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1. Finance Midterm Study

QuestionAnswer
Explain IRR The interest rate that sets the net present value of the cash flows equal to zero.
Retention Rate The fraction of a firm's current earning that the firm retains. 1-dividend rate. % of earnings that a firm chooses to grow and not give to its shareholders via dividends. Div rate=1-retention.
Treasury Yield Curve Risk-free rate of return for treasury bonds. Diminishing returns as time goes on.
Bond Price/Yield Relationship The discounting of future cash flows. A higher yield means that the future cash flows discount at a higher rate and it yields a lower present value (price) to get the same face value.
NPV>0 Go ahead with purchase bc it's adding value. The NPV>0 means the project is earning more than the rate of 17%. 17% is the measure of the opportunity cost of investing in other projects of similar risk.
Dividend Yield Dividend payment/share price
Identifying Discount/Premium We know bond will sell at a discount bc it has a coupon rate of 7% when the market requires 8%.
Created by: Elizabeth Hughes Elizabeth Hughes on 2012-09-12



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