Podcast
Questions and Answers
Which of the following best describes the core concept behind the Time Value of Money (TVM)?
Which of the following best describes the core concept behind the Time Value of Money (TVM)?
- Future dollars have a very low cost now and are worth more than dollars today.
- A dollar today is worth more than a dollar in the future because of its potential earning capacity. (correct)
- A dollar today is worth less than a dollar in the future due to inflation.
- A dollar today is worth the same as a dollar in the future, so there is no benefit to accelerating it.
What discount rate is used when calculating the Internal Rate of Return (IRR)?
What discount rate is used when calculating the Internal Rate of Return (IRR)?
- The rate that reflects the average market return for similar risk investments.
- The rate that sets the project's NPV equal to the project's initial investment.
- The rate that maximizes the present value of the project's future cash flows.
- The rate that makes the project's Net Present Value (NPV) equal to zero. (correct)
When using the Net Present Value (NPV) decision rule, under what conditions should a project be accepted?
When using the Net Present Value (NPV) decision rule, under what conditions should a project be accepted?
- When the NPV equals the average market return.
- When the NPV is less than zero.
- When the NPV is equal to the initial investment.
- When the NPV is greater than zero. (correct)
A company's bond is currently valued at $900 due to a relatively high market interest rate, but it has a par value of $1,000. What does this discount best indicate in the concept of Yield to Maturity (YTM)?
A company's bond is currently valued at $900 due to a relatively high market interest rate, but it has a par value of $1,000. What does this discount best indicate in the concept of Yield to Maturity (YTM)?
What does the Capital Asset Pricing Model (CAPM) primarily calculate?
What does the Capital Asset Pricing Model (CAPM) primarily calculate?
Flashcards
Time Value of Money (TVM)
Time Value of Money (TVM)
Concept stating a dollar today is worth more due to potential earning capacity.
Net Present Value (NPV)
Net Present Value (NPV)
NPV is used to assess a project's profitability by calculating the difference between present value of cash inflows and outflows.
Internal Rate of Return (IRR)
Internal Rate of Return (IRR)
The discount rate at which the Net Present Value of a project is zero.
Profitability Index (PI)
Profitability Index (PI)
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Dividend Discount Model (DDM)
Dividend Discount Model (DDM)
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Study Notes
Corporate Finance: Key Formulas and Concepts
- Time Value of Money (TVM): A dollar today is worth more than a dollar in the future due to potential earnings.
Time Value of Money Formulas
- Future Value (FV): Formula not provided.
- Present Value (PV): Formula not provided.
Net Present Value (NPV) & Internal Rate of Return (IRR)
- Net Present Value (NPV): Formula not provided.
- NPV Decision Rule: Accept if NPV > 0, reject if NPV < 0.
- Internal Rate of Return (IRR): The discount rate that makes NPV = 0.
Capital Budgeting
- Payback Period: Formula not provided.
- Profitability Index (PI): Formula not provided.
Valuation of Bonds & Stocks
- Bond Valuation: Formula not provided.
- Dividend Discount Model (DDM): Formula not provided.
- Capital Asset Pricing Model (CAPM): Calculates a stock's expected return based on its risk.
- CAPM Formula: Formula not provided.
Financial Ratios & Other Key Concepts
- Earnings Per Share (EPS): Formula not provided.
- Enterprise Value (EV): Formula not provided.
- Yield to Maturity (YTM): Calculates the total return on a bond held to maturity.
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