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Terms in this set (69)
cumulative vs non cumulative preferred stock
equity or debt
order at best price
order at max price
limitations of the dividend discount model
uncertain dividend forecasts, non dividend paying stocks
total payout model
values all of the firms equity, rather than a single share
what are some key differences between preferred stock and common stock?
preferred: dividends paid at regular intervals, stockholders get paid first
common stock: get paid last, board of directors will decide whether or not to pay out a dividend, fixed income security-- if a company does miss a dividend payment, it will be required to pay it before any future dividends are paid on either stock
what is the role of a floor broker at the NYSE
An independent member of an exchange who is authorized to execute trades on the exchange floor on behalf of clients. A floor broker is a middleman who acts as an agent for clients, indirectly giving them the best access possible to the exchange floor.
what discount rate do you use to discount the future cash flows of a stock?
weighted average cost of capital
what are the 3 ways that a firm can increase the amount of its future dividend per share?
increase its earnings, decrease number of shares outstanding, increase its dividend payout rate
what are the main limitations of the dividend discount model?
doesn't work for companies that don't pay dividends, uncertain about future dividends, sensitive to growth rate and the discount rate
garbage in and garbage out
how does the total payout model address part of the dividend discount models limitations?
values the firms equity rather than a single share
net present value
When making an investment decision, take the alternative with the highest NPV, which is equivalent to receiving its NPV in cash today.
npc rule implies that we should
accept positive npc project and reject negative npv projects
npv depends on
cost of capital
the payback rule
an opporutinty that pays back the initial investment quickly is the best idea
weakness of payback rule
ignores the time value of money, cashflows after the payback period, lacks a decision criterion grounded in economics
the internal rate of return
take any investment opportunity where IRR exceeds the opportunity cost of capital
weakness in IRR
in most cases ire rule agrees with NPV for stand alone projects if all negative cash flows precede positive cash flows--IRR may disagree with NPV
modified internal rate of return
used to overcome problems of multiple IRR
computes the discount rate that sets the NPV of modified cash flows to zero
equivalent annual annutiy
the cash flow per period with the same pv as the cost of buying and operatiing a machine
limit set on the amount of funds available for investment
limits on avaliable funds imposed by managment
limits on avalaible funds imposed by the unvailiabity of funds in the capital market
ratio of net present value to initial invesmtn
explain the NPV rule for stand alone projects
The NPV rule for stand-alone projects states that when choosing among alternatives, we should take the project with the highest positive NPV.
Under what conditions will the IRR rule lead to the same decision as the NPV rule?
if independent and IRR is greater than RR and NPv is greater than 0
What is the most reliable way to choose between mutually exclusive projects?
Explain why choosing the option with the highest NPV is not always correct when the options have different lives.
What does the profitability index tell you?
the value created per unit of investment
Factors to consider when estimating a project's revenues and costs:
A new product typically has lower sales initially
2. The average selling price of a product and its cost of production will generally change over time
3. For most industries, competition tends to reduce profit margins over time
Copyright © 2012 Pearson Prentice Hall. All rights reserved.
What is capital budgeting, and what is its goal?
the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash
Why do we focus only on incremental revenues and costs, rather than all revenues and costs of the firm?
Why does an increase in net working capital represent a cash outflow?
an investor estimates the value of a firm which manufactures cookware by examining the cash flows of similar firms. which of the following is assumed to be the same for these firms?
all of the above
valuation models use the relationship b/w share value, future cash flows, and the cost of capital to estimate these quantaties for a given firm. realistically, for publicly traded firm, what can we reliably use such models to determine?
the firms market price
which of the following statements is false?
for valutaion purposes, the trailing pe ratiois generally preferred
if you want to value a firm that consistently pays out its earnings as dividents, the simplest model for you to use is the
dividend discount model
if you want to value a firm but don't want to explicitly forecast its dividends, the simplest model for you to use is
the discounted free cash flow model
indivudal investors tendency to trade too much based on the mistaken belief that they can pick winners/losers better than invent professionals is known as
the investor overconfidence hypothesis
which of the following statements concerning the valuation of firms using the method of comparable is fasle
valuation multiples take into account differences in the risk and future growth b/w the firms being compared
a study of trading behavior of individual investors at a discount brokerage found that individual investors
made very actively, despite the fact that their performance is actually worse because of trading costs
which of the following is the best statement of the efficient markets hypothesis
competition b/w investors works to make the npc of all trading opportunities 0
joe pre orders a non refundalb emovie ticket...
yes since he invested a valuable asset
a company spends 20 million researching whether it is possible to create a durable plastic from the process waste from feedstock prep. the 20 mill should best be considered
as a sunk cost
which of the following isn't a factor that a manager should bear in mind when estimating a projects revenues and costs?
a new product typically has its highest sales immediately after release as customers are attracted by the novelty of the product
the capital budgeting process begins by
compiling a list of potential projects
which of the following best defines incremental earnings
the amount by which a firms earnings are expected to change as a result of an investment decision
net working capital
the ultimate goal of capital budgeting process is to
determine the effect of the decision to accpet/reject a project on the firms cash flows
the redesign of the plant only
you ar opening up a brand new retail strip mall...
when comparing 2 projects with diff lives, why do u compute an annuity w/ an equivalent pv to the npv?
so that the projects can be ccompared to their cost/value created per yr
which of the following statements is false?
if the cost of capital estimate is more than the IRR the NPV will be positive
a lawn maintence company
the mower is only expected to be needed for 3 yras
you are trying to decide b/w 3 mutual exclusive investment opp
according to graham and harvey
irr, npv, payback period
which of the following situations can lead to IRR giving a different decision than NPV
all of the aove
most corp measure the value of a project in terms of which of the following?
the IRR rule will agree withe the npv even when positive cash flows precede negative cash flows
you placed an order to purchase stock were u specified the max price u were willing to pay
a round lot consists of how many shares
which of the following will be a source of cash flows for a shareholder of a certain sotck
sales of the shares at a future date
the firm in which the shares are held paying out cash to shareholders in the form of dividents
which of the following is a limitation of the dividend discount model
it can't handle negative growth rates
which of the following is fasle
according to the constant dividend growth model, the value of the firm depends on the current dividend level, dividend by the equity cost of capital plus the grow rate
which of the following models directly values all of the firms equity rather than a single share
total payout model
which of the following isn't a way to increase dividend
by increasing its rendition rate
THIS SET IS OFTEN IN FOLDERS WITH...
BUSFIN 3120 Exam 3
FIN 3716 Ch. 8
BUSFIN 3120 Exam 3
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