Chapter 6
actual rate of interest charged by the supplier of funds
What is the nominal rate of interest?
Residual owners
What are common stockholders?
uncertainty surrounding the return that an investment will earn
What is risk?
costs of issuing and selling a security
What are flotation costs?
Measures an investment's value: PV of cash inflows and outflows
What is NPV?
real interest rate + inflation =
What is the risk free rate?
P0 = D1/(r-g)
What is the Gordon model?
Returned average nominal return of 11.5% from 1900-2019
What are common stocks?
index of degree of movement of an asset's return in response to a change in market return
What is Beta?
4th step of capital budgeting process
What is implementation?
place operating and financial constraints on borrowers to protect bondholers
What are restrictive covenants?
useful when valuing firms that have no dividend history
What is the FCF model?
Choose investments based solely on expected returns, disregarding risks
Who are risk neutral investors?
Statistical measure of relationship between any 2 series of numbers
What is correlation?
Discount rate that equates NPV of an investment opportunity with $0
What is IRR?
rate of return investors earn if they hold a bond until maturity
What is YTM or Yield to Maturity?
Shares of common stock that have been put into circulation
What are issued shares?
r= RF+B*(rm-RF)
What is CAPM?
Considered a risk -free asset
What are Treasury Bills?
Projects whose CFs are unrelated to one another
What are independent projects?
Price of bond: 12% coupon (quarterly), 10 years to maturity, RROR 14%, $1,000 par
What is $893?
Price of stock: $2.75 dividend in 1 year, 5% growth rate, RROR 12%
What is $39?
What is the market return?
Before-tax cost of debt: 10 years to maturity, 10% annual coupon, $1,000 par, selling at $920, tax rate 21%
What is 11.4%?
NPV of CFs: year 0=-5,000; year 1=1,400; year 2=1,900; year 3=1,700; year 4=1,300; cost of capital = 14%
What is -$393?