Test 2 Review 1 Question Types: Multiple choice, True/false w/ explanation, Short answer, Short essay, Fill-in-the-blank Problems: Multiple choice answer; must show all work / calculator inputs & cash flow diagrams Chapter 6: Bonds Concept Questions:  Understand Bond Ratings  Explain Selling At Par, At a Discount & At a Premium  Understand Bond Price Behavior wrt Changes in Market Interest Rates  Understand Bond Price Sensitivity wrt Maturity  Make Bond Investing Decision Using a Yield Curve Information  long-term or short-term and why  Compute Total Yield of a Bond  Explain Why Bond Market Rate is the Required ROR for Bond Investing  Understand Bond Provisions, Indentures & Covenants  Explain Interest Rate Risk and Reinvestment Risk Types of Problems:  Find retail price of a bond  Calculator Financial Functions (at coupon) (no date given)  Bond Worksheet (between coupons) (date given)  Given 2 bonds, which is most fairly priced  Find bond YTM  Find holding period return for bonds

Test 2 Review 2 Chapter 7: Stock Valuation Concept Questions:  Understand Fundamental Stock Concepts, Terms & Characteristics  Compute Stock Realized & Expected Total Yield  Compute the Theoretical Value of a Zero Dividend Growth Stock (Div. Discount Model)  Compute the Theoretical Value of a Constant Dividend Growth Stock (DDM)  Compute the Theoretical Value of a Non-constant Dividend Growth Stock (DDM)  Explain When to Use a Specific Pricing Models wrt the Corporate Life Cycle  Explain How Firms Meet the Cost of Stock  Understand the Relationship Between NI Growth, Dividend Growth & Stock Price Growth  Understand the Cost and Consequences of Debt Financing  Understand the Cost and Consequences of Stock Financing Types of Problems:  Find fair market value/theoretical value of a non-constant dividend growth Stock Chapter 13: Cost of Capital  Explain why WACC is considered a firm’s required ROR  Describe What Firms Can and Cannot do To Lower Their WACC

3 Formulas ROR = Profit/Investment = (Sales Price –COGS)/COGS = (End Price – Begin Price) / Begin Price = (New – Old) / Old Cost of Money Nominal Interest Rate = r = r* + IP + DRP + LP + MRP Time Value of Money r periodic = r nominal /m n = m x T FV = PV(1 + r nominal /m) n PV = FV / (1 + r nominal /m) n EAR = (1 + r nominal /m) m – 1 PV perpetuity = PMT / r periodic Bonds Cpn = FV(r CPN /m) Capital Gains Yield = ROR Bond Total Yield = EAR Coupon + Capital Gains Yield Real ROR = [(1 + r nominal )/(1 + Inflation)] - 1 Stocks P 0 = D/ r s (zero growth dividend) P 0 = D 0 (1 + g) = D 1 (constant growth dividend) r s – g r s - g P 0 = PV 0 (CFs t1-tx ) + PV 0 (PV t=x, CFs 4-infinity ) (non-constant growth dividend) r s = D 0 /P -1 + (P 0 - P -1 )/P -1 r s = D 1 /P 0 + g OR D 1 /P 0 + (P 1 - P 0 )/P 0 P 1 = P 0 (1 + g/m) n OR V horizon Cost of Capital WACC = w d r dT + w ps r ps + w s r s Test 2 Review