fin310 final

Index Fund

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes, such as the S&P 500.

arbitage

Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. This is considered riskless profit for the investor/trader.

DDM Formula

Po=Dividend/rate

uses of WACC

Securities analysts frequently use WACC when assessing the value of investments and when determining which ones to pursue. For example, in discounted cash flow analysis, one may apply WACC as the discount rate for future cash flows in order to derive a business's net present value. WACC may also be used as a hurdle rate against which to gauge ROIC performance. WACC is also essential in order to perform economic value added (EVA) calculations. Investors may often use WACC as an indicator of whether or not an investment is worth pursuing. Put simply, WACC is the minimum acceptable rate of return at which a company yields returns for its investors.

primary market

The primary market is where securities are created. It's in this market that firms sell (float) new stocks and bonds to the public for the first time. For our purposes, you can think of the primary market as being synonymous with an initial public offering (IPO). Simply put, an IPO occurs when a private company sells stocks to the public for the first time.

Direct Finance

The purpose of a direct investment is to gain enough control of a company to exercise control over future decisions. This can be accomplished by gaining a majority interest or a significant minority interest. Direct investments can involve management participation, joint-venture or the sharing of technology and skills.

secondary market

The secondary market is what people are talking about when they refer to the "stock market". This includes the New York Stock Exchange (NYSE), Nasdaq and all major exchanges around the world x

CAPM formula

=rf+b(rm-rf)

Mutual Fund

A mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Offshore Mutual Fund

A mutual fund that is based in an offshore jurisdiction, which is generally considered to be outside the United States. The term is often used, perhaps incorrectly, to describe a fund that is not in a high-tax country.

CAGE

C-cultural success of paris' fashion and wine industry globaly A-administrative Legal, institutional and political differences from country to country enable administrative arbitrage. Tax differentials are common examples. G-geographic Because of decrease in transportation costs, new opportunities for geographic arbitrage have been created. More than 20 million flowers and 2 million plants are auctioned off every day in Netherlands's Aalsmeer international flower market. E- Economic arbitrage comes from differences in the costs of labour and capital, as well as variations in more industry-specific inputs such as knowledge or the availability of complementary products, technologies or infrastructures.

Capital Budgeting

Capital budgeting is the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.

Capital Budgeting

Capital budgeting is the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. Ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time.

cost of equity

Cost of equity (Re) can be a bit tricky to calculate, since share capital does not technically have an explicit value. When companies pay debt, the amount they pay has a predetermined associated interest rate that debt depends on size and duration of the debt, though the value is relatively fixed. On the other hand, unlike debt, equity has no concrete price that the company must pay. Yet, that doesn't mean there is no cost of equity. Since shareholders will expect to receive a certain return on their investment in a company, the equity holders' required rate of return is a cost from the company's perspective, since if the company fails to deliver this expected return, shareholders will simply sell off their shares, which leads to a decrease in share price and in the company's value. The cost of equity, then, is essentially the amount that a company must spend in order to maintain a share price that will satisfy its investors.

Capital Budgeting

Ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time.

Issues with IRR and NPV

Depending on the initial investment costs, a project may have a low IRR but a high NPV, meaning that while the pace at which the company sees returns on that project may be slow, the project may also be adding a great deal of overall value to the company. A similar issue arises when using IRR to compare projects of different lengths. For example, a project of a short duration may have a high IRR, making it appear to be an excellent investment, but may also have a low NPV. Conversely, a longer project may have a low IRR, earning returns slowly and steadily, but may add a large amount of value to the company over time.

Dividend Discount Model

Here is the basic idea: any stock is ultimately worth no more than what it will provide investors in current and future dividends. Financial theory says that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate. According to the DDM, dividends are the cash flows that are returned to the shareholder.

IRR

Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project.

NPV

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project. Net Present Value - NPV AAA | Video Definition Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project. The following is the formula for calculating NPV: Net Present Value (NPV) where Ct = net cash inflow during the period t Co = total initial investment costs r = discount rate, and t = number of time periods A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

Avantages of Mutual Funds

One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS.

NPV Formula

PV = FV = I= N= A=

IRR formula

PV= 0 FV= I = N= A= To calculate IRR using the formula, one would set NPV equal to zero and solve for the discount rate r, which is here the IRR.

CAPM

The capital asset pricing model (CAPM) is a model that describes the relationship between risk and expected return and that is used in the pricing of risky securities

Breakdown of CAPM formula

The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).

payback period

The payback period is the length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.

WACC equation =

WACC= %e*coste+%d*costd

WACC

Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. A firm's WACC increases as the beta and rate of return on equity increase, as an increase in WACC denotes a decrease in valuation and an increase in risk. Put another way, WACC is an investor's opportunity cost of taking on the risk of investing money in a company.

Indirect Finance

is where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary.

payback formula

payment left over/ payment fixed amount

Cost of Debt

the effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; however, because interest expense is deductible, the after-tax cost is seen most often. This is one part of the company's capital structure, which also includes the cost of equity. A company will use various bonds, loans and other forms of debt, so this measure is useful for giving an idea as to the overall rate being paid by the company to use debt financing. The measure can also give investors an idea as to the riskiness of the company compared to others, because riskier companies generally have a higher cost of debt.

Cost of debit

to determine the cost of debt, use the market rate that a company is currently paying on its debt. If the company is paying a rate other than the market rate, you can estimate an appropriate market rate and substitute it in your calculations instead.