Corporate Finance Review
Chapter 2
-CAPM: how risk affects return
-Expected Return (on investment): mean value of its probability distribution of returns; greater the probability return will be below expected, greater the stand-alone risk
-Risk Averse: he/she must be compensated for holding risky assets
-Asset has 2 risk types: Diversifiable risk can be eliminated by diversification; market risk cannot be eliminated
-Market risk measured by standard deviation of returns on portfolio consisting of all stocks
-Relevant Risk: individual asset’s risk contribution to diversified portfolio
-Beta: measures how stock’s returns move relative to market (avg. = 1.0)
-Ri = Rrf + (RMp)Bi, Market Risk Premium (RMp) = Market return – Risk free
Chapter 4
-Bond: long term promissory note
-Zero Coupon Bond: issued at discount, no payment
-Call provision: issuing corp can redeem bonds prior to maturity at call premium; typically happens if interest rates fall below coupon rate
-Value of bond: present value of annuity + present value of lump sum
-Nominal interest rate (Rd) = r* + IP + DRP + LP + MRP r* = real risk free, IP = inflation premiums, DRP = default risk, LP = liquidity,
MRP = maturity risk
-Yield Curve: graph of relationship between yields on securities and securities’ maturities
-Normal curve upward sloping, however, curve can slope downward if inflation rate is expected o decline. Curve can be humped meaning interest rates on medium-term maturities are higher than rates on both short and long term maturities
-Expectations Theory: yields on long-term bonds reflect expected future interest rates
Chapter 9
-Forecast financial requirements with FFS (forecasted financial statements) method or AFN (additional funds needed) method; for changing conditions FFS is more reliable
-Determine AFN by estimating amount of new assets necessary to support forecasted level of sales, then subtract spontaneous funds generated from operations
-The higher a firms sales growth rate the
-CAPM: how risk affects return
-Expected Return (on investment): mean value of its probability distribution of returns; greater the probability return will be below expected, greater the stand-alone risk
-Risk Averse: he/she must be compensated for holding risky assets
-Asset has 2 risk types: Diversifiable risk can be eliminated by diversification; market risk cannot be eliminated
-Market risk measured by standard deviation of returns on portfolio consisting of all stocks
-Relevant Risk: individual asset’s risk contribution to diversified portfolio
-Beta: measures how stock’s returns move relative to market (avg. = 1.0)
-Ri = Rrf + (RMp)Bi, Market Risk Premium (RMp) = Market return – Risk free
Chapter 4
-Bond: long term promissory note
-Zero Coupon Bond: issued at discount, no payment
-Call provision: issuing corp can redeem bonds prior to maturity at call premium; typically happens if interest rates fall below coupon rate
-Value of bond: present value of annuity + present value of lump sum
-Nominal interest rate (Rd) = r* + IP + DRP + LP + MRP r* = real risk free, IP = inflation premiums, DRP = default risk, LP = liquidity,
MRP = maturity risk
-Yield Curve: graph of relationship between yields on securities and securities’ maturities
-Normal curve upward sloping, however, curve can slope downward if inflation rate is expected o decline. Curve can be humped meaning interest rates on medium-term maturities are higher than rates on both short and long term maturities
-Expectations Theory: yields on long-term bonds reflect expected future interest rates
Chapter 9
-Forecast financial requirements with FFS (forecasted financial statements) method or AFN (additional funds needed) method; for changing conditions FFS is more reliable
-Determine AFN by estimating amount of new assets necessary to support forecasted level of sales, then subtract spontaneous funds generated from operations
-The higher a firms sales growth rate the