B1 Deck 2 Flashcards
interest rate risk
risk of changes in value of the financial instrument in response to changes in interest rate (as value if IR increases the value of the fixed asset decreases)
Market / Systematic / nondiversification risk
fluctuations in value as a result of operating within an economy. It is the risk inherent in operating within the economy
unsystematic / firm-specific/ diversifiable risk
the portion of a firn’s risk that is associated with random causes and can be eliminated through diversificaiton
credit risk
a company’s inability to secure financing or favorable credit terms as a result of poor credit ratings
default risk
risk that a debtor will not repay principle or interest due
liquidity risk
when u desire to sell security but can’t or material price concessions have to be made to do so
price risk
exposure that investors have to a decline in the value of their individual securities or portfolios (correlated ti diversifiable risk)
transaction exposure
the potential that an organization could suffer economic loss / gain upon settlement of individual transactions as a result of changes in the exchange rates
economic exposure
the PV of org cash flows could increase ore decrease as a result of a changes in the exchange rates
translation exposure
risk that assets, liability, equity, or income of a consolidated org that includes foreign subs. will change as a result of a changes in exchange rates
weighted average cost of capital
the avg cost of all forms of financing used by a company. It often represents the companies hurdle rate and the lower the better
WACC formula
Cost of debt after tax: i x (1-t) times the allocation + cost of equity
weighted avg intereest rate formula
effective annual interest payment / debt outstanding
cost of preferred stock
preferred stock dividends (at par) / net proceeds of preferred stock
CAPM cost of RE formula
= risk free rate + [beta x (market return - risk free rate)]
