FIN 6100 Exam 2 Questions With Complete Solutions
3 types of stock repurchases Correct Answers 1. open market
2. tender offer
3. targeted
3 ways to price stock Correct Answers zero growth: dividend is
fixed and unchanging
Constant growth: dividend is changing at a fixed percentage
Non-constant growth: dividend changes at multiple rates.
are bond yields guaranteed? Correct Answers no.
market interest rates change constantly, so bond prices do as
well.
can debt increase the a company's returns? Correct Answers
yes
coupon payment formula Correct Answers payment = face
value (FV) x coupon rate
Difference between market risk and firm specific risk Correct
Answers market risk: Affects everyone. can't be diversified
away (energy, taxes, etc.)
Firm Specific Risk: can diversify. Only affects industry specific
firms. (potatoes, eggs, etc.)
,Dividends with constant growth equation Correct Answers P0
= D1 / (Ke - g)
P0: price right now
D1: next dividend
Ke: return
g: growth
Do you want a stock with zero risk? Correct Answers No. At
that point, you'd just buy a T-bill
Does diversifying allow you to pay more for stock? Correct
Answers Yes. When you have lower risk, you are willing to pay
more for each stock.
Formula for Cost of Equity using CAPM? Correct Answers Ke
= Krf + B * (Kmkt - Krf)
Formula for Cost of Equity using the Fundamental Approach?
Correct Answers Ke = (1-payout ratio) * ROE + (EPS * Payout
ratio) / share price
Formula for Current Yield Correct Answers Current Yield =
Coupon Payment / Market Price
(use annual rate, even for semi-annual bonds)
holding correlation constant, what will a higher standard
deviation do? (the chain, 5) Correct Answers high standard
deviation - high beta - high cost of equity - high WACC -
changes valuation
, How can a company make their bond more liquid? Correct
Answers Make them as standard as possible. Any unique
features make it more difficult to sell.
How is default risk measured? Correct Answers Through rated
bonds.
AAA through C
(low risk to high risk)
how is wealth paid to shareholders? (3) Correct Answers 1.
liquidation
2. capital gains
3. distribute through dividends or repurchases
In what 3 ways can firms lower their risk rating? Correct
Answers 1. Allow auditing (reduce info asymmetry)
2. place restrictions on their debt (stay within debt bounds)
3. Pledge collateral
Is there an optimal capital structure? Correct Answers no. more
like a comfortable range.
the inputs change constantly.
Is this a premium or discount bond?
Interest rate < Coupon rate Correct Answers Premium
3 types of stock repurchases Correct Answers 1. open market
2. tender offer
3. targeted
3 ways to price stock Correct Answers zero growth: dividend is
fixed and unchanging
Constant growth: dividend is changing at a fixed percentage
Non-constant growth: dividend changes at multiple rates.
are bond yields guaranteed? Correct Answers no.
market interest rates change constantly, so bond prices do as
well.
can debt increase the a company's returns? Correct Answers
yes
coupon payment formula Correct Answers payment = face
value (FV) x coupon rate
Difference between market risk and firm specific risk Correct
Answers market risk: Affects everyone. can't be diversified
away (energy, taxes, etc.)
Firm Specific Risk: can diversify. Only affects industry specific
firms. (potatoes, eggs, etc.)
,Dividends with constant growth equation Correct Answers P0
= D1 / (Ke - g)
P0: price right now
D1: next dividend
Ke: return
g: growth
Do you want a stock with zero risk? Correct Answers No. At
that point, you'd just buy a T-bill
Does diversifying allow you to pay more for stock? Correct
Answers Yes. When you have lower risk, you are willing to pay
more for each stock.
Formula for Cost of Equity using CAPM? Correct Answers Ke
= Krf + B * (Kmkt - Krf)
Formula for Cost of Equity using the Fundamental Approach?
Correct Answers Ke = (1-payout ratio) * ROE + (EPS * Payout
ratio) / share price
Formula for Current Yield Correct Answers Current Yield =
Coupon Payment / Market Price
(use annual rate, even for semi-annual bonds)
holding correlation constant, what will a higher standard
deviation do? (the chain, 5) Correct Answers high standard
deviation - high beta - high cost of equity - high WACC -
changes valuation
, How can a company make their bond more liquid? Correct
Answers Make them as standard as possible. Any unique
features make it more difficult to sell.
How is default risk measured? Correct Answers Through rated
bonds.
AAA through C
(low risk to high risk)
how is wealth paid to shareholders? (3) Correct Answers 1.
liquidation
2. capital gains
3. distribute through dividends or repurchases
In what 3 ways can firms lower their risk rating? Correct
Answers 1. Allow auditing (reduce info asymmetry)
2. place restrictions on their debt (stay within debt bounds)
3. Pledge collateral
Is there an optimal capital structure? Correct Answers no. more
like a comfortable range.
the inputs change constantly.
Is this a premium or discount bond?
Interest rate < Coupon rate Correct Answers Premium
