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ACFM 203 Exam 2
| Term | Definition |
|---|---|
| Sunk Costs | Paid for regardless of if we go through with the project or not |
| Book | Incremental Earnings represent what? |
| Bank | Incremental Free Cash Flows represent what? |
| Maturity Matching | Match loan period to actual project period |
| Cannibalization | Stealing from own sales |
| Complimentary | Bring out due to existing product |
| APR | Does not take into account compounding |
| EAR | Amount we are earning, brick wall (never get more) |
| Compounded Annually | APR = EAR when |
| Compounded Monthly | APR < EAR when |
| Interest Rate Default Liquidity | What are the 3 types of risk associated with debt? |
| Interest Rate | What kind of risk do treasuries have? |
| Corporate Specific | Default Risk & Liquidity Risk are? |
| Banks! | Who set the treasury yield curves? |
| Treasury Auctions | Government takes the lowest bids until filled, and closes at whatever interest ending bid is at |
| Down | When market yields go up, bond prices go __________ |
| Up | When market yields go down, bond prices go _____________ |
| Coupon Rates | Perfectly reflect market conditions at the time of the issue |
| Callable Bonds | Gives company the right but not the obligation to call (buy back) their bonds early; company not lender, will do it when interest rates go down and can retire expensive debt and reissue at the lower market yields |
| Call Premium | Little added to par to make calling more attractive, either dollar amount or % of face/par |
| Additional Funds Needed (AFN) | Upfront cost for us to produce new things to add value to the company |
| Flotation Costs | Whenever a firm needs to raise capital in a primary market transaction, an investment banker will get involved; investment bankers provide essential services and they know potential buyers so the firm needs to pay for that service |
| Dividends Price Appreciation | What are the 2 ways to make money in equities? |
| Weak Form | Efficient Market Hypothesis: All public info (past) is priced into stock |
| Semi-Strong Form | Efficient Market Hypothesis: All public info (past & present) is priced into the stock |
| Strong Form | Efficient Market Hypothesis: All info is everywhere, includes companies, results in insider trading, do NOT want |
| D1 / P0 + g = Re | What is the equation for DDM? |
| Capital Gains Growth | What does g represent? |
| Total Growth in Company | What does D1 & g represent? |
| Dividend Yield | What does D1 / P0 represent? |
| D1 = D0 * (1 + g) | How to calculate D1 if given D0? |
| D0 | If the statement says, "just paid" or "last dividends paid", is it D0 or D1? |
| D1 | If the statement says, "announced future dividend" or "expected dividend", is it D0 or D1? |
| No | For preferred shares is g added into the DDM equation? |
| Debt & Preferred Shares | Which two items in the WACC always have flotation costs? |
| Common Equity | Which item in the WACC only takes into account flotation costs if the company needs to issue new shares? |
| Beta | Slope of the fitted line in the regression, represents volatility of the risk |
| Positively Correlated | Moves in the same direction |
| Negatively Correlated | Moves in the opposite direction |
| Re = Rm | When beta is equal to 1 |
| Re < Rm, less volatile | When beta is less than 1 |
| Re > Rm, more volatile | When beta is more than 1 |
| Risk | You do not get what you want when you need it |
| By calculating DDM, CAPM, & BY + RP, and then averaging them | How do we calculate the Re in the WACC? |
| True | True or False. We can set the ROA equal to the WACC, since the latter is a hurdle rate for new projects. |
| False | True or False. The cost of capital (Rd) on a bond with a higher credit rating is higher. |
| False | True or False. Cannibalism can be described as losing relevant cash flows because a competitor introduces a new product. |
| False | True or False. A positive future value indicates that a company has "wiggle room" regarding a potential investment. |
| False | True or False. When a bond's price goes up, its yield also goes up because it is worth more. |
| Risk-Free Investments | Treasury bonds are considered: |
| Liquidity, Default, & Inflation Risk | What types of risk does a corporate bond reflect? |
| Bond price would increase | If a bond's coupon yield is 8% and current yield to maturity has decreased to 6%, what would happen to the bond's price? |
| The Banks/Investors | Who determines the Risk-Free Rate? |
| It exists as a tax benefit | Why do businesses like depreciation? |
| During the initial offering | When is the price of the bond (PV) equal to the par value (FV)? |
| When APR is compounded annually | When is EAR equal to APR? |
| 2 | How many cash flows does a zero coupon bond have? |
| True | True or False. If issuing new equity, we determine the flotation costs in the DDM & apply them to the average of our 3 methods for determining the company's Re. |
| Flotation costs increase the cost of capital | How do flotation costs affect a company's cost of capital? |
| Asset prices reflect all publicly available information | Which of the following is true according to semi-strong form of the EMH? |
| DDM | Which of the following Re models accounts for flotation costs when issuing new shares? |
| > 1 | If the market return increases by an arbitrary amount, and the return on the stock of a company changes in the same direction, but at a greater magnitude, then the Beta of that stock must be? |
| Because no investment banker is needed to access it | Why are there no flotation costs associated with retained earnings? |
| Sprint's beta is 1.47 | A linear regression was done to estimate the relation between Sprint's stock returns & the market's return. The intercept is 0.23 and the slope is 1.47. Which of the following statements is true regarding Sprint's stock? |
| Equity vs. Debt Premium | What does the risk premium in the Bond Yield + Risk Premium represent? |
Created by:
MOWGaming04
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