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Year 2 > Finance > Flashcards

Finance Flashcards

1
Q

What is the time value of money

A

The idea that money is more valuable today than in the future, since it can be invested to earn interest r

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2
Q

Give the equation for rates of return

A
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3
Q

What is the compound interest calculation

A

CT = C0(1 + r)T

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4
Q

Whats the holding period return

A

the overall return for the full period

r = (1 + rt)1/t - 1 where rt is the interest rate per period

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5
Q

What’s present value

A

the value of all future cash flows

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6
Q

What is the discount factor

A

1 / (1 + r)

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7
Q

Whats a zero coupon bond

A

A bond that costs CF0 today and promises to make CFT = (1+r)CF0 in the future

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8
Q

What’s Net Present Value

A

the present value of all its future cash flows minus the present value of it’s costs

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9
Q

What is the Capital budgeting rule for Present value?

A

Take all with NPV > 0

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10
Q

What’s a perpetuity?

A

A bond that pays C pounds, per period, forever.

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11
Q

What’s the equation for a growing perpetuity

A
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12
Q

State the three equations associated with the Gordon Growth model

A
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13
Q

What’s an annuity

A

an instrument that pays CF for T years

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14
Q

Whats the equation for a growing annuity

A
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15
Q

What’s the internal rate of return

A

the value of the discount rate r which sets the NPV = 0

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16
Q

does the IRR reflect cost of capital?

A

NO

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17
Q

What’s the capital budgeting rule for IRR

A

Accept the project if it’s IRR is higher than a ‘hurdle rate’

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18
Q

Give 2 advantages and 2 disadvantages for using IRR

A
  • allows for a margin of error
  • doesnt include cost of capital
  • some projects have no IRR, others have multiple
  • can’t handle different interest rates for different periods
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19
Q

Give the steps for incremental cash flow analysis

A

i) order alternatives in increasing order of the initial investment
ii) if the smallest investment has IRR > hurdle rate we consider the incremental cash flow
iii) if the IRRincremental > hurdle then accept the more expensive investment

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20
Q

Whats Profitability index and give the capital budgeting rule

A

The PV of the future cash flows, divided by the cost.

Invest if PI > 1, reject if PI < 1

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21
Q

Whats the payback rule

A

Choose the project with the shortest payback time, or projects that payback sooner than some cut off

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22
Q

What’s the Yield to maturity

A

the discount rate that sets the NPV of the bond equal to 0

P0 = FV / (1 + YTM)n

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23
Q

Whats expected value and variance?

A
24
Q

what utility functions fit

i) risk averse
ii) risk neutral
iii) risk seeking

A

i) U(w) = w1/2
ii) U(w) = w
iii) U(w) = w2

25
Q

What is expected interest rates and promised interest rates equal to

A

Expected interest rates = Time premium

Promised interest rates = Time premium + default premium

26
Q

What are equity holders repaid?

A

whatever profits remain after bond holders are paid off

27
Q

Whats covariance?

A
28
Q

Whats correlation?

A
29
Q

What is the expected return on a market portfolio consisting of X and Y

A
30
Q

What’s the variance of the market portfolio

A
31
Q

What are diversification benefits

A

come from mixing together assets with less than perfect co-movement, makes the portfolio less volatile

32
Q

What shocks are eliminated by diversification

A

firm specific shocks

33
Q

What is the market portfolio

A

Tangency portfolio, the portfolio that provides the highest return per unit of risk

34
Q

Whats the association between project P and the market portfolio M

A
35
Q

What is CAPM?

A

Capital Asset Pricing Model

36
Q

State the CAPM

A
37
Q

How do we calculate NPV when using CAPM

A

numerator uses expected cash flows, cost of capital is expected return, derived from CAPM

38
Q

For risk averse investors, what are promised returns and expected returns

A

promised returns = time premium + default premium + risk premium

expected return = time premium + expected risk premium

39
Q

When a firm has equity, what is the betaproject

A
40
Q

in a stock market, what do we buy and sell at

A

buy at ask price, sell at bid price

41
Q

Whats the average tax rate

A

total tax paid / total taxable income

42
Q

what is rafter tax

A

(1 - marginal tax rate) rbefore tax

43
Q

What is the nominal and real cash flow

A

nominal cash flow is simply the number of pounds you pay

real cash flow is adjusted for inflation

44
Q

whats the relationship between real r and nominal R interest rates

A

1 + r = 1 + R / 1 + inflation

45
Q

What does the Modiglani Miller irrelevance theorem state?

A

in perfect markets the firm value is equal to PV, regardledd of how its projects are financed

46
Q

Does MM hold in imperfect markets?

A

No

47
Q

Give the equation for APV, adjusted present value

A
48
Q

What is the debt to capital ratio

A

Debt / APV

49
Q

What is pricecum-dividend

priceex

A

The price before the expiration date, Pcum = current dividend + PV(future dividend)

Pex = PV(future dividend)

50
Q

In imperfect markets, do investors prefer repurchases or dividends?

A

repurchases, since dividends typically are charged at a higher tax rate

51
Q

What is a call option?

A

a contract that gives its owner the right to buy the asset at some future date at some specificed price

52
Q

What is a put option?

A

a contract that gives its owner the right the sell the asset at some future date at some specified price

53
Q

whats the strike price?

A

the pre-specified price at which the owner can buy or sell the asset

54
Q

When should we buy

A

When S(stock price) > K(strike price)

Pricecall = max(S-K, 0)

55
Q

When should we sell?

A

When S < K

Pput = max ( K-S , 0)

56
Q

What does the law of one price state?

A

S + P = PV(K) + C

known as put-call parity

57
Q
A

Year 2 (15 decks)

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