Intro to Finance Chapter 1

Question 1

Finance Is a Combination of :

Answer 1

Accounting and Economics

Question 2

What three aspects of cash flows affect an investment’s value?

Answer 2

Amount of expected cash flows (bigger is better)
Timing of the cash flow stream (sooner is better)
Risk of the cash flows (less risk is better)

Question 3

Free Cash Flows (FCF)

Answer 3

Free cash flows are the cash flows that are available for distribution to all investors (stockholders and creditors) after all expenses have been paid

Question 4

What is the weighted average cost of capital (WACC)?

Answer 4

is the average rate of return required by all of the company’s investors

Question 5

WACC is affected by

Answer 5

Capital structure (the firm’s relative amounts of debt and equity)
Interest rates
Risk of the firm
Investors’ overall attitude toward risk

Question 6

Intrinsic value

Answer 6

the sum of all the future expected free cash flows when converted into today’s dollars

Question 7

Three types of Transfer from borrowers to savers

Answer 7

1- Direct Transfer (capital to insurer)
2- Investment banking house or IPO
3- Financial Intermediary such as a bank

Question 8

Price (or cost) of Debt is called

Answer 8

The interest rate

Question 9

Price (or cost) of Equity is called

Answer 9

The required return, or dividend yield + capital gain

Question 10

What four factors affect the cost of money?

Answer 10

Production opportunities
Time preferences for consumption
Risk
Expected inflation