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