Finance Quiz: Free Cash Flow & Capital Cost

The cash available for distribution to investors after accounting for capital expenditures and working capital needs.

EBIT + Amortization/Depreciation - Taxes on EBIT - Capital Expenditures - Change in Working Capital

It focuses on cash available for reinvestment or distribution to shareholders.

The minimum return a company must earn on its investments to satisfy its investors (debt holders and equity shareholders).

It is the weighted average of the costs of equity and debt, reflecting the firm's overall cost of financing its assets.

It measures the cash flow generated from the company’s operating activities.

Cash flow that comes from daily operations, like selling products.

Cash flow that comes from investing in the company's assets, like buying new equipment.

The return that shareholders require to compensate for the risk of their investment in a company.

A mathematical model used to calculate the cost of equity. It considers the risk-free rate, the market risk premium, and the beta of the company's stock.

The rate of return on a risk-free investment, typically a government bond.

A measure of a stock's volatility compared to the overall market. A higher beta indicates higher risk.

The effective rate a company pays on its borrowed funds, taking into account the tax deductibility of interest.

The average cost of financing for a company, combining both equity and debt costs.

Risk that affects the overall market and cannot be eliminated through diversification, such as economic recession.

Risk that is specific to a company or industry, which can be reduced through diversification.

The proportion of equity financing in a company's capital structure, calculated as the market value of equity divided by the total value of debt and equity.

The proportion of debt financing in a company's capital structure, calculated as the market value of debt divided by the total value of debt and equity.

The rate of return that a company needs to earn on its investments in order to satisfy both its debt and equity holders.

The process of determining the optimal mix of debt and equity financing that minimizes the company's cost of capital while maintaining financial stability.

A method for valuing a company based on the present value of its future cash flows, using WACC as the discount rate.

The difference between the present value of cash inflows and the present value of cash outflows. It's used to evaluate investment projects and accept those creating shareholder value.

A method for evaluating investment projects that calculates the rate of return generated by the project.

A type of annuity that continues indefinitely, assuming constant cash flows and discount rates.

A method for valuing a company's future cash flows, assuming a constant growth rate in perpetuity.

A cash flow stream that occurs for a finite period, assuming equal payments over a set period.

The concept that money available today is worth more than money in the future.

Payments or receipts of funds occurring at distinct points in time, categorized as inflows (receipts) or outflows (expenditures).

The time frame over which cash flows are evaluated.

The rate used to adjust future cash flows to their present value, reflecting the opportunity cost of capital.

The value of a future cash flow or series of cash flows, measured in today's terms.

The value of a current amount at a future date, considering interest or returns.

A formula to calculate the present value of a future cash flow: PV = FV / (1 + r)^n, where PV is present value, FV is future value, r is the discount rate, and n is the number of periods.

A formula to calculate the future value of a present cash flow: FV = PV x (1 + r)^n, where FV is future value, PV is present value, r is the interest rate, and n is the number of periods.

The present value of future cash flows, discounted at a specific rate, minus the initial investment.

The total value of all future cash flows discounted to their present value.

A series of equal payments made at regular intervals over a specific period.

The present value of a series of equal payments received indefinitely.

NPV is positive. It creates value for the investor.

NPV is negative. It destroys value for the investor.

It helps investors assess the profitability of an investment by considering the time value of money.

The present value of all future cash flows, discounted at an appropriate rate.