Financial Management

Question 1

Method 1: What is the formula for CAPM (Capital Asset Pricing Model)?

Answer 1

Cost of retained earnings = Risk-free rate + [Beta x (Market return - Risk-free rate)]

Question 2

How is the market rate of interest on a one year U.S. Treasury all calculated?

Answer 2

Risk free rate of interest + Inflation premium

Question 3

What is the formula for the dividend growth model?

Answer 3

Cost of retained earnings = [ D(1)/P(0) ] + g

Question 4

What is the equation for the beta coefficient?

Answer 4

% change in stock price/

% change in market price

Question 5

What is the formula for market capitalization?

Answer 5

Market capitalization is equal to:

The number of common shares outstanding x FV per share

Question 6

Method 2: What is the formula for the Discounted Cash Flow (DCF) Model?

Answer 6

[(Current dividend x [1 x g]) / Current stock price ] + g

Question 7

Method 3: What is the formula for the Bond Yield Plus Risk Premium (BYRP)

Answer 7

Pretax cost of long term debt + Market risk premium

Question 8

How is the payback method computed?

Answer 8

The payback method is the most simple of all investment evaluation methods. The formula is purely the initial investment divided by the annual cash flows.

Disregard anything regarding salvage value.