Download Exam 3 Review Slides

Exam 3 Review
Comprehensive
Calculator skills
 PV and FV of single cash flow
 Annuities: solve for r, PMT, T, PV or FV
 Balloon Payments: Interest, Principal,
Balloon
 Continuous compounding
 Perpetuities
 Beta
Things to remember for
calculator problems
 Properly sign (+ or -) cash flows
 Set periods per year (P/YR)
 Clear previous memory
Interest rates
 Points on a Loan
 Add-on Interest
 Continuous compounding
Stock & Bond Valuation
 Know how to read WSJ quotations
 Understand various bond terminology
especially about coupon rate, current yield,
YTM
 Know constant growth, multi-stage growth
Capital Budgeting
 Which cash flows are relevant / irrelevant?
 All cash flows on after-tax basis
 Know the effects of depreciation, NWC,
Salvage
 Know the strengths and weaknesses of all
the capital budgeting rules
 Know how to calculate WACC
Understand Risk
 Total risk
 Systematic risk
 Unsystematic risk
 Which risk investors care about and why?
Know how to measure...
 Expected return of single stock and portfolio
 Total risk (variance, standard deviation)
of single stock and portfolio
 Systematic risk (beta)
 Reward-to-risk ratio
 Expected return using CAPM
CAPM
 Know the intuition behind CAPM
 Why investors care only about beta risk?
 Why do reward-to-risk ratio of all stocks are
the same in equilibrium
 What happens if they are not the same?
 How can one identify over- and undervalued securities using CAPM?
WACC
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Know how to calculate:
Cost of equity
Cost of debt
Cost of preferred
Capital structure weights
WACC
WACC
 Note that the cost of debt should be on an
after tax basis (multiply (1-T) )
 Cost of equity is from CAPM equation
 Cost of debt is the YTM
 Cost of preferred is from perpetuity formula
 Weights should always be based on market
values