TCU Finance Exit Exam Flashcards PDF

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Get 20% off Quizlet Plus Claim discount Search for flashcards Upgrade: free 7-day trial Social Science Economics Finance Save TCU Finance Exit Exam Leave the first rating Wake up Dry with Beta 40 % More Protection than Pull-Ups © BUY NOW Flashcards Learn Test Match Blast *Sizes XS and S/M ___ 2016 GMC Get a hint SIERRA 1500 SLE Price: $23,569 Stock #: GZ214147A VIN: 1GTR1MEH2GZ214147 Each payment will consist of two parts - interest and repayment Amortization of principal Schedule - the breakdown is shown on a __________________________. Track progress 21 / 187 All American Chevrolet of Killeen Killeen, TX Created by LEARN MORE tutorville Teacher Disclaimer Finals got you frazzled? Join the 99% of students who crush it with new Practice Tests Try it now Textbook solutions Students also studied Study guides Exam 2 Acct 4150 ch 2 exam 1 Accounting Exam 1 51 terms 24 terms Preview wpmorga Preview elsacheng2023 Preview Practice questions for this set Learn 1/7 Study with Learn P = PMT [(1 - (1 / (1 + r)n)) / r] Choose matching term Occurs when management places a constraint on the size of the firm's Buying of treasuries injects money into 1 2 capital budget during a particular the supply to stimulate growth period Calculation for the cost of equity using How do you find the Present Value of 3 4 CAPM. an Ordinary Annuity? Don't know? All Starred (4) Terms in this set (187) Original Rate of return you Opportunity Cost could earn on an alternative investment of similar risk Finding Present Value is Discounting called ______________, the reverse of compounding. WINTER Upto40%OFF Savenow Becker, SALE! BeckerCPE ContinuingProfessional Education NowwithCPEpodcasts If payments are equal Annuity and are made at fixed intervals, then the series is an _____________. If payments occur at the Ordinary Annuity end of each period, then it is an ___________________. Mortgages, car loans, Ordinary Annuity and student loans. What type of annuities are these? If payments are made at Annuity Due the beginning of each period, then it's an _______________. Rental payments, life Annuity Due insurance. What type of annuities are these? How do you find the FV = PMT[((1+r)^n - 1)/r] Future Value of an Ordinary Annuity PV = 0 (for calculator) (END)? How do you find the P = (PMT [((1 + r)n - 1) / r])(1 + r) Future Value of an Annuity Due (BEGIN)? True/False: The FV of an True annuity due will be greater than that of a similar ordinary annuity. How do you find the P = PMT [(1 - (1 / (1 + r)n)) / r] Present Value of an Ordinary Annuity? How do you find the P = (PMT [(1 - (1 / (1 + r)n)) / r]) x (1+r) Present Value of an Annuity Due? True/False: The PV of an False (Greater than) annuity due will be less than that of a similar ordinary annuity. In 1749 the British Consols government issued some bonds whose proceeds were used to pay off other British bonds and since this action consolidated the government's debt, the new bonds were called ___________. Promise to pay interest Perpetuity perpetually The interest rate that is Effective Annual Rate (EAR) actually earned or paid on an investment, loan, or other financial product due to the result of compounding over a given time period What is another name EFF% (Effective Percentage) for Effective Annual Rate (EAR)? Calculation for Effective (1 + Inom/M)^M - 1.0 Annual Rate (EAR). Inom/M = Periodic rate M = number of periods When should Effective Should be used to compare the effective cost or Annual Rate be used ? rate of return on loans or investments when payment periods differ A loan that is to be Amortized Loan repaid in equal amounts on a monthly, quarterly, or annual basis Each payment will Amortization Schedule consist of two parts - interest and repayment of principal - the breakdown is shown on a __________________________. How does Time effect The later you receive the payment, the lower the present and future present value of the cash flow values of cash flows? How does Interest Rate The higher the interest rate, the higher the value effect present and of the cash flows future values of cash flows? Long term contract Bond which a borrower agrees to make payments of interest and principal, on specific dates, to the holders of the bond Issued by the US Treasury Bond federal government, having no default risk, but are not free of all risk (aka government bond) A bond issued by a Corporate Bond corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business; exposed to default risk, or credit risk In regards to corporate Higher bonds, the larger the default risk the ____________ the interest rate the issuer must pay. Issued by state and Municipal Bonds local government, have default risk, the interest earned on most of these bonds is expected from federal taxes and from state taxes if the holder is a resident of the issuing state Municipal bonds carry Lower interest rates that are _________ than those on corporate bonds with the same default risk. Issued by foreign Foreign Bond corporations or governments, exposed to default risk, and some currency risk if denominated in other currency than domiciled The value if you bought Yield to Maturity (YTM) the bond and held it to maturity What is another name Market rate of interest (rd) for Yield to Maturity? What is the effect of The further out in time, the less the PV becomes Time to Maturity on The higher the discount rate, the