15 Questions
Which of the following best describes sensitivity analysis?
A method for assessing the impact of changes in calculation assumptions on NPV
What is an annuity?
A finite stream of payments over a set number of periods
What is a growing annuity?
A stream of payments that increases over time
What does the ROE indicate?
Profitability
What are fixed costs defined as?
Independent of production
What is the purpose of the annuity factor?
To ease present value computations
What does the receivables turnover measure?
Efficiency
What does the inventory turnover measure?
Efficiency
What is the profitability index?
A ratio of present value of future cash flow normalized by initial investment
What is a perpetuity?
A constant cash flow without an end
What does the equity multiplier measure?
Financial leverage
What is financial leverage?
The amount of debt a company has in its capital structure
Which of the following is included in a typical loan amortization plan?
Interest and principal payments
What can MPV be applied to?
Any type of cash flow
What is a real option in decision making?
A flexible decision making approach
Study Notes
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.
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