Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Time Value of Money > Resource Allocation Decisions > Flashcards

Resource Allocation Decisions Flashcards

(64 cards)

Start Studying
1
Q

What are the two types of decision criteria in resource allocation?

A

NPV and IRR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

If NPV is greater than 0, what do you do?

A

Accept the project!

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

If IRR is greater than Cost of Capital, What do you do?

A

Accept the project!

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

When given the choice, do you use NPV or IRR?

A

NPV

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What do you need in order to use NPV and IRR?

A

Expected free cash flow and the cost of capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the 5 Cash Flow drivers?

A 
Revenue
Cash Costs
Taxes
Capital Expenditure
Changes in Working Capital
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the two different types of expenditures you can have?

A

Expense items

Capital items

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the difference between expense and capital items

A

Expense items have a life of less than a year

Capital items have a life of more than a year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is amortization?

A

If you buy an intangible asset, the investment must be similarly spread over its tax life

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Is depreciation for tangible or intangible assets?

A

TANGIBLE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is CapEx

A

The amount spent to acquire fixed capital items

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are fixed capital items

A

Tangible and intangible assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are examples of fixed capital?

A 
Plant
Equipment
Building
Land
Intangible assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is working capital

A

Receivables less payable
Inventory
Operating cash

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Why do you need working capital?

A

If the company collects from customers later than when it has to pay various parties
If there is a timing gap between when customers pay you compared to when you have to pay

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are accounts receivable?

A

The amount owed by the customers to the company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What are the 3 different types of inventory?

A

Raw material inventory
Work in process inventory
Finished goods inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are accounts payable?

A

Amount owed to the supplier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the calculation of working capital?

A

Working capital = current operating assets - current operating liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is operating cash?

A

Cash needed for day-to-day operations such as paying temporary labor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are the components of working capital?

A 
Operating Cash
Accounts Receivable
Inventory
Pre-paid Expenses
Accounts Payable
Customer Advances
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Salvage value

A

Value that a buyer is willing to pay

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

How do you calculate profit from asset sales?

A

Salvage value - book value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are the non cash items that affect taxes?

A

Depreciation

Profit from asset sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What does NOPAT stand for?
Net operating profit after tax
26
How do you calculate wealth created by a project?
NPV (DO) - NPV (DONT)
27
What is a perpetuity?
A steady stream of equal cash flow expected to last forever
28
What is the equation for a perpetuity?
PV = c/r
29
What is an annuity?
A steady stream of equal casbah flows that has a finite life
30
Constant growth perpetuity
Cash flows grow at a constant rate in perpetuity
31
Constant growth perpetuity equation
PV = c1/r-g
32
What is NPV?
The change in shareholder wealth
33
What is cost of capital?
The rate of return that investors can earn elsewhere at the same risk
34
What is IRR?
Measures the expected average annual rate of return of an investment
35
Return on assets
The ratio of net income to total assets — not based on cash flow
36
What is the definition of fixed capital?
Cash spent to acquire fixed assets
37
What are free cash flows?
Total cash flows of the project
38
Cost of equity =
Risk free rate + risk premium
39
Risk free rate =
Real rate of interest + expected rate of inflation
40
What type of risk does a fully diversified investor face?
Market risk
41
What is the cost of capital?
The rate of return that investors can expect to earn for equivalent risk investments in the financial market
42
What does real rate measure?
The “cost of money” in an economy
43
What does the cost of capital of a firm reflect?
Its cash flows
44
What is a hurdle rate?
When a firm adds a premium to the cost of capital - it’s usually set greater than the cost of capital to make sure only projects that significantly add value are undertaken.
45
What are the 2 broad classes of capital?
Debt and Equity
46
What four parameters do you need to compute WACC?
Tax Rate Proportion of debt or equity Cost of debt Cost of equity
47
What is beta?
The sensitivity of market risk A stock with a beta of 1 has the same risk as the market A stock with a beta of less than 1 has less risk than the market A stock with a beta of more than 1 has more risk than the market
48
Can betas change over time?
Yes
49
What is the Capital Asset Pricing Model (CAPM)?
Cost of Equity = risk-Free rate + beta x market risk premium
50
What market risk premium are we using in this class?
6%
51
Why do small firms command a greater risk premium than the estimate using beta?
Small stocks have less liquidity Small stocks have limited trading Small stocks have greater default risk
52
How do you calculate the Weighted Average Cost of Capital (WACC)?
After-tax cost of debt x proportion of debt + cost of equity x proportion of equity
53
What is the debt ratio formula?
Debt/(Debt + Equity)
54
What is the equity ratio?
E/(D+E)
55
Are WACC of a company and a project the same?
NO!
56
What is a pure-play?
A publicly-traded company with the same business risk as our project or company
57
How do you handle multiple pure-plays?
Compute the WACC of each and use the average of them as the project’s WACC
58
What types of risk do stockholders face?
Business Risk | Financial Risk
59
What is business risk?
Risk that arises from the business operations and includes demand risk, price risk and technology risk
60
What is financial risk?
It is a type of risk that arises from debt - since stockholders have lower priority than lenders, they bear additional risk as a company starts borrowing
61
If a company has no debt, what kind of risk do shareholders bear?
Only business risk
62
If a company has some debt, what kinds of risk do shareholders bear?
Both business and financial risk
63
What happens to stockholder risk as debt increases?
It increases because business risk stays the same and financial risk increases
64
What is cost of preferred stock?
The preferred stock dividend divided by its market value

Time Value of Money (1 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions