D076 WGU
D076 WGU
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1. A decision science in which we use numbers finance
to help us make informed decisions to im-
prove business
Utilizes economic resources to achieve goals
Does the benefit of my decision outweigh the
cost of it
2. refers to the return a company needs to earn Cost of capital
on its investments to satisfy its investors,
which includes both the cost of debt and the
cost of equity.
It serves as a benchmark for evaluating new
projects and investments, ensuring they gen-
erate returns that exceed this cost
3. the interest rate used to determine the pre- discount rate
sent value of future cash flows from an in-
vestment, reflecting the time value of money
and associated risks.
It is also the rate set by the Federal Reserve
for short-term loans to banks, influencing liq-
uidity in the banking system
4. the minimum return an investor expects to required rate of return
receive from an investment, considering its
risk level.
It serves as a benchmark to evaluate the
attractiveness of potential investments, with
, D076 WGU
D076 WGU
Study online at https://quizlet.com/_i82vwe
returns below this rate typically seen as unat-
tractive
5. How is an interest rate determined? Nominal interest rate = general interest
rate +risk premium + liquidity
General interest rate = "risk free rate"
such as US treasury bond rate
Risk premium = time horizon of the in-
vestment and/or probability of default
Liquidity = amount of difficulty to con-
vert the investment to cash
6. You are earning interest only on the original simple interest
principal investment amount
Example - if you invest $1,000 at a 5% simple
interest rate for 3 years, you would earn $150
in interest ($1,000 x 0.05 x 3)
7. Earning interest on top of interest; snowball compound interest
effect (most questions are about this type of
interest unless specifically stated otherwise)
Example - if you invest $1,000 at a 5% an-
nual interest rate compounded annually, af-
ter one year you would earn $50 in interest,
making your total $1,050; in the second year,
you would earn interest on $1,050, resulting
in $52.50 in interest, bringing your total to
$1,102.50
8. difference between IRR and hurdle rate The hurdle rate is the minimum accept-
able rate of return that an investment
, D076 WGU
D076 WGU
Study online at https://quizlet.com/_i82vwe
must achieve to be considered worth-
while, while the internal rate of return
(IRR) is the actual return expected from
the investment
9. the minimum required return on an invest- hurdle rate (required rate of return)
ment that must be achieved for it to be con-
sidered acceptable
10. factors of required rate of return (hurdle rate) Risk
Inflation
Opportunity cost
11. A project is typically approved if its IRR meets or exceeds
_________ the hurdle rate
12. Demand "pull" inflation causes of inflation
Demand exceeds supply and prices are
"pulled" up, causing inflation
Cost "push" inflation
Cost of materials goes up
Example - if someone is making computers
and the prices for components to build the
computers go up, then the computers must
be sold at a higher price to compensate
Built-in inflation
Employees demand higher wages
13. Real rate = nominal rate - inflation real rate formula
D076 WGU
Study online at https://quizlet.com/_i82vwe
1. A decision science in which we use numbers finance
to help us make informed decisions to im-
prove business
Utilizes economic resources to achieve goals
Does the benefit of my decision outweigh the
cost of it
2. refers to the return a company needs to earn Cost of capital
on its investments to satisfy its investors,
which includes both the cost of debt and the
cost of equity.
It serves as a benchmark for evaluating new
projects and investments, ensuring they gen-
erate returns that exceed this cost
3. the interest rate used to determine the pre- discount rate
sent value of future cash flows from an in-
vestment, reflecting the time value of money
and associated risks.
It is also the rate set by the Federal Reserve
for short-term loans to banks, influencing liq-
uidity in the banking system
4. the minimum return an investor expects to required rate of return
receive from an investment, considering its
risk level.
It serves as a benchmark to evaluate the
attractiveness of potential investments, with
, D076 WGU
D076 WGU
Study online at https://quizlet.com/_i82vwe
returns below this rate typically seen as unat-
tractive
5. How is an interest rate determined? Nominal interest rate = general interest
rate +risk premium + liquidity
General interest rate = "risk free rate"
such as US treasury bond rate
Risk premium = time horizon of the in-
vestment and/or probability of default
Liquidity = amount of difficulty to con-
vert the investment to cash
6. You are earning interest only on the original simple interest
principal investment amount
Example - if you invest $1,000 at a 5% simple
interest rate for 3 years, you would earn $150
in interest ($1,000 x 0.05 x 3)
7. Earning interest on top of interest; snowball compound interest
effect (most questions are about this type of
interest unless specifically stated otherwise)
Example - if you invest $1,000 at a 5% an-
nual interest rate compounded annually, af-
ter one year you would earn $50 in interest,
making your total $1,050; in the second year,
you would earn interest on $1,050, resulting
in $52.50 in interest, bringing your total to
$1,102.50
8. difference between IRR and hurdle rate The hurdle rate is the minimum accept-
able rate of return that an investment
, D076 WGU
D076 WGU
Study online at https://quizlet.com/_i82vwe
must achieve to be considered worth-
while, while the internal rate of return
(IRR) is the actual return expected from
the investment
9. the minimum required return on an invest- hurdle rate (required rate of return)
ment that must be achieved for it to be con-
sidered acceptable
10. factors of required rate of return (hurdle rate) Risk
Inflation
Opportunity cost
11. A project is typically approved if its IRR meets or exceeds
_________ the hurdle rate
12. Demand "pull" inflation causes of inflation
Demand exceeds supply and prices are
"pulled" up, causing inflation
Cost "push" inflation
Cost of materials goes up
Example - if someone is making computers
and the prices for components to build the
computers go up, then the computers must
be sold at a higher price to compensate
Built-in inflation
Employees demand higher wages
13. Real rate = nominal rate - inflation real rate formula
