Final Managerial Finance Flashcards
(57 cards)
the potential of losing something of value vs the potential of gaining something of value
risk
preventing a risk from being unfavorable
minimize risk
once risks are unfavorable, keep it from getting worse
mitigate risks
the return on a risky asset (stock) expected in the future
expected returns
a risk that influences a large number of assets
has market-wide effects
systematic risk
this is also called a non-diversifiable risk
systematic risk
a risk that influences a small number of assets
is firm or industry specific
unsystematic risk
also called diversifiable risk
unsystematic risk
systematic risk + unsystematic risk = ?
total risk
the expected return on a risky asset depends only on that assets (or that stocks) systematic risk
Systematic Risk Principle
spreading investments over a number of assets to eliminate unsystematic risk (but not systematic risk)
Principle of Diversification
a group of assets held by an investor
portfolio
the amount of systematic risk present in a particular risky asset, relative to that of the average asset
Beta
Levels of Risk in Beta:
less than average risk
0-1
Levels of Risk in Beta:
Average Risk
1
Levels of Risk in Beta:
More than Average Risk
1+
positively sloped line displaying the relationship between expected return and beta
Security Market Line (SML)
the return an investor receives is the cost of that security to the company that issued it
cost of capital
the return common stock investors require on their investment in the firm
cost of equity
the return preferred stock investors require on their investment
cost of preferred stock
the purpose of the cost of equity
for every $1 in common stock, equity is how much we are paying investors
Advantages of Dividend Growth Model to find the Cost of Preferred Stock and Cost of Equity
Simple model
Disadvantages of Dividend Growth Model to find Cost of Preferred Stock and Cost of Equity
- Only applies to companies issuing dividends
- Dividends must be fixed (for preferred stock)
- Dividends must be constant rate (common stock)
- Estimated Growth Rates
- Fails to consider risk
The return lenders require on the firm’s debt
Cost of Debt
