- •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
Identify and briefly explain the 3 different categories of activities shown in the statement of cash flows.
1)Operating activities:converts the items repoted on the income statement from the accrual basis of accounting to cash.Include net income, depreciation and change in current assets and current liabilities other than cash and short-term debts.
2)Investing activities:reports the purchase and sale of long-term investments and property,plant and equipment.Include investments in or sales of fixed assets
3)financing ativities:reports the issuance and repurchasing of the company’s own bonds and stocks and the payment of dividentsInclude cash raised during the year by issuing short-term debt, long-term debt, or stock
Define net operating working capital and total operating capital.
Net operating working capital is a financial metric used to measure operational liquidity of a business. Net operating working capital operating working capital less noninterest-bearing current liabilities.
Total operating capital is the sum of all net operating working capital and fixed assets.
NOWC= All current assets – All current liabilities that do not charge interest
(Cash and Marketable securities+Accounts receivable+Inventories)-(Accounts Payable+Accruals)
TOC= NOWC + Net fixed assets
Net fixed assets include net plant and equipment.
Determine nopat and explain why it might be a better performance measure than net income.
NOPAT is the profit a company would generate if it had no debt and held only operating assets. Net income is the profit available to common stockholders; thus, both interest and taxes have been deducted. NOPAT is a better measure of the performance of a company’s operations than net income because debt lowers income. In order to get a true reflection of a company’s operating performance, one would want to take out debt to get a clearer picture of the situation.
NOPAT= EBIT(1-tax rate)
Define free cash flow and explain why free cash flow the most important determinant of a firm’s value.
Free cash flow is the cash flow actually available for distribution to investors after the company has made all the investments in fixed assets, new products, and operating working capital necessary to sustain ongoing operations. It is defined as FCF=NOPAT-Net investment in operating capital or Operating cash flow-Gross investment in operating capital. It is the most important measure of cash flows because it shows the exact amount available to all investors (stockholders and debtholders). The value of a company’s operations depends on expected future free cash flows. Therefore, managers make their companies more valuable by increasing their free cash flow. Net income, on the other hand, reflects accounting profit but not cash flow. Therefore, investors ought to focus on cash flow rather than accounting profit.
Define the terms “Market Value Added”(mva) and “Economic Value Added (eva)”. Explain the differences between eva and accounting profit.
Market Value Added-the difference between market value of a firm’s stock and equity capital supplied by investors.
MVA=Market value of stock – Equity capital supplied by investors.
<(Shares outstanding)(Stock price) – Total common equity> outstanding – кол-во акций
Economic Value Added – value added to shareholders by management during a given year.
EVA=Net operating profit after taxes,or NOPAT – after tax dollar cost of capital used to support operations
EVA=EBIT(1-tax rate)-(Total investor-supplied operating capital)(After tax percentage cost of capital)
EVA is an estimate of a business’s true economic profit for the year. The most important reason EVA differs from accounting profit is that the cost of equity capital is deducted when EVA is calculated. Other factors that could lead to differences include adjustments that might be made to depreciation, to research and development costs, to inventory valuations and so on.