Valuation

Question 1

Dividend Discount Model (general)

Answer 1

Price=D(1)/(r-g)

Question 2

Types of Risk

Answer 2

-Idiosyncratic, firm-specific, can be smoothed out with diversification
-Systematic Risk (beta)- unavoidable market conditions (inelastic goods have low systematic risk while luxury goods have higher)

Question 3

The Capital Asset Pricing Model

Answer 3

E(ri)=rf+[E(rm)-rf]*beta(i)

where:
E(ri) =capital asset expected return
rf=risk-free interest rate
beta(i)=sensitivity
E(rm)=expected market return

Question 4

Levered Cost of Capital

Answer 4

Re=Ru+(D/E)(Ru-Rd)

where:
Re=levered equity cost of capital
Ru=unlevered cost of capital
D=total debt
E=total equity
Rd=Interest rate(yield)

Question 5

Nominal vs. Real Rates

Answer 5

R(nominal) = (1+r(real))*(1+r(inflation))-1

Question 6

Effective Annual Rate (EAR)

Answer 6

EAR=(1+(APR/k)^(k)-1

where:
APR is annual percent rate(simple)
k=number of compounding periods

Question 7

When does an inverted yield curve occur and what does it mean?
What affects the short term? Long term?

Answer 7

-Short-term bond rates are higher than long-term, meaning a recession is near
-Short-term is affected by feds
-Long-term is affected by demographic factors, corporate performance

Question 8

Coupon Payment

Answer 8

PMT(coupon)=(r(coupon)*(face value))/(number of coupon payments per year)

Question 9

Zero Coupon Bonds and Price

Answer 9

Price=PV(CF)
bc no coupons, price=FV discounted back

Question 10

YTM/Price/FutureValue equations

Answer 10

-YTM=(FV/P(at time 0))^(1/t)-1
-P(at time 0)=FV/(1+YTM)^(t)

where:
YTM=yield to maturity=bond discount rate
FV=future value

Question 11

Coupon Bonds (meaning and equation)

Answer 11

-receives coupons every set period and then the principle at maturity(coupon received even in the last period)
-P(at time 0)=PV(cash flows)+PV(face value)
-P(at time 0)=(coupon/YTM)(1-(1/(1+YTM)^(t)))+FV/(1+YTM)^(t)

where:
(coupon/YTM)(1-(1/(1+YTM)^(t))) is the PV of the coupons
and FV/(1+YTM)^(t) is the PV of the principle

Question 12

What happens to price and yield when the following increase: risk, inflation, demand, rates?

Answer 12

Risk-Price down and Yield Up
Inflation-Price down and Yield Up
Demand-Price up and yield down
Rates-Price down and yields up

Question 13

Dividend Discount Model for 1 Year Investor

Answer 13

P(at time=0)=(P(at time=1)+Div(for period 1)/(1+Re)

where:
Re=equity cost of capital

Question 14

Dividend Discount Model for 2 Year Investor

Answer 14

P(at time=0)=Div(for period 1)/(1+Re)+(Div(for period 2)+P(at time=2)/(1+Re)^(2)

where:
Re=equity cost of capital

Question 15

Dividend Discount Model for Infinite Year Investor

Answer 15

P(at time=0)= {Summation from t=1 to infinity} Div(t)/(1+Re)^(t)

where:
Re=equity cost of capital