FIN 332 Final Exam Terms

Terms for finale exam for ERAU FIN 332

Capital Asset Pricing Model (CAPM)

Cost of equity and the expected return on an investment based on its risk compared to the market.

Compound Annual Growth Rate (CAGR)

the annualized rate of return that an investment is expected to grow over a specified period of time, assuming the profits are reinvested.

Weighted Average Cost of Capital (WACC)

the average rate of return a company is expected to pay its security holders to finance its assets.

Discounted Cash Flow Analysis (DCF Analysis)

a valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for the time value of money.

Tax Shield

a reduction in taxable income achieved through allowable deductions, such as interest payments on debt.

Impact of Interest Rate Changes for Present Value (PV)

Higher rates decrease PV.

Impact of Interest Rate Changes for Future Value (FV)

Higher rates increase FV due to compounding.

Bond Yields to Bond Yields

the return an investor can expect to earn on a bond, influenced by interest rates, credit quality, and market conditions.

Effect of Inflation

on the purchasing power of money, reducing the real return on investments and eroding savings.

Type of Business Entities

• Sole Proprietorship

• Partnership

• Corporation

• LLC

Primary Markets

Where new securities are issued and sold to investors for the first time, allowing companies to raise capital directly from the public.

Secondary Markets

Where previously issued securities are traded among investors. These markets provide liquidity and price discovery.

Investing

Allocation of resources to assets expected to yield returns.

Financing

Decisions on raising funds through debt, equity, or internal cash.

Capital Budgeting

Process of evaluating and selecting long-term investments.

Capital Budgeting Techniques

• Net Present Value (NPV)

• Internal Rate of Return (IRR)

• Payback Period

Capital Structure

The mix of debt and equity used to finance a company.

CPI (Consumer Price Index):

Measures average change in consumer prices.

PPI (Producer Price Index):

Tracks price changes from the producer’s perspective.

PCE (Personal Consumption Expenditures):

Measures price changes for consumer goods/services.

Inflations effect on Bond Yields

Inflation increases bond yields as investors demand higher returns.

Inflations effect on Cash Flow

Inflation erodes purchasing power, reducing real cash flow value.

Perpetuity

A stream of equal payments that continues indefinitely.

Annuity

A series of equal payments made at regular intervals.

Operating Cash Flow (OCF)

Cash generated from core business operations.

Net Working Capital (NWC)

Difference between current assets and current liabilities.

Depreciation

Allocation of the cost of a tangible asset over its useful life.

Operating Margin

The percentage of revenue remaining after covering operating expenses.

Gross Margin

The percentage of revenue remaining after deducting the cost of goods sold (COGS).