L1 - TVM

Question 1

What are the two major types of financial decisions in corporate finance?

Answer 1

• Financing
• Investing

Question 2

What is the primary corporate objective?

Answer 2

Maximization of shareholder wealth

Question 3

What is a normal market in finance?

Answer 3

A competitive market with no arbitrage opportunities

Question 4

What is arbitrage?

Answer 4

Buying and selling equivalent goods in different markets to profit from a price difference

Question 5

What is the formula for FV in the one-period case?

Answer 5

FV = CF x (1+r)

Question 6

What is the NPV?

Answer 6

The present value of expected cash flows minus the cost of investment

Question 7

State the rule of 72 for estimating time to double an investment

Answer 7

72/ r

Question 8

State the rule of 69 for estimating time to double an investment

Answer 8

(69 / r) + 0.33

Question 9

What is the Effective Annual Interest Rate (EAR)?

Answer 9

The annual rate that gives the same end of investment wealth after 1 year

Question 10

Give an example of a pure discount loan?

Answer 10

T Bills

Question 11

Give an example of an interest only loan:

Answer 11

Corporate bonds

Question 12

What are amortized loans?

Answer 12

Loans that require repayment of principal over time, in addition to required interest

Question 13

What are the determinants of intrinsic value?

Answer 13

• Free cash flow
• Market interest rates
• Firm’s business risk
• Market risk aversion
• Firm’s debt-equity mix

Question 14

How do you calculate Free Cash Flow?

Answer 14

Net Op Profit After Tax - Required investments