8/2/2019 Final Finance Cheat Sheet

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) IPO 80,000 shares. Full commitment underwriter. Initial price $32, 9% spread. Uw sells 68,

h received by co.?A: 32(.91) x 80,000 =2,329,600

) Quick ratio=1.5, CL=450,000. Must contain QR=1.2. Max it can borrow?A: 1.5=(CA-Inv)/CL, ()=675. 675/(450+x)=1.2,x=112,500) 15yr mortgage=250,000. Month pmt=2,109.64. IntRt=6%: The portion of the 2nd mortg. pmt. isinterest is 1,246. 2nd pmt will not reduce principal by 806. Principal portion pd. changes ov

time. Final pmt will not all go to reducing principal owed. Portion of pmt thats interest d

over time. Portion thats principal^ot. How long till amt owed is 125,000?A: I=.5 PV=250000

PMT=-2109.64 FV=-125000N110

) Raise 6.2M by sell 20yr, $1000 face val, 0-cpn bonds w/ yield 9.5%. Whats min. # to sell to ra

M?A: N=20 FV=1000 I=9.5 PV162.8, (6.2M/162.8)=38,078

)IntRt risk ^ with maturity of bonds. Nom. intRt is not always>inflation rate. Real intRt i

alwaysCR then discount. Protective provision in bond indenture might require a max dpayout ratio. Commercial paper isnt LT borrowing by corps. with junk/high bond ratings. Cal

bond not selling back.

) Bond cpn=8%, 8yrs. Bought @ par. Currnt mkt rate=8.25%. Expect:capital loss if you sell bond @ mkt p

ay & the CY>8%. YTM isnt 8%, next semi-ann int. pmt not $41.125) Normal features of corp. bond:interest-only loan & payment of interest is tax deductible poration & fixed coupon payment)S&P issues bond ratings on sovereign debt. Bonds issued by US govt are free of default ris

Bond ratings dontassess default risk and volatility of bond. Fallen Angel hasnt dropped

hi YTM>CR.

) Support IPO underpricing:counteract winners curse. Reward sharing of opinion of stock

value. Diminish risk to firm commitment Uws. Reduce prob. Investors will sue inv. banks inv

with IPO.

3) Retire today w/$387,419. Earn 6.8% cmpd monthly. Withdraw $3,000/beg.mo today. How long to run out?A:BegM

6.8/12) PV=387419 PMT=-3000 FV=0N230.19 mos.4) Short selling stock:borrowing stock, selling it, buying it back later and then returning

lender.5) Unexpected increase in Interest rates:mostly want to own bond with LOW YEARS to maturityH COUPON %.6) 1st pmt=$10k today. Never ending pmt increase by 4% annually. 10% discRt. PV of prize?A:00(1.04)/(.1-.04) + 10000 = $183,333.337) Bond price decreases =CY^ & YTM^

) Ann. Div.=.48, .60, & .62. (Constant g after 3 years). Beta=1.5, ExRet=11%, Rf=5%. Max amt

d pay for 1 share?A:$4.43) Stock=$22. Div=3.8%. MktRR=8.2%. Whats amt of last div. pd?A:$0.93) 2-stage div grwth model:can be used to compute a stock price at any point of time. Does n

consider cap gain & ignore the div yld. Does not state the mkt pr. of stock is only affected

amt of div.

) What gives you val. of Equity? A:Discount future expected dividends by cost of equity &

count future expected free cash flows by WACC, then deduct debt.

) Boom=.50chance, .27return. Norm=.65chance, .13return. Rec=.30chance, -.20return. Whats th

5.87

) Expected Div Yld=3.6%. Do=$1.8, D1=$1.86. (constant g=.033).A: 6.93%) SD of a portfolio:can be

8/2/2019 Final Finance Cheat Sheet

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0) NPV=0, then:projects RR just equals the rate required to accept project. Any delay in p

the projected cash outflows will cause project to have a positive NPV. IRR wont>disc rate.

0 acct profit

1) At the accounting break-even level of sales, the operating cash flow is equal to:Depreci2) Proj. w/ conventional CFs, IRR method:wont produce mult. rates return for 1proj.Doesn

always give same answer as NPV for MutExcl proj. Wont lead to incorrect acc/rej decisions.

= Disc. Payback accept/reject decisions.

3) Proj. req. Pb period=3yrs, then:CF3 is valued just as highly as CF1. CFs in ea. yr mustn

exceed 1/3 of proj. cost. CF4 isnt valued as much as CF3. All CFs discounted by same disc

rate.

4) Consistently earn abnormal + returns by buying stocks that lost >20% value. Mkt is: not song form efficient and not weak form efficient.5) Semi-strong form efficient markets:buy index funds, analysts rarely consistently make +abnormal profits, stock prices react quickly to unexpected news announcements.Shouldnt ha

active invest. strategy

6) Portfolio is already effectively diversified:unchanging port SD. Not inc/dec/constant po

a. Not decr in port SD.

7) Risks:mkt rewards you for non-divers risk by risk prem. Divers risk assoc w/ individfirm/industry. SD measures all risk. Non-Div risk measured by Beta. Risk premium doesnt ^

divers risk^. Syst risk cant be eliminated by investing in several stocks. Finance theory

doesnt say that total risk should be rewarded.

8) Stock Beta=1.1, ExRet=10.5%. T-bills ret=3.2%, MktRR=10.1%:The return on stock will grapbelow SML. Port 91% stock, 9%T-bill gives lower return than mkt port but have approx same r

Stock not Underpriced

9) When earn announcement made, delayed response for stock adjustments. You should:sell the stock shor

ediately after earn. announcemnt if earnings are lower than expected.

0) Stock returns=5%,16%,-18%,11&. Normally distributed. 99% prob range for any one given yea

.6% to 148.6%1) Perp. Pref. Stock par value=$10, div=8.5%. Cost of pref. stock=9%, how much is stock wort

x.085)/(.09) =$9.44

2) IRR will decrease if:each CF moved a year later. Not if initial cost of proj decr. Not if tot

of CF^. Not if RRR decr. Not if salv. value of assets utilized by project ^.

3) NPV=0, then:any delay in receiving the projected CF will cause project to have negative

4) Earnings & Div grow at 4% perp. ROE=16% (constant perp). Cost Debt=5%, Cost Equity=12%. Wtheoretical lagged PE ratio?A:9.75

5) Using Div Grwth Model to value stocks. Expect MktRR ^ across the board on all equity

urities. Then we should expect: market values of all stocks to decrease.

6) Efficient frontier is found by plotting:SD on the x-axis(horizontal) & Expected Return oxis(vertical).

7) Buy 6 call options. Strike=$40 when option quoted at $1.30. Expires today with value of s

at $41.90. Total profit?A: [(41.9 40) 1.30] x 6 x 600(b/c 100 shares per stock) =$360