FIN Test 2
Capital gains yield =
(P1-P0)/P0 [%]
cap gains yield
(P1-P0)/p0
Which of the following are considered relevant cash flows? -CF from erosion -CF from external costs -CF from beneficial spillover -CF from sunk costs
-CF from erosion -CF from external costs -CF from beneficial spillover
Place the steps involved in issuing securities to the public in chronological order: a.Prepare and file registration stmt b.determine sell price c. prepare and dist. preliminary prospectus copies d. obtain approval from the firm's Board of dir. e. Prepare and dist. a final prospectus
1. (d) obtain approval 2. (a) prep and file regist. statement w SEC 3. (c) preliminary prosp. 4. (b) det. selling price 5. (e) final prosp.
Borrowing rate=
=(%D)*Rd
WACC=
=(%equity)*(cost of equity) + (%debt)*(1-Tc)
Break Even point =
=Total Fixed Cost/Cont. margin where TFC=(Fc+Dep)(1-tc) and cont. margin=(price-VCpU)(1-tc)
WACC with stock=
=[%E*Re ]+ [%D*Rd*(1-Tc) ]+ [%Pref stock*Rp]
Beta for a portfolio
=sum of [(xi/xT)*Bi] where xi/xT is portion of total portfolio in 'i'
Cost of equity, Re=
D1/P0 + g =[D0*(1+g)]/P0 + g
*** Debt-Equity ratio=x Equity weight=? Debt weight=?
Equity weight= 1/(1+x) Debt weight = x/(1+x)
the rate most intl. banks charge on another for overnight EURODOLLAR loans
London InterBANK Offered RATE (LIBOR)
After tax cost of debt =
Rd*(1-Tc)
After tax yield on debt =
Rd*(1-Tc)
performing 3 offsetting deals simultaneously to obtain an arbitrage profit. The cross rate of the UK pound and the euro (£/€) must be in equilibrium with these currency's exchange rates to the dollar, ($/£) and ($/€).
Triangular arbitrage
a sophisticated investor who is able to evaluate the risks of a complex investment. measured by high personal wealth or income
accredited investor
a security issued in the US representing shares of a foreihn stock and allowing that stock to be traded in the US
american depositary receipt (ADR)
investors who invest their own funds to provide seed capital for starting a business
angel investors
buying an asset in one mkt at a lower price and SIMULTANEOUSLY selling an IDENTICAL asset in another market at a higher price. this is done with no RISK and AFTER all costs are accounted for
arbitrage
For an option buyer, purchasing a call option would give them a _ position while a put option would give them a ____ position
buyer: call option- put option-
A _ option allows the buying to PURCHASE the asset from the writer
call option
Dividends paid to common stockholders _____ be deducted from the payer's taxable income for tax purposes
cannot
the covariance of the returns divided by the std dev of each return; a measure of the common variability shared by assets
correlation
appropriate discount rate to use to evaluate a new project is the ____
cost of capital
the minimum rate of return required to undertake a project
cost of capital
the return that equity investors require on their investment in the firm
cost of equity
a stat measure of the degree to which rvs' move together
covariance
implicit ex rate between two currencies quoted in some third currency
cross rate
As depreciation expenses increase, net income and taxes will ___, while investment cash flows will ____
decrease, increase
INcremental cash flows come about as a ___consequence of taking a project under consideration
direct
forecasting risk is best defined as ___
estimation risk
international bonds issued in multiple countries but denominated in a single currency, usually the issuers
eurobonds
money deposited in a financial center outside the country whose currency is involved
eurocurrency if it was dollars, it would be a EURODOLLAR
The price of one country's currency expressed in terms of another country's currency.
exchange rate
risk related to having international operations in a world where relative currency values vary
exchanger rate risk
the price at which asset can be purchased or sold through option contract
exercise price
two parts that determine return on stock
expected and unexpected
additional funds to begin sales and manufacturing
first round stage
international bonds issued in a single country, usually denominated in that country's currency
foreign bonds
market in which one countries currency is trade for another's
foreign exchange market
profit for for ex trade =
forward price - future spot price
agreement to exchange currency at some time in the future
forward trade agrred upon rate is forward ex rate
funds for companies that are likely to go public within half a year
fourth round financing / *bridge financing
UK and Irish gov securities
gilts
to reduce risk by holding contracts or securities whose payoffs are NEGATIVELY correlated with some risk exposure
hedging
Weak-form efficiency: mkt price reflects ___
historic information/ technical info
in an efficient market, the cost of equity for a highly risky firm ____ in direct relation to the stock's systematic risk
increases
difference between the actual result and the forecast is called what?
