FNAN 522 EXAM 2 NEW UPDATED STUDY
GUIDE COMPLETE SOLUTION
State the basic valuation model - 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 - large
legal document that spells out the rights of bond holders - bond indenture
corporate IOUs - bonds
unsecured bonds with no liens - debentures
the face value of a bond which the holder receives at maturity - par value
what is the valuation model of preferred stock? - VP = D0 / rps
d0 = last dividend
rps = required return
hybrid stock - part debt and part equity - preferred stock
state the gordon model formula for common stock constant growth - 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 - 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" - efficient market hypothesis
securities are generally in __________ - equilibrium
the idea that, since people are involved in financial decision making, it is not a perfect
science - behavioral finance
what is the formula to calculate a stock's value based on its book value - Po = book
value of CS / # shares
what is the formula to calculate a stock's value based on the liquidation model? - Po =
(liquidation of assets - liabilities - preferred stock) / # of shares
what is the formula to calculate a stock's value based on P/E multiples? - P/E = price
per share / EPS
a systematic process to evaluate long-term (capital) business investments - capital
budgeting
an investment opportunity with a PV greater than its cost will ___ the value of the firm -
increase
, what are the steps in the capital budgeting process? - 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)
length of time it takes to recover an initial investment using based on cash flows or
discounted cash flows - payback period
discount of all expected cash flows by the appropriate discount rate minus the initial
investment - net present value
theoretically, what is the best capital budgeting technique? - Net present value
based on NPV, which projects should be accepted - if the NPV is >= 0
GUIDE COMPLETE SOLUTION
State the basic valuation model - 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 - large
legal document that spells out the rights of bond holders - bond indenture
corporate IOUs - bonds
unsecured bonds with no liens - debentures
the face value of a bond which the holder receives at maturity - par value
what is the valuation model of preferred stock? - VP = D0 / rps
d0 = last dividend
rps = required return
hybrid stock - part debt and part equity - preferred stock
state the gordon model formula for common stock constant growth - 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 - 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" - efficient market hypothesis
securities are generally in __________ - equilibrium
the idea that, since people are involved in financial decision making, it is not a perfect
science - behavioral finance
what is the formula to calculate a stock's value based on its book value - Po = book
value of CS / # shares
what is the formula to calculate a stock's value based on the liquidation model? - Po =
(liquidation of assets - liabilities - preferred stock) / # of shares
what is the formula to calculate a stock's value based on P/E multiples? - P/E = price
per share / EPS
a systematic process to evaluate long-term (capital) business investments - capital
budgeting
an investment opportunity with a PV greater than its cost will ___ the value of the firm -
increase
, what are the steps in the capital budgeting process? - 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)
length of time it takes to recover an initial investment using based on cash flows or
discounted cash flows - payback period
discount of all expected cash flows by the appropriate discount rate minus the initial
investment - net present value
theoretically, what is the best capital budgeting technique? - Net present value
based on NPV, which projects should be accepted - if the NPV is >= 0
