Fundamentals of Corporate Finance Mandatory Revision Questions and CORRECT Answers

Erosion - a reduction in the sales of a current product whenever a new product is introduced Opportunity Cost - the most valuable alternative that is given up if a particular investment is undertaken Sunk Cost - A cost that has already been incurred and that cannot be recouped Forecasting Risk - the possibility that errors in projected cash flows will lead to incorrect decisions Scenario Analysis - means of answering "What If" questions that affect multiple variables simultaneously. Sensitivity Analysis - Holds all projections constant except one; alter that one, and see how sensitive NPV is to change Efficient Capital Market - A market reflects all available information in the prices of the securities Risk Premium - reward for bearing risk, the difference between a risky investment return and the risk-free rate = Rate of return - risk free rate U.S. Treasury Bill - Good Proxy for the risk free asset and its rate can be used as the risk free rate. (Stock Rate - TBill Rate = Risk Premium). Small Company Stocks - Riskiest investment for past 80 years in US Stock Market Treasury Bills - Safest investment for past 80 years in US Stock Market Efficient Market Hypothesis - Asserts that modern US Stock Markets are, as a practical matter, efficient Risk Premium - the excess return required from an investment in a risky asset over that required from a risk-free investment Portfolio - A collection of financial assets, such as stocks and bonds, held by an investor.