Farah Notes Flashcards
With regards to risk, what is Beta?
The Sensitivity of a stock’s expected returns to systematic risk.
The expected percent change in the return of a security for a 1% change in the return of the market portfolio.
What is the equation for Beta?
= covariance / variance
What is the equation for CAPM
ri = rf + Bi(rm -rf) ri = expected return on i rf = risk-free rate r, = expected market return Bi = Beta of i
What is covariance
Covariance indicates the relationship of two variables whenever one variable changes. If an increase in one variable results in an increase in the other variable, both variables are said to have a positive covariance.
What does Equity Beta measure?
Equity Beta measures the volatility of the stock to the market, i.e., how sensitive is the stock price to a change in the overall market.
What is Equity Beta also referred to as?
Levered beta
(The beta of a firm with financial leverage)
Future value formula
FV = PV x (1+r)^n
Present value formula
FV/(1+r)^n
NPV formula
NPV = -PV of cost + FV/(1+r)^n
Perpetuity formula
PV (C in perpetuity) = C/r
Perpetuity growth formula
C/(r-g)
Annuity formula (of C for N period with discount rate r)
Growing annuity formula
What is the IRR?
The IRR is the discount rate that sets the net present value of cash flows of an investment to zero.
Equation for stock returns (3 years)
Formula for dividend with constant growth
Zero coupon bonds formula
Payback period equation
PP = Cost of a project / annual cash flows
Growth formula
g = retention ratio x return on new investment
Yield to maturity of a one year, zero-coupon bond
Bond price formula
YTM of a bond that pays coupons
Free Cash Flow
FCF = EBIT - Taxes + Depreciation - CapEx - ∆NWC
NWC
Inventory + Cash Requirements + Receivables - Payables
Interest tax shield
Interest tax shield = interest payment x tax rate
WACC
CAPM
re = rf + B(rm - rf)
Beta (equity/debt)
Beta
covariance/variance
Standard deviation
sq root of variance
Asset Beta
ROE
Return on investment
Return on assets
