FIN 422 Final Exam Essay

Submitted By Sean-Feeney
Words: 551
Pages: 3

Networking Capital= Current Assets – Current Liabilities

FV= C0 * (1+r)^t

PV= C1/(1+r)

NPV= -Cost + PV

FV= C0 * (1+ (r/m))^m*t m= times a year t= years

FV= C0 * e^rt (Continuous)

Profitability Index (PI)= Total PV of future cash flows/Initial Investment

OCF= EBIT – Taxes + Depreciation

Fisher Equation: (1+ Nominal Rate) =(1+Real Rate) * (1+Inflation Rate)

Bond Value = (C*(1-1/(1+r)^t)/r) + (F/(1+r)^t)

P0= Div/R P0= Div1/(1+R) + Div2/(1+R)^2….

P0= Div1/R-g

Pa= (C/R-g1) * (1-((1+g1)^t)/(1+R)^t)

Pb= ((DivT+1)/(R-g2))/(1+R)^t

Expected Return: Ri= Rf+Beta * (RM-RF) (CAPM)

DOL= (Change in EBIT/EBIT) * (Sales/Change in Sales)

Dividend Discount Model: Rs= (D1/P)+g

APV= NPV+NPVF

Black-Scholes Model: C0= S * N(d1)- Ee^-Rt * N(d2)

The goal of financial management is to maximize the current value per share of the existing stock.

Agency problems-not increasing current stockholders value

Higher financial leverage results in more volatility, and vice versa.

If NPV is positive accept a project. Negative NPV means discount rate is too high.

Use WACC when risks of the project are equal to risk of firm
Step1: Computation of Risk- Adjusted Discount rate. Risk-Adjusted Discount rate = Risk free rate of return + Risk Premium
Step2: Computation of the asset worth.
Asset Worth = CF1 / (1+r)0 + CF2 / (1+r)1 +CF3 /(1+r)2
Pension Fund=Balance/FV of annuity

Call options-high when:
I. the time to expiration increases.
II. the stock price increases.
III. the risk-free rate of return increases.
IV. the volatility of the price of the underlying stock increase Beta in Portfolio = = (weight of portfolio in asset× beta) + (weight of portfolio in asset× beta) + (weight of portfolio in asset× beta), T-bills beta = 0, market beta =1

Rewarding executives with options ensure that managers have no agency cost.

Managers should change capital structure only if the firm increases in value.

Financial Distress-most firms survive; can be good by reevaluate mission and raising new capital
Indirect cost=underinvestment, turn down low risk, low…