Title: Portable / Without sound / Finance / Welch - Corporate finance
Tags: 2.2 2.4 2.5 2.6 chapter3 questions 2.3 3.1 1.2 1.3 1.1 2.1 chapter2

Q: What is the law of one price?
A: The law of one price states that two identical items at the same venue should cost the same.

Q: What is a project?
A: In finance, a project is a set of flows of money (cash flows).

Q: What is a firm?
A: In finance, a firm is a collection of projects.

Q: Can you use the "law of one price" in your decision of whether to take or reject projects?
A: Yes. Indeed, the law of one price is the foundation upon which all project choice is based.

Q: What is the main objective of corporate managers that this book assumes?
A: The main objective of corporate managers assumed by this book is maximization of the value of the firm.

Q: What are the four perfect market assumptions?
A: In a perfect market,
* there are no taxes;
* there are no transaction costs;
* there are no differences in information among investors;
* there are so many agents in the market that the presence or absence of any one agent does not have an influence on prices.

Q: What is a loan?
A: A loan is the commitment of a borrower to pay a predetermined amount of cash at one or more predetermined times in the future (the final one called maturity), usually in exchange for cash up-front today.

Q: What is an interest?
A: Loosely speaking, an interest is the difference between the money lent and the money paid back.

Q: What is a bond?
A: A bond is a particular kind of loan, so named because it "binds" the borrower to pay money.

Q: What is fixed income?
A: "Fixed income" refers to loans and bonds, so called because they "promise" a fixed amount of payments to the holder of the bond.

Q: What is interest rate?
A: Interest rate is the rate of return on a loan.

Q: Is there a difference between buying a bond and putting that money into a bank savings account?
A: Yes.  The bond is defined by its future promised payoffs and the bond's value and price today are based on these future payoffs.  As the bond owner, you know exactly how much you will receive next year.  By contrast, an investment in a bank savings account is defined by its investment today.  The interest rate can and will change as time goes by, so you don't know what you will end up with next year.

Q: What is a return?
A: The payoff or return of an investment is simply the amount of cash it returns.  For example, an investment project that returns $12 at time 1 has a return of $12 at time 1.

Q: What is net return?
A: The net payoff, or net return, is the difference between the return and the initial investment. For example, if the investment costs $10 today and returns $12 at time 1 with nothing in between, then it earns a net return of $2.

Q: What is the rate of return?
A: The rate of return is the net return expressed as a percentage of the initial investment.

Q: What is capital gain?
A: Capital gain is the difference between the purchase price and the final price of an investment, not counting interim payments.

Q: What is a basis point?
A: A basis point is a 1/100 of 1%.  Basis points reduce percentage ambiguities.

Q: What is the time value of money?
A: A dollar today is worth more than a dollar tomorrow.  The time value of money is possibly the most fundamental and important concept in finance.

Q: What is future value?
A: Future value is the value of present cash at some point in the future.

Q: What is the formula for compound interest?
A: FV=PV( 1 + i )^n

Q: What is annual percentage yield (APY)?
A: APY is the simple rate of return, often simply called 'interest rate'.  Banks sometimes use the expressions 'annual equivalent rate' (AER) and 'effective annual rate'.  For example, if you invest $100 today and the APY is 10%, you will end up with $110 at the end of the year.

Q: What is a bank interest rate?
A: A quoted annual interest rate of 10% is a daily (real) interest rate of 10%/365, or roughly 0.0274%.  As such, at quoted bank interest rate of 10%, $100 invested today turn into $110.52 a year into the future.

Q: What is annual percentage rate (APR)?
A: APR is the rate that banks are required to quote on the loans they extend.  It is an annual rate, compounded monthly.  For example, if the quote is 10% per annum, then the lender will collect (1+10%/12)^12-1, which is roughly 10.47%.

Q: What is present value?
A: Present value is the amount a future sum of money is worth today, given a specific rate of return.

Q: What is discounting?
A: Discounting is the conversion rate of a future cash flow amount into its equivalent present value amount.  It is the reverse of compounding.

Q: What is the cost of capital?
A: The cost of capital is the rate of return at which you can raise money elsewhere.

Q: What is the discount factor?
A: The discount factor is a simple function of the cost of capital: it translates 1 dollar in the future into the equivalent amount of dollars dotay.

