finacne for finals

god placed me on earth to suffer

How to calculate variance

weighted average of squared deviations

calculating standard deviation

square root of variance

calculating deviations

difference between expected return and the mean

calculating expected return

weighted average of the possible outcomes

what is used as the weights for expected return

probabilities of the returns occuring

what does beta measure

the sensitivity of a stock compared to the market

what does a beta of 0.5 mean

the stock will move half as much as the market

what does a beta of 2 mean

a stock will change twice as much as the market

capm 

rf + B * risk premium

what does capm mean

capital asset pricing model

what is capital budgeting

identifying profitability of long time real assets

what is used as the rate of return when comparing projects of the same beta

opporuntiy cost of capital

what is the market risk premium

expected market return - risk free rate

formula for WACC

(D/V * (1-tc)r debt) + (E/V * r equity) + (P/V * r preferred)

MM propsition 1, no tax

Firm value is not effected by leverage

MM proposition 2, no tax

required Return to equity increases when debt increases, and the Wacc doesn’t change

Why does WACC stay the same when business restructures

no change in the business risk

MM proposition 1 with tax

Firms with more leverage are more valuable because debt creates a tax shield

Formula for the interest tax shield 

Debt * tax rate, (assume its a perpetuity, need to find the pv of perpetuity to give its value) 

MM propositon 2 with tax

required ROE increases with debt, some of the increase is offset by the tax shield, and WACC decreases with debt

Why does WACC fall under MM propoiston 2 with tax?

the intrest tax shielding provides extra returns, reflected in a lower opporutuntiy cost

why dont firms maximise debt even though MM propositions show that value rises and cost falls?

trade off between cost of finacial distress and benefit of tax shields, and firms prefer to use internal funding first

formula for after tax cost of debt

coupon rate * (1- tax rate)

required return on common equity formula, using DDM

re = ( div1 / p0 ) + g

required return on preferred stock, using ddm

r preferred = div1 / p0

which rates and weights are used for debt and equity when finding WACC

the market rates and weights

interest expense of debt is calculated using

the percentage of the debt, not the total expenses

what are the two options for a firm to payout to investors

paying dividends and stock repurchase

what effect does a divided have on the stock price

decreases it by the value of the dividend

why doesn’t stock repurchase change the stock price

it decreases both firm value (decreasing cash assets) and the shares outstanding (some are bought back)

what happens to the price of stocks when a stock split or stock dividend is issued?

the price falls, because the outstanding shares increase without the value of the share increasing.

what happens to investors wealth in a stock split?

stays unchanged, because they receive more shares, and the price of shares decreases.

how are dividends set using the residual distribution model

left over retained earnings after they are used to finance equity for a project

what rate does MIRR assume the cashflows are reinvested at

opportunity cost of capital, usally the intrest rate

finding MIRR

rate that makes the PV of the outflows and FV of inflows equal, within the number of periods

issue with finding irr in a project

multiple sign changes, means multiple correct irr

how is the pv set to find the mirr

negative, to represent the outflows of cash

how are assets with unequal lives treated

calculate the equivalent annual annuity,

formula for the equivalent annual annuity

pv of cash flows / annuity factor

3 elements involved in finding the cash flow

cash flow from capital investments, operating cash flows, and changes in working capital

formula of annuity factor

1/r - 1/r(1+r)^n

what is the annuity factor

the rates and time part of the annuity

taxable amount for selling machinery

market value - book value

with taxes, which payout policy is preferred for investors?

repurchases, because they only have to pay tax on the capital gain, rather than the dividend, and there is a choice in timing of the tax by choosing when to sell

what is used as the discount rate for a bond

the yield to maturity

what is the yield to maturity for a bond

total rate of return on the bond when it is held until maturity, and its coupons are reinvested

rate of return formula

(amount received - amount invested) / amount invested

firm specific risk

diversifble risk, due to events unique to the firm, avoidable by diversfying

market risk

non diversible risk, changes effecting the whole market, not avoidable by diversifying

what is the capital structure of a firm

the proportion of debt and equity used to finance the firm

how is the market value of debt found?

the current price of the bond, times the outstanding bonds

what are the two forms of risk

business risk and financial risk

what is financial risk

risk to shareholders from use of debt, variablity in EPS and ROE because of the debt 

what is business risk

variablity in the firms operating income

how does increasing debt change required roe

increases roe because there is more finacial risk 

what happens to the WACC when capital is restructed without changing the assets mix, ignoring tax?

stays the same

what do companies use as the discount rate for their projects?

the wacc, which is the opportunity cost of the project

how does the x for y terminology work for stock splits?

you get x amount of shares for every y amount you own

how many shares do you get per share in a 3 for 2 stock dividend

0.5 for 1 stock owned. 

what does the trade off theory say

take debt until the PV of marginal increase in tax shields = pv of the marginal increase of cost from financial distress

how much greater is the value of a levered frim to an unlevered, according to mm propsition 1 with tax

greater by the PV of the tax shield

when the coupon rate is given for a bond, what time scale is it using

yearly, the coupon rate amount is the total paid in a year

if coupons are paid semi anually and you have the coupon rate, what do you do to them to get the semi annual coupons

divide them by two, to give the amount paid semi annually

when is a stock overpriced

when its expected return is less than its CAPM

when is a stock underpriced

its expected price is above its capm

how to calculate the beta of a security

correlation coeffient between stock and market, times (sd of returns for stock / sd of returns for the market)

profitablity index

present value of cash flows (not net) divided by intially investment

when debt is incurred by a business, what expenses are also created?

interest, which have to be deducted from earnings

when does plowing back earnings increase stock price

when investors believe it will create increases in ROE in the future, otherwise it doens’t add to the stock price

when cash flows occur monthly what rate do you use

monthly rate, usally dividing your yearly by 12

accepting project using incremental irr

if the incremental irr is greater than discount rate

how is a no growth stock valued under ddm

valued as a perpetuity, providing the same dividend without growing

what is PVGO

intrinsic value - no growth rate

intrinsic value of a stock

the pv of its cashflows, usually its dividends and price