Finance Final

Normal Distribution

A symmetric, bell-shaped frequence distribution that is completely defined by its mean and standard deviation

WACC (Weighted Average Cost of Capital)

-appropriate when project risk is almost = to company risk -aka Pure Play Approach

CAPM (Capital Asset Pricing Model)

-defines relationship between risk and return -Most POPULAR

Sensitivity Analysis

-this is what happens to NPV (net present value) when we change one variable at a time -this is a subset of a scenario analysis where we look at the effect of specific variables on NPV

The CAPM shows the expected Return for a particular asset depends on 3 things...

1. The pure time value of money2. The reward for bearing systematic risk3. The amount of systematic risk

The ________ the volatility in NPV to a specific variable the ______ the forecasting risk.

Greater, larger

Volatility

It is a rate at which the price of a security increases or decreases for a given set of returns.

Operating Leverage

The degree to which a firm or project relies on fixed costs

Financial Break Even

The sales level that results in a zero NPV

Cash Break Even

The sales level that results in a zero operating cash flow

Accounting Break Even

The sales level that results in zero project net income

Break Even Analysis

Tool for analyzing the relationships between sales volume and profitability.

Diversification

having many different kinds of stock in different companies

Risk Premium

the excess return required from an investment in a risky asset over that required from a risk-free investment -extra return for taking on a risk -aka -risk premium = expected return - risk free rate -MORE risk = MORE MONAY