For Final

Question 1

OCF =

Answer 1

EBIT*(1 - Tax) + Depr

Question 2

NCS =

Answer 2

End NFA - Beg NFA + Depr

Question 3

Depr =

Answer 3

(Cost - BV at Salvage) * Depr Rate

Question 4

AT SV =

Answer 4

MV - Tax * (MV - BV)

Question 5

inflow of cash is () for NCS

Answer 5

negative

Question 6

rf represents

Answer 6

pure time value of money

Question 7

market risk premium

Answer 7

diff b/w expected return on market portfolio & risk free rate

Question 8

____ stocks earn more than predicted

Answer 8

low beta
small company
value
momentum

Question 9

firm value with WACC =

Answer 9

cash0 + sum of all future FCF discounted at WACC

Question 10

___ is (corporate) tax deductible, ____ is not

Answer 10

interest; dividends

Question 11

expected interest exp each year

Answer 11

D * rd

Question 12

expected TS each year

Answer 12

D * rd * Tc

Question 13

value of perpetual debt

Answer 13

D*Tc

Question 14

debt overhang

Answer 14

existing debt and the potential for distress cause shareholders to forego +NPV projects

assuming situation where shareholders would fund project

Question 15

risk shifting

Answer 15

more debt is bad

shareholders have incentive to take on riskier projects in presence of debt (and thus gamble w/debt holders $$)

Question 16

manager risk aversion

Answer 16

more debt is bad

manager wants to reduce personal risk in face of large financial risk

Question 17

FCF problems

Answer 17

more debt is good

debt acts as disciplinary device

Question 18

Trade off theory

Answer 18

VL = VU + PVTB - PVDC - value lost from excess risk-taking - value lost from manager risk aversion + value gained from disciplining debt

Question 19

signal from using internal funds

Answer 19

+, has enough CFs to finance business

Question 20

signal from using debt

Answer 20

+, low risk of future financial distress

Question 21

signal from issuing equity

Answer 21

-, signals that managers believe the firm is over-valued

Question 22

Calculating FCF in AHP case

Answer 22

Δexcess cash = FCF - net financial cash outflows

Amount added to excess cash comes from FCF that isn’t paid out in dividends, interest, etc

Question 23

dividend growth model

Answer 23

P0 = [ DPS0 * (1+g) ] / (re - g)

Question 24

if x denotes the ratio PVDC/VL, then PVDC =

Answer 24

x * [ (VU + PVTB) / (1 + x) ]

Question 25

key assumptions of perfect capital markets & div policy

Answer 25

firm always undertakes all +NPV projects firm finances itself @ fair market rates excess cash invested in correctly-priced securities

Question 26

firms with more investment opps will pay ____

Answer 26

less dividends

Question 27

if corporate tax

Answer 27

less dividends; keep cash in the firm and reinvest it on behalf of shareholders, then pay out returns as a dividend

Question 28

if capital gain tax

Answer 28

less dividends

Question 29

clientele effect

Answer 29

some clients will prefer diff div policies; they might pay diff tax rates on div income and capital gains

Question 30

dividends may act as a signal

Answer 30

since it's a commitment, consistent divs will incr investor's perception of firm's strength

Question 31

issuing securities is $$$

Answer 31

ex. underwriter fees

Question 32

dividends can be used to reduce ___ ___

Answer 32

agency conflicts

Question 33

reasons for share repurchase

Answer 33

tax adv if capital gains tax

Question 34

B-S assumptions

Answer 34

``` can buy/sell stock @all times no transaction costs unlimited borrowing/lending @ rf constant risk-free rate and volatility stock price is log-normally distributed stocks DON'T pay divs until after exp date ```

Question 35

option value relationship w/ sigma

Answer 35

option value will INCR with INCR in sigma unlimited upside potential, limited downside risk ( since we won't exercise option if price is very low)

Question 36

B-S limitation: Dividends

Answer 36

assumes no dividends until after T if there ARE dividends, they're paid to actual shareholders and not option holders; you have to adjust by subtracting from price

Question 37

B-S limitation: Horizons

Answer 37

overprices LT options bc B-S assumes variance grows proportionally with time horizon True variance is not going to be as large over long time periods --> a too high variance = too high options price

Question 38

call option & P

Answer 38

+ relationship, more likely to be in the money w/ higher current price

Question 39

call option & X

Answer 39

- relationship, more likely to be in the money w/ lower strike price

Question 40

call option & rf

Answer 40

+ relationship, increase in rf reduces PV of X

Question 41

PV of X =

Answer 41

X / (1 + rf)^T

Question 42

call option & sigma

Answer 42

+ relationship, unlimited upside, limited downside

Question 43

call option & T

Answer 43

+ relationship volatility scales up w/ time horizon PV of exercise price decreases

Question 44

put option & P

Answer 44

- relationship; more likely to be in the money w/ lower underlying price

Question 45

put option & X

Answer 45

+ relationship; more likely to be in the money w/ higher strike price

Question 46

put option & rf

Answer 46

- relationship; higher rf reduces PV of X that we'll receive when we sell the underlying asset

Question 47

put option & sigma

Answer 47

+ relationship; gain from downside, protected from upside

Question 48

put option & T

Answer 48

+ and - + from rising volatility w/ T - bc increase in T decreases PV of X

Question 49

put-call parity

Answer 49

Call0 + PV(X) = Put0 + P0 where PV(X) = X / (1+rf)^T

Question 50

valuing warrant bond component

Answer 50

bond value = C*(annuity etc) + F/(1+r)^T

Question 51

warrants: P

Answer 51

a * Y ``` a = n / (n+m) n = #new shares to which ALL convertible bonds will be converted (s*k) ```

Question 52

warrants: X

Answer 52

k*F

Question 53

Y for warrants

Answer 53

firm value - debt OR current MV of equity + cash proceeds from convertible bond issuance

Question 54

callable convertible bond

Answer 54

less exp bc more restrictions | can lessen financial distress by reducing leverage