Chapter 3 Flashcards
(18 cards)
What is an internal rate of return?
A time-adjusted rate of return from an investment.
Avg. collection period tells us what?
The average time it takes to collect A/R, which affects the availability of cash and liquidity.
How can the optimal capitalization be determined?
Lowest WACC.
Which depreciation method allows the most depreciation expense in the first year?
Double declining balance.
How is depreciation utilized in estimating cash flow?
In determining the tax costs or benefit.
Which method is best suited for evaluating the performance of a firm’s capital?
Economic value-added.
What measures the volatility of an investment?
Standard deviation, the most common measure of investment risk.
Which cash mgmt. technique focuses on cash disbursements?
Zero-balance accounts.
What is an advantage of the NPV model?
It accounts for compounding of returns.
Which performance measure may lead a manager to forego a profitable investment the company as a whole?
ROI, the manager would focus on profit percentage instead of absolute profit.
What are the 3 theories for differences in yields associated with interest rates?
Liquidity preference, market segmentation, and expectations.
When are dividends considered a liability?
When declared.
What is the T bill market rate?
Risk free rate + inflation premium
Modern Portfolio Theory (MPT)
The SD of a portfolio of investments will generally be much smaller than the SD of individual investments.
3 theories on the reason for differences in yields
Liquidity preference, market segmentation, and expectations.
What will increase annual cash flows and present value?
Decrease in taxes, decrease in cash outflows, and increase in cash inflows.
What will decrease annual cash flows and present value?
Increase in taxes, increase in cash outflows and decrease in cash inflows.
When is the discount rate determined in advance?
When using the NPV method.
