Finance Concepts Quiz

Sensitivity Analysis

• Assess the impact of variable changes on a project's outcomes.
• Helps determine how sensitive results are to changes in assumptions.

Annuity

• Series of equal payments made at regular intervals over time.
• Can be received or paid, commonly used in loans and investments.

Growing Annuity

• Similar to an annuity, but payments increase at a constant rate over time.
• Useful for modeling cash flows that are expected to grow, like retirement income.

Return on Equity (ROE)

• Measures a company's profitability relative to shareholder equity.
• Indicates how effectively management is using equity to generate profits.

Fixed Costs

• Costs that do not change with the level of production or sales.
• Examples include rent, salaries, and insurance.

Annuity Factor

• A factor used to calculate the present value of annuity cash flows.
• Simplifies the calculation by multiplying the payment amount by the annuity factor.

Receivables Turnover

• Measures how efficiently a company collects its receivables.
• Calculated by dividing net credit sales by average accounts receivable.

Inventory Turnover

• Indicates how quickly a company sells its inventory.
• Higher turnover suggests efficient inventory management and product demand.

Profitability Index

• Ratio used to evaluate the attractiveness of an investment.
• Calculated as the present value of future cash flows divided by the initial investment cost.

Perpetuity

• A financial instrument that provides constant payments indefinitely.
• Common examples include certain types of bonds or preferred shares.

Equity Multiplier

• Measures a firm's financial leverage by comparing total assets to shareholder equity.
• A higher multiplier indicates greater reliance on debt for financing.

Financial Leverage

• Refers to the use of borrowed funds to amplify returns on investments.
• Increases potential returns but also raises risk.

Loan Amortization Plan

• Typically includes a schedule outlining principal and interest payments over time.
• Ensures the loan is paid off in full by the end of the term.

Net Present Value (NPV)

• Applied to evaluate the profitability of an investment or project by calculating the present value of expected cash flows minus the initial investment.
• Positive NPV indicates the investment is likely profitable.

Real Option in Decision Making

• Provides the flexibility to make investment decisions in response to changing circumstances.
• Enables management to adapt to new information or market conditions.

Test your knowledge on finance concepts with this quiz! Topics covered include sensitivity analysis, net present value (NPV) computation, annuity, and growing annuity. Practice identifying and defining these key terms to improve your financial literacy.