BFC2140

What is valuation principle?

• The benefits and cost of a decision should be evaluated

• the decision will increase market value when benefits exceeds costs

What is Franking credit?

The credit used by individual shareholder to reduce his/her own taxation liability

Define Agency problem

When managers, despite being hired as the agents of shareholders, put their own self-interest ahead.

What is limited partners?

• Have limited liability

• no management authority and cannot legally be involved in the management of the business

Define imputation system

• Overcome the double taxation of corporate profits

• allowing company to transfer a tax credit to the shareholder for the amount of the tax the company has paid

What is Arbitrage?

The practice of buying and selling equivalent goods in different markets to take advantage of a price difference

Law of one price

• Market tries to push towards equilibrium where cashflow must have the same price.

Define Perpetuity

• A stream of equal cash flows that occur at regular interval that lasts forever

• Arrives at the end of the first period (payment in arrears)

Define Annuity and the type of annuity

• A stream of equal cash flows that ends after some fixed number of payments.

 

Ordinary Annuity:

• Pays at the end of the period

 

Annuity due:

• Pay at the start of the period

What is a bond?

• A tradeable debt security, usually issued by a government or semi government body to raise money

• Received a fixed rate over a period of time

• Repaid with interest on predetermined maturity date

• The bond issuer = the bond is a debt (liability)

• The bond holder = a lender (investor) --> seek a steady stream of income --> an asset

What is a share trading when Coupon rate = discount rate?

the bond trade at par

What is a share trading when Coupon rate < discount rate?

price < par value the bond trade at discount

• which is not valuable to investors

What is a share trading when Coupon rate > discount rate?

par value The bond trade at a premium

 

What are the factors that would impact the bond price?

1. Interest rate changes

• Market interest rate increase =the YTM also increases

• Higher YTM = investors demand for a higher return for the bond

• Leads to higher discount rate =reducing present value and the bond's price

  2. Time affect

• Zigzag pattern

• Price slowly rising as coupon payment nears

• Drop after payment has been made

  3. Interest rate risk

• Unexpected changes in interest rate --> risk that arises for bond owners

• Greater time to maturity = greater interest rate risk

• Lower coupon rate = greater interest rate risk

What is share equity?

• Corporate create and issue shares to raise equity capital, and incur a cost of equity

• More difficult to value due to uncertainty of promised cash flow and have no maturity

• Part ownership in a company

What are the types of shares?

• ordinary shares

• preference shares

• partly paid shares

Define ordinary shares

• Carry no special or preferred rights

• The right to vote and participate in any dividends or an distribution of assets

Define preference shares

• Priority or preference over ordinary shareholders to payments of dividends

• Voting rights are restricted

• Many different types of preference shares

Define partly paid shares

• Issued without the company requiring payment of the full issue price

• The company is entitled to call for all or part of the outstanding issue price

• Shareholder is legally obliged to pay for the call

• Similar rights as ordinary shareholder

What is the difference between a public and private corporation?

Public corporation is listed on the ASX and their shares are traded on an exchange, while shares of private corporation are not traded on a public exchange.

What is the difference between primary and secondary market?

A primary market is where the company sells shares of itself to investors. The secondary market is where investors can buy and/or sell the company's shares with other investors.