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Published byBartholomew Beasley Modified over 9 years ago
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Exam 3 Review Comprehensive
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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
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Things to remember for calculator problems Properly sign (+ or -) cash flows Set periods per year (P/YR) Clear previous memory
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Interest rates Points on a Loan Add-on Interest Continuous compounding
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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
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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
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Understand Risk Total risk Systematic risk Unsystematic risk Which risk investors care about and why?
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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
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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?
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WACC Know how to calculate: Cost of equity Cost of debt Cost of preferred Capital structure weights WACC
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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
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