- •What are agency costs, and who bears them?
- •Identify some factors beyond a firm’s control that influence its stock price.
- •Define ebitda and please define the reasons of calculating ebitda.
- •Explain statement of cash flows and types of questions it answers.
- •Identify and briefly explain the 3 different categories of activities shown in the statement of cash flows.
- •Define net operating working capital and total operating capital.
- •Determine nopat and explain why it might be a better performance measure than net income.
- •Define free cash flow and explain why free cash flow the most important determinant of a firm’s value.
- •Define the terms “Market Value Added”(mva) and “Economic Value Added (eva)”. Explain the differences between eva and accounting profit.
- •Determine characteristics of liquid assets and identify the ratios that are used to analyze a firm’s liquidity position and write out their equations.
- •Identify 4 ratios that are used to measure how effectively a firm is managing its assets, and write out their equations.
- •Explain the financial leverage and usage of financial leverage.
- •Identify and write out the
- •Describe 3 ratios that relate a firm’s stock price to its earnings, cash flow, and book value per share, and write out their equations.
- •Explain the calculation of book value per share and explain how inflation and goodwill cause book values to deviate from market values.
- •Define the usage of Du Pont system to analyze ways of improving the firm’s performance.
- •Define the standard deviation and coefficient of variation, and explain which one is a better measure for performance.
- •Explain the following statement: “most investors are risk averse”. Explain the relationship between risk aversion and rates of return.
- •Determine Security Market Line and construction of this line.
- •Explain Market Risk Premium and calculation.
- •Explain the correlation between returns on a project and returns on the firm’s other assets affect the project’s risk.
- •Define floating rate bonds and zero coupon bonds.
- •Define convertible bonds, bonds with warrants, income bonds, and indexed bonds.
- •Explain the reasons why bonds with warrants and convertible bonds have lower coupons than similarly rated bonds that do not have these features.
- •Explain what happens to the price of a fixed-rate bond if (1) interest rates rise above the bond’s coupon rate or (2) interest rates fall below the bond’s coupon rate.
- •Explain why prices of fixed-rate bonds fall if expectations for inflation rise. Define discount bond and a premium bond.
- •Explain the yield to maturity and yield to call, and describe their differences.
- •Differentiate between interest rate risk and reinvestment rate risk.
- •To which type of risk are holders of long-term bonds more exposed and short-term bondholders?
- •Explain and define mortgage bonds, debentures, and junk bonds.
- •Explain reasons for the existence of the preemptive right
- •Explain the reasons why a company uses classified stocks.
- •Define and differentiate between a closely held corporation and a publicly owned corporation
- •Define and differentiate between primary, secondary markets and ipo.
- •Determine the capital gains yield and the dividend yield of a stock.
- •Define the two parts of most stock’s expected total return.
- •Write out and explain the valuation formula for a constant growth stock.
- •Define the conditions that a company must hold if a stock to be evaluated using the constant growth model.
- •Explain how one would find the value of a supernormal growth stock.
- •Explain what is meant by terminal date and terminal value?
- •Define the conditions for a stock to be in equilibrium.
- •42.Efficient markets hypothesis.
- •Define the difference among the three forms of efficient market hypothesis: (1) weak form, (2) semistrong form, and (3) strong form.
- •2. Semi-Strong emh
- •3. Strong-Form emh
- •Explain the following statement: “Preferred stock is a hybrid security”.
- •Identify the firms 3 major capital structure components, and give their respective component cost symbols.
- •Explain the reasons of using after-tax cost of debt rather than the before-tax cost in calculating the weighted average cost of capital.
- •Explain three approaches that are used to estimate the cost of common equity.
- •Identify some problems with the capm approach.
- •Explain the two approaches that can be used to adjust for flotation costs.
- •Write out the equation for the weighted average cost of capital and explain.
- •Explain the calculation of debt structure in the capital structure used to calculate wacc.
- •Define the two factors that affect the cost of capital that are generally beyond the firm’s control.
- •Explain how a change in interest rates would affect each component of the weighted average cost of capital.
- •Three types of project risk and show the level of relevance.
- •Describe the pure play and the accounting beta methods for estimating individual project’s betas.
- •Identify some problem areas in cost of capital analysis. Explain how they invalidate the cost of capital procedures.
- •Define the determination of the capital structure weights that are used to calculate the wacc
Write out the equation for the weighted average cost of capital and explain.
WACC =
WACC - weighted average of the component costs of debt, preferred stock, and common equity.
– After-tax cost of debt; – before-tax cost of debt
– cost of preferred stock
– cost of common equity
– weights used for debt, preferred and common equity, respectively.
Explain the calculation of debt structure in the capital structure used to calculate wacc.
When calculating the firm’s target capital structure, total debt includes both long-term debt and bank debt. Investor-supplied capital doesn’t include other current liabilities such as accounts payable and accruals.
Define the two factors that affect the cost of capital that are generally beyond the firm’s control.
There are two factors beyond the firm’s control:
The level of interest rates If interest rates in the economy rise, the cost of debt increases because firms will have to pay bondholders more to obtain debt capital. The higher interest rates increase the costs of common and preferred equity capital.
Tax rates, which are largely beyond the control of an individual firm, have an important effect on the cost of capital. Tax rates are used in the calculation of the component cost of debt. In addition, tax policy affects the cost of capital in other less apparent ways. For example, lowering the capital gains tax rate relative to the rate on ordinary income makes stocks more attractive, and that reduces the cost of equity. That would lower the WACC, and, it would also lead to a change in a firm’s optimal capital structure (toward less debt and more equity).
Explain how a change in interest rates would affect each component of the weighted average cost of capital.
An increase in interest rate lead to increase the cost of debt, the cost of common and preferred equity capital. If interest rates in the economy rise, the cost of debt increase because firms will have to pay bondholders more to obtain debt capital. And conversely, decreases in interest rate reduce the cost of capital, encouraging additional investment.
Three types of project risk and show the level of relevance.
Stand-Alone Risk - the risk an asset would have if it were a firm’s only asset and if investors owned only one stock. It is measured by the variability of the asset’s expected returns. Stand-alone risk does not take into account how the risk of a single asset will affect the overall corporate risk.
Corporate, or Within-Firm, Risk risk not considering the effects of stockholders’ diversification; it is measured by a project’s effect on uncertainty about the firm’s future earnings.
Market, or Beta, Risk That part of a project’s risk that cannot be eliminated by diversification; it is measured by the project’s beta coefficient.
Of the three measures, market risk is theoretically the most relevant measure because it is the one reflected in stock prices. Then on the second place, corporate risk, and last is stand-alone risk