Constant Growth Model

Constant growth model
The Capital Asset Pricing Model
Zero coupon bonds
Principles of security valuation- intrinsic PV
Coupon payments
Valuing preference shares
Dividend discount model

PV commercial duty
Compound interest FV
Compound interest PV
Annual effective rate
Ordinary annuity
Deffered
Perpetuity
Primary markets are markets in which securities are issued for the first time whereas secondary
markets deal with sales of securities that have been issued by their respective firms in the past and do
not increase the stock of securities.
Primary markets are markets in which securities are issued for the first time. Secondary markets deal in
previously-issued securities.
Secondary markets support primary markets by providing liquidity, confidence and the ability to manage
risk. Primary markets would scarcely be viable without secondary markets, as people would be unwilling
to buy securities that could not readily be converted into cash.
The yield on a commercial bill can be calculated by first dividing the difference between its face value
and current price by its current price and then annualizing the quotients. Using the textbook symbols
yield = (FS-P)/P *365n
The discount rate on a commercial bill is calculated with reference to its face value; i.e discount rate =
(FS-P)/FS *365n
Systematic risk is that part of the total risk that is caused by

factors beyond the control of a specific company or individual.
Unsystematic risk (or firm-specific risk) comes from the way a
particular business conducts its activities.
Systematic risk is that part of total risk that is caused by factors beyond the control of a specific
company or individual
Systematic risk is the risk that is common to all businesses. Some sources of systematic risk include the
rate of job growth in the economy (more people working means more money being spent), changes in
the interest rate (the more people have to pay to borrow money the less they will consume) and war (if
your property is at risk of being destroyed, you are unlikely to purchase more property).
Unsystematic risk comes from the way a particular business conducts its activities. Sources of
unsystematic risk include technological change (how many blacksmiths do you know of compared to
how many your great grandparents would have known of), changes in society (consider the fall in the
percentage of the population who smoke cigarettes now compared to the percentage in the 1940s) and
fashion (if you were a fabric manufacturer, the demand for your products would vary with the fullness
of women’s skirts).
Diversification reduces unsystematic risk. Systematic risk cannot be reduced because it is common to all
businesses. Unsystematic risk can be reduced. If you hold a diversified portfolio, your wealth is
distributed across a number of businesses. The failure of one business does not make you bankrupt.
Further, the reasons for the failure of one of the businesses in your portfolio may provide new
opportunities for the other businesses in your portfolio to increase returns. Can you think of any
situations where this might occur?
The reason as to why overhead cost shifts from high volume to low volume products is because:
Traditional costing system only uses volume-based cost driver. However, due to technological changes,
such as high mechanization in production, most of the overhead costs are not driven by volume-based
drivers or there is an increase in non-manufacturing costs therefore the traditional costing system will
incorrectly allocate these costs to the products. This will result in cost distortion as costs are not
allocated appropriately to the products. Therefore, simple products will be over costed and a complex
product will be under costed. Hence, when activity-based costing is used, manufacturing overhead costs
shifts from high volume products to low-volume products because in traditional cost systems, product-
level costs are spread across all products using direct labour hours or some other allocation base related
to volume.
When activity-based costing is used, manufacturing overhead costs shift from high-

volume products to low-volume products because in traditional cost systems, product-
level costs are spread across all products using direct labor-hours or some other
allocation base related to volume. As a consequence, high-volume products are
assigned the bulk of such costs. In an activity-based costing system, batch-level and
product-level costs are assigned more appropriately. This results in shifting product-
level costs back to the products that cause them and away from the high-volume
products.
At the point when action based costing is utilized, fabricating overhead costs move from high-volume
items to low-volume items on the grounds that in customary cost frameworks, item level expenses are
spread over all items utilizing direct work hours or some other distribution base identified with volume.
As a result, high-volume items are relegated the greater part of such expenses. In a movement based
costing framework, clump level and item level expenses are doled out more properly. This outcomes in
moving item level expenses back to the items that cause them and away from the high-volume items.

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Constant Growth Model

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Constant growth model

The Capital Asset Pricing Model

Zero coupon bonds

Principles of security valuation- intrinsic PV

Valuing preference shares

Dividend discount model

Annual effective rate

Systematic risk is that part of the total risk that is caused by

When activity-based costing is used, manufacturing overhead costs shift from high-

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