lower the PV changes in bond prices becomes as yield changes? (2) A hybrid that is similar Preferred Stock to bonds and common stock; has a par value and a fixed amount of dividends that must be paid before dividends can be paid on common stock; unlike fixed payment on bonds, failure to make payments on this will not lead to bankruptcy Calculation for the Vps = Dps / rps price of preferred stock. Dps = preferred dividend rps = required rate of return Evaluates stock based Dividend Discount Model (DDM) on NPV of future dividends; it can only be applied to stocks that pay dividends; this helps investors to decide if future growth in dividends is worth the investment today Calculation for the Stock Value = Current Div. Per Share/ Disc. Rate - value of common stock Div. Growth Rate using the Dividend Discount Model. P0 = D1 / rs - g _____________ DDM assumes No growth company will pay the same amount of dividends until infinity. _____________ DDM assumes Constant growth company will grow and the dividends will also grow. How does the Growth is not factored in calculation change for the Dividend Discount P0 = D1 / rs Model if there is no or constant growth? When do growth in Growth in dividends occur as a result of growth in dividends occur? EPS resulting from inflation Amount of earnings the Earnings Per Share (EPS) company retains and reinvests and the rate of return the company earns on its equity True/False: If the firm's True earnings are not all paid out as dividends, the dollars of investment behind each share will rise over time which should lead to growth in earnings and dividends. Calculation the value of EPS = NI - Div. on Pref. Stock/ Stock Outstanding common stock using P/E = Price per share/EPS the earnings model. NI = net income What is the value of a The value of a firm is its future expected free firm equal to? cash flows discounted at the weighted average cost of capital The cash flow available Free Cash Flow for distribution to all of the firm's investors, not just the shareholders Calculation the value of V = FCF (1 + G) / WACC - g common stock using free cash flows (HINT: horizon value calculation). The expected total rate Dividend; capital gains of return from a stock consists of an expected ______________ yield plus an expected _______________ yield. True/false: For a True constant growth firm, both expected dividend yield and expected capital gains yield are constant. We have an expert-written solution to this problem! Calculation for the Exp. Return = Return x Percentage of possibility expected return of common stock. The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, if one invested in a stock that had a 50% chance of producing a 10% profit and a 50% chance of producing a 5% loss, the expected return would be 2.5% (0.5 x 0.1 + 0.5 x -0.05). Calculation the current CY = Annual Interest Payments/Bond's Current yield (dividend yield) of Price stock. Provides information Current Yield regarding the amount of cash income that a bond will generate in a given year, but it does not account for capital gains or losses that will be realized if the bond is held until maturity (or call) and it does not provide an accurate measure of the bond's total expected return Explain relative riskiness -Least risk = Bonds - first claim on assets of Bonds, Preferred -More risk = Preferred Stock - next in pecking Stock, Common Stock order, but are first equity holders to claim relative to claims on -Most risk = Common Stock - lowest in pecking assets and claims on order, last to claim income. We have an expert-written solution to this problem! What is the effect of Discount rate on bonds goes up, bond price changes in the discount goes down rate on the price of an asset? If there will be a non- Financed with a temporarily high level of debt constant capital that will be reduced to a substantial level as the structure in the years merger is digested immediately following the merger, how was the merger financed? The government Less receives ________ tax revenue from a levered firm than from an otherwise identical but unlevered firm, leaving more money for firm's investors, which increases a firm's value. Calculation for the Vops = Vunlevered +Vtaxshield value of a merger using Vunlevered = npv of FCFs + HVunlevered the adjusted present Vtaxshield = npv of TS + HVts value (APV) approach. using unlevered cost of equity as discount rate rsu = wsrsl+wdrd Agreements in which Forward Contracts one party agrees to buy a commodity at a specific price on a specific future date and the other party agrees to sell the product What are 3 differences -Futures contracts are marked-to-market on a of futures contracts daily basis, meaning that gains and losses are from forward noted and money must be put up to cover losses contracts? -With futures, physical delivery of the underlying asset is virtually never taken -Futures contracts are generally standardized instruments that are traded on exchanges, whereas forward contracts are generally tailor- made, are negotiated between two parties, and are not traded after they have been signed When two parties agree Swap to swap something, generally obligations to make specified payment streams The theory that states it Efficient Market Hypothesis is impossible to beat the market because stock market efficiency causes share prices to always incorporate and reflect all relevant information; stock are always in equilibrium Type of market Weak-Form Efficiency