Corporate finance EXAM
,Valuation principle - CORRECT ANSWERS-State that we can use current market prices
to determine the value today of the costs and benefits associated with a decision
Net present value rule - CORRECT ANSWERS-The main tool of project evaluation
where we weigh the costs and benefits at different points in time and apply this
information to decisions
Time value of money - CORRECT ANSWERS-The difference in value between money
today and money in the future i.e. investment
Discount rate - CORRECT ANSWERS-The risk-free interest-rate
NPV decision rule - CORRECT ANSWERS-When making an investment decision take
the alternative with the highest NPV. Choosing this alternative is equivalent to receiving
it's NPV in cash today
Accept projects - CORRECT ANSWERS-With positive NPV
Reject projects - CORRECT ANSWERS-With negative NPV
Arbitrage - CORRECT ANSWERS-The practice of buying and selling equivalent goods
in different markets to take advantage of a price difference
Normal market - CORRECT ANSWERS-A competitive market in which there are no
arbitrage opportunities
Law of one price - CORRECT ANSWERS-If equivalent investment opportunities trade
simultaneously in different competitive markets they must trade for the same price in all
markets
Financial security - CORRECT ANSWERS-An investment opportunity that trades in a
financial market
Separation principle - CORRECT ANSWERS-separate the firms investment decision
from its financing choice
Portfolio - CORRECT ANSWERS-A collection of securities
Value additivity - CORRECT ANSWERS-Because security C is equivalent to the
portfolio of A and B, by the law of one price they must have the same price
Stream of cash flows - CORRECT ANSWERS-A series of $ that last several periods
Timeline - CORRECT ANSWERS-Represents a stream of cash flows
, Net present value - CORRECT ANSWERS-Present value of benefits minus the present
value of costs
Perpetuity - CORRECT ANSWERS-A stream of equal cash flows that occurrs at regular
intervals and lasts forever, such as a British government bond which is called a consol
Annuity - CORRECT ANSWERS-A stream of equal cash flows paid at regular intervals
that ends after a fixed number of payments
Internal rate of return (IRR) - CORRECT ANSWERS-The interest rate that sets the net
present value of the cash flows equal to zero, the interest rate that equates the present
value and cash flow's of an investment opportunity
Compound annual growth rate (CAGR) - CORRECT ANSWERS-When looking at an
investment and converting it to an equivalent one year return so they can compare just
two cash flows but assuming that the amount compounds at regular intervals
Effective annual rate (EAR) - CORRECT ANSWERS-Indicates the actual amount of
interest that will be earned at the end of one year
Annual percentage rate (APR) - CORRECT ANSWERS-Indicates the amount of simple
interest earned in one year without the effect of compounding - usually less than what
you will actually earn
Continuous compounding - CORRECT ANSWERS-Compound the interest every instant
Amortizing loans - CORRECT ANSWERS-Each month you pay interest on the loan plus
some of the loan balance
Adjustable rate mortgage (ARM) - CORRECT ANSWERS-Interest rates that are not
constant over the life of the loan which results in recalculations based on the laws,
current outstanding balance, the new interest-rate, and the remaining life of the loan
Nominal interest rate - CORRECT ANSWERS-Interest rates that are quoted by financial
institutions which indicate the rate at which money will grow if invested for a certain time
period
Real interest rate - CORRECT ANSWERS-The rate of growth of your purchasing power
after adjusting for inflation is determined by this rate
Term structure - CORRECT ANSWERS-Regarding interest rates, the relationship
between the investment term and the interest-rate
Yield curve - CORRECT ANSWERS-Used to plot on a graph, the term structure which
corresponds the rate with the amount of time
,Valuation principle - CORRECT ANSWERS-State that we can use current market prices
to determine the value today of the costs and benefits associated with a decision
Net present value rule - CORRECT ANSWERS-The main tool of project evaluation
where we weigh the costs and benefits at different points in time and apply this
information to decisions
Time value of money - CORRECT ANSWERS-The difference in value between money
today and money in the future i.e. investment
Discount rate - CORRECT ANSWERS-The risk-free interest-rate
NPV decision rule - CORRECT ANSWERS-When making an investment decision take
the alternative with the highest NPV. Choosing this alternative is equivalent to receiving
it's NPV in cash today
Accept projects - CORRECT ANSWERS-With positive NPV
Reject projects - CORRECT ANSWERS-With negative NPV
Arbitrage - CORRECT ANSWERS-The practice of buying and selling equivalent goods
in different markets to take advantage of a price difference
Normal market - CORRECT ANSWERS-A competitive market in which there are no
arbitrage opportunities
Law of one price - CORRECT ANSWERS-If equivalent investment opportunities trade
simultaneously in different competitive markets they must trade for the same price in all
markets
Financial security - CORRECT ANSWERS-An investment opportunity that trades in a
financial market
Separation principle - CORRECT ANSWERS-separate the firms investment decision
from its financing choice
Portfolio - CORRECT ANSWERS-A collection of securities
Value additivity - CORRECT ANSWERS-Because security C is equivalent to the
portfolio of A and B, by the law of one price they must have the same price
Stream of cash flows - CORRECT ANSWERS-A series of $ that last several periods
Timeline - CORRECT ANSWERS-Represents a stream of cash flows
, Net present value - CORRECT ANSWERS-Present value of benefits minus the present
value of costs
Perpetuity - CORRECT ANSWERS-A stream of equal cash flows that occurrs at regular
intervals and lasts forever, such as a British government bond which is called a consol
Annuity - CORRECT ANSWERS-A stream of equal cash flows paid at regular intervals
that ends after a fixed number of payments
Internal rate of return (IRR) - CORRECT ANSWERS-The interest rate that sets the net
present value of the cash flows equal to zero, the interest rate that equates the present
value and cash flow's of an investment opportunity
Compound annual growth rate (CAGR) - CORRECT ANSWERS-When looking at an
investment and converting it to an equivalent one year return so they can compare just
two cash flows but assuming that the amount compounds at regular intervals
Effective annual rate (EAR) - CORRECT ANSWERS-Indicates the actual amount of
interest that will be earned at the end of one year
Annual percentage rate (APR) - CORRECT ANSWERS-Indicates the amount of simple
interest earned in one year without the effect of compounding - usually less than what
you will actually earn
Continuous compounding - CORRECT ANSWERS-Compound the interest every instant
Amortizing loans - CORRECT ANSWERS-Each month you pay interest on the loan plus
some of the loan balance
Adjustable rate mortgage (ARM) - CORRECT ANSWERS-Interest rates that are not
constant over the life of the loan which results in recalculations based on the laws,
current outstanding balance, the new interest-rate, and the remaining life of the loan
Nominal interest rate - CORRECT ANSWERS-Interest rates that are quoted by financial
institutions which indicate the rate at which money will grow if invested for a certain time
period
Real interest rate - CORRECT ANSWERS-The rate of growth of your purchasing power
after adjusting for inflation is determined by this rate
Term structure - CORRECT ANSWERS-Regarding interest rates, the relationship
between the investment term and the interest-rate
Yield curve - CORRECT ANSWERS-Used to plot on a graph, the term structure which
corresponds the rate with the amount of time
