Fin 310

Dealers

have their own inventory they sell and buy from

Broker

brings buyer and sellers together to exchange stocks

Gordon growth model

constant dividend growth and stock prices grow at the same rate

stock price

equals the present value of paid dividends and capital gain from selling stock

preferred stock

no voting rights, get dividends first,

common stock

get to vote, don’t have to receive dividends,

newly released stock are sold in what kind of market

primary

stock is resold in what market

secondary

is the ask price higher or lower than bid?

higher

is the bid higher or lower than the asking price?

lower

who trades more frequently, bonds or stocks?

bonds

debt holders are

not owners

equity holders

are owners

we only accept projects with…

NPV>0

profitability index accept if

PI > 1

AAR is based on…

based on accounting net income, ignores time value and risk

independent projects

can except both, none, or one

mutually exclusive

can except one, neither, but not both

payback

how long it takes to regain initial investment

IRR

measures dollar weighted return, is the discount rate that makes NPV=0

profitability index

benefit per unit cost, based on time value of money

sunk cost

costs that have already been done and won’t change future outcome

opportunity cost

something that could happen

managerial options

contingency plans, option to expand, option to abandon, option to wait, strategic options

Scenario analysis

examines range of possible situations

sensitivity analysis

how changes in only one variable affect NPV

type 1 errors

when you accept a project you shouldn’t have

type 2 error

reject a project you should’ve accepted

volatility

measures risk

Average return

whats the return average over a period

geometric return

whats the compound return per year over a period

risk premium

excess return on a risky asset over the return on a risk less investment

risk is…

the dispersion, spread, or volatility of returns

standard deviation

the square root of the variance

efficient market hypothesis

stocks are fairly priced, stock prices reflect info, stock prices are in equilibrium

efficient markets

will not protect investors from wrong choices if they don’t diversify

strong form

prices reflect all public and private information

semistrong form

prices reflect all publicly available info

weak form

prices reflect all past prices and volume data

who is always greater, the average return or the geometric return?

average return

semi strong form efficient

those with inside info have an advantage

probabilities of states must…

add up to 1

weights are…

a portfolio of assets and must add up to one

systematic changes

market wide surprises

unsystematic changes

firm specific surprises

anticipated components

predicted or expected

surprise components

unpredictable or unexpected

standard deviation measures

total risk

beta measures

market wide risks

WACC reflects

the average risk of the existing projects taken on by the firm