FNAN 522 Exam 2 Study Guide – Key Concepts, Formulas & Review
Notes
State the basic valuation model - correct answer ✔✔V = CF1/(1+R)^1 + CF2 / (1 + R)^2 + ... + CFn
/ (1 + R)^n
in the basic valuation model, if risk is high, i will be - correct answer ✔✔large
legal document that spells out the rights of bond holders - correct answer ✔✔bond indenture
corporate IOUs - correct answer ✔✔bonds
unsecured bonds with no liens - correct answer ✔✔debentures
the face value of a bond which the holder receives at maturity - correct answer ✔✔par value
what is the valuation model of preferred stock? - correct answer ✔✔VP = D0 / rps
d0 = last dividend
rps = required return
hybrid stock - part debt and part equity - correct answer ✔✔preferred stock
state the gordon model formula for common stock constant growth - correct answer ✔✔p0 = d1
/ (rs - g)
,p0 = value or price of a common stock
d1 = next dividend (D0 * (1 + g))
rs = required return for p0
g = growth rate in dividends
state the capital asset pricing model formula - correct answer ✔✔Rs = Rf + b(rM - Rf)
Rs = a stock's expected return
Rf = the current risk-free rate (T-Bonds)
b = the stock's beta
rM = the market's required return
idea that describes the behavior of a capital market--states that the market is efficient and that
it is therefore difficult to "beat the market" - correct answer ✔✔efficient market hypothesis
securities are generally in __________ - correct answer ✔✔equilibrium
the idea that, since people are involved in financial decision making, it is not a perfect science -
correct answer ✔✔behavioral finance
what is the formula to calculate a stock's value based on its book value - correct answer ✔✔Po =
book value of CS / # shares
what is the formula to calculate a stock's value based on the liquidation model? - correct answer
✔✔Po = (liquidation of assets - liabilities - preferred stock) / # of shares
, what is the formula to calculate a stock's value based on P/E multiples? - correct answer ✔✔P/E
= price per share / EPS
a systematic process to evaluate long-term (capital) business investments - correct answer
✔✔capital budgeting
an investment opportunity with a PV greater than its cost will ___ the value of the firm - correct
answer ✔✔increase
what are the steps in the capital budgeting process? - correct answer ✔✔idea
test the idea to make sure it confirms to the firm's goals and strategies
appoint a capital budgeting team and have them determine assumptions and gather data
gather required data
prepare the cash flow worksheet
apply capital budgeting techniques to the cash flow worksheet
make a decision
implement
follow-up (compare actual to predicted cash flows and investigate variances)
Notes
State the basic valuation model - correct answer ✔✔V = CF1/(1+R)^1 + CF2 / (1 + R)^2 + ... + CFn
/ (1 + R)^n
in the basic valuation model, if risk is high, i will be - correct answer ✔✔large
legal document that spells out the rights of bond holders - correct answer ✔✔bond indenture
corporate IOUs - correct answer ✔✔bonds
unsecured bonds with no liens - correct answer ✔✔debentures
the face value of a bond which the holder receives at maturity - correct answer ✔✔par value
what is the valuation model of preferred stock? - correct answer ✔✔VP = D0 / rps
d0 = last dividend
rps = required return
hybrid stock - part debt and part equity - correct answer ✔✔preferred stock
state the gordon model formula for common stock constant growth - correct answer ✔✔p0 = d1
/ (rs - g)
,p0 = value or price of a common stock
d1 = next dividend (D0 * (1 + g))
rs = required return for p0
g = growth rate in dividends
state the capital asset pricing model formula - correct answer ✔✔Rs = Rf + b(rM - Rf)
Rs = a stock's expected return
Rf = the current risk-free rate (T-Bonds)
b = the stock's beta
rM = the market's required return
idea that describes the behavior of a capital market--states that the market is efficient and that
it is therefore difficult to "beat the market" - correct answer ✔✔efficient market hypothesis
securities are generally in __________ - correct answer ✔✔equilibrium
the idea that, since people are involved in financial decision making, it is not a perfect science -
correct answer ✔✔behavioral finance
what is the formula to calculate a stock's value based on its book value - correct answer ✔✔Po =
book value of CS / # shares
what is the formula to calculate a stock's value based on the liquidation model? - correct answer
✔✔Po = (liquidation of assets - liabilities - preferred stock) / # of shares
, what is the formula to calculate a stock's value based on P/E multiples? - correct answer ✔✔P/E
= price per share / EPS
a systematic process to evaluate long-term (capital) business investments - correct answer
✔✔capital budgeting
an investment opportunity with a PV greater than its cost will ___ the value of the firm - correct
answer ✔✔increase
what are the steps in the capital budgeting process? - correct answer ✔✔idea
test the idea to make sure it confirms to the firm's goals and strategies
appoint a capital budgeting team and have them determine assumptions and gather data
gather required data
prepare the cash flow worksheet
apply capital budgeting techniques to the cash flow worksheet
make a decision
implement
follow-up (compare actual to predicted cash flows and investigate variances)
