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Economics
Finance
Finance Final Review
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Terms in this set (21)
Asset Beta
The unlevered beta; reflects the business risk of the assets; the asset's systematic risk.
Equity Beta
levered beta
Debt Beta
Refers to the systematic risk of the debt of the company
Beta
Measure of systematic risk. Expected percent change in excess return of the firms security for a 1% change in excess return of the market. A measure of 1.0 means the stock moves in line with the index. Lower numbers suggest less volatility; higher numbers suggest more
premium bond
The difference between the selling price and the face value of a bond when a bond is sold for more than its face value.
discount bond
A bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate
P/E Ratio
price per share/earnings per share
PEG ratio
Price-Earnings Ratio/Earnings Growth Rate (%)
Peg ratio = 1
Fairly Valued
Peg ratio < 1
undervalued
Peg ratio > 1
Overvalued
Risk
The potential to gain or lose something
Expected Return
the mean of the probability distribution of possible returns
correlation coefficient
a statistical measure of the extent to which stocks move in the same direction calculate from -1 to 1
What is the impact of correlation on risk and return?
Correlation has no effect on the expected return of a portfolio; however the volatility/risk of the portfolio will differ depending on the correlation.
The Lower the positive correlation
lower the volatility we can obtain via diversification
When the correlation coefficient is 1
There's a straight line between two points because they're moving in lock step in the same direction
Covariance
A measure of linear association between two variables. Positive values indicate a positive relationship; negative values indicate an inverse relationship
interest tax shield
the tax saving attained by a firm from interest expense
Value of levered firm
value of unlevered firm + PV of interest tax shied - PV Financial Distress costs
As D/E moves up, WACC...
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