Final Exam

Question 1

4 useful things about EVA?

Answer 1

• 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

Question 2

If EVA is positive, what does that mean regarding the ROE?

Answer 2

ROE (return on equity) is greater than the Cost of Capital

Question 3

Formula for EVA?

Answer 3

EBIT(1-T) - (Total Capital - AIP and Accruals) * (after-tax cost of Capital or WACC)

Question 4

Which one is Cumulative, MVA or EVA?

Answer 4

MVA

Question 5

Formula for MVA?

Answer 5

(# o/s shares) * (stock price) - Total Common Equity

Question 6

Formula for:

Operating Working Capital

Net Operating Capital

Total Operating Capital

Answer 6

Operating Working Capital (OWC)
CA

Net Operating Working Capital (NOWC)
CA - (AIP + Accurals)

Total Operating Capital
NOWC + FA
(CA - (AIP + Accurals)) + FA

Question 7

What happens to the U.S. value/Purchasing power when the Money Supply increases and decreases?

Answer 7

Money Supply Decreases
-U.S. dollar value Increases

Money Supply Increases
-U.S. dollar value Decreases

Question 8

Market Expectations Theory

Answer 8

Says interest rates will remain the same from year to year, and the only difference is caused by inflation

*means MRP = 0

Question 9

What is the relationship of interest rates to bond prices?

Answer 9

Interest Rate increases, Bond Price decreases

Interest Rate decreases, Bond Price increases

Question 10

What is the relationship of interest rates to discount rates?

Answer 10

Discount Rate increases, Interest Rate increases

Discount Rate decreases, Interest Rate decreases

Question 11

What is the relationship of Demand of Money and interest rates?

Answer 11

Demand of Money increases, Interest Rates increase

Demand of Money decreases, Interest Rates decrease

Question 12

Difference between Money Markets and Capital Markets?

Answer 12

Money Markets
-short-term highly liquid debt securities

Capital Markets

• long-term debt securities
• bonds, notes, etc.

Question 13

What is the largest Capital Market?

Answer 13

New York Stock Exchange

Question 14

Which trades more volume of stock per day? Which trades more dollar-value of stock per day?

NASDAQ or New York Stock Exchange

Answer 14

NASDAQ
-trades more volume of shares

New York Stock Exchange
-trades more dollar-value per day

Question 15

Are capital gains taxed?

Answer 15

If they are long-term capital gains

held for 1 year or longer

Question 16

What is the formula for Total Yield?

Answer 16

DY + CGY

DY
D1/P0

CGY
(P1-P0) / P0

Question 17

What is another way to say “KRF is 3.5%”

Answer 17

Short-term Treasure securities are 3.5%

Question 18

Who cares about beta and Co-efficient of Variation? Non-diversified investors or Diversified Investors?

Answer 18

Non-Diversified Investors
-care about Coefficient of Variation
(σ / Expected Rate of Return or “K Hat”)

Diversified Investors
-care about Beta

Question 19

2 stock exchanges that have a physical location?

Answer 19

New York Stock Exchange (NYSE)

American Stock Exchange (AMEX)

Question 20

NASDAQ

Answer 20

National Association of Securities Dealers Automated Quotation

• is a network of computers
• has no physical location

Question 21

When did the American Stock Exchange (AMEX) and the NASDAQ merge and split?

Answer 21

Merged in 1988

Split in 2005

Question 22

Black Knight

Answer 22

• buys majority of IPO
• when company is just first putting stock out
• tries to gain control of company

Question 23

White Knight

Answer 23

• company that buys another company

- buys company to save company from being bought from third-party

Question 24

If inflation increases, what will this do to the interest rate?

Answer 24

Interest Rate will increase

Question 25

AMEX merged with ___ in 2008. However, they did not integrate until into ___ until ___

Answer 25

Merged with Euronext in 2008

Integrated into NYSE in 2009

Question 26

What year was the NASDAQ created?

Answer 26

1971

Question 27

Efficient Markets Hypothesis

Answer 27

• stocks are always in equilibrium

- it’s impossible for investor to consistently beat the market