Presentation is loading. Please wait.

Presentation is loading. Please wait.

Exam 2 Review Bonds Stocks Capital Budgeting 1. Bonds l Know all bond features / terminology l Know how to read WSJ quotations for corporate and treasury.

Similar presentations


Presentation on theme: "Exam 2 Review Bonds Stocks Capital Budgeting 1. Bonds l Know all bond features / terminology l Know how to read WSJ quotations for corporate and treasury."— Presentation transcript:

1 Exam 2 Review Bonds Stocks Capital Budgeting 1

2 Bonds l Know all bond features / terminology l Know how to read WSJ quotations for corporate and treasury bonds l Know how to calculate bond value l Understand yield, YTM, coupon rate, current yield and their relation l Understand interest rate risk, default risk

3 Stocks l WSJ quotations l Stock valuation models: General DDM, Constant Growth DDM, Multi-Stage l Assumptions behind various DDM models l No dividend case l Required return based on constant growth

4 Capital Budgeting l NPV, IRR, PI, Payback, Disc. Payback, AAR Rules l Cross over rate l Know how to make decisions using various rules l Know the weaknesses of the rules l Understand NPV profile diagrams l Understand terms: conventional, unconventional, mutually exclusive etc.

5 Treasury Bonds l Semi-annual coupon - _____ l Maturity date = ______ l Price you can buy 1 bond = _____ l Price you can sell 1 bond = _____ l YTM based on purchase price = ______ Maturity Ask Rate Mo/Yr BidAsked Chg. Yld. 5 7/8Feb 08n 96:17 96:

6 Bond Example 1 l Calculate the value of 10-year, 7% annual coupon bond with a yield of 5.5% l Answer: ______

7 Bond Example 2 l Calculate the value of a 20-year, 8% semi-annual coupon bond yielding 11% l Answer: ________

8 Stock Example 1 l Bozo corp. will pay a constant $7 dividend for the next seven years after which it will stop paying dividends forever. r = 12? What is the current stock price? l Answer: _______

9 Stock Example 2 l T. Amos Corp. is a young start-up company. No dividends will be paid for the next five years. In the 6th year a dividend of $6 per share will be paid which will increase at 5% forever thereafter. r = 23%. What is the stock price? l Answer: _____

10 Stock Example 3 l J Osborne Corp just paid a dividend of $1.50 which will grow at 30% for the next three years. Thereafter the growth will fall back to 7%. r = 23%. What is the current stock price? l Answer: ________

11 Capital Budgeting l The projects are mutual exclusive. r = 15%

12 NPV l NPV (A) = _____ l NPV (B) = _____ l Which project to accept? l If they were not mutually exclusive, which one(s) will you accept?

13 IRR l IRR (A) = _____ l IRR (B) = _____ l Which project to accept? l If they were not mutually exclusive, which one(s) will you accept?

14 Profitability Index l PI (A) = _____ l PI (B) = _____ l Which project to accept? l If they were not mutually exclusive, which one(s) will you accept?

15 Crossover rate l Find the crossover rate of the two projects l Crossover rate = ______ l Roughly draw the NPV profiles, labelling all points of interest carefully

16 Unconventional Cash flows l r = 25%, 35%, 400%. What is the NPV? Year Cash flow 0 -$4, , ,000 IRR = ?

17 Payback l Payback (A) = _____ l Payback (B) = _____ l Which project to accept? l If they were not mutually exclusive, which one(s) will you accept?

18 Discounted Payback l Disc. Payback (A) = _____ l Disc. Payback (B) = _____ l Which project to accept? l If they were not mutually exclusive, which one(s) will you accept?

19 NPV Profiles l Understand l What is being plotted n Axes, IRR, Accept/Reject regions, etc. l How to interpret them n Unconventional cash flows n Mutually exclusive projects

20 Year Cash flow 0– $ Net Present Value Profile Discount rate 2% 6% 10% 14% 18% Net present value 0 – 20 – 40 22% IRR NPV>0 NPV < 0

21 NPV Profile - Multiple IRR Problem $0.06 $0.04 $0.02 $0.00 ($0.02) NPV ($0.04) ($0.06) ($0.08) IRR = 25% IRR = 33.3% IRR = 42.8% IRR = 66.6% Discount rate

22 IRR, NPV, and Mutually Exclusive Projects Discount rate % 2% 6% 10% 16%20% – 20 – 40 Net present value $ – 60 – 80 – % IRR A < IRR B NPV B >NPV A NPV A >NPV B Project A Project B Crossover rate


Download ppt "Exam 2 Review Bonds Stocks Capital Budgeting 1. Bonds l Know all bond features / terminology l Know how to read WSJ quotations for corporate and treasury."

Similar presentations


Ads by Google