- •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 reasons for the existence of the preemptive right
Preemptive right a provision in the corporate charter that gives common stockholders the right to purchase additional shares in the company.
The first reason is PR enables current stockholders to maintain control. If it were not for this safeguard, the management of a corporation could issue a large number of shares and purchase these shares itself. The second reason is that prevents the transfer of control to new stockholders. For instance, it blocks the ability for new buyers to buy stock at a falsely lower price, thereby instantly making profit and devaluing the price of the shares held by the current stockholders. Overall it prevents the rapid changing of stockholder control for a firm.
Explain the reasons why a company uses classified stocks.
The separation of company equity into more than one class of common shares, usually called "Class A" and "Class B”, and so forth, to meet special needs of the company. Voting privileges are the main reason companies create different classes, although liquidation and dividend rights may also be involved. The use of classified stock thus enabled the public to take a position in a conservatively financed growth company without sacrificing income. The use of a classified stock investment structure for a company can be a very attractive option that helps the corporation attract more than one type of investor. Sometimes considered acomplex capital structure, classified stock is really a relatively easy strategy to implement and manage.
Define and differentiate between a closely held corporation and a publicly owned corporation
Closely held corporation a corporation that is owned by a few individuals who are typically associated with the firm’s management.
Publicly owned corporation a corporation that is owned by a relatively large number of individuals who are not actively involved in its management.
The biggest difference between a closely held corporation and a publicly owned company is that a closely held corporation has a tight-knit group of shareholders that make up the ownership committee for the company, while a publicly held corporation is one that is owned by stockholders. In a publicly held company, the ownership shares of the corporation are traded publicly on the international stock market.
Define and differentiate between primary, secondary markets and ipo.
Primary Market – the market in which firms issue new securities to raise corporate capital. The important thing to understand about the primary market is that securities are purchased directly from an issuing company.
Secondary Market – the market in which “used” stocks are traded after corporations have issued them. A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves. The company receives no new money when sales occur in this market.
IPO(initial Public offering) – the market for stocks of companies that are in the process of going public.
You can think of the primary market as being synonymous with an initial public offering. But the different is that an IPO occurs when private company sells stocks to the public for the first time.