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financial accounting

Questions and Answers of Financial Accounting

What are the two main components of the required rate of return on equity securities?
In what ways are preferred shares different from bonds?
Why is share value based on the present value of expected future dividends?
What is the "bigger fool theorem" of valuation?
How can we estimate future growth rates?
Why can the P/E ratio be viewed as a type of payback period?
What drives P/E ratios?
Why do P/E ratios differ even between comparable firms?
How are multiples linked to a discounted cash flow valuation?
What are some of the key assumptions that must be made when applying the valuation concepts discussed in this chapter to an actual valuation situation?
Why do the income and capital gains component of the total return differ between common shares and bonds?
Why might a scenario-based estimate be more accurate for a short-run expected return estimate than a historical AM estimate?
What is the difference between estimating a scenario-based (probability) estimate of risk versus a historic data-based estimate of risk?
Why would we sometimes want to use scenario based risk measures rather than the standard deviation of actual returns over a long time period?
Why is the expected return on a portfolio a weighted average of the expected returns of the underlying securities?
Why is portfolio standard deviation not a weighted average of the standard deviations of the underlying securities?
What is the difference between the covariance and the correlation coefficient?
Why is all risk removed in a two-security portfolio if the securities are perfectly negatively correlated?
How do you form the minimum variance frontier in the two-security case?
What assumptions about investors underlie Markowitz's theories regarding efficient portfolios?
What is an unattainable portfolio, and what is a dominated portfolio?
Why is the tangent portfolio so important?
How do we generate a portfolio with a higher expected rate of return than that on the tangent portfolio?
What is the slope of the CML, and why can it be reviewed as the market price of risk for efficient portfolios according to the CML?
Assuming the CAPM holds, if the expected return on a diversified portfolio lies above the CML, should an investor buy or sell the portfolio?
When is the expected return equal to the required return?
Why is beta a measure of market risk for a security?
What is a characteristic line, and why is it useful?
Why the CAPM is called a single-factor model?
Describe some of the criticisms of the CAPM, including Roll's critique.
Briefly describe the strengths and weaknesses of the Fama-French model and the APT.
Describe the various forms of EMH.
Is the weak form EMH well supported by empirical evidence? Discuss any exceptions.
Is the semi-strong form EMH well supported by empirical evidence? Discuss any exceptions.
Is the strong form EMH well supported by empirical evidence? Discuss any exceptions.
Contrast behavioural finance with the traditional view.
Explain why behavioural flaws could result in investors holding portfolios that are not as predicted by modern portfolio theory.
Explain why behavioural traits can cause asset price bubbles.
What are the main implications of the EMH for investors? For corporate officers?
Why do forward contracts involve credit risk for banks?
When would a speculator assume a long position in a forward contract on an underlying asset? When would a speculator assume a short position?
When would a hedger assume a long position in a forward contract on an underlying asset? When would a hedger assume a short position?
What is the relationship among spot rates, forward rates, and the cost of carry?
Define initial margin, maintenance margin, margin call, open interest, and notional amount.
Explain what is meant by "marked to market".
What is basis risk? Why is it important for hedgers?
Explain how plain vanilla interest rate swaps are structured and what purpose they serve.
Explain how currency swaps are structured and how they can be used for hedging purposes.
Why does it make sense that interest rate swaps involve an exchange of net payments, while currency swaps exchange all cash flows?
Explain the difference between an insurance contract and a credit default swap.
How and why did AIG fail?
Why would making CDSs an exchange-listed product have avoided the collapse of AIG and averted the 2008-9 financial crisis?
Discuss three different strategies you can follow to invest in Canadian securities to obtain a return over a three-year period.
If the yield curve is upward (downward/inverted) where is the market expecting short-term interest rates to go?
Explain why the payoff from a call option is non-linear.
Briefly describe the main factors that affect a call option's value, and how they affect the value.
Contrast the payoff from a put option with that from a call option.
Briefly describe the main factors that affect a put or a call option's value, and explain how they affect the value of each.
Illustrate how to combine the four basic option positions to create a variety of net payoff positions.
Explain why the put-call parity relationship should hold if markets are efficient.
Explain how to synthetically create long and short positions in calls, puts, and the underlying assets using put-call parity.
How can the Black-Scholes equation be used to price options?
What is measured by each of the five Greeks discussed in this section?
How are implied volatilities calculated? What information do they provide?
What real options have you been given over the past year and how valuable were they? What factors do you think influenced your valuation of them?
Explain how to create a risk-free portfolio from the stock and the option's payoff.
What is a hedge ratio?
Why don't the probabilities of going up and down affect the options value?
What are risk-neutral probabilities?
What are irrevocable investment decisions? Why are they important for capital budgeting?
Contrast top down and bottom up analysis.
In what ways is DCF capex analysis similar to valuing common shares, and in what ways is it different?
Why is the payback period a poor evaluation technique?
What discount rate do we use to determine the NPV of a project and why?
What complications arise when firms are rationed in terms of their available capital budget?
How and why do we adjust the discount rate for multi-divisional firms?
What mistakes can occur if firms do not make the appropriate adjustments?
What is so different about evaluating FDI compared to domestic projects?
Name some unique risks that may arise when evaluating FDI.
What improvement does MIRR represent over traditional IRR?
When will a calculated MIRR be greater than a calculated IRR?
How should we treat taxes and inflation when determining the present value of future cash flows?
What do we mean by incremental cash flows?
What are externalities and opportunity costs?
Why do we not deduct interest costs from the cash flows to be discounted?
How do taxes affect the annual cash flows and terminal cash flows of an investment project?
Explain why the valuation by components approach can save computational time and still lead to the correct answer.
Discuss any differences in the evaluation of a replacement decision versus the evaluation of an expansion decision.
What insights can be gained by using sensitivity analysis, scenario analysis, and NPV break-even analysis?
What limitations of scenario analysis does the real option valuation approach address?
Why is it usually more precise to use nominal cash flows and nominal discount rates when evaluating projects?
What is an amalgamation?
What is the majority of the minority rule?
What goes into a confidentiality agreement and why do people sign them?
What is a shareholder rights plan?
When is it best to mount a hostile bid?
What is the difference between vertical and horizontal mergers?
What is an extension M&A, an overcapacity M&A, and a geographic roll-up M&A?
What tax benefits can occur in an M&A?
What is the empirical record on the success of M&A's in the 1990s?

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