1. Review Financial Management midterm

2. Present Value You have a relative who has savings of $100,000 and now plans to retire. Assuming that she wishes to make equal annual withdrawals from these savings for the next 20 years of her life, how much will each annual withdrawal amount to if she is earning 5% on her savings?

3. Present Value You buy a 10-year zero-coupon bond, with a face value of $1000, for $500. What is the rate of return you will make on this bond?

4. Financial Statements What does the balance sheet show?

5. Financial Statements What does the income statement show?

6. Financial Statements Do accountants use the market value or the book value of assets when making the balance sheet?

7. Financial Statements Where would accounts payable be located exactly on the balance sheet?

8. Financial Statements What are the 2 main categories of expenses in the income statement? Which one includes depreciation?

9. Financial Statements If the net income of a firm is $1,000,000 and the book value of common equity is $10,000,000, then what is the return on equity?

10. Give 2 characteristics of Debt? Cost of Debt

11. –Commitment to make fixed payments in the future –The fixed payments are tax deductible –Failure to make the payments can lead to either default or loss of control of the firm to the party to whom payments are due.

12. How can we estimate the cost of debt for a company if the firm is rated? Cost of Debt

13. If the firm is rated, use the rating to calcul ate the default spread. Add the default spr ead to the risk free rate.

14. Bookscape has an operating income of 35 75 and a interest expense of 575. What is its interest coverage ratio? Cost of Debt

15. Interest Coverage Ratio = EBIT / Interest Expenses = 6.22

16. What is the after tax cost of debt for Tata chemicals given the following information. Risk free rate 2.5% Country default spread for India 3% Default spread for company 3% Indian Tax rate 34% Cost of Debt

17. Pre-tax cost of debt = Riskfree Rate(Rs) + Country Default Spread + Company Default spread = 2.5% + 3% + 3% = 8.5% After-tax cost of debt = Pre-tax cost of debt (1- tax rate) = 8.5 (1-.34) = 5.61%

18. Risk Why do we need a model that measures the risk of an investment?

19. Risk From whose perspective do we measure risk?

20. Risk Who takes a more easy view of risk, equity investors or lenders?

21. Risk Which is not a characteristic of a good risk and return model? A. It should come up with a measure of risk that is specific for just one asset. B. It should clearly show what types of risk are rewarded and what are not C. It should come up with standardized risk measures D. It should work well not only at explaining past returns, but also in predicting future expected returns

22. Risk Name 3 of the 5 main components of risk?

23. Risk Why does diversification reduce or eliminate Firm-Specific Risk?

24. Risk The news has a headline that the Fed will increase in interest rates? What kind of risk is this? Would that usually positively or negatively affect prices?

25. Risk If the firm has small institutional holdings and small insider holdings, and its stock is held by large numbers of individual investors with small equity holdings, then who is the marginal investor?

26. Risk What is the name for an imaginary holding of every traded risky asset in the market in proportion to their market value?

27. Risk Which are more risky assets that move more with the market portfolio or assets that move less (unrelated)?

28. Risk What is the correct risk-free rate to use in the CAPM?

29. Risk The ten-year rupee-denominated bond, issued by the Indian government traded to yield 8%. The default spread is 3% estimated for India, based upon its sovereign rating of Ba2. What is the riskfree rate for rupee-based CAPM computations?

30. Risk If we would like to calculate the risk-free rate in real terms i.e. minus inflation, what should we use?

31. Risk What does the Risk Premium measure?

32. Risk Are investors more or less risk adverse (risk-off) after large market drops?

33. Risk How does the historical approach measure the risk premium?

34. Risk In many emerging markets where there is very little historical data how can we estimate the risk premium?

35. Risk Bonds issued by the Brazilian government default spread is 2.5%. The standard deviation in the Brazilian equity index is 34.0 percent, whereas the standard deviation in the Brazilian bond is 21.5 percent. What is the country equity risk premium for Brazil?

36. Risk What is the cost of equity for Microsoft if it has a total risk premium of 6% the US treasury bond rate of 2% and a beta of 1.25%

37. Beta What does the R squared of a regression provide an estimate for?

38. Beta What does Jensen’s Alpha tell us?

39. Beta Name 2 ways to bring down your beta?

40. Beta Disneys average % change in Ebit is 12% and average % change in sales is 15%. What is their operating leverage?

41. Disneys debt to equity ratio is 30% and levered beta is 1.1. The tax rate is 40%. What is Disneys unlevered beta?