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

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