BUS 370 Finance Final

a perpetuity

A preferred stock would be an ideal example of:

working capital management strategies

Financial managers use two types of strategies for current assets: flexible and restrictive

growing annuity

Growing Annuity Equally-spaced cash flows that increase in size at a constant rate for a finite number of periods Example: Multiyear product or service contract with periodic cash flows that increase at a constant rate for a finite number of years

cash flows that grow at a constant rate

Growing Perpetuity Equally-spaced cash flows that increase in size at a constant rate forever Common stock whose dividend is expected to increase at a constant rate forever Equation 6.6 𝑃𝑉𝑃=__𝐶𝐹_1_/𝑖−𝑔_

False

Jacob Oram pay the same amount every month as insurance premium for a term life policy for a period of five years, the stream of cash flows is called a perpetuity.

true

The appropriate measure of risk for a diversified portfolio is beta.

true

The market risk-premium is equal to the expected return on the market less the risk-free rate of return.

false

The standard deviation of a distribution can be a negative value.

false

The variance of a distribution can be a negative value.

variance

a measure of risk, square the difference between each possible outcome and the mean, multiply each squared difference by its probability, and sum:

ture

Utilizing the fact that values of two or more assets do not always move in the same direction at the same time in order to reduce the risk of a portfolio is called diversification.

false

Variance is equal to the square root of standard deviation.

foreign exchange rates

When U.S.-based firms buy raw materials or finished goods, they want to get the best possible deal—the quality they need at the lowest price When the suppliers are not located in the United States, comparisons are more difficult However, U.S.-based firms would prefer to pay for purchases in dollars, while the foreign supplier must pay employees and other local expenses with its domestic currency One of two parties in a transaction will be forced to deal in a foreign currency and incur foreign exchange rate risk We can easily compare prices stated in different currencies by checking the foreign exchange rate quotes in major newspapers or on the internet A foreign exchange rate is the price of one monetary unit, such as the British pound, stated in terms of another currency, such as the U.S. dollar

payback period

𝑃𝐵=𝑌𝑒𝑎𝑟𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑐𝑜𝑠𝑡 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦+_𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑡𝑜 𝑟𝑒𝑐𝑜𝑣𝑒𝑟/𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟_

market value of assets

𝑀𝑉 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠=𝑀𝑉 𝑜𝑓 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠+𝑀𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦

EAR ex

Anna is charged 1% interest when she borrows $2,000 for one week (1% is the weekly rate). What is the effective annual interest rate (EAR) on the loan? 𝐸𝐴𝑅=__1+0.01__52_−1=0.6777, 𝑜𝑟 67.77%

5 step approach for NPV

1.Estimate project cost Identify and add the present value of expenses related to the project There are projects whose entire cost occurs at the start of the project, but many projects have costs occurring beyond the first year The cash flow in year zero (NCF0) on the timeline is negative, indicating and outflow 2.Estimate project net cash flows Both cash inflows and outflows are likely in each year of the project; estimate the net cash flow for each year Include the salvage value of the project in its terminal year 3.Determine project risk and estimate cost of capital The cost of capital is the discount rate used to determine the present value of expected net cash flows The riskier a project, the higher its cost of capita 4.Compute the project's NPV Determine the difference between the present values of the expected net cash flows from the project and the expected cost of the project 5.Make a decision Accept the project if it has a positive NPV Reject the project if it has a negative NPV

risk tolerant

: those who are willing to take on more risk for more possible reward

growing annuity ex

A coffee shop will operate for fifty more years. Cash flow was $300,000 last year and increases by 2.5% each year. The discount rate for similar firms is 15%. Estimate the value of the firm. _𝐶𝐹_1_=$300,000×_[1+0.025]_=$307,500 𝑃𝑉𝐴=_$307,500/0.15−0.025_×_[1− (1.025/1.15)^50]__ =$2,460,000×0.9968=$2,452,128

aging AR

A common tool that credit managers use is called an aging schedule The aging schedule shows the breakdown of the firm's accounts receivable by their date of sale; how long has the account not been paid in days Its purpose is to identify and then track delinquent accounts and to see that they are paid Aging schedules are also an important tool for analysing the quality of a firm's receivables The aging schedule reveals patterns of delinquency and shows where collections efforts should be concentrated

present value of an annuity example

A contract will pay $2,000 at the end of each year for three years and the appropriate discount rate is 8%. What is a fair price for the contract? _𝑃𝑉𝐴_3_=$2,000×[1−_1/(1+0.08)^3 / 0.08]=$5,154.19

