Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
77 Cards in this Set
- Front
- Back
- 3rd side (hint)
|
The efficient portfolios:
(I) have only unique risk (II) provide highest returns for a given level of risk (III) provide the least risk for a given level of returns (IV) have no risk at all |
One and two only
|
|
|
|
The correlation measures the:
|
Direction of movement between the returns of two stocks
|
|
|
|
Maximum diversification is obtained by combining two stocks with a correlation coefficient equal to:
|
-1.0
|
|
|
|
Beta of the market portfolio is:
|
+1.0
|
|
|
|
Beta of Treasury bills portfolio is:
|
0
|
|
|
|
The capital asset pricing model (CAPM) states that:
|
The expected risk premium on an investment is proportional to its beta
|
|
|
|
Beta measure indicates:
|
The change in the rate of return on an investment for a given change in the market return
|
|
|
|
T F Financial leverage affects the risk of the firm's assets.
|
False
|
|
|
|
A stock with a beta of zero would be expected to:
|
Have a rate of return equal to the risk-free rate
|
|
|
|
The "beta" is a measure of:
|
Market risk
|
|
|
|
Cost of capital is the same as cost of equity for firms that are:
|
financed entirely by equity
|
|
|
|
Total capitalization is defined as:
|
Total long-term liabilities plus stockholders' equity
|
|
|
|
The market value of equity is calculated as:
|
(Market price) x (# of shares outstanding)
|
|
|
|
Modigliani and Miller's Proposition I states that:
|
The market value of any firm is independent of its capital structure
|
|
|
|
As EBIT increases for a levered firm,
|
the EPS increases by a larger percent
|
|
|
|
When comparing levered vs. unlevered capital structures, leverage works to increase EPS for high levels of operating income because:
|
Interest payments on the debt stay fixed, leaving more income to be distributed over less shares
|
|
|
|
T F According to Proposition II, the cost of equity increases as more debt is issued, but the weighted average cost of capital remains unchanged.
|
True
|
|
|
|
T F Financial leverage increases the expected return and risk of the shareholder.
|
True
|
|
|
|
Risk shifting implies:
|
When faced with bankruptcy, managers tend to invest in high risk, high return projects
|
|
|
|
The trade-off theory of capital structure predicts that:
|
Safe firms should borrow more than risky ones
|
|
|
|
T F Financial leverage affects the risk of the firm's common stock.
|
False
|
|
|
|
The pecking order theory of capital structure implies that:
(I) Risky firms will end up borrowing more (II) Firms prefer internal finance (III) Firms prefer debt to equity when external financing is required |
II and III only
|
|
|
|
Corporations typically have the right to repurchase a debt issue prior to maturity at a fixed price. Such debt issues are said to be:
|
Callable
|
|
|
|
= Current Assets/Current Liabilities
|
Current Ratio
|
|
|
|
=(CA-Inventory)/CL
|
Quick Ratio
|
|
|
|
What are the two liquidity ratios?
|
Current and quick
|
|
|
|
= COGS/ Inventory
|
Inventory Turnover Ratio
|
|
|
|
=365/ (Revenue/Accts. Rec)
or Accts Rec/ (Sales/365) |
Day Sales Outstanding Ratio
|
|
|
|
= Total Debt/(Shares outstanding*Price)
|
Debt to Equity Ratio
|
|
|
|
=(EBIT+Depreciation)/Int. Exp
|
Interest Coverage Ratio
|
|
|
|
=Net Income/Sales
|
Profit Margin Ratio
|
|
|
|
=Net Income/Total Assets
|
Return on Assets ratio
|
|
|
|
=Net Income/Total Equity
|
Return on Equity ratio
|
|
|
|
=Net Income/Shares Outstanding
|
Earnings Per Share (EPS)
|
|
|
|
=Market Price per Share/Earnings per share
|
Price Earnings Ratio
|
|
|
|
=Tax Expense/Earnings Before Taxes
|
Tax Rate
|
|
|
|
G=(1-payout ratio)* ROE
|
Growth Rate. ROE = (NI/Total equity)
|
|
|
|
Capital Gains Yield = (Pe-Pb)/Pb
|
[Ending Price(Pe)-Beginning Price(Pb)]/Beginning Price (Pb)
|
|
|
|
Dividend Yield=Div/Pb
|
Dividend/Beginning price
|
|
|
|
βA = (pA,M)σA / σM
|
Beta of the Firm - Stdev(firm)*(the correlation between the returns for the firm and market)/Stdev(mkt)
|
|
|
|
βU = βL / [1 + (1 – T)(D/E)]
|
Change to:
βL = βU*[1+(1-T)(D/E)] D/E= Liabilities/Equity |
|
|
|
How do you calculate the We?
