ADVANCED CORPORATE FINANCE
CHAPTER 1, 4, 8, 9, 5, 6, 10, 11, & 13
EXAM QUESTIONS WITH CORRECT
ANSWERS
Infrequent Annuity - ANSWER-A level stream of equal dollar payments that lasts for a
fixed time however, these compounds differently due to infrequent payments.
Growing Annuity - ANSWER-An annuity with periodic payments that grow at a certain
rate,
= C [ (1 - (1+g/1+r)^r) / r-g ]
Coupon - ANSWER-The stated interest payment on a debt instrument
Face Value - ANSWER-The value of a bond that appears on its face. Also called par
value or principal.
Coupon Rate - ANSWER-The annual coupon a bond pays divided by its face value
Maturity - ANSWER-The number of years until the face value of a bond is paid
Yield to Maturity - ANSWER-The discount rate that equates the present value of the
interest payments and redemption value of a bond with the present price of a bond.
Bond Value - ANSWER-= C * [ 1-1/(1+r)^t ] / r + F/(1+r)^t
Nominal Interest Rate - ANSWER-o Percentage change on the number of dollars you
have.
Real Interest Rate - ANSWER-o Is the difference between the nominal interest rate and
the inflation rate.
$1,011.11 - ANSWER-• Computing bond yields and prices and how bond prices are
quoted e.g. 101.101 = __________________
Interest Rate Risk - ANSWER-o Extra compensation required by bondholders because
of uncertainty about future interest rates.
Time Value of Money - ANSWER-The idea that money available at the present time is
worth more than the same amount in the future due to its potential earning capacity.
, Default Premium - ANSWER-Extra compensation required by bond holders because of
the risk of a bond issuer defaulting. Also called Credit Risk.
Investors recognize that issuers other than the Treasury may or may not make all the
promised payments on a bond, so they demand a higher yield as compensation for this
risk
Taxability Premium - ANSWER-Extra compensation required by bondholders because
of unfavorable tax treatment.
Municipal bonds are free from most taxes and as a result, have a much lower yield than
taxable bonds. Investors demand the extra yield on a taxable bond as compensation for
the unfavorable tax treatment.
Liquidity Premium - ANSWER-Extra compensation required by bondholders because of
an asset's illiquidity.
There are an enormous number of bond issues, most of which do not trade on a
regular basis. As a result, if you wanted to sell quickly, you would probably not get as
high a price as you could otherwise.
Maturity Premium - ANSWER-The risk is the potential for interest rates to change while
your money is tied up in a bond until it matures. Buying a bond with a longer maturity
increases the likelihood that the interest rates could change in that period.
Inflation Premium - ANSWER-The extra compensation required by bondholders
because of inflation
Yield Curve - ANSWER-o Plot of Treasury yields relative to maturity.
Stock with Constant Dividends - ANSWER-P0 = Div / R
Stock with Constant Growth of Dividends - ANSWER-P0 = Div / R - g
Retention ratio - ANSWER-o Retained earnings divided by net income. Also called the
plowback ratio.
Return on Equity - ANSWER-o Net income divided by total equity. Measures the profit
per dollar of book equity.
Growth rate in earnings - ANSWER-o = Retention ratio * ROE
NPVGO - ANSWER-o This is the Net Present Value of Growth Opportunities which is a
calculation of the net present value of all future cash flows involved with an additional
acquisition, or potential acquisition.
Dividend Yield - ANSWER-The dividend divided by the price of the stock.
CHAPTER 1, 4, 8, 9, 5, 6, 10, 11, & 13
EXAM QUESTIONS WITH CORRECT
ANSWERS
Infrequent Annuity - ANSWER-A level stream of equal dollar payments that lasts for a
fixed time however, these compounds differently due to infrequent payments.
Growing Annuity - ANSWER-An annuity with periodic payments that grow at a certain
rate,
= C [ (1 - (1+g/1+r)^r) / r-g ]
Coupon - ANSWER-The stated interest payment on a debt instrument
Face Value - ANSWER-The value of a bond that appears on its face. Also called par
value or principal.
Coupon Rate - ANSWER-The annual coupon a bond pays divided by its face value
Maturity - ANSWER-The number of years until the face value of a bond is paid
Yield to Maturity - ANSWER-The discount rate that equates the present value of the
interest payments and redemption value of a bond with the present price of a bond.
Bond Value - ANSWER-= C * [ 1-1/(1+r)^t ] / r + F/(1+r)^t
Nominal Interest Rate - ANSWER-o Percentage change on the number of dollars you
have.
Real Interest Rate - ANSWER-o Is the difference between the nominal interest rate and
the inflation rate.
$1,011.11 - ANSWER-• Computing bond yields and prices and how bond prices are
quoted e.g. 101.101 = __________________
Interest Rate Risk - ANSWER-o Extra compensation required by bondholders because
of uncertainty about future interest rates.
Time Value of Money - ANSWER-The idea that money available at the present time is
worth more than the same amount in the future due to its potential earning capacity.
, Default Premium - ANSWER-Extra compensation required by bond holders because of
the risk of a bond issuer defaulting. Also called Credit Risk.
Investors recognize that issuers other than the Treasury may or may not make all the
promised payments on a bond, so they demand a higher yield as compensation for this
risk
Taxability Premium - ANSWER-Extra compensation required by bondholders because
of unfavorable tax treatment.
Municipal bonds are free from most taxes and as a result, have a much lower yield than
taxable bonds. Investors demand the extra yield on a taxable bond as compensation for
the unfavorable tax treatment.
Liquidity Premium - ANSWER-Extra compensation required by bondholders because of
an asset's illiquidity.
There are an enormous number of bond issues, most of which do not trade on a
regular basis. As a result, if you wanted to sell quickly, you would probably not get as
high a price as you could otherwise.
Maturity Premium - ANSWER-The risk is the potential for interest rates to change while
your money is tied up in a bond until it matures. Buying a bond with a longer maturity
increases the likelihood that the interest rates could change in that period.
Inflation Premium - ANSWER-The extra compensation required by bondholders
because of inflation
Yield Curve - ANSWER-o Plot of Treasury yields relative to maturity.
Stock with Constant Dividends - ANSWER-P0 = Div / R
Stock with Constant Growth of Dividends - ANSWER-P0 = Div / R - g
Retention ratio - ANSWER-o Retained earnings divided by net income. Also called the
plowback ratio.
Return on Equity - ANSWER-o Net income divided by total equity. Measures the profit
per dollar of book equity.
Growth rate in earnings - ANSWER-o = Retention ratio * ROE
NPVGO - ANSWER-o This is the Net Present Value of Growth Opportunities which is a
calculation of the net present value of all future cash flows involved with an additional
acquisition, or potential acquisition.
Dividend Yield - ANSWER-The dividend divided by the price of the stock.
