59 free flashcards covering all 5 units. Study key concepts, terms, and exam-relevant topics.
What is the time value of money?
The concept that money available now is worth more than the same amount in the future because of its potential earning capacity.
Understanding this principle is crucial for evaluating investment opportunities and deciding present vs. future cash balances in the exam.
How do you compute the present value (PV) of a single future cash flow?
PV = FV ÷ (1 + i)^n, where FV is future value, i is the periodic interest rate, and n is the number of periods.
Students must apply this formula to score points on questions that involve discounting future amounts.
Compare an ordinary annuity to an annuity due.
Ordinary annuity payments occur at period end; annuity due payments occur at period start. PV of annuity due = PV ordinary × (1 + i).
Knowing when payments occur affects cash‑flow timing and discounting, a common exam focus.
What is a perpetuity and how is its present value calculated?
A perpetuity is a stream of equal cash flows with no end. PV = PMT ÷ i, where PMT is the payment and i the discount rate.
Perpetuities test your grasp of infinite series and the simplification of their present value.
What is the formula for the future value (FV) of an ordinary annuity?
FV = PMT × [((1 + i)^n – 1) ÷ i], where PMT is payment per period, i is rate, and n is number of periods.
Calculating FV of annuities allows you to solve problems on building investment balances over time.
What is Net Present Value (NPV) and how is it calculated?
NPV is the sum of discounted future cash flows minus the initial investment. Formula: Σ CF_t / (1+r)^t – Investment.
NPV determines if a project adds value; a positive NPV indicates acceptance.
If a project's NPV is negative, what does that indicate and what action should management take?
Negative NPV means expected cash inflows do not cover the cost of capital, so management should reject the project to avoid reducing firm value.
Exam expects the decision rule based on NPV.
What are the main trade‑offs when choosing between debt and equity financing?
Debt is tax‑deductible, has fixed payments, and increases financial risk; equity avoids debt risk but costs more and dilutes ownership.
Capital structure decisions shape financial risk and the weighted cost of capital.
Define working capital and explain its importance.
Working capital equals current assets minus current liabilities; it indicates a firm’s liquidity and ability to cover short‑term obligations.
Liquidity management ensures smooth operations, a core corporate finance concern.
How does the Internal Rate of Return (IRR) differ from NPV in evaluating projects?
IRR is the discount rate that zeroes NPV, indicating project yield; NPV measures absolute value added, so use NPV for value decisions and IRR for comparing yields.
Exam tests understanding of yield versus value concepts.
What is the primary purpose of the capital market in a capitalist economy?
Enable long‑term financing by matching investors who seek safe returns with firms needing capital for growth.
Understanding why capital markets exist is foundational; the exam tests this concept early on.
Define a ‘dividend yield’ for a common stock.
Annual dividend per share divided by the current market price, expressed as a percentage.
Calculations involving yield are common on the test; knowing the formula is essential.
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