Corporate Finance at Universität Münster | Flashcards & Summaries

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Lernmaterialien für Corporate Finance an der Universität Münster

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shorting a risk free investment

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TESTE DEIN WISSEN

means taking long 

--> borrorwing money for investment in risky 

-pay back interests 

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TESTE DEIN WISSEN

when is debt risk free 

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TESTE DEIN WISSEN

when the cash flow is higher than the guaranteed payment

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TESTE DEIN WISSEN

e µ−σ−principle “compatible” with expected utility theory

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TESTE DEIN WISSEN

in general they are not compatible even though they lead to the same decision making

but when only consider normal distributions they are compatible

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TESTE DEIN WISSEN

negative sharp ratio meaning?

sharp ratio general meaning

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TESTE DEIN WISSEN

higher return with riskfree asset 

return of an investment per risk unit

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TESTE DEIN WISSEN

security which has a lower return than the risk free asset possible in capm equilibrium

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TESTE DEIN WISSEN

yes negativ correlated to the market portfolio 

lower risk than the risk free asset 

possible because it lowers the portfolio risk

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Cost of capital for equity= for the investor?


Cost of capital for debt= "     "

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RE : Return received by Equity providers


RD : Return received by Debt providers

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TESTE DEIN WISSEN

why do we start by looking at individual decision making?

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TESTE DEIN WISSEN

individual investors influence financial markets and markets influence corporoate finance decisions 

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µ


σ  meaning

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TESTE DEIN WISSEN

return


risk (standard deviation)

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reasons for better performance by experts

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-imitation effect a lot of people imitate and the price raises, 

-pros have superior abilities 

-higher risk adjustment 

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. xj > 1 meaning?

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short-sale effect --> you get the proceeds from the sale which you can invest in another security

so it is possible that you invest more than 100% of the initial busget

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Debt vs. Equity


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Debt:

-fixed claim 

- certain repayment execpt for default risk

- does not depend on how well company is doing 

Equity

residual claim on a share of the companys assets 

higher return for higher risks



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TESTE DEIN WISSEN

General idea of the DCF method

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TESTE DEIN WISSEN

Calculate the present
value of all the cash flows CFt that the company owners will
obtain in the future periods. This present value is today‘s fair price of the company


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Q:

shorting a risk free investment

A:

means taking long 

--> borrorwing money for investment in risky 

-pay back interests 

Q:

when is debt risk free 

A:

when the cash flow is higher than the guaranteed payment

Q:

e µ−σ−principle “compatible” with expected utility theory

A:

in general they are not compatible even though they lead to the same decision making

but when only consider normal distributions they are compatible

Q:

negative sharp ratio meaning?

sharp ratio general meaning

A:

higher return with riskfree asset 

return of an investment per risk unit

Q:

security which has a lower return than the risk free asset possible in capm equilibrium

A:

yes negativ correlated to the market portfolio 

lower risk than the risk free asset 

possible because it lowers the portfolio risk

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Q:

Cost of capital for equity= for the investor?


Cost of capital for debt= "     "

A:

RE : Return received by Equity providers


RD : Return received by Debt providers

Q:

why do we start by looking at individual decision making?

A:

individual investors influence financial markets and markets influence corporoate finance decisions 

Q:

µ


σ  meaning

A:

return


risk (standard deviation)

Q:

reasons for better performance by experts

A:

-imitation effect a lot of people imitate and the price raises, 

-pros have superior abilities 

-higher risk adjustment 

Q:

. xj > 1 meaning?

A:

short-sale effect --> you get the proceeds from the sale which you can invest in another security

so it is possible that you invest more than 100% of the initial busget

Q:

Debt vs. Equity


A:

Debt:

-fixed claim 

- certain repayment execpt for default risk

- does not depend on how well company is doing 

Equity

residual claim on a share of the companys assets 

higher return for higher risks



Q:

General idea of the DCF method

A:

Calculate the present
value of all the cash flows CFt that the company owners will
obtain in the future periods. This present value is today‘s fair price of the company


Corporate Finance

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