Final Exam Flashcards
4 useful things about EVA?
- can be used for divisions of company as well as for entire company
- used to determine managerial compensation
- EVA strongly correlated with firms stock price
- good measure of addition to shareholder value
If EVA is positive, what does that mean regarding the ROE?
ROE (return on equity) is greater than the Cost of Capital
Formula for EVA?
EBIT(1-T) - (Total Capital - AIP and Accruals) * (after-tax cost of Capital or WACC)
Which one is Cumulative, MVA or EVA?
MVA
Formula for MVA?
(# o/s shares) * (stock price) - Total Common Equity
Formula for:
Operating Working Capital
Net Operating Capital
Total Operating Capital
Operating Working Capital (OWC)
CA
Net Operating Working Capital (NOWC)
CA - (AIP + Accurals)
Total Operating Capital
NOWC + FA
(CA - (AIP + Accurals)) + FA
What happens to the U.S. value/Purchasing power when the Money Supply increases and decreases?
Money Supply Decreases
-U.S. dollar value Increases
Money Supply Increases
-U.S. dollar value Decreases
Market Expectations Theory
Says interest rates will remain the same from year to year, and the only difference is caused by inflation
*means MRP = 0
What is the relationship of interest rates to bond prices?
Interest Rate increases, Bond Price decreases
Interest Rate decreases, Bond Price increases
What is the relationship of interest rates to discount rates?
Discount Rate increases, Interest Rate increases
Discount Rate decreases, Interest Rate decreases
What is the relationship of Demand of Money and interest rates?
Demand of Money increases, Interest Rates increase
Demand of Money decreases, Interest Rates decrease
Difference between Money Markets and Capital Markets?
Money Markets
-short-term highly liquid debt securities
Capital Markets
- long-term debt securities
- bonds, notes, etc.
What is the largest Capital Market?
New York Stock Exchange
Which trades more volume of stock per day? Which trades more dollar-value of stock per day?
NASDAQ or New York Stock Exchange
NASDAQ
-trades more volume of shares
New York Stock Exchange
-trades more dollar-value per day
Are capital gains taxed?
If they are long-term capital gains
held for 1 year or longer
What is the formula for Total Yield?
DY + CGY
DY
D1/P0
CGY
(P1-P0) / P0
What is another way to say “KRF is 3.5%”
Short-term Treasure securities are 3.5%
Who cares about beta and Co-efficient of Variation? Non-diversified investors or Diversified Investors?
Non-Diversified Investors
-care about Coefficient of Variation
(σ / Expected Rate of Return or “K Hat”)
Diversified Investors
-care about Beta
2 stock exchanges that have a physical location?
New York Stock Exchange (NYSE)
American Stock Exchange (AMEX)
NASDAQ
National Association of Securities Dealers Automated Quotation
- is a network of computers
- has no physical location
When did the American Stock Exchange (AMEX) and the NASDAQ merge and split?
Merged in 1988
Split in 2005
Black Knight
- buys majority of IPO
- when company is just first putting stock out
- tries to gain control of company
White Knight
- company that buys another company
- buys company to save company from being bought from third-party
If inflation increases, what will this do to the interest rate?
Interest Rate will increase
