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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 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