Q: How is the present value of bonds related to the prevailing interest rate?
A: Bonds' preseent values and the prevailing interest rates move in opposite directions. For example, if you have a bond that promises to pay $1,000 in one year, and the prevailing interest rate is 5%, the bond has a present value of $1,000/1.05=$952.38.  If the prevailing interest rate suddenly increases to 6%, the bond's present value becomes $1,000/1.06=$943.40.

Q: What is net present value (NPV)?
A: The net present value of an investment is the present value of all its future cash flows minus the present value of its cost.

Q: What are some ways of thinking about net present value?
A: 1. NPV may be thought as "value added"--the difference between the market value of the future cash flows and the project's cost.
2. NPV may instead by understood in terms of a set of bonds that replicate its cash flows.
3. Finally, NPV may be seen as how your project compares to the alternative opportunity of investing in the capital markets.

Q: What is the NPV formula?
A: NPV = C0 + PV(C1) + PV(C2) + ... + PV(Cn)

Q: What is the NPV budgeting rule?
A: According to the NPV budgeting rule, you should accept a project if NPV is positive, and reject it if NPV is negative.

Q: Do higher-growth companies necessarily earn a higher rate of return?
A: No.  Consider two companies, A and B.  The price of each company is its present value.  Over the next three years, A's cash flows are 100, 150 and 250, while B's cashflows are 100, 90 and 80.  There is no uncertainty involved and the cost of capital is 10% for both firms.  Despite the fact that A is growing while B is shrinking, both companies have a 10% rate of return. The firms' market prices today already reflect their future growth rates.

Q: How is the point that species-typical behaviors may depend on learning illustrated by the examples of two-legged walking and language in humans, and singing in white-crowned sparrows?
A: Two-legged walking and talking are species-typical behaviors in humans, but a human raised in an environment where either of these skills was impossible to practice would not develop that skill.  Such an inhuman environment would not produce a normal human being.  Similarly, white-crowned sparrows develop the ability to sing their species-typical song only if they are permitted to hear it during the first summer after hatching.

Q: How is the concept of biological preparedness related to that of species-typical behavior? How is biological preparedness illustrated with the examples of human walking and talking?
A: The difference between behaviors that we call instinctive, or species-typical, and those that we do not so label has to do with their degree of biological preparedness.  Natural selection has equipped each species with anatomical structures that ensure that normal individuals of the species, who grow up in a normal environment for that spceies, will be physicall able to perform their species-typical behaviors and will be motivated to learn what they must for adequate performance.

Q: Why is the concept of species-typical behavior relative rather than absolute?
A: The concept of species-typical behavior is useful as long as we accept it as relative and do not argue about whether one or another behavior really should or should not be called species-typical.

Q: What is the difference between a homology and an analogy, and how can researchers tell whether a similarity between two species in some trait is one or the other?
A: A homology is any similarity that exists because of the different species' common ancestry.  An analogy, in contrast, is any similarity that stems not from common ancestry but from convergent evolution.  An illustrative example is that of flying: birds, some mammals and some insects can fly, but this ability evolved independently in each of those three groups.  So similarity with respect to the ability to fly between species belonging to different groups is an instance of analogy, whereas similarities between species within the same group are instances of homologies.
Aside from evidence based on knowledge about the degree of relatedness of the compared species, analogies and homologies can often be distinguished by the nature of the observed similarity.  Analogies involve similarity in function and gross form, but not in detail and underlying mechanism.

Q: How are homologies used for learning about (a) the physiological mechanisms and (b) the evolutionary pathways of species-typical traits?
A: Researchers who seek to understand the physiological mechanism of some behavior in humans through experiments on other species must study species in which the relevant behavior is homologous, not analogous, to that in humans.  Homologies are also useful for inferring the pathways along which species-typical behaviors evolved.  By comparing the different forms of a particular species-typical behavaior in closely related species, it is often possible to reconstruct how the more complex of these forms evolved through a series of steps from the simpler form.

Q: What is a perpetuity?
A: A perpetuity is a project with a stream of costant cash flows that repeats forever

What is the shortcut perpetuity formula?

Q: What is a growing perpetuity?
A: A growing perpetuity is a perpetuity that grows at a constant rate.

What is the formula for the present value of a growing perpetuity?