lecture 11 Flashcards
(32 cards)
what is the companies overall value mesaured in
fundamental value is calculated as the Net Present Value (NPV) of all its projects.
how does tariffs effect
Tariffs increase production costs → lower NPV → share price drops.
what can cause uncertainty
Rapid changes (like tariffs or economic shocks) cause uncertainty:
May lead companies to reduce dividend payouts to keep more cash.
Increases risk → raises the cost of equity (because investors demand more return for extra risk).
market value formula
MV= Div1/Ke-g
D1= expected div
Ke= cost of equity
g= growrth rate
Amortisation meaning
When you repay a loan over time, each payment includes part interest and part principal
Calculate Monthly Repayment using: (amortisation formula)
pv= CF*AF
total payable equation
Total Payable = Monthly Repayment × Number of Months
-total amount to be repaid
total interest equation
Total Payable – Initial Loan
how to compare loans
Compare loans based on total interest (watch out for early repayment penalties!)
Recommend for comparing loans
Consider other non-
financial factors:
*Is one more flexible than
the other (eg has no early
repayment fees)
*Is one lender generally
more flexible than the
other (eg if a bit late in
making a payment).
what are options
are financial contracts giving a right, not an obligation, to buy/sell an asset at a specific price before a specific date.
waht is options used for
Used for:
Risk Management: Protect against price falls.
Speculation: Bet on price movements.
what types of options r there
Stock options, commodity options, currency options, etc.
negative of options beong used for risk mamnagememnt
options limit the downside risk but allow the
upside potential to be retained.
american options
can be exercised anytime before expiration.
european options
can be exercised only on the expiration date.
what is a call option
investor has Right to buy an asset at strike price.
Used when expecting price rise.
call options: ITM meaning
In the Money (ITM): Stock price > strike price → positive value.
call options: ATM meaning
At the Money (ATM): Stock price = strike price → zero value.
Call options: OTM meaning
Out of the Money (OTM): Stock price < strike price → no value.
example of call option:
Buy a call on Apple at $175.
If stock rises to $178
, you exercise: profit = $178 - $175 = $3 (intrinsic value).
=ITM
intrinsic value in terms of the call option
ForaCallOption= StockPrice−StrikePrice
can options have negative instruicn va;ue
Options never have negative intrinsic value.
put option
Right to sell an asset at strike price.
Used when expecting price fall.
