Final exam
Debt Ratios
Measures a firms ability to pay long-term obligations
Open Market Purchase
an expansion of reserves and deposits in the banking system. expansion of the monetary base and the money supply
Excess Reserves
any additional reserves the bank choose to hold. insurance against deposit outflows
Dynamic open market operations
are intended to change the level of reserves and the monetary base
an organization must prepare ____ and bylaws when forming a corporation
articles of incorporation
t*D is
depreciation tax shield..tells us how much higher the firms cash flows will be due to depreciation compared to a firm without depreciation
Modified IRR
discount rate where the PV of a projects cost is equal to the PV of its terminal value where terminal value is found as the sum of future values of the cash inflows compounded at firms cost of capital
IRR Method
discounted rate that forces a projects NPV of the expected cash inflows equal to the present value of expected cash outflows. Sets NPV equal to zero. Use Cash Flow Register and Click IRR
cash flow/ shareholders
dividends paid - net new equity (stock)
working capital management
ensures that the firm has sufficient funds to continue operations on a day-to-day basis
Benchmark
established by managemt as the time to compare to decide if you will reject or accept the project
Expansion Decisions
expansion of existing products or expansion into new products
how is ownership transferred in a corporation?
by gifting or selling shares of stock
Present Value
current value of a future investment
Contingent Projects
decision concerning a project that is contingent upon acceptance of a prior project
shareholders
owners of a corporation
private placement
primary offerings in which shares are sold directly to a small group of institutional or wealthy investors
Required Projects
projects required by law
Complementary Projects
projects that can be combined. Look at projects in isolation and look at them combined
Independent Projects
projects with cash flows that are not affects by the accepted or rejection of other projects. Accept if NPV is zero
Important mechanism used by unhappy stockholders to replace current management
proxy fight
Demand Curve Reserve
quantity demand of Excess Return and Required Return. When the Federal Funds Rate is above the rate paid above the rate paid on excess reserve, as the federal rate decreases, the quantity of reserves demanded increase
As discount rate increases
the NPV will go down- the slope will be negative, non linear and convex
maturity risk premium
the added return expected by lenders or investors because of interest rate risk on instruments with longer maturities
relevant cash flows can be considered
the additional cash flows that is expected if a project is implemented (this is also called the incremental cash flow or CFAT)
What is a shareholder's liability limited to?
the amount the shareholder invested in the corporation
Payback Period
the length of time required for an investments cash flows to cover its cost
Discounted Payback Method
the length of time required for an investments cash flows, discounted at the investments cost of capital to cover its costs. Takes into consideration TVM where regular payback down not
a firm's capital structure
the mix of debt and equity
t/N
the number of periods that equates a present value and future value at given interest rate
capital budgeting
the process of planning and managing a firm's long-term assets
r/I
the return an investment can make or interest that is paid "Made/Paid"
Seasoned Equity Offering (SEO)
the sale of additional stock by a company whose shares are already publicly traded
Monetary base
the sum of the feds monetary liabilities and the us treasury monetary liabilities (treasury currency in circulation, primary coins)
auction market primary objective
to bring buyers and sellers together
Goal for "for profit" businesses
to maximize the value of shareholder wealth
net worth
total assets-total debt
Equity Multiplier -a measurement of a company's financial leverage
total assets/ total equity - alternate = 1+ debt/ equity ratio
Debt/ equity
total debt/ total equity - alternate =total debt ratio/ remainder
partnership
two or more owners, all responsible for debt limited Part: one or more can be responsible based on capital invested
Finding Modified IRR
use case flow register, enter RI as the WACC and hit down to find MOD
If they give terminal value (the firm sells the project and thus receives some big cash flow at the end of the project)
use this as a part of terminal cash flow instead of the net CFAT from salvage
stock options
used to encourage managers to maximize the value of the stock
Efficient market hypothesis
well-organized markets are efficient (US Market) - Global security meets the definition of Efficient Market Hypothesis
Market to Book Ratio
what the market values equity vs what your company is actually worth
Discount paying
when a bank repays its discount loan and so reduces the total amount of discount lending, the amount of reserve decreases along with the monetary base and the moeny supply
externalities (spillovers, side effects)
when taking on a project affects other parts of the firm
Market Equilibrium
where the quantity supplied equals quantity demanded
total income tax liability
• If corporation distributes profits as dividends to shareholders, shareholders will be taxed again. • Assuming dividends are taxed @ 15% - Dividend tax = 15% of $750 = $112.50 = 250+112.5= 362.5 EBT= 1,000 - federal tax @ 25% = $250
Cash Flow vs Accounting Income difference come from
fixed assets, noncash charges, changes in net operating working capital and interest expense
Net Present Value Profile
graph showing the relationship between a projects NPV and the firms cost of capital
if the firm is going to produce something by a machine that could be sold, make sure the NPV of the project is
greater than the sale value of the machine
Gross Profit Percentage
gross profit/net sales
Capital Rationing
have limited access to external fund or managerial means that preclude ability to participate in profitable project.
