EFB210: Fundamentals of Finance - Lecture 9: Weighted Average Cost of Capital (WACC)

These flashcards cover key vocabulary terms and concepts related to the Weighted Average Cost of Capital (WACC) and financial fundamentals discussed in Lecture 9 of EFB210.

Weighted Average Cost of Capital (WACC)

The average rate of return a company is expected to pay to its securities holders to finance its assets.

Setting the Discount Rate

The process of determining the discount rate used to discount future cash flows to their present value.

CAPM

Capital Asset Pricing Model; used to determine the expected return on an investment based on its systematic risk.

Cost of Equity (ke)

The return required by equity investors given the risk of the investment in the firm.

Cost of Debt (kd)

The effective rate that a company pays on its borrowed funds.

Net Present Value (NPV)

The difference between the present value of cash inflows and outflows over a period of time.

Internal Rate of Return (IRR)

The discount rate that makes the net present value of all cash flows from a particular project equal to zero.

Market Value of Debt

The total value of a company's debt, which reflects the amount that investors are willing to pay for that debt.

Corporate Tax Rate

The tax rate imposed on a corporation's taxable income.

Terminal Value

The value of a project or investment at the end of a forecast period, used in discounted cash flow analysis.

Beta (β)

A measure of a stock's volatility in relation to the market; used in the CAPM to calculate expected return.

Risk-Free Rate

The return on an investment with zero risk, typically represented by government bonds.

Market Risk Premium

The additional return expected from holding a risky market portfolio instead of risk-free assets.

Tax Shield

The reduction in income taxes that results from taking an allowable deduction from taxable income.

Equity

Ownership interest in a company, represented by shares.

Debt

The amount of money borrowed by the company that must be repaid, typically with interest.

Non-Constant Growth Model

A model that assumes dividends will grow at a variable rate, useful for valuation when growth rates change.

Dividends

Payments made by a corporation to its shareholders, typically from profits.