Unit 1:  Financial Statement Analysis

Unit 2:  Financial Markets and Interest Rates  (Continued)
Market Players ............................................................................2-2
Types of Financial Markets........................................................2-2
Money Markets................................................................ 2-3
Capital Markets............................................................... 2-3
Interest Rates...........................................................................................2-5
Calculating Interest Rates ..........................................................2-6
Pure Interest Rate ........................................................... 2-7
Inflation............................................................................. 2-7
Risk................................................................................... 2-8
Term Structure of Interest Rates..............................................2-10
Yield Curve.....................................................................2-10
Normal Yield Curve Theories.......................................2-12
Effect on Stock Prices..............................................................2-14
Unit Summary........................................................................................2-14
Progress Check 2.................................................................................2-17

Unit 3:  Time Value of Money

Unit 4:  Valuing Financial Assets

Unit 5:  Introduction to Capital Budgeting  (Continued)
Adjusting for Inflation...................................................................5-4
Practice Exercise 5.1 .............................................................................5-7
Net Present Value...................................................................................5-9
Present Value of Cash Flows ....................................................5-9
Net Present Value of Cash Flows ...........................................5-10
Practice Exercise 5.2 ...........................................................................5-13
Internal Rate of Return..........................................................................5-15
Adjusting NPV and IRR for Inflation.....................................................5-17
Other Methods for Making Investment Decisions..............................5-18
Payback Period ........................................................................5-18
Profitability Index (PI) ................................................................5-20
Practice Exercise 5.3 ...........................................................................5-23
Unit Summary........................................................................................5-27
Progress Check 5.................................................................................5-29
Unit 6:  Corporate Valuation Risk
Introduction to Units 6, 7, and 8 – Corporate Valuation......................6-1
Introduction...............................................................................................6-3
Unit Objectives ........................................................................................6-3
Calculating Expected Cash Flows ........................................................6-4
Expected Return..........................................................................6-4
Expected Cash Flows ................................................................6-7
Practice Exercise 6.1 .............................................................................6-9
Measuring Risk .....................................................................................6-11
Variance.....................................................................................6-13
Standard Deviation...................................................................6-16
Summary....................................................................................6-18
Practice Exercise 6.2 ...........................................................................6-19
Portfolio Risk.........................................................................................6-21
Portfolio Diversification............................................................6-21
Systematic and Unsystematic Risk.........................................6-27

Unit 6:  Corporate Valuation – Risk (Continued)
Summary................................................................................... 6-30
Practice Exercise 6.3 .......................................................................... 6-31
Beta ........................................................................................... 6-33
Summary................................................................................... 6-37
Practice Exercise 6.4 .......................................................................... 6-39
Symbols and Definitions ..................................................................... 6-41
Risk vs. Return...................................................................................... 6-42
Required Rate of Return.......................................................... 6-42
Capital Asset Pricing Model (CAPM).................................... 6-45
Practice Exercise 6.5 .......................................................................... 6-49
Unit Summary....................................................................................... 6-53
Unit 7:  Corporate Valuation – Cost of Capital
Introduction...............................................................................................7-1
Unit Objectives ........................................................................................7-1
Sources of Capital and Their Costs......................................................7-1
Cost of Debt ................................................................................7-2
Cost of Preferred Stock .............................................................7-3
Cost of Common Stock (Equity)................................................7-4
Dividend Valuation Model.............................................. 7-5
Capital Asset Pricing Model (CAPM)........................... 7-6
Summary......................................................................................7-8
Practice Exercise 7.1 .............................................................................7-9
Weighted Average Cost of Capital.........................................7-15
Capital Structure ...........................................................7-17
Flotation Costs..............................................................7-18
Summary....................................................................................7-19
Practice Exercise 7.2 ...........................................................................7-21

Unit 8:  Corporate Valuation – Estimating Corporate Value
Introduction...............................................................................................8-1
Unit Objectives ........................................................................................8-1
Forecasting Cash Flows ........................................................................8-1
Free Cash Flow Calculation.......................................... 8-2
Assumption-based Cash Flow Forecasting ................ 8-4
Residual Value ........................................................................................8-7
Perpetuity Method.......................................................................8-8
Growing Perpetuity Method .......................................................8-9
Other Methods...........................................................................8-10
Summary....................................................................................8-10
Practice Exercise 8.1 ...........................................................................8-11
Discounted Cash Flow Method...........................................................8-13
Placing Value on a Company..................................................8-13
Summary....................................................................................8-18
Practice Exercise 8.2 ...........................................................................8-19
Other Valuation Methodologies...........................................................8-21
Price / Earnings Ratio ..............................................................8-21
Market / Book Ratio..................................................................8-23
Liquidation Value ......................................................................8-24
Dividend Value..........................................................................8-24
Other Ratios...............................................................................8-25
Factors Affecting Value........................................................................8-26
Market Liquidity.........................................................................8-26
Country Conditions ...................................................................8-27
Industry Conditions....................................................................8-28
Synergies...................................................................................8-28
Unit Summary........................................................................................8-29
Progress Check 8.................................................................................8-31

Unit 9:  Fixed Income Securities
Introduction...............................................................................................9-1
Unit Objectives ........................................................................................9-1
Introduction to Bond Pricing and Yield Mathematics...........................9-2
U.S. Treasury Bills.......................................................................9-2
Pricing U.S. Treasury Bills ............................................. 9-3
Calculating the Discount Rate ....................................... 9-4
Rate of Return.................................................................. 9-4
Summary.......................................................................... 9-6
Practice Exercise 9.1 .............................................................................9-9
U.S. Treasury Notes................................................................. 9-11
Pricing U.S. Treasury Notes ....................................... 9-11
Calculating Yield to Maturity........................................ 9-13
U.S. Treasury Bonds................................................................ 9-14
Call Provision............................................................... 9-14
Summary................................................................................... 9-15
Practice Exercise 9.2 .......................................................................... 9-17
Eurobonds ................................................................................ 9-19
Other Bonds.............................................................................. 9-21
Accrued Interest ....................................................................... 9-21
Bond Price Quotes .............................................................................. 9-23
Treasury Bill Quotes................................................................. 9-23
Treasury Note and Bond Quotes............................................ 9-25
Summary................................................................................... 9-27
Practice Exercise 9.3 .......................................................................... 9-29
Duration................................................................................................. 9-33
Factors That Affect Bond Prices............................................ 9-33
Duration of a Bond................................................................... 9-34
Duration of a Portfolio.............................................................. 9-37
Duration Relationships............................................................ 9-38
Summary................................................................................... 9-39

Unit 9:  Fixed Income Securities (Continued)
Practice Exercise 9.4 .......................................................................... 9-41
Unit Summary....................................................................................... 9-43
Unit 10:  Derivative Securities
Introduction............................................................................................ 10-1
Unit Objectives ..................................................................................... 10-1
Options.................................................................................................. 10-1
Background and Markets........................................................ 10-3
Payoff Profile for Calls and Puts............................................. 10-4
Call Options .................................................................. 10-4
Put Options ................................................................... 10-6
Summary................................................................................... 10-9
Swaps ................................................................................................... 10-9
Interest Rate Swaps................................................................. 10-9
Currency Swaps......................................................................10-14
Unit Summary......................................................................................10-15
Progress Check 10.............................................................................10-17
Appendix
Glossary...................................................................................................G-1

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