growing perpetuity ex

A firm's cash flow was $450,000 last year. You expect the cash flow to increase by 5% per year forever. If you use a discount rate of 18%, what is the value of the firm? _𝐶𝐹_1_=$450,000×_[1+0.05_]=$472,500 𝑃𝑉𝑃=_$472,500/0.18−0.05_=$3,634,615

modified MIRR

A major weakness of the IRR compared to the NPV method is the reinvestment rate assumption In the MIRR technique, cash flow is assumed to be reinvested at the firm's cost of capital The compounded value are summed to get a projects terminal value (TV) at then end of its life The MIRR is the rate which equates a project's cost to its terminal value Equation 10.5 _𝑃𝑉_𝐶𝑜𝑠𝑡_=_𝑇𝑉_/1+𝑀𝐼𝑅𝑅__𝑛__

rise of multinational corporations

A multinational corporation is a business firm that operates in more than one country but is headquartered or based in its home country Multinationals are owned by a mixture of domestic and foreign stockholders Transnational corporations are multinational firms that have widely dispersed ownership and are managed from a global perspective rather than a firm residing in a particular country Exhibit 21.1 lists the top 15 multinational business firms ranked by total revenues

annuity

A series of equally-spaced and level cash flows extending over a finite number of periods

perpetuity

A series of equally-spaced and level cash flows that continue forever

ex cost of preferred stock

A share of preferred stock has a 5% dividend rate, $100 stated value, and a price of $85. What is the cost of this preferred stock? _𝐷_𝑝𝑠_=$100_0.05_=$5 _𝑘_𝑝𝑠_=__𝐷_𝑝𝑠___𝑃_𝑝𝑠__=_$5_$85_=0.059, 𝑜𝑟 5.0%

perpetuities

A stream of equal cash flows that goes on forever Preferred stock and some bonds are perpetuities Equation for the present value of a perpetuity can be derived from the present value of an annuity equation Equation 6.3 𝑃𝑉𝑃=_𝐶𝐹/𝑖_×_[1−_1/(1+𝑖)^∞]___ =_𝐶𝐹/𝑖_×_[1−0]_=_𝐶𝐹_/𝑖_

lockboxes

A system allows geographically dispersed customers to send their payments to a post office box close to them With a concentration account, a post office box is replaced by a local branch which receives the mailings, processes the payments, and makes the deposits Either approach will reduce the collection time to an extent but there is a cost associated with it

apr ex

Anna is charged 1% interest when she borrows $2,000 for one week. What is the annual percentage interest (APR) on the loan? 𝐴𝑃𝑅=_0.01_×52=.52, 𝑜𝑟 52%

Finance balance sheet

Accounting Balance Sheets reflect book values Left-hand side: book value of the firm's assets, based on historical costs Right-hand side: how those assets were financed Finance Balance Sheets reflect market values Left-hand side: total market value of assets, the present value of total cash flows that those assets are expected to generate in the future Values of the claims that investors hold must equal the value of the cash flows that they have a right to receive Total market value of the debt and the equity of a firm is the present value of the cash flows that the debt holders and the stockholders have the right to receive

sources of short term financing

Accounts Payable Accounts payable (trade credit), bank loans, and commercial paper are common sources of short-term financing The buyer decides whether to take advantage of the cash discount or wait and pay in full when the account is due Accounts Receivable Financing A company can secure a bank loan by pledging the firm's accounts receivable as security Accounts receivable financing is an important source of funds for medium-size and small businesses A second way for a business to finance itself with accounts receivables, called factoring, is to sell the receivables to a factor at a discount; the firm that sells the receivables has no further legal obligation to the factor Short-term Bank Loans If the firm backs the loan with an asset, the loan is defined as secured, otherwise the loan is unsecured Secured loans should allow the borrower to borrow at a lower interest rate An informal line of credit is a verbal agreement between the firm and the bank, allowing the firm to borrow up to an agreed-upon upper limit In exchange for providing the line of credit, a bank may require that the firm hold a compensating balance with them A formal line of credit is also known as revolving credit Under this type of agreement, the bank has a legal obligation to lend an amount of money up to a pre-set limit; the firm pays a yearly fee in addition to the interest expense on the amount they borrow Commercial Paper Commercial paper is a promissory note issued by large financially secure firms that have high credit ratings Commercial paper is not secured (the issuer is not pledging any assets to the lender in the event of default), but most commercial paper is backed by a credit line from a commercial bank The default rate on commercial paper is very low, resulting in an interest rate that is usually lower than what a bank would charge on a direct loan

True

Allen Bell pay the same amount every month on a car loan for a period of three years, the stream of cash flows is called annuity.

