Exam 3 FIN 3403 Part 1 Ch 1-8

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Capital budgeting
Capital Structure
Working capital management

What are the three functions of financial Manger ? (note : these reflect on the balance sheet)

a conflict of interest between the corporate shareholders and the corporate mangers

What is agency problem ?

Assets
Current assets + Net fixed assets = total assets

Liabilities and shareholder's Equity
Current liabilities + long-term liabilities + Share holder's equity - Total liabilities and shareholder's equity

Formula for Balance sheet

Revenues - Expenses = Income

Formula for Income statment

is your tax bill divided by your taxable income, In other words, the percentage of your taxes the goes to pay taxes.

Formula:
Total taxes/ Total taxable income = Average taxes

What is average taxes?

amount of tax payable on next dollar earned

or: the rate of extra tax you will pay if you earned 1 more dollar.

What is marginal taxes?

Net Working Capital (which is also known as "Working Capital" or the initials "NWC") is a measurement of the operating liquidity available for a company to use in developing and growing its business.

CA -CL =NWC

Note: page 21

What is net working capital ?

Liquidity
Turnover
Long-term solvency/ leverage ratio
Profitability ratio
Market value ratio

What are the 5 groups of ratio?

Depreciation

What is non-cash item on a the income statement ?

A standardized finical statement presenting all items in percentage terms.


Balance sheet items are shown as %in total assets
Income statement items are shown as % in sales

Common-size statements

A standardized financial statement presenting all items relative to certain base year amount.

Common -base year statement

Reports every item as a % of the same item in another year.

Combined common-size and common - base year statements

$1 today is worth more than $1 tomorrow

What is the definition of TVM?

There will be examples

Know how to calculate PV&FV of simple cash flows for Ch.5 . Be able to solve 1 out of 4 variables. PMT is not included in Ch.5

CLR TVM
40000 FV
5 N
8 I/Y
CPT PV = -27,223.33

You need $40,000 in 5 years, you can invest your money at 8%, how much do you need to invest today?

CLR TVM
-100 PV
4000 FV
50 N
CPT I/Y = 7.66%

•You invest $100. In 50 years your investment is worth $4,000. What annual return will you have earned?

Step 1:
CF CLR WORK (2nd CE/C)
CF 0 = 0 ENTER 
C01 = 50 ENTER 
F01 = 1 ENTER 
C02 = 60 ENTER 
F02 = 1 ENTER 
C03 = 70 ENTER 
F03 = 1 ENTER 

NPV
I = 10 ENTER
NPV = CPT
NPV = $147.633


Step 2:
CLR TVM
147.633 PV
3 N
10 I/Y
CPT FV
FV = -$196.5

Ch. 6 : Consider the following cash flow:
Year 1 2 3
CF 50 60 70
What is FV at the end of year 3 at 10%?

CLR TVM
3 N
5 I/Y
200 PMT
CPT PV = -544.65

Chh.6 At the end of each of the next 3 years you will receive $200. If the appropriate rate is 5%, how much is this investment worth today?

Simple interest is interest not reinvested, interest period is only earned each period only in the original principle

Compounding interest is the process of accumulating interest on an investment over time to earn more interest and is reinvested. Called interest on interest in process.

What is the difference between simple interest and compound interest?

Annuity Due:
BGN (2nd PMT), SET (2nd ENTER), QUIT (2nd CPT)

CLR TVM
50000 PV
5 N
5 I/Y
CPT PMT = -10,998.80
(remember to set the calculator back to the END mode, when done)

Ch.6 You just deposited $50,000. How much can you withdraw at the most at the beginning of each of the next 5 years if the interest rate is 5%?

When a corporation or government wishes to borrow money from the public on long-term basis, it usually does so by issuing or selling debt securities.

What is bonds ?

An interest -only loan, meaning that the borrower, will Pay the Interest every period, but none of the principle will be repaid until the end of The Loan.

A bond is normally....

The stated interest payment made on the bond

Coupon

the amount that will be repaid at the En of the loan

What is a face value or a par value ?

The annual coupon rate divided by the face value of the bond

Coupon Rate

Number of years until the face value is paid

Maturity

The interest rate required In the market bond

Yield to maturity (YTM)

when bond sells less than face value
(Price< Face Value)

Note : page 193

What is discount bond ?

