Lecture 1

Question 1

State the law of one price

Answer 1

If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets

Question 2

State the “formula” for value additivity

Answer 2

Price(C) = Price(A + B) = Price(A) + Price(B)

If this does not hold, there are arbitrage opportunities

Question 3

What is a “normal market”?

Answer 3

A competitive market in which there are no arbitrage opportunities

Question 4

Vilken typisk miss ska man undvika när man räknar med perpetuities och annuities?

Answer 4

Ofta vill man ha med pengar år noll, alltså startkapital - dessa måste adderas. C blir alltså inte pengarna år noll (T0), utan pengarna år ett (T1). De ska redan ha vuxit ett snäpp (för perioden T0-T1).

Question 5

Introduktionen fokuserar på att flytta kassaflöden i två dimensioner, vilka är de?

Answer 5

Tid och valuta

Discount/compound rate och exchange rate

Question 6

State the formula for company growth

Answer 6

g = retention rate × return on new investment

Question 7

How can a shareholder match (or “counteract”) a companies decision to leverage or delever the firm?

Answer 7

Borrow money (or pay back) in proportion to the firms actions, to buy new shares (or with money from sold shares)

Note that the fraction should be between debt and equity; the value of total assets is never included

Question 8

What thinking would have led to the right answer on the arbitrage question?

Answer 8

Sell the expensive stuff and buy cheap stuff in a way that gives you exactly equivalent assets

Question 9

If shareholders offer to buy a fraction of equity at a given price, what is the value of the remaining equity?

Answer 9

The remaining percentage of equity, multiplied to what shareholders paid per percent

Question 10

How can necessary assumptions be found?

Answer 10

Start with immediate actions in the answer, then proceed to theoretically necessary assumptions

Question 11

What is the typical unnecessary mistake when calculating NPV?

Answer 11

Not subtracting the initial investment?

Question 12

How are costs of debt and equity expressed in the wacc?

Answer 12

In whole percentage numbers (e.g. 5 instead of 0.05)

Question 13

What is important to remember about debt/equity ratios in the WACC?

Answer 13

D/E is expressed in relation to one another, never in relation to total assets

Question 14

Is the tax shield i recurring income (to be discounted) or a one-time income?

Answer 14

A one-time income

Question 15

How should you think about cash being spent, in financial terms?

Answer 15

Increasing leverage by that amount