Free Cash Flow to Firm from Net Income

• FCFF = Net Income + NCC + (Interest Expense * (1 – tax rate)) – Fixed Capital Expenditures – Working Capital Expenditures
• NCC = Non-cash Charges such as depreciation and amortization

Free Cash Flow to Firm from CFO

• FCFF = CFO + (Interest Expense * (1 – tax rate)) – Net Capital Expenditures

Constant Growth Rate Model

• Vj = D1 / (k – g)
• Vj = value of the stock J
• D1 = Current Dividend times (1 + g) = D0 * (1 + g)
• k = The required rate of return
• g = The constant growth rate of dividends
• g = ROE * (1 – dividend payout ratio)

When a dealer strips a Treasury bond and sells the strips in the bond market, what is the coupon on each stripped bond?

0%

Each Treasury strip is a zero-coupon instrument. Its yield is determined by the market through active trading.

Do currency swaps have currency risk?

NO

High return on invested capital and high pricing power are associated with:

• High industry concentration (ie a small number of firms)
• High barriers to entry
• Low industry capacity

Yield Curve Risk

Bonds with different maturity dates are more or less sensitive to changes in the market interest rate depending on the time until they mature.