Financial Management Flashcards
Levered Beta
measures the risk of a firm with debt and equity in its capital structure to the volatility of the market
Unlevered beta
asset beta
measures the market risk of the company without the impact of debt
Definition of Decision
consciously or unconsciously
between alternatives of action to realize objective
Situation of Certainty
seldom, perfect level of information
every enviro, nmental condition probability of occurrence of 1 or 0
Situation of Risk
imperfect level of information
total of all probabilities of occurrence is 1
Situation of (Complete) Uncertainty
a certain environmental condition cannot be assigned any
probability of occurrence, but it will occur
risk averse decision maker
choose the one alternative expecting the smallest danger of sustaining a loss
willing to take risk decision maker
highest possibility of gaining a profit
risk neutral decision maker
choose the best alternative on average (loss, profit)
Bayes-Rule
calculate Expected Value
E(p) = eij * pj
and sum up, choose highest
Maximin-Rule
choose the maximum of the minima of each row
Maximax-Rule
choose the maximum of the maxima of each row
Hurwicz-Rule
compromise between Maximin and Maximax
λ = Optimism-Parameter
λ > 0.5 willing risk
λ < 0.5 risk averse
best result (row maxima) is multiplied by λ, the worst (row minimum) by 1-λ
Laplace-Rule
Assumption: All environmental situations same probability of occurrence
mean over eij, choose highest
Savage-Niehans-Rule / Minimum-Regret-Rule
minimize his forgone benefit resuling from not choosing best
regret measure: difference best and the alternative (column wise)
choose the alternative with smallest maximum regret measure (row wise)
Preinvestment Analysis
assistance on deciding on a certain investment opportunity
means of different calculation methods
Preinvestment Analysis - Static Techniques
do not take into account the chronology of the payments
Preinvestment Analysis- Dynamic Techniques
take into account the chronology of the payments (inpayments and
payouts)
Net Present Value (NPV)
value of the cash flows discounted to the beginning of the planning period
positive NPV indicates investment expected generate profit
overall performance of investment
NPV = (Cash Flow / (1 + r)^n) - Initial Investment
r…discount rate
Future Value (FV):
value of the cash flows compounded (accumulated) to the end of the planning period
expected value of an investment at a future point in time
FV = PV x (1 + r)^n
Discount Rate
required rate of return of the investor
best possible alternative rate of return (opportunity cost)
higher discount rate -> higher level of risk investment
Perfect Capital Market:
no distinction between equity and debt
no limits in availability of capital
perfect market information
uniform capital interest -> interest of debt equals interest earned
Annuity Method
periodical performance of the investment opportunity
NPV0 * i/(1-(1+i)^-n)
i … interest rate
Internal Rate of Return Method
relative performance (internal rate of return) of the investment opportunity
solving for the discount rate (r) that makes NPV=0
NPV = (Cash Flow / (1 + r)^n) - Initial Investment
if IRR is greater than required rate of return -> investment profitable
Asset Future Value
increase in financial assets effectuated by an investment
assumes two different rates of return/interst rates
1 interest rate on debt, paid for raising capital: s
2 interest rate earned from investment of capital: h
FV with both (negative payment surpluses for s, positive for h)
collective account
Interest on Debt Method
interest of debt resulting in Asset Future Value of zero
Assumes the existence of two interest rates
Leasing
allocation of assets at ex ante determined leasing rates
is a special type of debt financing
Direct Leasing: Lessee pays Lessor a periodical leasing fee
Indirect Leasing: lessor purchases the lease object at the request of lessor, leases it for periodic leasing fee
Operate Leasing Contracts
both parties can withdraw at any time
no minimum lease term
insured/risk by lessor
Finance Leasing Contracts:
fixed minimum lease term
no possibility to withdraw
risk/insured by lessee
Weighted Average Cost of Capital (WACC)
weighted average cost of equity capital and debt capital
WACC = Re * E/V + Rd * (1 - Tc) * D/V
E = Market value of the firm’s equity
D = Market value of the firm’s debt
V = Total market value of the firm (D+E)
Re = Cost of equity
Rd = Cost of debt
Tc = Corporate tax rate
Risks concerning the investment in a company
strategic
operating
financial
cross-functional
segregation of beta
operating beta
fincancial beta
beta
measure of systematic risk of a security
high beta -> higher risk to investor
beta of market portfolio = 1