|
Total Equity/(Total Equity+Total Liabilities)
or (1- Wd) |
|
|
|
How do you calculate the Wd?
|
Total Liabilities/(Total Equity+Total Liabilities)
or (1-We) |
|
|
|
How do you calculate the Kd?
|
Yield to Maturity, or Given
|
|
|
|
How do you calculate the Ke(acctg)?
|
Growth Rate + [(Forecast EPS * Payout Ratio)/Price]
|
|
|
|
How do you calculate the Ke(CAPM)?
|
Krf + [Beta*(Km-Krf)]
|
|
|
|
What is the WACC equation? Both CAPM and acctg?
|
(Wd*Kd)(1-t)+(We*Ke)
|
|
|
|
What are the leverage ratios?
|
1. Debt to Equity
2. Total Debt Ratio 3. Interest Coverage Ratio |
(3)
|
|
|
What are the Profitability Ratios?
|
1. Profit Margin
2. Return on Equity 3. Return on Assets |
(3)
|
|
|
What are 4 ways to manipulate earnings?
|
Channel stuffing, Reserve accounts, options as compensation, off balance sheet items
|
|
|
|
What is the Kd?
|
Cost of Debt (interest rate)
|
|
|
|
What did MMI State?
|
That capital structure doesn't matter. It is irrevelant because assets create revenue
|
|
|
|
What were the 3 assumptions for MMI
|
1. Perfect information
2. Everyone borrows at Kfr 3. Everyone has the same tax rate |
|
|
|
What did MMII state?
|
Higher debt will increase tax shields - however, it is exactly counteracted by the increase in the cost of capital
|
|
|
|
What are the 3 theories for how we see capital structure?
(why we see different levels of debt) |
1. Pecking order
2. Trade off theory 3. Agency Cost theory |
|
|
|
What is the pecking order theory?
|
You use the cheapest source of funds first. Usually RE, then Debt. But debt gets more expensive than Equity, so then switch again
|
|
|
|
What is the trade off theory?
|
Issue debt to get tax shields until marginal benefit of the tax shield = marginal cost of the financial distress
|
|
|
|
What is the agency cost theory?
|
Issue debt to constrain management
|
|
|
|
What is moral hazard?
|
Moral hazard is the result of maximizing behavior. A person weighs the costs and benefits of an action, and when benefits exceed costs, he takes the action.
|
|
|
|
What are the two types of agency problems?
|
Adverse Selection, Moral hazard
|
|
|
|
What is adverse selection?
|
A market process in which "bad" results occur when buyers and sellers have access to different information. The "bad" customers are likely to be selected
|
|
|
|
What is an Agency Relationship?
|
The relationship between stockholders and management
|
|
|
|
What are the three types of ownership structures for a firm?
|
1. Managerial Ownership
2. 5% shareholders/blockholders 2. Institutional Ownership |
|
|
|
What are the two committies within the board of directors?
|
-Compensation Committee
-Audit Committee |
|
|
|
How do you calculate the Market rate?
|
Market Risk Premium + Risk Free Rate
|
|
|
|
Kd can also be equal to ____
|
Krf
|
|
|
|
What are the Leverage ratios?
|
Debt to Equity
Interest Coverage Total Debt |
(3)
|
|
|
How do you calculate the Debt to Equity Ratio?
|
Total Debt/(Shares outstanding *price)
|
|
|
|
How do you calculate the Interest coverage ratio?
|
(EBIT+Depreciation)/ Interest Expense
|
|
|
|
What are the Efficiency Ratios?
|
Inventory Turnover
DSO |
(2)
|
|
|
What are the four types of ratios?
|
Liquidity
Leverage Efficiency Profitibility |
|
|
|
Example of a moral hazard
|
Credit card companies limiting the amount that borrowers can spend, b/c without such limits, they may spend recklessy, leading to default
|
|
|
|
Lending institutions and moral hazard
|
Lending institutions can make risky loans that will pay handsomely if the investment turns out. They will be bailed out by the taxpayer if the investment goes bad
|
|
|
|
Reducing Adverse Selection problems through innovative pricing and product schemes:
|
Insurance companies can segregate high-risk and low-risk policy holders by offering different policies with different prices
|
|
|
|
What does a Beta of 1 mean?
|
The company moves in line with the market
|
|
|
|
What does a beta < 1 mean?
|
The share is more stable
|
|
|
|
What does a beta greater than 1 mean?
|
the share is exaggerating the market movement
|
|