When bond sells more than face value ($1000)

What is premium bond ?

The risk that arises for bond owners from fluctuating interest rates.

What is interest rate risk?

Direct, Indirect

Be aware that Interest rate risk has a _______ relationship with coupon rate but _________ relationship with with time to maturity.

ou may Have to adjust the YTM & the coupon payments, if necessary.

Bonds can make semi annual or annual coupon payments but keep in mind ____________________________.

5 variables
I/Y= YTM
N= Time To Maturity
PMT- coupon rate (% x (Face value =$1000))
FV= 1000
PV = price

PMT and FV are positive and PV is negative sign .

How many variables are in the bond valuation formula?

1000 FV
60 PMT
5 I/Y
40 N
CPT PV = -1,171.59

What is the price of a bond with 20 years left to maturity. The YTM (quoted as an APR) is 10%, the face value is $1,000, and the semi-annual coupons are $60.

1000 FV 80/2 = 40 PMT 5x2 = 10 N PV = -800
CPT I/Y = 6.8245 x 2 = 13.65%

Ch. 7 A bond Makes semi- annual payments, has 5 YTM, an 8% coupon rate (APR), a $ 1000 face value. If the price is $ 800, what is the YTM ( quoted as APR) ?

dividends. stock prices

Ch. 8 we use ________ and __________ to value our stocks

A share of common stock in a company with a constant dividend is much like a share of preferred stock .

Formula :
P= D/ r

what is zero growth rate ?

Formula :
P= D/ r

$10/.20= $50 Per share

Example of a Zero/ no growth rate : Paradise protocopying co. has a policy for paying $10 per share dividend every. If this policy is to be continued indefinably, what is the value of a share of stock if the required rate of return is 20%?

A model that determines the current price of a stock as it dividend next period divided by the discount rate less the dividend growth rate .

If the constant growth rate exceeds the discount rate , then the stock price is indefinitely large.

Constant growth rate (dividend growth rate)
Only the definition of growth model

We need to find the required return of the stock. Using the constant growth model, we can solve the equation for R. Doing so, we find:

R = (D1 / P0) + g = ($2.10 / $48.00) + .05 = .0938 or 9.38%

Ch 8 example of constant growth rate: The next dividend payment by Hot Wings, Inc., will be $2.10 per share. The dividends are anticipated to maintain a 5 percent growth rate forever. If the stock currently sells for $48 per share, the required return is ____________ percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

The main reason we consider this case is to allow super normal growth rates over some finite length in time .

The growth rate cannot exceed the required rate return indefinitely , but it certainly could do so for some number of years.

Non constant growth rate

Step 1: calculate the price at time 2
P2 = D3 /(R-g) =D2 x (1+g)/(R-g) = 2 x (1.05)/(0.08- 0.05) = 2.1/.03 = $70
Step 2: Enter the CFs into you CF register and calculate the NPV:
CF, CLR WORK (2nd CE/C)
CF 0 = 0 ENTER 
C01 = $1 ENTER  F01 = 1 ENTER 
C02 = $2+$70 = $72 ENTER  F02 = 1 ENTER 
NPV I = 8 ENTER (this is the R)
NPV = CPT NPV = $62.65

Ch. 8 example of a Non Constant growth rate (dividend growth rate): A stock pays a dividend of $1 in 1 year, $2 in 2 years and then grows at 5% after that. What is the value of the stock today if the required rate of return is 8%?

P4 = D4(1 + g) / (R - g) = $2.00(1.05) / (.12 - .05) = $30.00

P0 = $11.00 / 1.12 + $8.00 / 1.122 + $5.00 / 1.123 + $2.00 / 1.124 + $30.00 / 1.124 = $40.09

Or you can use your CF function:
CF
CLR WORK
CF0 = 0
C01 = 11 enter ↓
F01 = 1
C02 = 8 enter ↓
F02 = 1
C03 = 5 enter ↓
F03 = 1
C04 = 32 enter↓
F04 = 1 NPV
I=12 enter ↓
NPV CPT

Ch 8 example of non constant growth rate :
Far Side Corporation is expected to pay the following dividends over the next four years: $11, $8, $5, and $2. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 12 percent, the current share price is $___________ . (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

dividend yield and a capital gains yield

what is the rate of return comprised of according to the dividend growth model?

As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a ___________.

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