Finance 2000
What is the FV when we calculate the cost of debt?
1000 or -1000
What is the decision rule for NVP?
Accept if greater than zero
Which is more relevant in WACC, after tax or pretax costs of debt?
After-tax
Assuming that S&P 500 represents all of the industries in the market, where would you expect its Beta to be?
Around 1.0
Which financial statement summarizes a firm's accounting value as of a particular date?
Balance sheet
How do you make money when you have a stock?
Buy/sell or dividends
NWC is calculate by
CA-CL
What is the term for when a company's acceptance of a new project causes it to loose sales in an old project?
Cannibalism
What does CAPM stand for?
Capital asset pricing model
What is the name of the formula we use to calculate expected return for a stock using beta?
Capital asset pricing model
Which company is more likely to pay its debts, a company with a beta of 0.5 or a company with a beta of 2.5?
Company with 0.5
John has $1000 to invest. Would he rather have simple interest or compound interest?
Compound
I hold bonds issued by ABC company. I require a 10% return on my ABC bonds. What does ABC call this 10%?
Cost of debt
I own 100 shares of ABC stock. I require a 10% return on my ABC stock. what does ABC call 10%?
Cost of equity
I own 100 shares of ABC preferred stock. I require a 10% return on my ABC stock. What does ABC call this 10%?
Cost of preferred equity
Assume my company has no preferred stock, If my stock price increases, what happens to my weight of debt?
Decrease
If i decrease the cost of preferred stock, what happens to WACC?
Decrease
What is an example of a perpetuity?
Dividend
Other than the CAPM, what model could we use to solve for the return on a stock?
Dividend growth model
What does DGM stand for?
Dividend growth model
What is the term for an interest rate that is expressed as if it were only compounded once per year?
EAR
What is the market risk premium equal to?
Expected return on the market less risk free rate
How do we calculate the PMT in a semiannual bond?
Face Value (1000) X Coupon Rate / 2
True or False: because dividend are tax deductible, we have to use the after-tax cost of equity in WACC.
False
Generally speaking, the greater the risk the ____ the reward.
Greater
What Beta would you expect a stock to have if it was more volatile than the market?
Greater than 1.0
If I increase the cost of debt, what happens to WACC?
Increases
If I increase the cost of equity, what happens to WACC?
Increases
What beta would you expect a stock to have if it was less volatile than the market?
Less than 1.0
What is the big advantage to being a corporation?
Limited liability
What do we use to calculate weights in WACC, market value or book value?
Market value
What do we use to calculate weights in a portfolio, market value of book value?
Market value
What is the primary goal of financial management?
Maximize shareholder wealth with respect to the business
A group of assets held by an investor is defined as what?
Portfolio
John needs to incest $100 today to have $500 in 15 years. What is the $100 referred to as?
Present value
Would you rather have secured debt in ABC company or unsecured?
Secured
Risk that affects a large number of assets is defined as what?
Systematic
True of false: Because interest is tax deductible, we have to use the after-tax cost of debt in WACC.
True
True or false: When calculating the cost of debt, we use TVM.
True
Which of the following would have the lowest beta? Coca-Cola, Facebook or US treasury bills?
US treasury bills
Diversification can eliminate which kind of risk?
Unsystematic
Risk that only affects one or two assets is defined as what?
Unsystematic
Give an example of systematic risk.
Vaires
An example of unsystematic risk
Varies
If I did a weighted average of the cost of equity and after-tax cost of debt, what would I get?
WACC
The rate of return a firm must earn on its assets if is to maintain the current value of its securities is defined as what?
WACC
How do you solve for the beta of a portfolio?
Weighted average
How do you solve for the expected return of a portfolio?
Weighted average
What does WACC stand for?
Weighted average cost of capital
What is the beta of US treasury bills?
Zero