Capital Market efficiency
history suggests the market value of securities fluctuates widely from year to year due to information available to investors
the threat of a ___ motivates managers to make good decisions
hostile takeover
Profitability Ratios
how efficiently a firm operates and how it translates to their bottom line
Current Ratios
how efficiently a firm uses its assets and cash
Market Ratios
how the market values a firm
Chief financial officer
in large firms, financial activity is usually associated with
Where do clean up expenses get accounted
in your TCF
Balance Sheet Equation
Assets = Liabilities + Owner's Equity
Treasury Bills
Had the fewest negative returns for the period 1926 - 2014
Cost of capital
The minimum required return on a new investment.
Which are included in a firm's capital structure?
The mix of debt and equity
quick ratio -gauge company's liquity
(CA-INV)/CL
Cash Coverage - the amount of cash available to pay for a borrower's interest expense
(EBIT + Dep)/ Interest
EBT (earnings before tax)
(tax exp./tax rate)(operating income) EBIT = EBT + Int. expense
Total Debt ratio -to evaluate a firm's ability to pay its long term debt and its capital structure (debt+equity)
(total assets - total equity) / total assets
Total Asset Turnover
-"Big picture ratio" -for every dollar in assets, how many are generated in sales
Quick Ratio
-Current ratio removing inventory -Shows how liquid your company is
Cash Coverage Ratio
-Firms abilities to generate cash from operations
Inventory Turnover
-How quickly a company turns inventory each year
Receivables Turnover
-How quickly we get paid
Dupont Identity
-Measuring ROE -Operating Efficiency (Profit Margin) -Asset Use Efficiency (Total Asset Turnover) -Financial leverage (Equity Multiplier) -Profit margin x Total asset turnover x equity multiplier
Cash Ratio
-Used by short term creditors
Profit Margin
-cents we keep on every dollar in sales -Net Income/Sales
Price Earnings Ratio
-measures how much investors are willing to pay per dollar of current earnings
Return on Assets
-measures profits per dollar of assets -net income/total assets
Return on equity
-profits per dollar of equity -Net Income/Common Stock Equity
if it affects another part of the companies sales, subtract it out of revenues for every year
...
what three things are the financial manager concerned with?
1. Capital Structure 2. Working capital management 3. Capital budgeting
Reasons corporations are the most important form of businesses:
1. Corporations can sue and be sued 2. Corporations are separate legal entities 3. Corporations can enter contracts
Business finance is concerned with:
1. How to finance long-term investments 2. Which long-term investment to make 3. How to manage day-to-day finances of the firm
three main questions to be addressed if you want to start your own business
1. How will everyday financial activities be handled? 2. Where will long-term financing be obtained to pay for investments? 3. What long term investments should be made?