False

An annuity due is a series of equal cash flows where a cash flow occurs at the end of each period.

finding the interest rate

An insurer requires $350,000 to provide a guaranteed annuity of $50,000 per year for 10 years. What is the rate-of-return for the annuity? enter: n:10, i: ?, PV: -350,000, PMT: 50,000, FV:0 answer i: 7.073

estimating cost of debt

Analysts often cannot directly observe the rate of return that investors require for a particular type of financing and instead must rely on observed security prices to estimate the required rate With regard to the cost associated with each type of debt that a firm uses when we estimate the cost of capital for a firm, we are particularly interested in the cost of the firm's long-term debt Long-term debt refers to debt borrowing set to mature in more than one year Debt with a maturity of more than one year can typically be viewed as permanent debt because firms often borrow the money to pay off this debt when it matures Interest rate (or historical interest rate determined when the debt was issued) that the firm is paying on its outstanding debt does not necessarily reflect its current cost of debt Current cost of long-term debt is the appropriate cost of debt for WACC calculations WACC is the opportunity cost of capital for the firm's investors as of today Use yield to maturity (YTM) for cost of debt, adjusting for the tax deductibility of interest on debt

electronic funds transfers

Another increasingly popular means of reducing cash collection time is through the use of electronic funds transfers. Such payments reduce cash collection times in every phase First, mailing time is eliminated Second, processing time is reduced or eliminated since no data entry is necessary Finally, electronic funds transfers typically have little or no delay in funds availability Using PayPal eliminates float

international financial management

Basic principles remain the same for managerial finance whether a transaction is domestic or international The time value of money is not affected by whether a business transaction is domestic or international Likewise, the same models are used for valuing capital assets, bonds, stocks, and entire firms Exhibit 21.2 lists some of the important finance concepts and procedures and indicates where there are differences between domestic and international operations

foreign currency quotations

Bid and Ask Rate Quotations Foreign exchange dealers quote two prices: bid and ask quotes The bid quote represents the rate at which the dealer will buy foreign currency The ask quote is the rate at which the dealer will sell foreign currency The difference between the bid and ask price is the dealer's spread, which is often calculated in percent form Equation 21.1 𝐵𝑖𝑑−𝑎𝑠𝑘 𝑠𝑝𝑟𝑒𝑎𝑑=_𝐴𝑠𝑘 𝑟𝑎𝑡𝑒−𝐵𝑖𝑑 𝑟𝑎𝑡𝑒_/𝐴𝑠𝑘 𝑟𝑎𝑡𝑒_

capital budgeting

Capital budgeting decisions are the most important investment decisions made by management These decisions determine the long-term productive assets that will create wealth for a firm's owners Capital investments are large cash outlays, long-term commitments, not easily reversed, and primary factors in a firm's long-run performance Capital budgeting techniques help management systematically analyze potential opportunities in order to decide which are worth undertaking

True

Cash flow streams that increase at a constant rate over time are called growing annuities or growing perpetuities.

annuity due

Cash flows occur at the beginning of a period Examples include leases and car insurance

ordinary annuity

Cash flows occur at the end of a period Examples include mortgage payments and interest payments to bondholders

cash collection

Collection time, or float, is the time between when a customer makes a payment and when the cash become available to the firm Collection time can be broken down into three components: Delivery, or mailing, time: when a customer mails a payment it may take several days before that payment arrives Processing delay: once the payment is received it must be opened, examined, accounted for, and deposited at the firm's bank Finally, there is a delay between the time of the deposit and the time the cash is available for withdrawal Payments in cash at the point of sale reduce the collection time to zero Payments by checks or credit cards at the point of sale eliminates the mail time but not the processing time

false

Complete diversification means that the portfolio is no longer subject to market risk.