efficiency in which all information contained in past price movements is fully reflected in current market prices Type of market Semistrong-Form Efficiency efficiency in which current market prices reflect all publicly available information Type of market Strong-Form Efficiency efficiency in which current market prices reflect all pertinent information, whether publicly available or privately held A measure of the Beta volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole Calculation for Beta of a Covariance (stock vs. market returns) / Variance common stock based (market returns) on historical pricing data. What does a beta of 1 A beta of 1 indicates that the security's price indicate? moves with the market What does a beta of A beta of less than 1 means that the security is less than 1 indicate? theoretically less volatile than the market What does a beta of A beta of greater than 1 indicates that the more than 1 indicate? security's price is theoretically more volatile than the market A measure of Alpha performance on a risk- adjusted basis; the abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM) Calculation for Alpha of Alpha = Return on portfolio - (risk free rate a common stock based +Beta(Market return - risk free)) on historical pricing data. What are 3 benefits of o Less risk diversification? o Can take advantage of profits on many different assets while lowering risk in the case that some bring profits and some may bring losses o Will lower the highest potential returns but also bring down the amount of potential losses The day-to-day Systematic Risk potential for an investor to experience losses from fluctuations in securities prices; cannot be diversified away; market risk A measure of how much Beta market risk a stock faces Company or industry Unsystematic Risk specific risk that is inherent in each investment; also known as "specific risk", "diversifiable risk" or "residual risk". EX. News that is specific Unsystematic Risk to a small number of stocks, such as a sudden strike by the employees of a company you have shares in What type of risk is this considered to be? A measure for Sharpe Ratio calculating risk- adjusted return, and this ratio has become the industry standard for such calculations What is the relationship Excess return (risk premium) per unit of risk in an of the Sharpe Ratio to investment asset or trading strategy risk-benefit trade-off? Calculation for the Sharpe Ratio = Asset Return - (Risk-free rate / Sharpe Ratio. Standard Deviation of excess of the asset return) Analysis of potential Capital budgeting projects; long-term decisions; involve large expenditures Projects are ________________, Independent if the cash flows of one are unaffected by the acceptance of the other. Projects are ________________, Mutually Exclusive if the cash flows of one can be adversely impacted by the acceptance of the other. Calculation for the cost Preferred dividend divided by the net issuing of preferred stock with price, where the net issuing price is the price the flotation cost. firm receives after deducting flotation costs: rps = Dps/[Pps(1-F)] True/False: Flotation False (large) costs for preferred stock tend to be relatively small. Calculation for the cost r(e )=D1/(P0 (1-F) )+ g of common stock using the dividend growth model with flotation costs. Calculation for the cost CAPM: cost of equity = risk free rate + beta * of equity using CAPM. (return on market - risk free rate) Attempts to correct a Adjusted Beta possible statistical bias by adjusting the historical beta to make it closer to the average beta of 1.0 Beta that incorporates Fundamental Beta information about the company, such as changes in its product lines and capital structure How does a firm's level The cost of equity rises as more debt is added of debt affect the cost because of the increased risk due to financial of common equity? distress, which is borne primarily by common shareholders True/False: Additional True debt increases the probability of bankruptcy. The average rate of Weighted Average Cost of Capital (WACC) return required by all of the company's investors; the current weighted avg cost the company would face for a new, or marginal, dollar of capital - it is not the avg cost of dollars raised in the past What is WACC affected Capital structure (the firm's relative amounts of by? (4) debt and equity) Interest rates Risk of the firm Investors' overall attitude toward risk The cost needed to Marginal Cost of Capital raise the last dollar of capital, and usually this amount increases with total capital If external funds will be Higher raised, then the NPV of all projects should be estimated using _____________ marginal cost of capital. The number of years Payback Period required to recover a project's cost What are 2 strengths of -Provides an indication of a project's risk and the payback period? liquidity -Easy to calculate and understand What are 2 weaknesses -Ignores the TVM of the payback period? -Ignores CFs occurring after the payback period Used to calculate the Discounted Payback Period length of time to recoup an investment based on the investment's discounted cash flows True/False: NPV does False (does assume) not assume reinvestment at the cost of capital. The discount rate that Internal Rate of Return (IRR) forces PV inflows = cost See 87 more ADVERTISEMENT You can also click the terms or definitions to blur or reveal them Hide definitions Choose a study mode