Chapters 1-3
The management of money and investments.
What is finance?
Concept that explains why a dollar today is > a dollar in the future.
What is the time value of money?
Market where new securities are issued.
What is the primary market?
Principle that links higher returns with higher risk.
What is risk - return tradeoff?
Combines the cost of debt and equity into one rate.
Refers to the next best investment alternative.
What is opportunity cost?
This interest is calculated only on the original principal.
What is simple interest?
Institutions that transfer funds from savers to borrowers.
What are financial intermediaries?
Reduces risk by spreading investments.
What is diversification?
Measures value added by a project.
What is NPV?
Reports revenue and expense over a period of time.
What is an income statement?
The value today of a future sum of money.
What is PV?
Stock valuation model that assumes dividends growth at a constant rate.
What is the Gordon Model?
Risk that cannot be eliminated through diversification.
What is systematic risk?
The rate that makes NPV = 0
What is IRR?
Ratio measuring a firm's ability to meet short-term obligations.
What is the current ratio?
The process of finding today's value of future cash flows.
What is discounting?
The semiannual payment for a $1,000 par, 7% coupon bond.
What is $35?
Measures total variability of an investment's returns around its expected value.
What is standard deviation?
Estimates the cost of equity using Beta.
What is CAPM?
Ratio that measures how efficiently a firm uses its assets.
What is asset turnover?
The value of an investment earning interest over time.
What is FV?
Extra return that bond investors demand for the possibility of default.
What is default risk premium?
Reflects how two assets move together.
What is correlation?
This component of WACC is tax-deductible and should be adjusted for taxes.
What is debt?