Fin 301 Final Exam Questions with Complete Solutions
5 views 0 purchase
Course
FIN 301
Institution
FIN 301
Discount - Answer-Multiply a number by less than one.
Discount rate - Answer-A function of time and risk: discount rate=f(time, risk)
Discount factor - Answer-A function of both time and the discount rate: [discount rate=f(time, discount)]
Present value - Answer-of an investment is the sum...
Fin 301 Final Exam Questions with
Complete Solutions
Discount - Answer-Multiply a number by less than one.
Discount rate - Answer-A function of time and risk: discount rate=f(time, risk)
Discount factor - Answer-A function of both time and the discount rate: [discount
rate=f(time, discount)]
Present value - Answer-of an investment is the sum of the expected cash flows
multiplied by their respective discount rate.
Three-Step Approach [DCF Valuation] - Answer-1. Develop a set of expected cash
flows.
2. Estimate the discount rate and calculate the discount factors.
3. Multiply the cash flows by the discount factors and add them to determine the value
of the asset.
Project/Venture - Answer-An investment to produce a product or provide a service that
will generate money in the future.
Cash Inflows - Answer--Additional revenues coming into the company as a result of the
project.
-Consist of dividends and increase/decrease in stock price.
Cash Outflows - Answer-Additional expenses being spent by the company as a result of
the project.
Bond - Answer--A debt instrument.
-Corporations, the US Government, and municipalities issue bonds.
-Payable from taxes from US government or the general revenues of a corporation.
Cash inflows to an investor - Answer-Bond interest payments, usually every 6 months,
and repayment of principal.
Stock - Answer-Represents ownership interest in a corporation.
Life of stock - Answer-Infinite. There is no maturity associated with a stock.
, Risk of a stock - Answer-Hard to quantify, making it difficult to determine the proper
discounting rate.
Capital budgeting - Answer--The process of planning and managing a firm's long-term
investment in projects and ventures.
-Estimating the amount, timing and risk of future cash flows.
-Starts with estimation of incremental cash flows from a project; creating a time line of
expected cash flows; and comparing the value of the cash flows to the cost of project.
Net Present Value [NPV] - Answer--The difference between the value of an investment
and its cost.
-The value of any project, venture or investment is equal to the present value of its
expected cash flows, discounted for their risk and timing.
NPV Rule - Answer-NPV, Positive : Invest!
NPV, Negative : Do not invest!
Internal Rate of Return [IRR] - Answer--The rate of return that is expected to be earned
on a project.
-The discounting rate that makes the net present value of an investment equal to zero.
Payback Period - Answer--The length of time for the return on an investment to cover
the cost of the investment.
-Calculation involves only gross cash flows and not discounted cash flows.
Payback Rule - Answer-Payback period < Predetermined no of years : Accept!
Payback period > Predetermined no of years : Reject!
Profitability Index - Answer-Accept project with highest Profitability Index
Efficient Capital Market [ECM] - Answer--Stock market is brutally efficient.
-Current stock prices reflect all publicly available information
-Stock prices react completely, correctly and almost instantaneously to incorporate the
receipt of new information
If stock market is efficient... - Answer-It would be useless to forecast future prices by
technical analysis and fundamental analysis.
Calculation of simple averages - Answer--If there is a negative percentage, biased
upwards
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller lectknancy. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $11.49. You're not tied to anything after your purchase.
