Fin515 Week1 Homework

FIN515 – Chapter one

Mini Case

F. What are free cash flows?

Free cash flows are company’s available cash flow that will be dispersed to company’s stockholders and creditors. The three elements that define cash flow are sales revenues, operating expense and operating capital

G. What is the weighted average cost of capital?

It is the required average rate by shareholders that company’s necessity earns on a current asset base to fulfill their investor, or else they will leave to invest in another places. It involves the company’s capital structure, interest rate, the risk, and investors’ risk choice.

H. How do free cash flows and the weighted average cost of capital interact to determine a firm’s value?

A firm’s value is when the change all their free cash flow to today’s dollars.

J. What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy?

The price paid for borrower debt capital is interest rate. The price of equity capital is dividends and capital gains. The four factors affect the cost of money is 1) Production opportunities, 2) Time preferences for consumption, 3) Risk, and 4) expected Inflation.

K. What are some economic conditions (including international aspects) that affect the cost of money?

The economic conditions that affect the cost of money are Federal Reserve policies, budget deficits or surpluses, recession or boom, inflation, international trade deficits or surpluses and the international country risk.

P. Briefly explain mortgage securitization and how it contributed to the global economic crisis.

Mortgage securitization was major problem for the world economy. Investment bank were the majority who securitizing loans by putting the large amount of mortgage loans into pools and called it “tranches” . It contributed to global economic crisis by...