Exam 2 Part 2
Answer any EIGHT of the ten questions. Each question is worth 5 points. Return your answers to me by 11:59 PM Sunday 11 November 2012 1. A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible? Does this violate our basic principle of stock valuation? Explain.

Our basic principle of stock valuation is that the value of a share of stock is simply equal to the present value of all of the expected dividends on the stock. According to the dividend growth model, an asset that has no expected cash flows has a value of zero, so if investors are willing to purchase shares of stock in firms that pay no dividends, they evidently expect that the firms will begin paying dividends at some point in the future. 2. Explain why some bond investors are subject to liquidity risk, default risk, and/or taxability risk. How does each of these risks affect the yield of a bond?

Liquidity problems exist in thinly traded bonds making some bonds difficult to sell at their actual value. Default risk is the likelihood the corporation will default on its bond obligations. Taxability risk reflects the fact that some bonds are taxed disadvantageously compared to others. If any of these risks exist, investors will require compensation by demanding a high yield. 3. The discussion of asset pricing in the text suggests that an investor will be indifferent between two bonds which have equal yields to maturity as long as they have equivalent default risk. Can you think of any real-world factors which might make a given investor prefer one of these bonds over the other?

4. Why do corporations issue 100-year bonds, knowing that interest rate risk is highest for very long-term bonds? How does the interest rate risk affect the issuer?

Treasury bonds make great safe, long-term investments, but is there any point in Why would the Fed consider issuing a bond with a 100-year maturation, are...

...discountedcashflow (DCF
In finance, discountedcashflow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cashflows are estimated and discounted to give their present values (PVs) — the sum of all future cashflows, both incoming and outgoing, is the net present...

...In finance, the discountedcashflow (DCF) analysis is a method of valuing a project, company or asset using the concepts of time value of money (Wikipedia, 2004). Three inputs are required to use the DCF, also called dividend-yield-plus-growth-rate approach, include: the current stock price, the current dividend, and the marginal investor’s expected dividend growth rate. The stock price and the dividend are east to obtain, but the expected growth...

...Capital Asset Pricing Model (CAPM) Versus the DiscountedCashFlows Method
Managerial Analysis/BUSN 602
Capital asset pricing model or CAPM is a financial model that measures the risk premium inherent in equity investments like common stocks while DiscountedCashFlow or DCF compares the cost of an investment with the present value of future cashflows generated by the...

... evening before
discussion
Be prepared to discuss the case in class (your answers, your
analysis, etc.)
1
Valuation - Use NPV approach
How to make investment decisions:
1.
Estimate (expected) cashflows in each time period
2.
Choose an appropriate discount rate
3.
Use discountedcashflow analysis to calculate NPV
4.
Make decision that maximizes NPV
Fundamental principle: V(A+B)>V(A)+V(B)
Value...

...to reflect the true value of JetBlue.
Assumptions made in Exhibit 13
There were several valuation techniques used by analysts and underwriters to value an enterprise’s share, they are respectively the DiscountedCashFlow Method (DCF) for instance, Free CashFlow to Equity (FCFE), Free CashFlow to Firm (FCFF), and Dividend Discount Model, and the Relative Valuation Techniques, for instance...

...Technical Questions
1. Can you explain quarterly forecasting, updating revenue and expense models?
2. What projects have you implemented these skills?
3. In conjunction with these projects how do you execute input of detailed plans and forecast into the financial systems?
4. Describe how you coordinate plan transfers.
5. Are you familiar with creating daily sales reports?
6. What processes do you use to create reports?
7. Have you created month-end sales reports?
8. Have...

... What is the discounted payback period for the bond assuming its 4% coupon rate is the required return? What general principle does this example illustrate regarding a project’s life, its discounted payback period, and its NPV?
A8-1. a. Payback on this bond is 25 years. You pay $1,000. You receive $40 a year for 25 years, a total of $1,000.
b The bond is not necessarily a bad investment. Payback does not take time value of money into account, nor does it...

...Sample Questions Ch. 10
1- The possibility that errors in projected cashflows can lead to incorrect NPV estimates is called:
A) Forecasting risk.
B) Projection risk.
C) Scenario risk.
D) Monte Carlo risk.
E) Accounting risk
2- An analysis of what happens to NPV estimates when we ask what-if questions is called:
A) Forecasting analysis.
B) Scenario analysis.
C) Sensitivity analysis.
D) Simulation analysis.
E)...