On this page, you can find the recording of the Exam practice for FM [Financial Markets]. Feel free to ask questions in the comment section below, we will answer them 🙂
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Hey Thomas,
Isn’t it supposed to be 88000/176000 on slide 19, as its D to E ratio not D to C ratio?
Hey there 🙂
You are right. I just made a mistake while writing it. The whole calculatiom is correct. If you actually type 9% + 88,000/220,000 * (9%-5%), the result is not 11%. As shown on the next slide and you said, it should be 9% + 88,000/176,000 * (9%-5%) = 11%. I also explained it correctly orally by saying that the equity does not change.
Does that makes sense?
Thanks a lot 💯
In slide 46, when inputting the risk free rate into our formula; why do we take (1.05)^1/2 instead of (1+ (0.05^1/2)). Can you explain?
Thanks in advance.
Hello atallaesen,
The formula is (1+rate)^n where n represents the number of period of the rate (r). So here the rate is 5% (which you can assume yearly if not stated) and the up or down movement happens in half a year so n = 1/2. All in all, we get 1.05^(1/2) = 1.024695. Roughly 2.47% for half a year and 5% for year.
If we would use (1+0.05^(1/2)), we would get 1.223607. That would be 22% for half a year and 5% for year, that would not really work.
Now I might be a bit over-reading into your question but I have a feeling you are confusing when to divide by CF/(1+r)^n and CF/n, if not, stop reading 😀
Why sometimes CF/(1+r)^n and sometimes CF/r? That’s very common issue but thanksfully with an easy explanation:
If it is only ONE payment, CF/(1+r)^n
Infinite payment, use CF/r
Examples:
A)
CF(s) 500
Discount: 3%
Payment(s): once next year
PV(CFs) = 500/(1.03)^1 = 485.44
B)
CF(s) 500
Discount: 3%
Payment(s): Every years starting next year
PV(CFs) = 500/0.03 = 16,666.67
Let me know if you have more questions 🙂
Have a lovely evening!
Thomas
Why there are no Merger & Acquisition problems?
Hey atallaesen,
Our Exam Training is a curated version of the topics available during the course. Therefore, I made a selection which I thought was representative of the exams. I did not think it was so useful to spend time on that topic in particular. That being said, if you have a question related to that, feel free to ask and I’d be happy to help you 🙂
Have a nice evening!