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introduction to finance final Flashcards

1
Q

Is the IRR insensitive or sensitive to the scale of the project?

A

insensitive

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2
Q

Is the profitability index insensitive or sensitive to the scale of the project?

A

insensitive

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3
Q

What does a stock’s beta measure?

A

the systematic risk of the stock

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4
Q

What does it mean when a stock has a positive beta? Negative beta? What does it mean when beta is greater than 1? When beta is less than 1?

A
  • positive: same direction as market
  • negative: opposite direction of market
  • stock’s price is more volatile (large and frequent fluctuations in price) than the market
  • stock’s price is less volatile (large and frequent fluctuations in price) than the market
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5
Q

What is an arbitrage opportunity?

A

situation in which it is possible to make a profit without taking any risk or making any investment

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6
Q

If you are given a lump sum of money today or an annual amount at the end of each of the next ten years, what should you do?

A
  • take lump sum if you expect interest rates to rise in the future
  • take the annuity if you expect interest rates to fall in the near future
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7
Q

Which bonds are more sensitive to changes in interest rates?

A
  • bonds with long maturities
  • bonds with lower coupon payments
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8
Q

Which bonds have a higher yield to maturity?

A

bonds with higher probability of default

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9
Q

What are shareholders to corporations?

A

residual claimants (receive remaining profits/assets only after all other obligations are met)

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10
Q

The rate at which the stock price is expected to appreciate (or depreciate) is the…

A

capital gains yield

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11
Q

The declaration of dividend is at the discretion of…

A

the board of directors

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12
Q

When does a project create value?

A

when NPV is bigger than 0

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13
Q

What is the formula for debt?

A

debt = firm value - equity

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14
Q

What is the formula for NWC?

A

NWC = cash + inventory + receivables - payables

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15
Q

What is a portfolio’s beta?

A

the weighted average of the individual betas

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16
Q

What is a call option? How does it look like on a graph? How does a short position in a call option look like?

A

buy at a fixed price

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17
Q

What is a put option? How does it look like on a graph? How does a short position in a put option look like?

A

sell at a fixed price

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18
Q

In a call option, if stock price (ST) is bigger than strike/exercise price (K), how do you calculate the value of a European call option (CT)? What happens if stock price (ST) is smaller than or equal to strike/exercise price (K)?

A
  • stock price (ST) - strike price (K)
  • value of European call option (CT) is 0
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19
Q

In a put option, if stock price (ST) is smaller than strike/exercise price (K), how do you calculate the value of a European put option (PT)? What happens if stock price (ST) is bigger than or equal to strike/exercise price (K)?

A
  • strike price (K) - stock price (ST)
  • value of European put option (PT) is 0
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20
Q

Stock price is equal to…

A

debt’s face value

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21
Q

Forward P/E ratio is equal to…

A

equity/net income

22
Q

What is the formula for NPV of a machine?

A

NPV machine = PV initial + PV replacement (or maintenance)

23
Q

What is the formula for principal payment?

A

principal payment = total payment (cash flow C) - interest payment

24
Q

Capital gains yield equals…

A

dividend growth rate

25
In an options graph, what does it mean to buy? What does it mean to sell?
- buy means above 0 - sell means short and below 0
26
What type of risks matter to a diversified investor?
non-diversifiable risk (market risk, systematic risk, etc.)
27
What does diversification do?
reduces firm-specific risk (does not reduce market or systematic risk)
28
In an efficient market, is investing in an individual stock a positive, zero, or negative NPV investment?
zero
29
In an efficient market, is investing in the market portfolio a positive, zero, or negative NPV investment?
zero
30
What does a lower discount rate mean for coupon payments?
coupon payments are more valuable
31
When interest rates rise, what happens to the price of bonds?
fall
32
What happens to prices today when there are bonds with large coupon payments?
prices are higher
33
A coupon can be thought of as...
an interest payment
34
What do bond ratings measure?
the likelihood of a company/government of paying you back (better to have high rating)
35
What is the law of one price?
similar assets should trade for the same price
36
What happens to the price of premium bonds over time? Discount bonds?
- premium: prices go down - discount: prices go up
37
What are high-yield bonds?
- risky - high default risk
38
If the coupon rate of a bond is larger than its YTM, the bond should sell at...
premium
39
Do debt-holders have voting rights?
no, they do not own corporations
40
Do equity-holders have voting rights?
yes, they own corporations
41
What are some differences between common shareholders and preferred shareholders?
COMMON SHAREHOLDERS - have voting rights - get paid last PREFERRED SHAREHOLDERS - no voting rights - paid before common shareholders
42
What are zero coupon bonds? Do they sell at a premium or at a discount?
- bonds that do not pay periodic interest - since there are no coupon payments (interest payments), they are sold at a discount
43
What does it mean to sell at a premium? To sell at a discount?
DISCOUNT - bond is sold less than its face value - coupon rate/interest is lower than the current market's interest rate PREMIUM - bond is sold for more than its face value - coupon rate/interest is higher than the current market's interest rate
44
Are dividends paid tax-deductible?
no, dividends are paid from after-tax profits
45
In competitive markets, is it possible for assets with the same cash flow to have different prices?
no
46
What are the two formulas for capital gains yield?
- capital gains yield = re - dividend yield - capital gains yield = (P1-PO)/PO
47
What is a balloon payment?
a large lump sum at the end
48
What are 2 other ways to calculate FCF that is not on the formula sheet?
- FCF = (revenues - costs)(1-TC) + TC (depreciation) - CAPX - change NWC - FCF = net income + (1-TC) x interest paid + depreciation - CAPX - change NWC
49
In the expected return formula, what is (E(Rmkt) - rf)?
market risk premium
50
What is the formula for terminal value?
TV = (FCF (1+g)) / (WACC - g)
51
What is the formula for # of shares?
shares = (CU - CD) / (SU - SD)
52
The PV (Growing Perpetuity) formula can also be used for...
current stock price Div1 / (r-g) where Div1 is the value of the next year's dividend

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