Capital Management and Financial Decisions Flashcards
The Security Market Line (SML)
graphs the relationship between expected return and risk as measured by the beta coefficient
equation for the SML
capital asset pricing model (CAPM)
beta coefficient
measures systematic risk
When two investments have the same expected return
the project with the lower standard deviation is preferred
when projects have different expected returns
the project with the lower coefficient of variation is preferred
Limitations of IRR vs NRV
1) IRR assumes reinvestment of each cash flow at the IRR
2) NPV assumes reinvestment at the cost of capital
Modified Internal Rate of Return (MIRR) improves upon the Internal Rate of Return (IRR) technique by
allowing the reinvestment rate assumption to be modified by the user
Perpetuity
pays cash flows Forever
consol
is a perpetual bond issued by the British government.
An annuity and annuity due
are equal cash flows over a specified period of time