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Managerial Finance > Exam 4 (Chapters 8 and 10) > Flashcards

Exam 4 (Chapters 8 and 10) Flashcards

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1
Q

the process of planning and managing firms long term financial investments

A

Capital Budgeting

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2
Q

What are the 4 different types of Projects?

A
  1. Expansion
  2. Improvements of efficiency
  3. Recalls or Replacements
  4. Government Mandated
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3
Q

What are the 3 Capital Budgeting Methods?

A

Payback, NPV, and IRR

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4
Q

Time required for an investment to generate cash flows, to recover initial costs

A

Payback

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5
Q

what is another terms for Payback?

A

“Get your bait back” method

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6
Q

What are the advantages of payback?

A

Easiest
Adjust cash flows
Biased towards liquidity

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7
Q

What are the disadvantages of payback?

A

Ignores TVM
Requires an arbitrary cutoff point
Ignores cash flows beyond cutoff date
Biased against long term projects

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8
Q

what is the rule regarding payback?

A

accept on the project if the payback is less than the project cutoff

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9
Q

the difference between a projects market value and its cost

A

NPV

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10
Q

What is the rule of NPV?

A

accept projects with a positive NPV

reject projects with a negative NPV

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11
Q

what are the advantages of NPV?

A

Most reliable capital budgeting method
Provides a direct measure of investor contributions
DOES consider TVM

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12
Q

What are the disadvantages of NPV?

A

the growth rate is arbitrary

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13
Q

the discount rate (interest rate) that makes NPV of an investment zero

A

Internal Rate of Return (IRR)

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14
Q

the point at which you make nothing

A

Break even point

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15
Q

What is the rule of IRR?

A

accept project if the IRR that we calculate is the same or greater than the return investors require

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16
Q

What are the advantages of IRR?

A

investors prefer to speak %

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17
Q

what are the disadvantages of IRR?

A

often lead to inaccurate investment decisions

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18
Q

if you take on one investment, you cannot take on any other

A

mutually exclusive projects

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19
Q

as the level of risk increases, so does the potential for higher returns and greater losses. invested money renders higher profits only if subject to the possibility of being lost

A

Risk and Return

20
Q

an investor’s preference toward risk

A

risk tolerance

21
Q

what happened in 2008 for the stock market?

A

record lows since the great depression

22
Q

who were the biggest winners during the Great Recession

A

Emergent Bio Solutions, and Mexico Energy

23
Q

who were the biggest losers during the Great Recession?

A

AIG and Fannie Mae/Freddie Mac

24
Q

Who were the biggest winners in 2014?

A

RadNet and Achillon Pharmaceutical

25
Q

Who were the biggest losers of 2014?

A

TransOcean and Avon Products

26
Q

the smallest 20% of companies listed on the NYSE, also measured by total market value of outstanding stock

A

Small-company stocks

27
Q

standard & poors 500 index, composed of the 500 largest companies, in terms of total market value of outstanding stock

A

Large-company stock

28
Q

high-quality corporate bonds with 20 year to maturity

A

Long-term Corporate Bonds

29
Q

US government bonds with 20 years to maturity

A

Long-term US Government Bonds

30
Q

one month maturity

A

US Treasury Bills

31
Q

sum of actual returns divided by number of terms

A

Average Returns

32
Q

the average squared difference between the actual return and the average return

A

Variance

33
Q

the positive square root of the variance

A

standard deviation

34
Q

a symmetric, bell-shaped frequency curve that is completely defined by its average and standard deviations (most commonly 2 positive and 3 negative deviations)

A

Normal Distribution

35
Q

history suggests that the market value of securities fluctuations widely from year to year due to info available to investors

A

Capital market efficiency

36
Q

what is the percent chance of stock falling within 1 deviation?

A

68%

37
Q

what is the percent chance of stock falling within 2 deviation?

A

95%

38
Q

what is the percent chance of stock falling within 3 deviation?

A

99%

39
Q

the hypothesis that well-organised markets, such as New York Stock Exchange are efficient

A

Efficient Market Hypothesis (EMH)

40
Q

the price of stock instantaneously adjusts to reflect new info

A

efficient market reaction

41
Q

the price partially adjusts to the new information slowly, usually over a period of 8 days

A

delayed reation

42
Q

the price over-adjusts and subsequently corrects itself

A

Over-reaction and correction

43
Q

all info of every kind is reflected in stock prices

A

strong form efficient

44
Q

all public info is reflected in stock prices

A

semi-strong form efficient

45
Q

stock prices reflect a company’s own past prices

A

weak form efficient

46
Q

what does history tell us about the stock market?

A

prices generally do respond very well to new info
future prices are difficult to predict based on publicly available info
if mis-priced stocks do exist, there is not an obvious way to identify them in advance

Managerial Finance (6 decks)

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