Exam (elaborations)
FINA 3332 EXAM 2 QUESTIONS AND ANSWERS 2024
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FINA 3332 EXAM 2 QUESTIONS AND ANSWERS 2024
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FINA 3332 EXAM 2What are some of the differences btw preferred and common stock? - ANSWERS-
preferred gives no voting rights while common stock does
What discount rate do you use to discount future cash flows of stock? -
ANSWERS-weighted average cost of capital
What are three ways that a firm can increase the amount of its future dividend
per share? - ANSWERS-by increasing earnings, dividend payout rate or by
decreasing shares outstanding
What are the main limitations of the discount dividend model? - ANSWERS-lack of
accuracy
How does the total payout model address part of the dividend discount models
limitations? - ANSWERS-values the firms equity rather than a single share
interest rate - ANSWERS-set by market forces, in particular the suppmy and
demand of funds
Effective Annual Rate (EAR) - ANSWERS-the total amount of interest that will be
earned at the end of one year
, Discount Rate Formula - ANSWERS-1/(1+r)^t
Annual Percentage Rate (APR) - ANSWERS-cost of credit expressed as a yearly
percentage
Effective annual rate formula - ANSWERS-(1+APR/m)^m-1 = 1+EAR
If given APR, - ANSWERS-EAR increases with compounding frequency
Outstanding balance of a loan is equal to the present value of loan cash flows, -
ANSWERS-when evaluated using the actual interest rate per payment interval
based on loan rate
Amortised Loan - ANSWERS-a loan in which the borrower pays interest and
principal over time
What is the difference between EAR and APR? - ANSWERS-APR-simple interest
EAR-compound interest is taken into account
quoted interest rate are nominal interest rates - ANSWERS-which indicate rate of
growth of money invested
nominal interest rates tend to be high when inflation is high, - ANSWERS-as well
as low when inflation is low
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