Lecture 4-12 September 2013

Question 1

How do you define risk in business decisions?

Answer 1

risk is the fluctuation of variance of returns that exists for that investment (whether it’s a business or security)

Question 2

What is one risk decision-making considertion for a business?

Answer 2

What the the addition of the risk in the new business will affect the portfolio.

Question 3

How might a firm raise its revenues?

Answer 3

1. Increase prices of product or service(cost remain the same) 2. size of the market grows

Question 4

What is the difference between nominal and real rates?

Answer 4

Nominal rates do not consider the effects of inflation.

Question 5

What is the equation for Gordon’s model?

Answer 5

V0=(EAT or whatever)(1+g) = EAT1/r-g

Question 6

What components must be considered for g?

Answer 6

the market share and costs for the firm?

Question 7

What is the equation for ROE?

Answer 7

EAT/equity(book value) or earningreturn/equity

Question 8

What are the effects of using different types of returns when using valuation methods.

Answer 8

It will affect what the valuation because of taxes, interests, depreciation, and amortization.

Question 9

What is the difference between pure profit maximization and value maximization

Answer 9

pure profit maximization does not take into account many years of return and the risk involved.

Question 10

What is another term for the economic value of a business?

Answer 10

market value

Question 11

What is meant by risk neutral

Answer 11

decisions in which there are no portfolio or diversification effects. In this situation a firm would only face day-to-day business decision-making. This not not mean there are no risks for the firm.

Question 12

How can you determine the book value net worth of a business

Answer 12

You can look at the accounting equity which is equivalent to the net worth.

Question 13

What determines liquidity

Answer 13

1. The amounty of time needed to turn the asset into cash

2. The stability of the the asset.

Question 14

Do EAT and the EAT1 need to be the same?

Answer 14

No, When calculating ROE EAT is now. When calculating Vo it is what it will be one year from now

Question 15

What is the difference between return of equity and r in valuation

Answer 15

r in valuation is what is required what is needed, desired to make. r of ROE is the current return what it is right now.