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Questions and Answers
What is the primary advantage of issuing commercial paper?
What is the primary advantage of issuing commercial paper?
- It provides long-term financing.
- It offers fixed repayment schedules.
- It does not require collateral.
- It typically has lower interest rates compared to bank loans. (correct)
How is factoring without recourse different from factoring with recourse?
How is factoring without recourse different from factoring with recourse?
- Factor without recourse carries no risk for the seller. (correct)
- Factoring without recourse requires higher fees.
- Factoring without recourse involves higher risk for the factor.
- Factor with recourse guarantees payment to the seller. (correct)
What is a bond's face value?
What is a bond's face value?
- The value repaid to the bondholder at maturity. (correct)
- The initial investment made to purchase the bond.
- The price the bond will be trading at on the market.
- The total interest paid over its lifetime.
What does it mean if a bond is traded at a discount?
What does it mean if a bond is traded at a discount?
Which factor has the greatest impact on bond prices?
Which factor has the greatest impact on bond prices?
What does YTM stand for in finance?
What does YTM stand for in finance?
What is considered a disadvantage of the Dividend Discount Model?
What is considered a disadvantage of the Dividend Discount Model?
Which method can be used to calculate the intrinsic value of preferred stock?
Which method can be used to calculate the intrinsic value of preferred stock?
Flashcards
Cost of Giving Up Cash Discount
Cost of Giving Up Cash Discount
The cost of giving up a cash discount offered by a supplier for early payment. This cost represents the implied interest rate paid by the buyer for delaying payment.
Commercial Paper
Commercial Paper
A short-term, unsecured debt instrument issued by corporations to raise funds. It's similar to a loan but is typically issued in larger denominations and has a maturity of less than 270 days.
Line of Credit
Line of Credit
A revolving credit facility that allows a company to borrow funds up to a pre-approved limit, providing flexibility in managing short-term financing needs. The company pays interest only on the outstanding amount.
Common Stock
Common Stock
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Bond
Bond
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Yield to Maturity (YTM)
Yield to Maturity (YTM)
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Weighted Average Cost of Capital (WACC)
Weighted Average Cost of Capital (WACC)
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Dividend Discount Model (DDM)
Dividend Discount Model (DDM)
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Study Notes
Principles of Finance Final Exam Study Guide
- Be able to calculate the cost of a cash discount.
- Understand the advantages and disadvantages of commercial paper.
- Define a line of credit and explain its use by companies, including the annual cleanup process.
- Describe factoring, both with and without recourse, and calculate its cost.
- Define bond types: coupon, face value, convertible, floating rate, TIPS, zero-coupon, callable, and puttable.
- Compare and contrast coupon rates for callable/puttable vs. ordinary bonds.
- Understand bond risk levels based on issuer and maturity.
- Identify factors impacting bond prices.
- Determine if a bond trades at a discount, premium, or par.
- Relate coupon rate to yield to maturity (YTM).
- Define and calculate approximate YTM.
- Calculate annual and semi-annual bond prices.
- Calculate preferred and common stock prices using the dividend discount model, including zero and constant growth.
- Calculate D₁ given D₀ or EPS.
- Explain when the dividend discount model is appropriate and understand its advantages and disadvantages.
- Calculate intrinsic stock value using book value per share and liquidation value. Evaluate the advantages and disadvantages of these methods.
- Calculate the weighted average cost of capital (WACC) components.
- Determine the best weightings for WACC.
- Calculate earnings per share (EPS) (bonus).
Formulas Provided on Exam
- Y'= (annual interest payment + principal payment - price of the bond) / 0.6 (price of the bond) + 0.4 (principal payment); Number of years until maturity
- P₀ = D₁/(K₂ - g)
- P₀ = D / (K₀ - g) ;P = D / K₂
- WACC = (wd × Kd) + (wp × Kp) + (we × Ke)
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Description
Test your finance knowledge with this quiz that covers key concepts related to bonds, commercial paper, and stock valuation methods. Explore the intricacies of bond pricing, the advantages of using commercial paper, and the various methods for determining stock value. Perfect for finance students and enthusiasts alike!
