
A. time t
Indirect costs of financial distress:
effectively limit the
amount of equity a firm
B. serve as an incentive to increase the financial leverage
C. include direct costs such as legal and accounting fees.
D. include the costs inc
A T-bill pays 6 percent rate of return. Would risk-averse investors invest in a risky portfolio that pays 12
percent with a probability of 40 percent or 2 percent with a probability of 60 percent?
A. Yes, because they are rewarded with a r
One of the key differences between corporate
finance and financial accounting courses is:
the focus on cashflows
instead of earnings.
B. the focus on marginal tax rates versus average tax rate
C. the role of total income flow versus inc
The acceptance of a capital budgeting project is
usually evaluated on its own merits. That is, capital
budgeting decisions are treated separately from
capital structure decisions. In reality, these
decisions may be highly interwoven. This
A pure discount bond:
B. pays interest annually.
C. pays interest semiannually.
D. pays no coupon.
A level coupon bond:
pays the same
B. pays the same taxes every period.
C. is a zero cou
The firm's capital structure refers to:
the way a firm
B. the amount of equity or capital in the firm.
C. the amount of dividends a firm pays.
D. the way in which a firm's assets are financed.
E. how much cash the f
A $25 investment produces $27.50 at the end of
the year with no risk. Which of the following is not
NPV is positive if the
interest rate is less than
B. NPV is negative if the interest rate is less than 10%.
C. NPV is zero if
An equity issue sold directly to the public is called:
B. a general cash offer.
C. a restricted placement.
D. a fully funded sales.
E. a standard call issue.
An equity issue sold to the firm's existing
The time value of money concept can be defined
the time in your life when
you receive an inheritance.
B. the relationship between money spent versus money re
C. the relationship between a dollar to be received in the fu
D. the relat
A derivative is a financial instrument whose value
is determined by:
such as the FTC.
B. a primitive or underlying asset.
C. hedging a risk
D. hedging a speculation.
Derivatives can be used to either hedge or
Both the APT and the CAPM imply a positive
relationship between expected return and risk. The
APT views risk:
very similarly to the CAPM
via the beta of the security.
B. in terms of individual intersecurity correlation versus the
The balance sheet is based on which following
(Stockholder's equity +
B. Assets (Liabilities + Stockholder's equity
C. Assets (Current Long Term Debt + Retained earnings
D. Fixed Asset (Liabilities
Theory of Firm II
Issue Debt or Issue Equity?
When and how much?
Pay Dividends, Buy Back Shares?
Financing Decisions can create value
Financing & Abnormal Returns
This chapter discusses financial distress, private
workouts, and bankruptcy.
A firm that defaults on a required payment may be
forced to liquidate its assets. More often, a defaulting
firm will reorganize.
Formulas for the Final Exam
Return of a security following the single index model
ri = E(ri ) + i F + ei
Variance of a security following the single index model
V ar(ri ) = i M + 2 (ei )
Covariance between two risky securities each following the si
Theory of Firm II
Different Investment Rules
The Payback Period Rule
The Discounted Payback Period Rule
The Average Accounting Return
The Internal Rate of Return
The Profitability Index
Net Present Value
The Payback Period Ru
Theory of Firm II
The Time Value of Money
Money NOW is worth more than money LATER!
Dollar received today can be invested to earn interest
The amount of interest earned depends on the rate of return
that can be earned on
Theory of Firm II
Value of the Firm
Financial Leverage and Firm Value
Trans Can Corporation
Currently No Debt
Number of Shares Outstanding is 400, Price per Share is $20
Interest Rate is 10%
Issue $4,000 in Debt to Buy Ba
Corporate Financing Decisions and Efficient
Can Financing Decisions Create Value?
Earlier lectures covered how to evaluate investment projects according
to NPV criterion.
Now we look at financing decisions.
What Sort of Financin
Are markets ecient?
JUN 30, 2016
SECTIONS ECONOMICS FINANCE
What is the ecient-markets hypothesis and
how good a working model is it?
Fama: Its a very simple statement: prices reect all available i
Net Present Value and Capital Budgeting
8.1 Incremental Cash Flows
8.2 The Majestic Mulch and Compost Company:
8.3 Inflation and Capital Budgeting
8.4 Alternative Definitions of Operating Cash Flows
8.5 Applying the