Basic Areas of Finance
1. Investments 2. Financial Institutions 3. International Finance 4. Corporate Finance
sole proprietorship truths
1. Limited to the life of the proprietor 2. Simple to form, requires no formal charter, and few govt regulations must be satisfied in most industries
5 importants types of US investments
1. Small company stocks - smallest 20% of companies listed on the NYSE - total market value of outstanding stock 2. Large company stocks - S & P 500 - largest companies measured by 3. Long-term corporate bonds - high quality corporate bonds with 20 years to maturity 4. Long-term government bonds - government bonds with 20 years to maturity 5. US Treasury Bills - 1 month to maturity -> Nominal return
a general partnership has which of the following characteristics:
1. all the partners share in gains or losses of the partnership 2. each owner has unlimited liability for all firm debts
Corporations
1. borrow money in the corporation's name 2. own property 3. sue and be sued 4. own stock in another corporation 5. is a legal person 6. enter into contracts 7. general partner or limited partner in a partnership 8. Limited liability for business debts 9. ease of transferring ownership 10. unlimited life of business 11. has to pay taxes 12. corporate profits taxed twice
working capital includes:
1. cash 2. inventory 3. short-term assets
two rules to help figure out relevant cash flows
1. cash flows not accounting income should be used to make the capital budgeting decision 2. the only cash flows that are relevant are incremental cash flows
the Sarbanes-Oxley act requires corporate officers to:
1. confirm the validity of the financial statements 2. be responsible for errors on the annual report
corporations in other countries are often called:
1. joint stock companies 2. limited liability company 3. public limited companies
treasurer's responsibilities
1. managing capital expenditure decisions 2. making financial plans 3. handling cash flows
features of a primary market
1. proceeds from the sale of securities goes to the issuing firm 2. the market where initial public offerings are made
Working capital includes:
1. short-term assets 2. cash 3. inventory
capital intensity ratio -is the measure the necessary capital per revenue dollar
1/ total assets turnover ratio
Risk and Return
As the level of risk increase, so does the potential for higher returns and greater losses
days' sales in inventory
365/ inv. turnover
days' sales in receivables -how many days a year receivables are collected
365/ receivables turnover
After identifying possible capital budgeting projects the first step in evaluating these projects is to ______: A. forecast the project's cash flows B.calculate the IRR C. calculate the NPV D. none of these
A
Investing in research and development or innovation is harder to evaluate than cost-cutting projects because: A. cash flows are harder to estimate B. cash flows are easier to estimate C. mangement does not understand innovation D. there is no difference in evaluation difficulty
A
The process of investing money for the firm with the expectation of generating positive returns is known as _______: A. capital budgeting B. capital structure C. risk taking D. none of the above
A
Top management's decision to focus on a specific type of acquisition is one component of a firm's ______: A. strategy B. net present value C. demise D. none of these
A
Assets
A = L + OE
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
Unsystematic risk
A risk that affects at most a small number of assets. Also unique or asset-specific risk.
Systematic risk
A risk that influences a large number of assets. Also market risk.
liquidity risk premium
Additional return required by investors in securities that cannot be quickly converted into cash at a reasonably predictable price
Beta coefficient
Amount of systematic risk present in a particular risky asset relative to that in an average risky asset.
Higher risk projects should be evaluated using _____ discount rates. A. lower B. higher C. the same D. there is no relationship between risk and discount rate
B
The most critical step in project analysis is: A. calculating the NPV B. estimating cash flows C. investing the money D. establishing a discount rate
B
Ultimately concern over BP's ______ is pushing many investors to sell the company's stock. A. business model B. future cash flow C. management D. none of the above
B
Public Offering
Both individuals and institutional investors have the opportunity to purchase securities. The securities are initially sold by the managing investment bank firm. The issuing firm never actually meets the ultimate purchaser of securities.
Which of the following statements is FALSE? A. As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings. B. Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project C. When evaluating a capital budgeting decision, we generally include interest expense. D. Many projects use a resource that the company already owns.
C
Which of the following would you NOT consider when making a capital budgeting decision? A. The opportunity to lease out a warehouse instead of using it to house a new production line. B. The change in direct labor expense due to the purchase of a new machine C. The cost of a marketing study completed last year D. The additional taxes a firm would have to pay in the next year
C
New working capital (NWC)
CA (current assets) - CL (current liabilities)
net working capital
CA-CL
Open Market Operations
CB purchase or sales of bonds in the open market. most important monetary policy tool
components of operating cash flows
CFAT=(CFBT)*(1-t)+t*D
Inventory Turnover
COGS/ Inv. -to evaluate a firms ability to manage its assets
Using Payback Method
Cash Flow Register, hit down tell you get PB for payback and DPB for discounted payback
current assets
Cash, accounts receivable, inventory, and other assets that are likely to be converted into cash, sold, exchanged, or expensed
Which positions generally report to the chief financial office(CFO)?
