Final Exam Flashcards

1
Q

liquidity ratios

A

measures of company’s ability to meet short term obligations

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2
Q

activity/efficiency ratios

A

how well the company utilizes and manages assets

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3
Q

leverage/coverage/debt ratios

A

how well company uses liabilities and ability to cover fixed financial charges

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4
Q

profitability ratios

A

how well the company produces earnings/returns

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5
Q

market ratios

A

based on market values

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6
Q

ROE breakdown

A

identify key drivers of profitability and not how they’ve changed over time for company

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7
Q

return

A

total gain/loss experienced on an investment over a given period of time

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8
Q

risk

A

measure of uncertainty surrounding return of investment

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9
Q

risk averse

A

investors require increased return as compensation for increase in risk

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10
Q

risk neutral

A

investors choose investment with higher return regardless of risk

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11
Q

risk seeking

A

investors prefer riskier investments even with lower expected returns

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12
Q

portfolio performance determinants

A

expected return and standard deviation of each asset and how they are correlated

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13
Q

capital asset pricing model (capm)

A

measures how much additional return an investor should expect from taking a little extra risk; based on historical data so betas may not actually reflect future variability

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14
Q

total risk

A

combination of a security’s nondiversifiable and diversifiable risk

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15
Q

diversifiable/unsystemic risk

A

portion of an asset’s risk that is attributable to firm-specific, random causes; can be eliminated through diversification

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16
Q

nondiversifiable/systemic risk

A

relevant portion of an asset’s risk attributable to market factors that affect all firms; cannot be eliminated through diversification

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17
Q

market risk (beta)

A

relative measure of nondiversifiable risk; beta coefficient for entire market = 0

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18
Q

market return

A

return on market portfolio of all traded securities

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19
Q

risk free rate of return

A

required return on risk-free asset, typically 3-month US treasury bill

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20
Q

risk premium

A

premium investor receives for taking on risk; represents average amount of risk associated with holding the market portfolio of assets

21
Q

weighted average cost of capital (wacc)

A

reflects average future cost of capital over long run

22
Q

cost of capital

A

firm’s total cost of financing as % of total financing, minimum rate of return as % that investment must earn to add value to the firm

23
Q

pretax cost

A

financing cost associated with new funds before taxes are applies

24
Q

net proceeds

A

funds actually received by firm from sale of security

25
Q

flotation costs

A

total costs of issuing and selling a security; underwriting costs and administrative costs

26
Q

underwriting costs

A

compensation earned by investment bankers for selling the security (.5%-2% of total value)

27
Q

administrative costs

A

issuer expenses such as legal, accounting, and printing

28
Q

cost of common stock equity

A

rate at which investors discount the expected dividends of firm to determine share value

29
Q

constant-growth dividend discount (Gordon) model

A

assumes value of a share of stock = present value of all future dividends (assumed to grow at constant rate) that it is expected to provide over infinite time

30
Q

capital budgeting

A

process of developing, evaluating, and selecting long-term investments consistent with the firm’s goal of maximizing owner wealth

31
Q

capital expenditure

A

outlay of funds/cash (cash outflow) by the firm that is expected to produce benefits over a period of time greater than 1 year

32
Q

operating expenditure

A

outlay of funds by the firm resulting in benefits received within 1 year

33
Q

capital budgeting process

A

proposal generation
review and analysis
decision making
implementation
follow-up

34
Q

independent projects

A

cash flows unrelated to one another

35
Q

mutually exclusive projects

A

acceptance of one eliminates from further consideration all other projects that serve a similar function

36
Q

unlimited funds

A

financial situation wherein a firm is able to accept all independent projects with acceptable returns

37
Q

capital rationing

A

financial situation in which a firm has only a fixed number of dollars available for capital expenditures and numerous projects compete for them

38
Q

accept-reject approach

A

evaluation of capital expenditure proposals to determine whether they meet the firm’s minimum acceptance criterion

39
Q

ranking approach

A

ranking of all capital expenditure projects on the basis of some predetermined measure, such as rate of return

40
Q

payback method

A

amount of time required for a firm to recover initial investment in a product as calculated from cash inflows; simple but doesn’t account for time value of money or recognize cash flows after payback period

41
Q

net present value (npv)

A

sophisticated capital budgeting technique

42
Q

internal rate of return (irr)

A

discount rate that allows npv of investment opportunity to be $0

43
Q

initial investment

A

relevant cash outflow for proposed project at time zero

44
Q

operating net cash flows

A

operating annual net cash flows and terminal cash flows

45
Q

operating annual net cash flows

A

incremental net cash inflows resulting from implementation of a project during its life

46
Q

terminal cash flow

A

after-tax nonoperating cash flow occurring in final year of project; usually attributable to liquidation of project

47
Q

sunk costs

A

cash outlays that have already been made and have no effect on cash flows relevant to a current decision

48
Q

opportunity costs

A

cash flows that could be realized from the best alternative use of an owned asset

49
Q

cost of a new asset

A

net outflow necessary to acquire a new asset