Exam 2(ch 10,14,15,16,17,19,23) Flashcards
5 methods for firm valuation
dividend discount model
free cash flow to the firm
free cash flow to equity
adjusted present value
residual income
main advantage of forecasting inflation for NPV
Consistency in the calculation for cashflows and the discount rate
what makes the discount rate increase
to calculate the inflation and real cost of capital are compounded an increase in these will cause the discount rate to increase
operating cash flow calculation
sales
- variable costs
= gross margin
- fixed costs
= operating profit
- taxes
= net profit
+ depreciation
= operating cash flow
four main differences in with investments cash flows and without investment cashflows
- increase in annual depreciation with the investment
- decrease in annual labor costs with the investment
- the salvage value
- the initial investment in year zero with the investment
why is project npv not very sensitive to with investment labor costs
labor costs are much lower
which two points identify break even unit sales
when revenue crosses total cost
when account profit goes from negative to positive
relationship between npv and year 1 and year 2 unit sales
direct, selling more increases cash flow increasing present value
is npv more sensitive to year 1 sales or year 2
year 2 because the growth rate is compounded
six steps used to forecast financial statements
analyze historical financial statements and look for close to constant percentages of sales
forecast sales
apply avg historical percentage to income statement and balance sheet items
forecast other key items
make balance sheet balance
raise or lower the portion of equity relative to debt
list major balance sheet items that are not nearly consistent percentages of sales
COGS
DEPRECIATION
RECIEVABLES
INVENTORY
PPE
SHARES OUTSTANDING
PAYABLES
SHORT TERM INVESTMENTS
Relationship between external funds needed and sales growth
positive linear relationship because most items are percentages of sales
are contributions, gains and distributions taxed or not
401k: contributions taxed, gains not, distributions taxed
ROTH 401k: contributions taxed, gains tax free, distributions not subject to tax
which age demographic will generate more income for ROTH IRA
Young due to current lower rates
real human capital
find the NPV of the salary using 1% as the discount rate
real financial capital
compound year zeros real financial capital at 1% real risk free rate adding year 1 real savings
real total wealth
obtained by summing year 1 real human capital and real financial capital
advantages and disadvantages of bsm over bm
advantage: efficient and simple calculation
disadvantage: limited applicability to a narrow range of derivatives
why is call price with continuous dividend lower than that without
since stock price decreases when dividend is paid, decreasing profitability
what happens to call price when exercise price is decreasing
increases call price because it enhances the liklihood of the stock price exceeding the call price
what happens to call price when risk free rate is decreasing
decreases call price because present value of the exercise price increases
what happens to call option price when time to maturity decreases
call price will decrease due to decreased profitability and an increased of the exercise price
Fully describe what the Chart in Fig. 23.8 indicates about the patterns of implied volatilities of calls and puts, compared to the volatility assumption of the Black-Scholes
model.
Puts tend to exhibit lower implied volatility compared to calls, in
contrast to the volatility assumption of the Black-Scholes model, which assumes constant volatility.