Controller and Treasurer
Current ratio
Current Assets/current liabilities -to evaluate a firm's ability to pay its short term debt
inflation rate
Current year - Last year / last year * 100 the percentage increase in the price level from one year to the next
A decrease in the sales of a current project because of the launching of a new project is A. irrelevant to the investment decision B. an overhead expense C. a sunk cost D. cannibalization
D
The best capital budgeting evaluation tool is _______: A. IRR B. modified IRR C. payback period D. net present value
D
The process of evaluating and selecting projects for a company to invest in is called: A. capital structure B. project generating C. budget preparing. D. capital budgeting
D
when calculating BV and land improvements are involved
DO NOT INCLUDE THEM only use the original BV of the land
OCF (operating cash flow)
EBIT + dep.- tax
Times interest earned -a measure of a company's ability to honor its debt payments
EBIT/Interest
Non-owner stakeholders in a company
Employees, suppliers, government
Debt-Equity Ratio
Equals 1
Capital asset pricing model (CAPM)
Equation of the SML showing the relationship between expected return and beta.
If measuring two machines with different lives, calculate the
Equivalent Annual Cost
If machinery is depreciated over fewer years then the reduction of the tax shield in later years will lead to a lower project RRR, T or F?
FALSE. if you depreciate over fewer years then you will have more depreciation in early years, just like explained in part A above. Think of it this way - the Depreciation that would result in the HIGHEST value would be to IMMEDIATELY depreciate. So the whole part about 'reduced depreciation in later years' is crap. The extra depreciation in early years more than compensates for lower depreciation in later years. Bottom line - the faster you depreciate the more valuable.
FV compound FV simple PV (present value)
FVcompound= PV(1+R)^t FVsimple = PV + (PV x R x t) PV = FV/ (1+R)
True or False: An announcement by the government that they will decrease corporate marginal tax rates in the future would increase the attractiveness of MACRS depreciation.
False
Government Securities
Feds holdings of securities issued by the US Treasury
Liquidity Ratios
Firms ability to pay short-term bills
Assets
Government securities, discount loans. earn interest
Gross Profit Margin
Gross Profit/Sales
Portfolio
Group of assets such as stock and bonds held by an investor.
when solving for operating cash flow, and figuring out deprectiation amount..
IGNORE LAND. and add in modifications
Federal Reserve Notes
IOUs from the Fed the bearer. means of payments
Methods of Costing Capital Budgeting
IRR Method, Modified IRR, Regular Payback, Discounted Payback, Net Present Value and Profitability Index
If NPV is positive then
IRR will be greater than the required return and we will accept
Types of Projects
Independent, Mutually Exclusive, Complementary, Contingent and Required
IRR Decesions
Independent- if IRR > WACC accept the project Mutually Exclusive- accept project with highest IRR creater than WACC
Premiums
Items offered free or at a minimal cost as a bonus for purchasing a product
when a corporation is formed, it is granted which of the rights?
Legal powers to sue, ability to issue stock, provincial citizenship for jurisdictional purposes
Conditions Necessary for there to be a Conflict with NPV and IRR
ME Projects Size and Timing Disparity for two graphed NPVs have an Intersection Point where the cost of capital and NPVs are equal Required Rate is less than this Intersection Point
Profit margin
NI / Sales - to evaluate a firm's ability to generate profit (NI)
ROA (return on assets)
NI / total assets
ROE (return on equity)
NI / total equity
Reinvestment Rate Assumptions
NPV in IRR is calculated based on assumption that cash inflows can be reinvested at the projects risk adjusted WACC
Terminal Cash flow
Net CFAT from salvage and Net Working Capital
when calculating the initial cash outlay for a replacement project we should include the
Net CFAT from salvage from the sale of the old machine at year 0
Principle of diversification
Spreading an investment across a number of assets will eliminate some, but not all, of the risk.
which companies were involved in the corporate scandals that led to the sarbanes-oxely act?
WorldCom, Tyco, Enron
Profitability Index Model
PI= Pv of E(CI) / PV of E(CO) Accept if greater than 1, for ME accept the highest greater than 1
Portfolio weight
Percentage of a portfolio's total value in a particular asset.
what is not a basic area of finance?
Personal Finance
Security market line (SML)
Positively sloped straight line displaying the relationship between expected return and beta.
Efficient market reactions:
Price instantly adjust and remain there: - Delayed reaction: price adjust ( 8 days) - Over-reaction and correction: shoots and slowly adjusts (also over 8 days)
Financial Ratio Analysis
Relationships between pieces of financial info, for comparison in a firm, for time periods, trends against other firms, the industry or market
Categories of Projects
Replacement, Expansion, Safety, Mergers, Other
want IRR to be greater than
Required rate
Expected return
Return on a risky asset expected in the future.
