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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?


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

Do currency swaps have currency risk?


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.


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