FINANCE

Question 1

Risk (Debt vs equity)

Answer 1

The equity investor earns more than the lender - because it is higher risk

Risk differential: debt has a priority return over equity
Equity gets everything after the debt has been payed off (called residual claim)

Question 2

Dividends/retained earnings

Answer 2

dividend = a sum of money paid by a company to its shareholders
retained earnings = cumulative net profits of a company after accounting for dividend payments
If a company pays dividends, the dividends reduce the company’s retained earnings.

Question 3

Benefits of IPO

Answer 3

Yields the optimally high price for the company
+ lets you retain most of the company + puts cash in you pocket

Question 4

mutual funds pros

Answer 4

Pros: portfolio diversity
Managed by a professional investor

Question 5

compounding

Answer 5

Compound effect in your returns when investing your money

Question 6

accounting vs finance

Answer 6

accounting tracks the decisions made by finance

Question 7

time value of money (+discounting)

Answer 7

concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim

(Discounting = the process of converting a value received in a future time period to an equivalent value received immediately)

Question 8

capital budgeting

Answer 8

project costs and future returns (uses net present value)

Question 9

how much is an investment worth today?

Answer 9

NPV = PV (Cash Inflows) - PV (Cash Outflows)
= > must be greater than 0 for it to be a good investment)

Question 10

Present value

Answer 10

concept that states an amount of money today is worth more than that same amount in the future.

Question 11

diversification

Answer 11

reduces risk