FIN350 - Fundamentals of business Finance

Dollar Return

The amount of profit or loss from an investment denoted in dollars

Constrained WACC

The WACC formula that does NOT include a tax benefit on debt issued by the company

Coefficient of Variation

Interpreted as the amount of risk (measured by volatility) per unit of return

A relative measure of the risk-vs-reward relationship

This is known as the trade-off between risk and return

Geometric returns

This return is computed by finding the equivalent return that is compounded for N periods

CAPM - Capital Asset Pricing Model

A calculation for the cost of equity

The best-known asset pricing equation

The approach to specify an equation that relates a stock’s required return to an appropriate risk premium

Standard Deviation

The total risk of a security or portfolio

Square root of the average squared deviation of returns

Portfolio Beta

The weighted average of the portfolio stocks’ betas

Constant Growth model

An alternative to CAPM for computing shareholders’ required return

Market Risk Premium

The portion of the required return that represents the reward for taking risk

The average return or market return – (minus) the risk free rate

The reward for unsystematic risk (risk in stock market)

Total Risk

Firm-specific risk + Market risk

Correlation

A measurement of the co-movement between two variables that ranges between −1 and +1

Expected return

The average of the possible returns weighted by the likelihood of those returns occurring

Standard Deviation of Expected returns

A way to characterize risk using the expected return method

Required return

The return investors require for the risk level (risky contribution) they take

WACC - Weighted Average Cost of Capital

The average cost per dollar of capital raised

The avg. rate of return that the firm must earn from a new project in order for it to add value to the firm

Probability

The likelihood of occurrence

Risk Free Rate

Typically considered the return on U.S. government bonds and bills

Percentage Return

The dollar return characterized as a percentage of money invested (%)

Unconstrained WACC

The WACC formula that includes a tax benefit on debt issued by the company

Preferred Stock

A form of equity where the dividend issued is a constant dividend

Average return

Summarizes the past performance of an investment and allow us to examine performance over time