Finance Skills for Managers - Financial Decision Making
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| show | Metrics and calculations used to determine whether a project or asset will add value and be a worthwhile investment.
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| show | Considers time value of money
Calculates value added to the firm
Considers risk and required return
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| Disadvantages of NPV | show 🗑
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| What indicates to a firm that a project will increase shareholder wealth? | show 🗑
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| show | The cost of capital. The cost of capital is affected by several things, such as different capital structures, timing of cash flows, and investment potential, which makes it difficult to calculate.
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| internal rate of return (IRR) | show 🗑
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| show | internal rate of return
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| show | is easy to interpret,
considers time value of money, and
does not require use of required rate of return.
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| show | is not a good indicator of the amount of value created,
ignores mutually exclusive projects,
assumes reinvestment at the IRR rate,
cannot be used to compare projects with different durations, and
requires conventional cash flows.
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| capital-constrained environment | show 🗑
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| mutually exclusive | show 🗑
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| profitability index (PI) | show 🗑
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| Advantages of PI | show 🗑
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| show | requires calculation of cost of capital and
is not useful for mutually exclusive projects.
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| show | Profitability index (PI)
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| show | It gives an idea of the return generated by a project.
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| show | No, because the project would be generating cash inflows that are 20% short of the initial investment.
Correct! As a rule, firms should accept only projects that have a PI greater than 1.
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| show | Another name for bonds; a financial security in which the borrower pays a fixed interest payment to investors each year.
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| show | The stated interest rate of a bond; also known as coupon yield.
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| show | The sum of money that a corporation promises to pay at the expiration of a bond; also called face value.
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| face value | show 🗑
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| show | A legal contract that governs the relationship between a firm and its bondholders.
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| coupon yield | show 🗑
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| show | The date at which a bond expires.
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| yield to maturity (YTM) | show 🗑
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| covenants | show 🗑
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| show | A bond covenant that describes things the company pledges itself to do in order to protect bondholders.
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| show | A bond covenant that describes things the company pledges itself not to do in order to protect bondholders.
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| default | show 🗑
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| premium bond | show 🗑
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A bond whose price is exactly equal to its par value.
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| show | A bond whose price is below its par value.
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| show | The current market value of a publicly traded company’s total outstanding shares, indicating the size of a company.
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| show | represents equity, or ownership, in a firm
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| show | A group of people who jointly supervise the activities of an organization.
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| show | The system of rules, practices, and processes by which a firm is directed and controlled.
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| show | A hybrid security that has no fixed maturity, has fixed payments, and does not confer voting rights on bondholders.
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| hybrid security | show 🗑
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| show | A feature of preferred stock specifying that if a company ignores preferred stock dividends, it cannot pay anything to its common stockholders.
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| cumulative | show 🗑
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| show | The sum of money invested in a business to purchase long-term assets to further its objective of maximizing owner wealth.
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| show | To purchase long-term assets for future growth
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| show | The value of an asset as determined through fundamental analysis without referring to the asset’s market value.
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| show | A formula used to value preferred stock that is based on the calculation of a perpetuity.
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| Gordon growth model | show 🗑
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| dividend discount model | show 🗑
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| show | Companies or securities with beta greater than 1.
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| show | Companies or securities with beta less than 1.
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| show | A model used to determine the risk-return relationship for an asset.
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| Capital budgeting | show 🗑
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| Which method should you use to calculate a bond value? | show 🗑
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| show | The growth rate is assumed to stay the same forever.
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| show | Capital budgeting
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| Criteria to Consider for Capital Investment | show 🗑
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| show | Interest expense on debts is paid before taxes are calculated.
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| show | Cash flows that result from accepting a project. (Any additional cash flows, whether in or out of the firm, that are created as a result of accepting a project)
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| show | are one specific type of incremental cash flow that you need to include in your project evaluation.
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| cannibalization | show 🗑
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| sunk costs | show 🗑
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| show | any assets—such as land, cash, equipment, or even time—for a certain project implies the loss of the ability to use that same asset toward the next best project
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| show | These cash flows are not a direct result of a specific project but are a general cost to the firm.
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| How are non-incremental cash flows different from incidental cash flows? | show 🗑
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Created by:
mschelle816