Corporate Finance Quiz Logic & Formulas Flashcards

A comprehensive set of vocabulary and formula-based flashcards covering corporate finance concepts, valuation methods, and project evaluation logic.

Market Value Added (MVA)

The difference between the Market Value of Equity and the Book Value of Equity, calculated as $(Price \times Shares) - (Book Value per Share \times Shares)$.

Cost of Equity

The rate of return required by shareholders, calculated using the formula: $Cost of Equity = Risk Free Rate + (Beta \times Market Risk Premium)$.

Cost of Debt

The effective rate a company pays on its borrowed funds, calculated as $Risk Free Rate + Default Risk Premium$, where the premium is derived from bond rating basis points.

Weighted Average Cost of Capital (WACC)

The average rate a business pays to finance its assets, calculated as $(Cost of Debt \times (1 - t)) \times (\frac{Total Debt}{Total Debt + Total Equity}) + (Cost of Equity \times (\frac{Total Equity}{Total Debt + Total Equity}))$.

Economic Value Added (EVA)

A measure of a company's financial performance; discounting an investment's annual EVA stream to the present is mathematically equivalent to calculating its Net Present Value (NPV).

Investment Grade Bonds

Bonds rated BBB and above (such as AAA or A), which are considered to have a lower risk of default.

Junk Bonds

High-yield bonds rated BB and below, which carry higher risk and typically offer higher yields than investment-grade bonds.

Beta

A specific measure of systematic (market) risk; a value of $1.0$ matches market volatility, while values greater than $1.0$ indicate higher volatility than the S&P 500.

Enterprise Value

The total value of a company, calculated as $Market Capitalization (Shares \times Price) + Net Debt$.

Net Debt

A liquidity metric used to determine how much debt a company has after paying off as much as possible with its liquid assets, calculated as $Total Debt - Cash$.

Free Cash Flow (FCF)

The cash a company produces through its operations, calculated as $(EBIT \times (1 - t)) - Capex - \text{Change in WC} + Depreciation$.

Terminal Value (Constant Growth)

The value of a project beyond the explicit forecast period, calculated using the formula: $\frac{EBIT_n \times (1 + g) \times (1 - t)}{r - g}$ or $\frac{FCF_0 \times (1 + g)}{r - g}$.

Economic Profit

The difference between accounting income and the cost of capital, calculated as $Accounting Income - (Capital Investment \times Cost of Capital)$.

Return on Sales (ROS)

A ratio used to evaluate a company's operational efficiency, calculated as $\frac{Net Income}{Total Sales}$.

Ordinary Annuity

A series of equal payments made at the end of each period over a set number of years.

Internal Rate of Return (IRR)

The discount rate at which the Net Present Value (NPV) of all cash flows from a particular project equal zero.

Total Risk

The overall volatility of an asset, measured by Standard Deviation, encompassing both market-wide and firm-specific risks.

Systematic Risk

Nondiversifiable, market-wide risk measured by Beta.

Diversifiable Risk

Firm-specific risk that can be eliminated through diversification, such as a CEO resigning.

Independent Projects

Projects whose cash flows are unaffected by the acceptance or rejection of others; they should be accepted if $NPV > 0$ or $IRR > \text{Cost of Capital}$.

Mutually Exclusive Projects

A set of projects where only one can be chosen; the decision rule is to select one with the highest positive NPV.

Capital Rationing

A situation where a firm has a fixed budget constraint and must select the combination of projects that yields the highest total combined NPV.

Capital Expenditures (CapEx)

Cash outflows for long-term assets recorded in the Cash Flow from Investing Activities section of the Cash Flow Statement.

Least Common Multiple (LCM) Method

A technique used to compare mutually exclusive projects with unequal lives by extending the analysis period to a common horizon to account for reinvestment opportunity costs.