MGT 6201 - Finance Acronyms and Terms

What is the full name of the term abbreviated as NPV?

Net Present Value

What is the full name of the term abbreviated as IRR?

Internal Rate of Return

What is the full name of the term abbreviated as PI?

Profitability Index

What is the full name of the term abbreviated as PP?

Payback Period

What is the full name of the term abbreviated as TVM?

Time Value of Money

What is the full name of the term abbreviated as PV?

Present Value

What is the full name of the term abbreviated as FV?

Future Value

What is the full name of the term abbreviated as PMT?

Annuity Payment

What is the full name of the term abbreviated as NPER?

Number of Periods

What is the full name of the term abbreviated as CAPM?

Capital Asset Pricing Model

What is the full name of the term abbreviated as WACC?

Weighted Average Cost of Capital

What is the full name of the term abbreviated as EVA?

Economic Value Added

What is the full name of the term abbreviated as MVA?

Market Value Added

What is the full name of the term abbreviated as FCF?

Free Cash Flow

What is the full name of the term abbreviated as EBIT?

Earnings Before Interest and Taxes

What is the full name of the term abbreviated as EPS?

Earnings Per Share

What is the full name of the term abbreviated as TTM?

Trailing Twelve Months

What is the full name of the term abbreviated as CAPEX?

Capital Expenditures

What is the full name of the term abbreviated as NWC?

Net Working Capital

What is the full name of the term abbreviated as DNWC?

Increase in Net Working Capital

What is the full name of the term abbreviated as NOPAT?

Net Operating Profit After Taxes

What is the full name of the term abbreviated as ROS?

Return on Sales

What is the full name of the term abbreviated as CT?

Capital Turnover

What is the full name of the term abbreviated as ROTC?

Return on Total Capital

What is the full name of the term abbreviated as ROIC?

Return on Invested Capital

What is the full name of the term abbreviated as NFA?

Net Fixed Assets

What is the full name of the term abbreviated as SGA?

Selling, General and Administrative

What is the full name of the term abbreviated as CGS?

Cost of Goods Sold

What is the full name of the term abbreviated as PVGO?

Present Value of Growth Opportunities

Concept: Economic Value Added (EVA)

Definition: A measure of economic profit calculated as NOPAT minus a charge for capital.

Concept: Market Value Added (MVA)

Definition: The difference between the market value of a firm's equity and the book value of its equity.

Concept: Beta

Definition: A measure of the market risk of a stock that cannot be reduced through diversification.

Concept: Free Cash Flow (FCF)

Definition: Cash available to all investors after expenses, taxes, and investments in assets and working capital.

Concept: Capital Expenditure (CAPEX)

Definition: Funds used by a company to acquire or upgrade physical assets like property, plant, and equipment.

Concept: Time value of money

The concept that a dollar today is worth more than a dollar in the future

In the TVM concept, why is money today worth more than the same amount in the future?

Because of its potential earning capacity (interest).

Concept: Compounding

Definition: The growth of money over time through the reinvestment of earned interest to earn further interest.

Concept: 'Discounting'

The process of finding the present value of future cash flows.

What does the term 'NOPAT' represent in performance measurement?

The net operating profit a company would have if it had no debt and only held operating assets.

If a project has an IRR of 25% and the cost of capital is 10%, should the project be accepted?

Yes, because the IRR is greater than the cost of capital.

What specific type of risk does 'Beta' measure?

Market risk (or systematic risk).

Concept: 'Market Risk Premium'

The difference between the expected return on the market and the risk-free rate.

What is the primary rule managers should use to decide if a long-term investment project should be accepted?

The Net Present Value (NPV) rule.

In the EVA framework, what does the 'capital charge' represent?

The cost of the capital employed multiplied by the total capital invested.

What is the 'Profitability Index' used for in investment analysis?

To rank projects by their benefit-to-cost ratio when capital is limited.

Concpet: 'Internal Rate of Return' (IRR)

The discount rate that makes the net present value of a project equal to zero.

Concept: 'Payback Period'

The amount of time required for an investment to generate cash flows sufficient to recover its initial cost.

Which investment evaluation method is inconsistent with maximizing firm equity value?

Payback Period

Which financial model explains the relationship between risk and expected return?

Capital Asset Pricing Model (CAPM)

Concept: Weighted Average Cost of Capital (WACC)

Determines the minimum rate of return a corporation must earn to break even in economic terms.

What is the primary method for estimating the value of a firm using projected free cash flows?

Discounted cash flow (DCF) framework

Concept: 'Default Risk Premium'

The extra return investors demand over the risk-free rate to compensate for a company's default risk.

Concept: Net Present Value (NPV)

It measures the value created for shareholders by the investment project