CFBT
Revenue-Expenses
opportunity cost excess reserves
Rm-Rer= opporunity cost Rm= federal funds rate+premium
Working Capital
Short term assets+Short term liabilities ex: inventory=short term asset money owed to suppliers=short-term liability *is not total current liabilities
Market risk premium
Slope of the SML, the difference between the expected return on a market portfolio and the risk-free rate.
Discount Loans
The Fed can provide reserves to the banking system making discount loans
Currency in Cirrculation
The Fed issues currency. amount of currency in the hands of the public (outside banks).
default risk premium
The additional return required by investors to compensate them for the risk of default.
Systematic risk principle
The expected return on a risky asset depends only on the asset's systematic risk.
Discount Rate
The interest charged banks for these loans
The lower the standard deviation of returns on a security
The lower the expected rate of return and the lower the risk
Non Borrowed Rserves (NPR)
amount supplied by the Feds market Operations
True or False: Firms should use the most accelerated depreciation scheme allowable.
True
-Companies operate in different industries/environments -Shows past, cant predict future -different accounting procedures -Fiscal years -Seasonal variations and one time events
What are some limitations of financial ratio analysis?
1) High Inventory Turnover--High profit margin 2)High inventory turnover--low profit margin 3)Low Inventory turnover--High Profit Margin 4)Low inventory turnover--low profit margin
What are the four inventory turnover strategies
Evaluate the trade off between dollars today and at some point in the future
What is the goal of TVM?
Serves as a benchmark Means of comparison
Why are financial ratios useful?
Increasing shareholder wealth means increasing the _____.
current common stock value
Non normal Cash Flows
a cash outflow sometimes occurs after inflows have commenced- cash flow sign changes more than once. Will have multiple IRRS
Sunk Cost
a cost that ahs already occurred and can no be recovered no matter if we accept or reject a project
Time value of money
a dollar today is worth more than a dollar promised at some point in the future
The date at the top of an income statement is:
a period of time, not a specific date
Mutually Exclusive Projects
a set of projects where only one can be accepted. The acceptance of one project prevents the acceptance of another. Accept the project with highest positive NPV
The date at the top of a balance sheet is:
a specific day of the year, not a quarter or year
Indirect Transfer
a transfer of funds between suppliers and users of funds through a financial intermediary
why would a projects NPV be higher if the firm uses modified ACRS instead of straight line depreciation
accelerated depreciation (such as Modified ACRS) means the tax shield (which is t*D) will be higher in early years (compared to if the firm used straight line). Time value of money indicates that this increases the value of the project - it's better to save money on taxes sooner rather than later.
Cost of fixed assets, cash flow vs accounting
accountants dont show the purchase of fixed asset as a cash outlfow or deduct the cost from accounting income. Instead the show the purchase of the asset through yearly deductions of depreciation expense
What do we do with depreciation for the operating cash flow
add it back because it is a non-cash expense
Monetary Policy
affects money supply and interest rates, economic level
Reserves
all banks have an account at the Fed in which they hold deposits. deposits at the fed and physically held by the banks. Fed pays interest
Future value
amount an investment is worth in one more periods
Borrowed Reserves (BR)
amount of reserves borrowed from the Fed. primary cost is interest rate. aslong as Fed funds rate is cheaper than Discount rate banks wont borrow from the fed but from other banks
Calculator for NPV
cash flow, NPV key, CF0 has to be Minus
Incremental Cash flows
cash inflows or outflows that will occur only if we take on the project
Cash ratio
cash/ current liabilities
Monetary Rules and FFR
change the supply of reserves by omp and discount lending. reserve requirements affect federal funds rate by changing the demand of for reserves
agency problem
conflict of interest between an agent and a principal
officer responsible for corporate tax reporting
controller
officer responsible for corporate tax reporting:
controller
the federal government taxes which of the following?
