Flashcards in Final Deck (32):
What is the relationship btw risk & return?
The more risk the more possible return.
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.
The slope of the SML represents the relationship btw which 2 variables?
Risk & return
What is the CAPM and why is it important?
Capital Asset Pricing Model: shows the relationship btw risk and return.
The risk-free rate is which interest rate? Where is this found? Why is it important?
It is the base interest rate.
What is the prime interest and why is it important?
Risk-free rate plus, the rate banks charge their best customers
What are the 2 primary reasons that capital budgeting decisions are important?
Lots of money tied up for a long time
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.
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.
Which method of evaluating projects is the single best measure of profitability?
Net Present Value
If the npv is positive, then the project should be?
If there are two mutually exclusive projects with positive NPVs, which project should be chosen?
The project with the higher NPV
Which method in capital budgeting analysis sets NPV = to 0?
Internal Rate of Return
What are three sources of funding for capital budgeting projects?
Debt, equity, retained earnings
The profitability index is 3. What does this mean?
For every dollar invested, you get 3 dollars back
The NPV gives you a figure in dollars. IRR gives you a figure in?
Debt frequently has no flotation costs. Explain.
It's privately placed
When financing capital projects, what is the primary reason debt is less expensive than stock?
Is there a cost involved in using retained earnings? If so, what is the cost called?
Yes, it's called opportunity cost.
What does the cost of retained earnings represent?
What is target capital structure?
The break down of how a company will finance itself
Explain the relationship between target capital structure and WACC.
It gives the weights for WACC
What info does WACC provide?
Weighted average cost of financing
Why is WACC important in financing decisions?
The cost of financing
To what other info should WACC be compared?
IRR and MIRR
What are flotation costs?
Costs of selling stock
What does the Marginal Cost of Capital (MCC) provide?
Cost of the next dollar of financing
The weights of the average cost of capital must sum to?
A WACC of 10% provides what info?
For every dollar of financing, it costs me 10 cents
Determine the price of the stock, in dollars and cents.
Add a $ on the quote.
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