Currency Decisions Flashcards
Payable
Buy Currency
Receivable
Sell Currency
Payable and it asks what to do in the forward market
Foreign Currency is trading at 28 today and 29 future
It’s a receivable = Sell 28 x
A company headquartered in Vancouver, British Columbia, is building a pipeline in Russia. The invoice amount is due in 90 days and is denominated at 28 million rubles. The Canadian dollar is trading for 28 rubles currently and 29 rubles 90 days forward. Which of the following strategies will the Canadian firm mo
I took this to mean that they were having a pipeline built and that it was a payable. It doesn’t say “building a pipeline for another company.” But it’s a receivable. and so must sell foreign currency. Ignore the prices on the spot and future currency. But it doesn’t say “is having a pipeline built.” It says “building a pipeline.”
Beta is what
Sensitivity of Stock to Overall Price Movements in the market, how volatile is the stock relative to the volatility of the overall market
Market Risk - Is it Systematic? Is It Diversifiable
Market risk (volatility) is systematic Market risk (volatility) is not diversifiable
Is Market Risk Systematic
Yes
Is Market Risk Diversifiable
No
Is Beta Systematic?
Yes because beta is a measure of market volatility risk
What’s a Beta of 1 mean versus a Beta of 1.4
A stock with a beta of 1 is as volatile (i.e. has the same systematic risk as the overall market). A stock with a Beta of 1.4 has a “Systematic risk is higher than that of the market portfolio.”
Systematic Volatility Risk is also called what
Market Risk
Undiversifiable Risk is also called what
Market Risk
Does Market Risk = Total Risk
No only the systematic risk
Total Risk =
Market Risk + Unsystematic Risk
CAPM Required Rate of Return Equals What
Risk Free Rate
+ Beta (Market - Risk Free Rate)
= CAPM Required Rate of Return
should make investments with return over this minimum rate
Market Risk Premium
Amount above the risk free rate that will induce investment. Basically if u are getting the same expected return in terms of $$$, but the required rate on the risky investment is higher, the price of risk basically.
HAS NOTHING TO DO WITH BETA!!!!
“What is the risk premium on the market?”
It’s just looking for the Expected Return on the Market Portfolio - Risk Free Rate
Nothing to do with beta
Another question spoke in terms of securities asking for “the difference between the required rate of return on risky versus a risk less investment” with the same “expected return”. here the difference was the “risk premium” and not the beta. I give up, it’s a bad question, the only way it works is if the same “expected return” is the dollar amount of interest earned and not the “expected rate of return”, because then it would be a function of the beta (not the beta itself).
R is the
R squared is the
R is the Coeeficient of Correlation -1 to 1
R Squared is the Coeeficient of Determination -
COST OF COMMON EQUITY
Think dividend percentage of stock issue price now + what every the rate is expected to grow bye.
TTBO75 or 90
title transfer bargain purchase
75% of useful life
90% of purchase price
If you are calculating the effective rate of the cost of debt do you use the coupon rate or the effective rate
The effective rate
When you are computing the cost of debt on preferred stock do you use the issue price or the current price?
You use the current price NOT the issue price.
So it’s effective rate for the debt (not the par stated) and market price for the preferred.
What is a spontaneous source of financing Accounts Receivable Mortgage Bonds Debentures Accounts Payable
The payables because you are choosing not to pay for stuff. The rest require hoop jumping.
Dividend Payout Ratio
Declared Dividends/Net Income - Preferred Dividends
Measures how much of income is paying out to Shareholders, you want to know if you want a good dividend
What type of depreciation is relevant to capital budgeting (think cash flow)
Only tax depreciation is relevant, not book depreciation. Two sets of books. One for tax return and one for published financials.
Accounting Rate of Return says Accounting Income/Investment
Does accounting income include the impact of depreciation?
Does the savings take into account the tax shield in the accounting method?
How about salvage value?
Yes the accounting income includes the effect of depreciation.
And watch out that you don’t see “After tax” costs and think that’s equivalent to the depreciation being figured in. Saving $20,000 in “after tax cash costs” means that ur income will be $20,000 higher and that will be subject to tax except the depreciation on the new machine will save you (shield) part of the savings from taxation. Salvage is irrelevant.
So if you save $20,000 a year on a $100,000 machine and now have an extra $10,000 depreciation expense you net increase in accounting income is $10,000. In the question I’m looking at they don’t mention tax rates. But anyway to figure the return it’s $10,000/$100,000 or 10%.
Does the net present value depreciation shield get the present value factor applied to it.
Yes. You calculate the after tax inflow per year and apply. the present value factor to it.
Then calculate the depreciation shield (tax rate X the depreciation) and apply the present value factor to that. Add the two together and you get the After Tax Present Value.
What do you do to the operating net cash inflows (if it doesn’t say after taxes) on a present value calculation for the project.
You find the tax rate and multiply them by (1 - the tax rate) to get what the net after tax inflow is. Then you calculate the cash inflow from the depreciation shield (the annual depreciation X the tax rate) and apply the PV factor to that. Then you add the two together to get the After tax NPV.
Present Value Backward Problems
They give you the residual value, the cost, the PV factors and ask what it has to generate in yearly savings to earn that yield.
You need to:
1. PV the salvage and net it out of the cost in current dollars.
- Divide that cost by the PV factor for the ordinary annuity.
Really are just calculating where the PV equals 0.
Present Value Problems
Pay attention to cash - “cash operating expenses” means without depreciation, you can net these out of the cash income and then apply the tax rate.
Pay attention to Depreciation for both “financial and tax purposes”
Net Present Value Means Net
Don’t jump and look for the answer after u calculate the PV, remember to net out the cost
NPV and Depreciation
I guess if the question says “after tax inflows” you don’t worry about the depreciation??? in a NPV question.