corporate earnings and shareholder dividends
controller
corporate officer who is responsible for accurate financial accounting of the firm's activities and tax reporting and payments
agency costs
costs incurred due to conflict of interest between stockholders and management
Liabilities
currency in circulation, reserves. increase in either both will in the increase of the money supply
if a firm is considering a replacement project, the firm should include the
incremental depreciation (the difference in depreciation between the old and new machine) in the capital budget analysis
cash flows that need to be estimated by the company are
initial investment cost (net capital spending), money needed to smooth the current accounts (net working capital) and annual net cash flows expected (operating cash flows)
Defensive open market operations
intended to offset movements in other factors that affect reserves and monetary base
compound interest
interest builds on principal and prior interest
Simple Interst
interest earned only on the original principal
cash flow/ creditors
interest paid- net new borrowing (debt)
Federal Funds Rate
interest rate on overnight loans of reserves from one bank to another. interest rated is affected directly by the Fed. affected by reserves, market operations, and discount policy. always higher tha interest paid on reserves
Capital Budgeting
investment decisions involving fixed assets. Includes analyzing projects and deciding which ones to include in the capital budget
which of the following areas of finance is concerned with financial asset allocation
investments
Open Market Sell
leads to a contraction of reserves and deposits in the banking system. a decline in monetary base and the money supply
Discount lending
leads to an expansion of reserves, which can be lent out as deposits, thereby leading to an expansion of the monetary base and the money supply
in a limited partnership, a limited partner's liability for business debts is ___
limited to their cash contribution to the partnership
Strategic Business Plan
long run plan that outlines in broad terms the firms basic strategy for the next 5 to 10 years
Capital
long term assets used in product
net capital spending
machinery and training... use present selling price for land and cost for other depreciable items
Bias to Accept
managers often have this bias
Total debt ratio
measures debts of all maturities how much debts for every dollar in assets
Activity Ratios
measuring how effectively and efficiently a firm uses its assets
Net Present Value
method of ranking investment proposals using NPV, which is equal to the present value of each projects free cash flows discounted at cost of capital. Best method because it centered on maximizing shareholders wealth
Timing Disparity
most of the cash flows of one project occur earlier in the life and for the other project later in the life
Replacement Decisions
needed to continue current operations or for cost reducitons. These decisions more simply made
components of initial cash outlay
net capital spending and net working capital
fixed assets
net property, plant, and equipment patents
direct transfer
new issues of securities are sold to initial buyers; issuing firm gets money
real interest rate
nominal interest rate - inflation rate interest rate after inflation
for NWC
only use one years worth in beginning and end
Operating Margin Ratio
operating income/sales
required return on a project represents the
opportunity cost to the firm for a project
nominal interest rate
r = m × [ ( 1 + i)1/m - 1 ] m- number of compounding periods I - effective rate r - stated rate Real risk-free rate + Inflation premium + Default-risk premium + Maturity-risk Premium +Liquidity-risk Premium (approximately equals) real rate of interest + inflation rate exact: = real rate of interest + inflation rate + (inflation rate * real rate of interest)
What do we use to calculate the NPV
required rate of return
Required Reserve Ratio
requirement for every dollar to be held as reserve
Required Reserves Requirement
reserves the bank requires banks to hold. a fraction of their deposits to be held at the reserve. When the Fed raises requirements raise demands raise fed rate goes up
income statement
sales - COGS = Gross Profit -------------- - Operating Expenses (mark, selling, admin, depreciation = operating income (earnings before interest and taxes) -Interest expense (cost of borrowing money) -------------- = Earnings before taxes - In. Tax ---> debt x tax rate = tax ------------ net income NI = dividends + retained earnings
receivables turnover
sales/ accounts receivable
total assets turnover -measures the efficiency of a company's use of its assets
sales/ total assets
always ignore...
salvage value and interest expense
when one owner or creditor sells to another, the transaction takes place in the ____ market
secondary
Bias to reject
shareholders are normally ones who incur the loses of projects
Times Interest Earned Ratio
shoes how many rimes over a firm can meet its interest obligation
Multiple IRRs
situation in which a project has two or more IRRs. Should use modified IRR model
NPV Outlay
solution to capital rationing, look at the financial restrains and possibly combination of projects and pick the one to maximize NPV
stakeholder
someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm
Rule of 72
takes years to double= 72/Interest rate
Regular Payback Method
tells you the payback times for the projects Independent- pick projects that pay you back by the benchmark Mutually Exclusive- pick project with shortest payback time
If NPV is negative then
the IRR will be less tha nthe
