- •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
Explain the reasons why bonds with warrants and convertible bonds have lower coupons than similarly rated bonds that do not have these features.
The reason for this is because convertibles and warrant bonds can be called in at any time. This means that the person holding the bond can demand cash from the entity that issued the bond. This poses a risk for the issuer because and increases liquidity for the holder. Thus you see lower rates.
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.
1. When interest rises above the coupon rate, a fixed-rate bond’s price will fall below its par value. Such bond called discount bond
2. When interest rate is less than stated coupon rate. A fixed-rate bond’s price will rise above its par value. Such bond is called a premium bond.
Explain why prices of fixed-rate bonds fall if expectations for inflation rise. Define discount bond and a premium bond.
Inflation is a bond's worst enemy. Inflation erodes the purchasing power of a bond's future cash flows. We know that an increase in interest rate will cause the prices of fixed-rate bonds to fall. Inflation has direct influence to interest rate. When inflation rises, the interest rate rises too.
Discount bond a bond that sells below its par value
Premium bond a bond sells above its par value.
Explain the yield to maturity and yield to call, and describe their differences.
Bond yields are the rate of return you receive after purchasing a bond and are the accounting measurements that allow you to compare one bond with another. Two yield calculations are generally evaluated when it comes to selecting callable bonds for a portfolio:
1. yield to maturity -the expected rate of return on a bond if bought at its current market price and held to maturity. A bond’s yield to maturity calculation provides you with the total return you would receive if the bond was held through its maturity date. Yield to maturity is based on the coupon rate, face value, purchase price and year until maturity, calculated as:
Yield to maturity = {Coupon rate + (Face value – Purchase price/years until maturity)} / {Face value + Purchase price/2}
Bond Price=cashflow* OR
2. yield to call -the yield of a bond or note if you were to buy and hold the security until the call date. This yield is valid only if the security is called prior to maturity. The calculation of yield to call is based on the coupon rate, the length of time to the call date and the market price.
For most bond investors, it is important to also estimate the yield to call, or the total return that would be received if the bond purchased was held until its call date instead of full maturity. Because it is impossible to know when an issuer may call a bond, you can only estimate this calculation based on the bond’s coupon rate, the time until the first (or second) call date, and the market price.