FIN 320 Final

Beta

If there is new and unanticipated information that causes the value of average stock to increase by 1%, than the price of asset J is expected to increase by the amount of Beta

Market Risk Portfolio

The premium we should require per unit of beta [E(Rm)-Rf]

Shorting stock

Thinking the stock is overpriced and expecting it to go down, we borrow the stock and sell it. If the stock declines, you then buy it back and return the stock… pocketing the difference as profit.

Why do we use the tax rate into account for bonds?

For every $1 it will save 0.30 more in taxes because interest is a tax deductible item

WACC

Weighted Average Cost of Capital- how much its costing the company to finance its assets

NPV

Net Present Value = PV of inflows - PV of Outflows
Whether a particular project is under or overpriced (+) = Under (-) = Over

IRR

Internal Rate of Return= Return we would get
Assumes that cash inflows will be reinvested at the IRR rate of return for a project over its lifespan.

If there is a conflict between the IRR and the NPV, which one do you go off?

NPV because it assumes that cash inflows will be reinvested at the WACC rate of return, which is more realistic.

Covariance

Pattern: %²

(-) = if one investment under performs, the other investment overperforms.

(+) = both investment underperform and overperform at the same time.

Variance

%² > 0
Risk

What does increasing the number of assets do?

As n increases, the covariance terms increases at a faster rate than the variance terms. Since covariance can be negative, the sum of all terms will go down.

Why do we calculate Non diversifiable risk

So that we can calculate how much uncertainty/risk we take from the asset. Diversifiable risk is irrelevant because we can remove it by increasing the number of assets.

Profit Index

(PV of inflows/PV of outflows)
NPV + PV pf outflow = Inflows
For every dollar of cost incurred you would get $PI return on investment.

What are the topics we covered

Time value of money, financial statement, bonds, stocks, risk, CAPN, WACC, Capital Budgeting, and Business