FNAN 522 FINAL EXAM STUDY GUIDE FULLY SOLVED

FNAN 522 FINAL EXAM STUDY GUIDE FULLY SOLVED Systematic risk - Answers Also known as non-diversifiable risk, attributable to market factors that affect all firms; can't be eliminated through diversification Unsystematic risk - Answers Also known as diversifiable risk, attributable to firm-specific, random causes; can be eliminated through diversification. Beta - Answers Relative measure of non-diversifiable risk. An index of the degree of movement of an asset's return in response to a change in the market return CAPM(Capital Asset Pricing Model) - Answers Describes the relationship btw the required return and the non-diversifiable risk of the firm as measured by beta. CAPM(2) - Answers The basic theory that links risk and return for all assets SML(Security Market Line) - Answers Depiction of the CAPM as a graph that reflects the required return in the marketplace for each level of non-diversifiable risk Risk Averse - Answers The attitude toward risk where investors would require an increased return as compensation for an increase in risk Annuity - Answers A stream of equal periodic cash flows over a specified time period. These cash flows can be inflows or outflows Annuity Due - Answers An annuity for which the cash flow occurs at the beginning of each period Bond - Answers Long-term debt instrument used by business and government to raise large sums of money, generally from a diverse group of lenders Preferred Stock - Answers A special form of ownership having a fixed periodic dividend that must be paid prior to payment of any dividends to common stockholders Common Stock - Answers The purest and most basic form of corporate ownership Gordon Model - Answers Also known as the constant growth model that is widely cited in dividend valuation Diversification - Answers Reduces risk, combines to adds assets that have a low correlation with each other Risk - Answers A measure of uncertainty surrounding the return that an investment will earn or, more formally, the variability of returns associated with a given asset C.V.(Coefficient of variation) - Answers A measure of relative dispersion that is useful in comparing the risks of assets with differing expected returns Payback Method - Answers How long it takes to recover an investment NPV - Answers The best and correct method. Most theoretical method Advantages of NPV - Answers Answer is in dollars, shows the change in the value of the firm, reinvestment rate assumption for the cash flows is the discount rate