basics of working capital

Current assets are cash and other assets that the firm expects convert into cash in a year or less Current liabilities (or short-term liabilities) are obligations that the firm expects to pay off in a year or less Working capital is the funds invested in a company's cash account, account receivables, inventory, and other current assets (also called gross working capital) Net working capital (NWC) refers to the difference between current assets and current liabilities; it is important because it is a measure of liquidity and represents the net short-term investment the firm keeps in the business Working capital management involves making decisions regarding the use and sources of current assets Working capital efficiency refers to the length of time between when a working capital asset is acquired and when it is converted into cash Liquidity is the ability of a company to convert assets—real or financial—into cash quickly without suffering a financial loss Cash includes cash and marketable securities like Treasury securities Receivables represent the amount owed by customers who have availed themselves of the firm's trade credit facility Firms maintain inventory of raw materials, work in process, and finished goods Payables represent the amount owed to the firm's vendors and suppliers for materials purchased on credit

total holding period return example

Ella buys a stock for $26.00. After one year, the stock price is $29.90 and she receives a dividend of $0.80. What is her return for the period? _𝑅_𝑇_=_∆𝑃+_𝐶𝐹_1/𝑃_0__ =__[29.90−26.00]_+0.80/26.00_ =_4.70/26.00_=0.180769, or 18.08%

eurocredit bank loans

Eurocredit bank loans are short- to medium-term loans of a Eurocurrency to multinational corporations or governments Can have a high degree of credit risk and may be too large for a single bank to handle The lending banks often form a syndicate to spread the risk The loan rate is equal to a base rate, such as LIBOR, which represents the bank's cost of funds, plus a mark-up Eurocredits typically are floating-rate loans structured as "rollovers" The general equation for Eurocredit pricing is expressed in the following equation: Equation 21.3 𝑘=𝐵𝑅+𝐷𝑅𝑃+𝐹𝑋𝑅+𝐶𝑅+𝐺𝑃𝑀𝐴𝑅 Where k=individual firm's loan rate, BR=Eurocurrency base rate such as LIBOR, DRP=default risk premium, FXR=foreign exchange rate or currency risk premium, CR=country risk premium, and GPMAR=bank's gross profit margin

intnl banking

European governments fostered the growth of large international banks in their countries and viewed them as engines of territorial and economic expansion To accommodate their customers' needs, large U.S. Banks established networks of foreign branches and affiliates Exhibit 21.7 shows the 15 largest banks in the world ranked by total assets in 2013

equilibrium exchange rate

Exhibit 21.4 shows the equilibrium exchange rate, which is at the point where the supply and demand curves intersect Equilibrium occurs at the price at which the quantity of the currency demanded exactly equals the quantity supplied In general, whatever causes U.S. residents to buy more or fewer foreign goods shifts the demand curve for the foreign currency Similarly, whatever causes foreigners to buy more or fewer U.S. goods shifts the supply curve for the foreign currency

foreign currency quotations

Exhibit 21.5 shows selected exchange rate quotations from the Wall Street Journal The Spot Rate Is the cost of buying a foreign currency today, "on the spot" If the exchange rate is the price in dollars for a foreign currency, it is often called the American or direct quote If the exchange rate is the price in foreign currency for a dollar, the quote is called an European or indirect quote Cross Rates When one is given two quotes of foreign exchange rates involving three currencies, it is possible to find the exchange rate between the third pair of currencies, and this is known as the cross rate People dealing with more than one foreign currency make use of a table of spot exchange rates called cross rates, which are simply exchange rates between two currencies Exhibit 21.5 shows cross rates for seven different currencies

intnl bond markets

Foreign Bonds Long-term debt sold by a foreign firm to investors in another country and denominated in that country's currency Firms sell foreign bonds when they need to finance projects in a particular foreign country May have colourful nicknames Foreign bonds sold in the United States are called Yankee bonds Yen-denominated bonds sold in Japanese financial markets by non-Japanese firms are called Samurai bonds Eurobonds Long-term debt instruments sold by firms investors in countries other than the country in whose currency the bonds are denominated Used to finance both international and domestic projects Bearer bonds that do not have to be registered Eurobonds Eurodollar and other Eurocurrency bonds have a number of characteristics that differ from similar U.S corporate bonds Eurobonds also pay interest annually Historically almost all Eurocurrency bonds were sold without credit ratings Today, more than half of the Eurodollar bonds sold in Europe have credit ratings

