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Exam 3

by: Anna Notetaker
Anna Notetaker
GPA 3.62
Business Finance
Gregory Nagel

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Business Finance
Gregory Nagel
Study Guide
50 ?




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This 0 page Study Guide was uploaded by Anna Notetaker on Monday November 30, 2015. The Study Guide belongs to FIN 3010-001 at Middle Tennessee State University taught by Gregory Nagel in Fall 2015. Since its upload, it has received 33 views. For similar materials see Business Finance in Finance at Middle Tennessee State University.

Similar to FIN 3010-001 at MTSU


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Date Created: 11/30/15
Firms39 Goals gt Payback Promise gt 1 Bonds 2 Stocks 3 Capital investments Examples 1 Corporate nance business nance gt Nissan 2 Investments gt Stocks 3 Financial institutions gt Banks Insurance companies 4 International Finance gt Apple General Electric Capital budgeting is important because it will determine where you end up Working capital management is daytoday nancing Goal of nancing is to maximize stock price The primary disadvantages of sole proprietorships and partnerships as forms of business organization 1 Unlimited liability for business debts on the part of the owners 2 Limited life of the business 3 Dif culty of transferring ownership Corporation is a business created as a distinct legal entity owned by one or more individuals or entities A corporation is a legal quotpersonquot separate and distinct from its owners and it has many of the rights duties and privileges of an actual person The corporate form has a signi cant disadvantage Since a corporation is a legal person it must pay taxes Moreover money paid out to stockholders is the form of dividends is taxed again as income to those stockholders This is double taxation Dupont Equations 1 Return on equity net incometotal equity Return on equity net incomeassets x assetstotal equity Return on equity return on assets x equity multiplier or return on assets 1 Debtequity ratio Return on equity pro t margin x total asset turnover x equity multiplier Future Value Formula FV PV 1 rquott As t increases FV increases as well Present Value Formula PV FV 1 rquott As t increases PV decreases as well As interest rate goes up so does the risk Discount Rate Formula R FV PVquot1t 1 Number of Periods Formula T lNFVPVIN1 r Coupon payment Face amount coupon interest rate of coupon payments per year Change in a bond39s price caused by a change in interest rates is called Interest Rate Risk or Price Risk Low coupon rate bonds have more price risk than high coupon rate bonds High coupon rate bonds have more reinvestment rate risk than low coupon rate bonds Uncertainty concerning rates at which cash ows can be reinvested Shortterm bonds have more reinvestment rate risk than longterm bonds Yieldtomaturity YTM the market required rate of return implied by the current bond price The Fisher Effect de nes the relationship between real rates nominal rates and in ann 1 R1 r1 h R nominal rate Quoted rate r real rate h expectedin ation rate Approximation R r h 1 What is the capital gain percent return for the following stock The stock was bought for 45 and paid a 050 dividend quarterly The stock was held for three years and then sold for 50 a 111 b 133 c 244 d 600 2 You are thinking of investing in a highly volatile stock ABC lnc ABC s historical return for the last 60 years has been 18 percent per year The expected return for ABC is 6 and the volatility is still expected to be high The expected return for a welldiversi ed portfolio of stocks is 75 If you invest in ABC are you likely to obtain a higher return that you can get by investing in the diversi ed portfolio YesNO Which investment is likely to be lower risk a Yes ABC b Yes Diversi ed portfolio cNoABC d No Diversi ed portfolio 3 ABC Inc wants to estimate the required return on its stock Beta for ABC is 25 The risk free rate is 3 and the expected return on the market is 8 What is ABC39s required return a 3 b 8 c 150 d 155 4 The cost of capital is the a Minimum return that investors expect for providing capital to the company b The discount rate used to nd the present value of cash ows when evaluating capital budgeting projects c The weighted average of the cost of the debt and equity provided to the company by investors d All of the above 5 Why is the cost of debt to rms less than the YTM on the debt that rms issue Because a Firms are able to deduct the interest payments from their income which reduces their taxes b Firms usuay default on their debts c Most rms have tax loopholes specially designed for debt d Firms usually are able to nd ega ways to avoid paying interest on debt


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