characterized by intense return volatility (covering historically high returns over the examined period). 2.1. Karachi Stock Exchange * Incorporated on March 10, 1949 * Premier Stock exchange of the country * Started with 5 companies that had a paid up capital of Rs. 37 million. * Trading was done through an open-out-cry system * The first index was the KSE 50 Index * Exchange owned by 200 members * 652 companies listed * 4 indices * Modern Risk Management System
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x (1.05/0.10) = $19.95 c) When a required rate of return goes up, the anticipated price goes down. In other words, the ‘better deal’ on the stock (lower price) gets you a higher overall return. Bond: a) The present value of that stream of payments is $785.45. b) When annual interest rate changes to 12.36%, i calculated the semiannual rate (which is 6%) and the present value is re-calculated as $917.59. Beta: a) Beta = (return – riskless rate) / market premium Therefore, Beta =
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yesterday on its 6.75% bonds that mature in 8.5 years. If the required return on these bonds is 8% APR, what should be the market price of these bonds? PMT -33.75 FV -1000 N 17 Rate 4% Market Price $923.96 Fair Value of a bond = C/r*(1-1/(1+r)^n)+M/(1+r)^n Assuming that it’s a semi-annual bond with face value of $1000 A13. (Required return for a preferred stock) Sony $4.50 preferred is selling for $65
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Ch26-Basic Tools of Finance 1. The future value of a deposit in a savings account will be larger a. the longer a person waits to withdraw the funds. b. the higher the interest rate is. c. the larger the initial deposit is. d. All of the above are correct. 2. Edgar has four savings accounts. Which one has the most in it? a. $100 deposited 1 year ago at an 8% interest rate. b. $100 deposited 2 years ago at a 4% interest rate. c. $100 deposited 4 years
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officer (CFO). Financial managers develop strategies that will implement the long-term goals of a corporation. Their main goal is to maximize the value of stock shares. Stockholder wealth maximization is the appropriate goal for management decisions. The risk and timing associated with expected earnings per share and cash flows are considered in order to maximize the price of the firm’s common stock. Maximizing shareholder wealth is maximizing purchasing power or maximizing the flow of discounted cash flow
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budget so that the overall portfolio will have an Expected rate of return of 16%. (a) (b) What is the proportion y? What is the standard deviation of the rate of return on your client’s portfolio? Answer: a. E(rC) = rf + y[E(rP) – rf] = 8 + y(18 8) If the expected return for the portfolio is 16%, then: 16 = 8 + 10 y y 16 8 10 0.8 Therefore, in order to have a portfolio with expected rate of return equal to 16%, the client must invest 80% of total funds in the risky
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C H A P T E R 5 Uncertainty and Consumer Behavior CHAPTER OUTLINE 5.1 Describing Risk S o far, we have assumed that prices, incomes, and other variables are known with certainty. However, many of the choices that people make involve considerable uncertainty. Most people, for example, borrow to finance large purchases, such as a house or a college education, and plan to pay for them out of future income. But for most of us, future incomes are uncertain. Our earnings can go up or down; we can be
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allocated in time. • Outcomes of financial decisions are spread out over time and not known with certainty in advance • Three key concepts in finance are : Time value of money Asset Valuation (stocks, bonds, derivatives,...) Risk management 1.1: Interest and return • Income almost never matches consumption desires exactly. Either one will need to borrow to purchase more than one can afford or save excess income. • Costs / benefits of financial decisions are spread over time. So one needs
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-1? “ The Aim of the Course To develop and apply technologies for valuing firms and for strategic planning to generate value within the firm. • • Features of the approach: A disciplined approach to valuation: minimizes ad hockery – Built on theoretical and empirical findings from scientific research I ‘_ Marries fundamental analysis and financial statement analysis – Exploits accounting as a system for measuring value added – Exposes good (and “bad”) accounting from a valuation perspective
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Explain systematic risk and what is firm-specific risk? Market equity beta measures the covariability of a firm’s returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market
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