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Flashcards in Final Deck (32):
0

What is the relationship btw risk & return?

The more risk the more possible return.

1

Do you ever want to eliminate all risk from a portfolio?

No because the higher the risk the higher return. Without risk you won't make a significant return on your investments.

2

The slope of the SML represents the relationship btw which 2 variables?

Risk & return

3

What is the CAPM and why is it important?

Capital Asset Pricing Model: shows the relationship btw risk and return.

4

The risk-free rate is which interest rate? Where is this found? Why is it important?

It is the base interest rate.

5

What is the prime interest and why is it important?

Risk-free rate plus, the rate banks charge their best customers

6

What are the 2 primary reasons that capital budgeting decisions are important?

Lots of money tied up for a long time

7

what useful piece of info does the payback period provide as capital budgeting projects are evaluated?

How long it will take you to pay back your initial investment.

8

Explain the difference between projects that are independent and those that are mutually exclusive.

Independent: can decide to do both. Mutually exclusive: have to choose one.

9

Which method of evaluating projects is the single best measure of profitability?

Net Present Value

10

If the npv is positive, then the project should be?

Accepted

11

If there are two mutually exclusive projects with positive NPVs, which project should be chosen?

The project with the higher NPV

12

Which method in capital budgeting analysis sets NPV = to 0?

Internal Rate of Return

13

What are three sources of funding for capital budgeting projects?

Debt, equity, retained earnings

14

The profitability index is 3. What does this mean?

For every dollar invested, you get 3 dollars back

15

The NPV gives you a figure in dollars. IRR gives you a figure in?

Percentages

16

Debt frequently has no flotation costs. Explain.

It's privately placed

17

When financing capital projects, what is the primary reason debt is less expensive than stock?

Tax breaks

18

Is there a cost involved in using retained earnings? If so, what is the cost called?

Yes, it's called opportunity cost.

19

What does the cost of retained earnings represent?

Opportunity cost

20

What is target capital structure?

The break down of how a company will finance itself

21

Explain the relationship between target capital structure and WACC.

It gives the weights for WACC

22

What info does WACC provide?

Weighted average cost of financing

23

Why is WACC important in financing decisions?

The cost of financing

24

To what other info should WACC be compared?

IRR and MIRR

25

What are flotation costs?

Costs of selling stock

26

What does the Marginal Cost of Capital (MCC) provide?

Cost of the next dollar of financing

27

The weights of the average cost of capital must sum to?

100%

28

A WACC of 10% provides what info?

For every dollar of financing, it costs me 10 cents

29

Determine the price of the stock, in dollars and cents.

Add a $ on the quote.

30

Determine the price of the bond, in dollars and cents.

Make into a decimal and multiply by par. % of par. Bond is 96%. 1000 x .96 = 960

31

Why is finance important to all majors and concentrations?

Every business, NPO, or gov't agency needs to manage their finances to stay open.