Financial Management

Question 1

Levered Beta

Answer 1

measures the risk of a firm with debt and equity in its capital structure to the volatility of the market

Question 2

Unlevered beta

Answer 2

asset beta
measures the market risk of the company without the impact of debt

Question 3

Definition of Decision

Answer 3

consciously or unconsciously
between alternatives of action to realize objective

Question 4

Situation of Certainty

Answer 4

seldom, perfect level of information
every enviro, nmental condition probability of occurrence of 1 or 0

Question 5

Situation of Risk

Answer 5

imperfect level of information
total of all probabilities of occurrence is 1

Question 6

Situation of (Complete) Uncertainty

Answer 6

a certain environmental condition cannot be assigned any
probability of occurrence, but it will occur

Question 7

risk averse decision maker

Answer 7

choose the one alternative expecting the smallest danger of sustaining a loss

Question 8

willing to take risk decision maker

Answer 8

highest possibility of gaining a profit

Question 9

risk neutral decision maker

Answer 9

choose the best alternative on average (loss, profit)

Question 10

Bayes-Rule

Answer 10

calculate Expected Value
E(p) = eij * pj
and sum up, choose highest

Question 11

Maximin-Rule

Answer 11

choose the maximum of the minima of each row

Question 12

Maximax-Rule

Answer 12

choose the maximum of the maxima of each row

Question 13

Hurwicz-Rule

Answer 13

compromise between Maximin and Maximax
λ = Optimism-Parameter
λ > 0.5 willing risk
λ < 0.5 risk averse

best result (row maxima) is multiplied by λ, the worst (row minimum) by 1-λ

Question 14

Laplace-Rule

Answer 14

Assumption: All environmental situations same probability of occurrence
mean over eij, choose highest

Question 15

Savage-Niehans-Rule / Minimum-Regret-Rule

Answer 15

minimize his forgone benefit resuling from not choosing best
regret measure: difference best and the alternative (column wise)
choose the alternative with smallest maximum regret measure (row wise)

Question 16

Preinvestment Analysis

Answer 16

assistance on deciding on a certain investment opportunity
means of different calculation methods

Question 17

Preinvestment Analysis - Static Techniques

Answer 17

do not take into account the chronology of the payments

Question 18

Preinvestment Analysis- Dynamic Techniques

Answer 18

take into account the chronology of the payments (inpayments and
payouts)

Question 19

Net Present Value (NPV)

Answer 19

value of the cash flows discounted to the beginning of the planning period
positive NPV indicates investment expected generate profit
overall performance of investment

NPV = (Cash Flow / (1 + r)^n) - Initial Investment
r…discount rate

Question 20

Future Value (FV):

Answer 20

value of the cash flows compounded (accumulated) to the end of the planning period
expected value of an investment at a future point in time

FV = PV x (1 + r)^n

Question 21

Discount Rate

Answer 21

required rate of return of the investor
best possible alternative rate of return (opportunity cost)
higher discount rate -> higher level of risk investment

Question 22

Perfect Capital Market:

Answer 22

no distinction between equity and debt
no limits in availability of capital
perfect market information
uniform capital interest -> interest of debt equals interest earned

Question 23

Annuity Method

Answer 23

periodical performance of the investment opportunity
NPV0 * i/(1-(1+i)^-n)
i … interest rate

Question 24

Internal Rate of Return Method

Answer 24

relative performance (internal rate of return) of the investment opportunity
solving for the discount rate (r) that makes NPV=0
NPV = (Cash Flow / (1 + r)^n) - Initial Investment

if IRR is greater than required rate of return -> investment profitable

Question 25

Asset Future Value

Answer 25

increase in financial assets effectuated by an investment
assumes two different rates of return/interst rates
1 interest rate on debt, paid for raising capital: s
2 interest rate earned from investment of capital: h

FV with both (negative payment surpluses for s, positive for h)

collective account

Question 26

Interest on Debt Method

Answer 26

interest of debt resulting in Asset Future Value of zero
Assumes the existence of two interest rates

Question 27

Leasing

Answer 27

allocation of assets at ex ante determined leasing rates
is a special type of debt financing
Direct Leasing: Lessee pays Lessor a periodical leasing fee
Indirect Leasing: lessor purchases the lease object at the request of lessor, leases it for periodic leasing fee

Question 28

Operate Leasing Contracts

Answer 28

both parties can withdraw at any time
no minimum lease term
insured/risk by lessor

Question 29

Finance Leasing Contracts:

Answer 29

fixed minimum lease term
no possibility to withdraw
risk/insured by lessee

Question 30

Weighted Average Cost of Capital (WACC)

Answer 30

weighted average cost of equity capital and debt capital

WACC = Re * E/V + Rd * (1 - Tc) * D/V

E = Market value of the firm’s equity
D = Market value of the firm’s debt
V = Total market value of the firm (D+E)
Re = Cost of equity
Rd = Cost of debt
Tc = Corporate tax rate

Question 31

Risks concerning the investment in a company

Answer 31

strategic
operating
financial
cross-functional

Question 32

segregation of beta

Answer 32

operating beta
fincancial beta

Question 33

beta

Answer 33

measure of systematic risk of a security

high beta -> higher risk to investor
beta of market portfolio = 1