FIN 304: Final Exam
Study online at https://quizlet.com/_1btume
1. opportunity cost of capital Expected rate of return given up by investing in a project.
2. Net Present Value (NPV) Present value of cash flows minus investment.
3. payback period Time until cash flows recover the initial investment in the project.
4. internal rate of return Discount rate at which project NPV = 0.
(IRR)
5. profitability index Ratio of net present value to initial investment.
6. capital rationing Limit set on the amount of funds available for investment.
7. capital structure The mix of long-term debt and equity financing.
8. weighted-average cost of Expected rate of return on a portfolio of all the firm's securities,
capital (WACC) adjusted for tax savings due to interest payments.
9. free cash flow Cash flow that is not required for investment in fixed assets or working
capital and is therefore available to investors.
10. restructuring Process of changing the firm's capital structure without changing its
real assets.
11. operating risk (business Risk in firm's operating income.
risk)
12. financial leverage Debt financing to amplify the effects of changes in operating income
on the returns to stockholders.
13. financial risk Risk to shareholders resulting from the use of debt.
14. MM's proposition I The value of a firm is unaffected by its capital structure.
(debt-irrelevance proposi-
tion)
1/2
Study online at https://quizlet.com/_1btume
1. opportunity cost of capital Expected rate of return given up by investing in a project.
2. Net Present Value (NPV) Present value of cash flows minus investment.
3. payback period Time until cash flows recover the initial investment in the project.
4. internal rate of return Discount rate at which project NPV = 0.
(IRR)
5. profitability index Ratio of net present value to initial investment.
6. capital rationing Limit set on the amount of funds available for investment.
7. capital structure The mix of long-term debt and equity financing.
8. weighted-average cost of Expected rate of return on a portfolio of all the firm's securities,
capital (WACC) adjusted for tax savings due to interest payments.
9. free cash flow Cash flow that is not required for investment in fixed assets or working
capital and is therefore available to investors.
10. restructuring Process of changing the firm's capital structure without changing its
real assets.
11. operating risk (business Risk in firm's operating income.
risk)
12. financial leverage Debt financing to amplify the effects of changes in operating income
on the returns to stockholders.
13. financial risk Risk to shareholders resulting from the use of debt.
14. MM's proposition I The value of a firm is unaffected by its capital structure.
(debt-irrelevance proposi-
tion)
1/2
