Efficient Markets, PV, NPV Flashcards Preview

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Flashcards in Efficient Markets, PV, NPV Deck (27)
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1

weak market efficiency

prices reflect the information
contained in the record of past prices.

2

semistrong market efficiency

prices reflect not just past prices but all other
public information, for example, from the Internet or the financial press.

3

strong-market efficiency

prices reflect all the information that can be acquired by painstaking analysis of the company and the economy.

4

Alpha

states how much on average the stock price changed when the market index was
unchanged

5

Beta

tells us how much extra the stock price moved for each 1% change in
the market index

6

arbitrage

investment strategy that guarantees superior returns without any risk

7

How to sell a stock short

To sell a stock short, you borrow shares from another investor’s portfolio, sell them, and
then wait hopefully until the price falls and you can buy the stock back for less than you
sold it for. If you’re wrong and the stock price increases, then sooner or later you will be
forced to repurchase the stock at a higher price (therefore at a loss) to return the borrowed
shares to the lender. But if you’re right and the price does fall, you repurchase, pocket the
difference between the sale and repurchase prices, and return the borrowed shares

8

Equity financing

giving out stocks

9

Debt financing

lenders giving money in hopes of interest

10

Sarbanes Oxley Act

requires that corp place more independent directors on the board

11

net present value

PV - intital investment

12

amortizating loan

part of payment goes to interest and rest goes to reduce the loan

13

Conditions for market efficiency (4) from lecture notes

1) there should be a large number of profit maximization participants

2) widely publicly and cheaply available information to all investors

3) new info should be rapidly flowing

4) transactions cost must be low

14

Goal of financial manager

To maximize market value of corporation by maxing stock price

15

Market information

Everyone has access to w/o doing any math
Example prices

16

Non market information (4)

Macro economics aggregates, dividends/ earning announcement
Political news
Stock splits

17

Insider information

Mergers and acquisitions

18

Types of capital budgeting decisions

Accept reject decisions
Capital rational decisions
Mutually exclusive decisions

19

Payback

Number of periods it takes to recover/recoup the initial investment

20

Issues w/ payback

TVM IS IGNORED
required payback is iffy
Don't take into consideration years after payback

21

Type 1 error

Accept a project that should have been rejected

22

Type 2 error

Reject a project you should have acccepted

23

Multiply IRR

when there is more than one sign change
put CF in calc as normal. 1 i RCL g R/S
200 i RCL g R/S

24

setbacks of IRR

NPV and irr assume that cash benefits are re-invested at the prevailing market rate. BUT irr is re-invested at projects rate which is bigger than market rate.
Projects have different scale
Projects have different lives

25

Modifiy IRR

1) find NPV of + numbers with neg numbers as 0. Find FV of NPV as PV
2) find NPV of - numbers with pos numbers as 0. Find NPV as PV
3) Compute i with FV and PV found

26

EAA

Find NPV. Make it -PV and compute for PMT which is EAA

27

Working Capital Mistake

1) Forget about it entirely
2) forget that it changes
3) forget to recover it at the end of project