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56 Cards in this Set
- Front
- Back
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Stock Valuation
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Intrinsic value of an asset equals the Present value of the stream of expected cash flows DISCOUNTED at an appropriate required rate of return
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How to calculate dividend payment for preferred stock
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Use par value
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What is unique about Preferred stock?
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It is NON-voting and non-participating, and in terms of liquidating, remember, it is ahead of CS but behind Debt
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Equation for PS valuation?
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V=D/kps
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Name some properties of CS
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Variable income, represents equity, includes voting rights and liquidation priority is the lowest
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When do we use the gordon growth model?
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Assumes common stock dividends will grow at a constant rate into the future
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What is g?
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constant annual dividend growth rate
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what is sustainable growth rate equation?
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ROEx(1-b) with 1-b being the payout ratio.
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Pro and COn of Constant Growth Model
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Strength: Good for mature, stable dividend paying firms and supplements other methods.
Weaknesses: -sensitive to estimates of g and difficult to use with non-dividend paying stock. Not useful for acquision valuation b/c doesn't take control perspective |
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Why is the H model good in Dividend discount models?
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Gradual drop with change in growth
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When determining whether to accept a project, what must you look at?
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1. Includes all cash flows that occur during the life of the project
2. Considers TVM 3. Incorporates the RR of project |
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What is a drawback of pay back period?
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1. firm cut off is subjective
2. doesn't consider TVM 3. Does not consider any RR of return 4. Doesn't consider all of the project's cash flows |
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What is the NPV rule whether to accept or reject a project
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If NPV is positive, accept. If both is negative, accept less negative one
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what is the ultimate goal of the firm?
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Maximize shareholder wwealth
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With profitability index when do you accept a project?
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when it is greater than 1
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How do we calculate profitability index?
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make Initial outlay zero, so cfj at time 0 will be o and at the end divide the NPV by Initial outlay
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what is IRR
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Rate of return that the firm earns on its capital projects (IRR is the rate at which NPV is zero)...or makes the PV equal to the Initial outlay
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when do we accept a project with using IRR
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IF IRR is greater or equal to the Required rate, ACCEPT, but less, REJECT
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what is a weakness of IRR method
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Can't be used between mutually exclusive projects, and can't be used if there are sign changes in the cash flows. Only if cash flows are conventional
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How is IRR and NPV related?
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Inversely related
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What is the MACRS depreciation system?
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It is depreciation=cost times percentage
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What are the two types of risk?
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Business and financial
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What is business risk?
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Specific industry...variability or uncertainty associated with operating income
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What is financial risk?
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Risk of distress or bankruptcy due to the use of fixed cost financing.. ..caused by management
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What is the relation with fixed operating and operating leverage
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High fixed cost create more variability so increase in fexed-increase in operating leverage=increase in business risk
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What is the breakeven Point Formula
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Total FC/Unit contribution margin
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DOL: operating measure
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measure SALES change =DOL change in EBIT
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what does DFL measure
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Use fixed cost finacing (debt or preferred stock, a small change in operating income is magnified into a larger changes in EPS
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DFL Equarion
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Q(P-V)-F/Q(P-V)-F-I
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What is BATNA
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Best alternative to a negotiated agreement
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DCL, what does it combine?
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Operating leverage and financial leverage
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How do you measure risk
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Variance, SD, beta
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How do you reduce risk
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Diversification
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How do you price risk
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Security Market Line, CAPM
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What does correlation say about risk
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:pwer correlation among assets (closer to 1) the greater the risk reduction possibilites for the portfolio
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What is in the build up method components?
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Bond Yield
Equity Risk Premium Micro Cap Risk Premium Liquidity (ie Start-up) risk Premium |
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What are the cost of equity measuring methods?
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CAPM and Build up method
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incremental cash flow
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cash flow that results from accepting the project
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Systematic Risk
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Market Risk, not diversifiable; ex: business cycle changes in the economy
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Standard deviation measures what type of risk
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TOTAL RISK
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non systematic risk
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firm specific risk; Oil tank bursts and floods a company's production area; diversifiable
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Systematic risk is measured by
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BETA
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What is required rate of return
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Return on a investment required by an investor given the investment's risk
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What is flotation cost
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Any cost associated with obtaining new debt such as transaction fees government fees cost or printing...etc
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What is two problems with project ranking
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Size disparity problem (unequal size)
Time disparity Problem Equal Lives |
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NWC definition
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CA-CL
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what is leverage?
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operating or financing's magnification in relation to fixed costs
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what is operating leverage?
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fixed operating costs (rent/property, administrative salaries)
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What is financial leverage:
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Use of debt and preferred stick rather than VC financing such as common stock.
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what are some risks associated with business risk?
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Sales volume, competition, cost variability, product diversification, product demand, operating leverage
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Cost of capital can be thought as
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Cost of bringing funds into the business
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If ROA is greater than CofC,the firm's value
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Increases
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if ROA is less than the cost of capital,
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Decrease firm's value
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How is finanacial risk caused?
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By management decision
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what is the relationship between NPV and Required rate of return?
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Inversely related
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Relation between IRR and required rate of return?
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None, except IRR> RR in order for it to be accepted
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