FIN/571 Version 7 / 1
Week 4 Study Guide: Business Valuation
Readings and Key Terms
· Ch. 5 of Fundamentals of Corporate Finance
o Time value of money
o Time zero
o Future value (fv)
o Principal
o Simple interest
o Compounding
o Compound interest
o Discounting
o Discount rate
o Present value (pv)
o Rule of 72
· Ch. 6
o Annuity
o Perpetuity
o Ordinary annuity
o Present value of an annuity (PVA)
o Amortization
o Future value of an annuity (FVA)
o Annuity due
o Annual percentage rate (APR)
· Ch. 7
o Total holding period return
o Expected return
o Variance (σ2)
o Standard deviation (σ)
o Normal distribution
o Portfolio
o Diversification
o Coefficient of variation (CV)
o Covariance
o Diversifiable and nondiversifiable risk
o Market portfolio
o Market risk
o Beta (β)
o Capital asset pricing model (CAPM)
o Security market line (SML)
· Ch. 8
o Coupon payments
o Face value or par value
o Coupon rate
o Opportunity cost
o Par value bonds
o Discount bonds
o Premium bonds
o Yield to maturity
o Effective annual rate (EAY)
o Realized yield
o Interest rate risk
o Yield curve
· Ch. 9
o Bid price
o Offer (ask) price
o Dividend yield
o Common stock
o Preferred stock
Content Overview
· Time value of money
o Single sums
· Calculate present value.
· Calculate periods.
· Calculate interest and discount rate.
· Calculate future value.
· Interpret and make decisions from the calculations.
· Understand the relationship between time, rate, and value.
o Annuities
· Identify various forms of annuities.
· Calculate present value.
· Calculate periods.
· Calculate interest and discount rate.
· Calculate payments.
· Calculate future value.
· Interpret and make decisions from the calculations.
· Identify and understand perpetuities.
o Costs of loans
· Calculate effective annual rate.
· Compare interest rates on different loans.
· Risk and return
· Calculate the return of an investment.
· Determine expected rate of return.
o Measuring risk
· Calculate variance and standard deviation.
· Interpret variance and standard deviation.
· Understand risk diversification.
o Capital asset pricing model (CAPM)
· Calculate expected return using capital asset pricing model.
· Identify and interpret the security market line.
· Choose between two investments using CAPM.
· Bond valuation
o Wealth maximization
· Identify types of bonds.
· Calculate value of a bond.
· Identify difference between par, discount, and premium bonds.
· Calculate yield to maturity (YTM).
· Compare bonds uisng effective annual rate.
· Understand correlation between interest rate risk and bonds.
· Stock valuation
o Markets
· Differentiate between primary and secondary markets.
· Differentiate between common and preferred stock.
o Valuation
· Calculate value of common stock.
· Calculate value of preferred stock.
· Calculate yield of common and preferred stock.
· Understand growth rates and how they affect dividend payments and stock valuation.
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