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,

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Presentation transcript:

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 under- valued 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