Exam 3 Flashcards
Risk and return of small caps
super risky and higher return
What do you want with risk?
Highest return for a given level of risk and lowest rish for given level of return
Sharpe’s and Treynor’s Ratio
Standard Dev, Beta on bottom
The two categories of risk
Diversifiable, firm specific, un/nonsystematic, idiosyncratic
Market risk, nondiversifiable, systematic, beta risk
Hedging
control/mitigate risk
Fisher effect and Nominal return
fisher effect is the real and nominal is an estimate
Capital Market Line?
Compute capital gains return (no dividends) on using linear regression to calculate beta compared to market
Security Market Line on the Capital Asset Pricing Model
slope is market risk premium (look up!!)
Build up method (4) for small firms, no stock rtns, under-diversified, and investor
Bond Yield
+Equity Risk Premium
+Micro-Cap Risk Premium
+Start-up Risk Premium
Optimal Capital Structure WACC/Firm Value 2 U’s
know what the graph looks like
M&M
In a perfect world, debt vs equity wouldn’t matter.
When are the floating costs?
When they’re sold into the primary market
What equity do you float on?
Only with external equity
What are the three rating tools for project evaluation methods?
TVM, RRR Dec Rule, All CF
7 things to include in a financial report?
Payback/disc paryback, NPV, PI, IRR< MIRR, AARR
Problems with IRR
- reinvestment assumption
- additivity problem (not apples to apples)
- changing signs
- order of cash flows (biased for little to big)
- Project size to => IO (biased towards smaller projects)
(if not same amoutn of years) Replacement cost repeatable method
common multiple changing project (just remmber to include IO again)
(if not same amoutn of years) Equivelant Annual Annuity
Calculate PMT each year with FV=0
