FINC 3610 UPDATED EXAM SCRIPT QUESTIONS AND
ANSWERS MARKED A+
✔✔Weak-Form Efficiency - ✔✔Prices reflect all past trading information
✔✔Semi-Strong Form Efficiency - ✔✔Prices reflect all public information
✔✔Strong-Form Efficiency - ✔✔Prices reflect all public and private information
✔✔S&P 500 - ✔✔Index of ~500 large U.S. companies
✔✔DJIA - ✔✔Index of 30 major U.S. companies
✔✔Nasdaq Composite - ✔✔Index of 3,000+ technology-heavy companies
✔✔Cost of Capital - ✔✔Minimum return needed to satisfy investors; if the company
earns more, value is created
✔✔Sources of Capital - ✔✔Debt, preferred stock, common equity
✔✔Cost of Equity (Two Ways) - ✔✔Dividend Growth Model; CAPM
✔✔Dividend Growth Model Formula - ✔✔P₀ = D₁ / (r - g)
✔✔Dividend Growth Model Rearranged - ✔✔r = D₁/P₀ + g
✔✔Growth Rate Sensitivity - ✔✔DGM is highly sensitive to g (small changes → big r
changes)
✔✔Cost of Equity (CAPM) - ✔✔Return = Rf + Beta(Rm - Rf)
✔✔Cost of Debt - ✔✔The required return on new borrowing; found using Yield to
Maturity (YTM)
✔✔After-Tax Cost of Debt - ✔✔Rd × (1 - tax rate) because interest is tax-deductible
✔✔Tax Deductibility of Interest - ✔✔Interest lowers taxable income, reducing cost of
debt
✔✔Cost of Preferred Stock - ✔✔Rp = Dividend / Price
✔✔Preferred Stock Price Formula - ✔✔P₀ = D / Rp (perpetuity formula)
ANSWERS MARKED A+
✔✔Weak-Form Efficiency - ✔✔Prices reflect all past trading information
✔✔Semi-Strong Form Efficiency - ✔✔Prices reflect all public information
✔✔Strong-Form Efficiency - ✔✔Prices reflect all public and private information
✔✔S&P 500 - ✔✔Index of ~500 large U.S. companies
✔✔DJIA - ✔✔Index of 30 major U.S. companies
✔✔Nasdaq Composite - ✔✔Index of 3,000+ technology-heavy companies
✔✔Cost of Capital - ✔✔Minimum return needed to satisfy investors; if the company
earns more, value is created
✔✔Sources of Capital - ✔✔Debt, preferred stock, common equity
✔✔Cost of Equity (Two Ways) - ✔✔Dividend Growth Model; CAPM
✔✔Dividend Growth Model Formula - ✔✔P₀ = D₁ / (r - g)
✔✔Dividend Growth Model Rearranged - ✔✔r = D₁/P₀ + g
✔✔Growth Rate Sensitivity - ✔✔DGM is highly sensitive to g (small changes → big r
changes)
✔✔Cost of Equity (CAPM) - ✔✔Return = Rf + Beta(Rm - Rf)
✔✔Cost of Debt - ✔✔The required return on new borrowing; found using Yield to
Maturity (YTM)
✔✔After-Tax Cost of Debt - ✔✔Rd × (1 - tax rate) because interest is tax-deductible
✔✔Tax Deductibility of Interest - ✔✔Interest lowers taxable income, reducing cost of
debt
✔✔Cost of Preferred Stock - ✔✔Rp = Dividend / Price
✔✔Preferred Stock Price Formula - ✔✔P₀ = D / Rp (perpetuity formula)