innovation or surprise
Unanticipated changes in relative economic conditions may cause the value of foreign operations to change.
long RUN
us company agrees sell games to UK. they mak forward deal to purchase pounds at a price with a rate of $/pound. this puts the company's accounts ___ in a __ position
long forward
standing to profit from an increase in the exchange rate
long position
if an international firm borrows money in the foreign country where it has operations it can reduce ____
long-run exchange rate exposure
unanticipated changes in relative economic conditions that affect the value of a foreign operation are known as ___ exposure to exchange rate risk
long-term
venture capitalism is expensive because ___
many if not most companies will fail without having provided a positive return to investors
Ideally, we should use ____ values in the WACC. BV's are often similar to MV for ___
market debt
Semistrong Efficiency: mkt price reflects
market price reflects all publicly available information
slope of the security market line;
market risk premium
the dif between the expected return on a mkt port. and the risk free rate
market risk premium
the holder of an option has valuable flexibility to exercise the option or to walk away from it. the price the pay for this is called
option premium
describes an option that if exercised immediately results in a loss of money
out of the money
risk related to changes in value that arise because of political actions
political risk
to prepare ____ financial statements, estimates of quantities such as unit sales, selling price per unit, var cost per unit and total fixed costs are required
proforma
the legal document that must be given to every investor who contemplates purchasing registered securities in an offering. it describes the details of the company and offering
prospectus
when using the ___ approach for a proposed investment, a firm is primarily seeking a rate of return that best matches the risk level of the proposed investment
pure play
Other companies that specialize only in projects similar to the project your firm is considering are called ___
pure plays
a _ option allows the buyer to SELL the asset to the writer
put
Crowdfunding
raising capital from a large number of investors through the INTERNET
the first document released by an underwriter for a new issue to prospective investors
red herring
discloses all the pertinent info concerning a corporation that wants to make a public offering. It is filed with the securities and exchange commsission
registration statement
An all equity firm discounts a project's CF w the firm's WACC, even through the project's beta is less than the firm's overall beta, it is possible the project might be ______ when it should be____
rejected, accepted
reward on average for bearing risk
risk premium
the excess return on a risky asset that is the diff between expected return on the asset and the return on the risk free asset
risk premium
working capital funds for companies that are selling products but not yet profitable
second round stage
The initial capital used when starting a business, often coming from the founders' personal assets, friends or family, for covering initial operating expenses and attracting venture capitalists
seed capital
the systematic risk of a security is just a reflection of its ___ to overall market movement
sensitivity
The day-to-day fluctuations in exchange rates create short-run risks for international firms.
short RUN
standing to profit from a decrease in ex rate
short position
day to day fluctuations in EX rates create __
short term exchange risk exposure
an agreement to trade currencies based on the exchange rate TODAY for settlement within *TWO business days
spot trade exchange rate for this is called spot exchange rate
____ refers to the assumption that a project will be evaluated based on its incremental CF's
standalone principle
financing for firms started within the past year to pay for marketing and product development
start up stage
agreement to exchange two securities or currencies
swaps
___ risk is the only risk important to the well diversified investor
systematic
____ is defined as any risk that affects a large number of assets
systematic risk
financing for a company that is breaking even and expanding
third round stage or *mezzanine financing
an ad that announces a public offering of securities. It identifies the issuer, the type of security, the underwriters, and where additional information is available.
tombstone
if a firm uses its overall WACC to discount Cf's from projects in higher risk divisions, it will accept ___ projects -too many -too few -optimal
too many
cost of debt with bonds is the __
total market value
the effect of an UNANTICIPATED change in the exchange rates on the CONSOLIDATED financial statements of a MULTINATIONAL corporation
translation exposure
MIRR is designed to address problems with ____
unconventional cash flows
the option _ issues the option and is obligated to go through with the OPTION contract if called upon
writer
a risk free asset has a beta of ___
zzero