foreign exchange markets

Foreign exchange markets are a group of international markets connected electronically where currencies are bought and sold in wholesale amounts Provide three basic economic benefits A mechanism to transfer purchasing power from individuals who deal in one currency to people who deal in a different currency A way for corporations to pass the risk associated with foreign exchange price fluctuations to professional risk-takers A channel for importers and exporters to acquire credit for international business transactions Market structure and major participants The market for foreign exchange is very large, and the daily volume was more than $5 trillion in 2013 London is by far the largest foreign exchange trading center, while New York City is second, and Tokyo is third Participants are linked by telephone, telegraph, and cable Market structure and major participants The major participants in the foreign exchange markets are multinational commercial banks, large investment banking firms, and small currency boutiques that specialize in foreign exchange transactions In addition, the central banks, which intervene in the markets primarily to smooth out fluctuations in their exchange rates, also play a significant role

forward rates

Forward Rates are rates at which one agrees to buy or sell a currency on some future date Note that the forward rate is established at the date on which the agreement is made and defines the exchange rate to be used when the transaction is completed in the future By contracting now to buy or sell foreign currencies at some future date, businesses can lock in the cost of foreign exchange at the beginning of the transaction and do not have to worry about the risk of an unfavourable movement in the exchange rate in the future The difference between the forward rate and the spot rate is called the forward premium or forward discount Equation 12.2 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑝𝑟𝑒𝑚𝑖𝑢𝑚_𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡_=_𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑟𝑎𝑡𝑒−𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒_/𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒_×_360/_𝑛_×100

estimating cost of capital

If analysts at a firm could estimate the betas for each of the firm's individual projects, they could estimate the beta for the entire firm as a weighted average of the betas for the individual projects Analysts must use their knowledge of the finance balance sheet, along with the concept of market efficiency, to estimate the cost of capital for the firm Rather than performing calculations for the individual projects represented on the left-hand side of the finance balance sheet, analysts perform a similar set of calculations for the different types of financing (debt and equity) on the right-hand side of the finance balance sheet

beta

If the beta of an asset is Zero, the asset has no measurable systematic risk Greater than one, the systematic risk for the asset is greater than the average for assets in the market Less than one, the systematic risk for the asset is less than the average for assets in the market

false

If the capital appreciation return from owning a stock is positive, then the total return from owning the same stock can be negative.

alternatives to WACC

If the discount rate for a project cannot be estimated directly, a financial analyst might try to find a public firm that is in a business that is similar to the project This public company would be what financial analysts call a pure-play comparable because it is exactly like the project This approach is generally not feasible due to the difficulty of finding a public firm that is only in the business represented by the project Financial managers sometimes classify projects into categories based on their systematic risks They then specify a discount rate that is to be used to discount the cash flows for all projects within each category

WACC

If we divide the costs of capital into debt and equity portions of the firm, then we can use the above to arrive at the weighted average cost of capital (WACC) for the firm: _𝑘_𝐹𝑖𝑟𝑚_=_𝑥_𝐷𝑒𝑏𝑡__𝑘_𝐷𝑒𝑏𝑡_+_𝑥_𝐸𝑞𝑢𝑖𝑡𝑦__𝑘_𝐸𝑞𝑢𝑖𝑡𝑦_

false

If you are building a portfolio, then you desire those assets to have a correlation coefficient of one.

true

If you are trying to determine whether to purchase Security A or Security B as the only holding in your portfolio, then you can consider the coefficient of variation in order to understand the risk-return relationship of the individual securities.

true

If you know the risk-free rate, the market risk-premium, and the beta of a stock, then using the Capital Asset Pricing Model (CAPM) you will be able to calculate the expected rate of return for the stock.

an annuity due

If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is called:

an ordinary annuity

If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called:

the amount of interest paid each period does not remain constant.

In a typical loan amortization schedule, the amount of money paid towards reducing the loan balance increases over time and the amount of interest paid each period does not remain constant. In a typical loan amortization schedule: Entry field with incorrect answer the amount of each payment does not remain constant. the amount of money paid towards reducing the loan balance decreases over time. the amount of interest paid each period does not remain constant. the amount of interest paid each period increases over time.

True

In an annuity due, cash flows occur at the beginning of each period.

True

In computing the present and future value of multiple cash flows, each cash flow is discounted or compounded at a same rate.

False

In ordinary annuities, cash flows occur at the beginning of each period.

Constant growth dividend model

In the second method to estimate the cost of equity we use the constant growth valuation model we discussed in Chapter 9: _𝑃_0_=__𝐷_1__/𝑅−𝑔_ We can rearrange this equation to solve for the required rate of return: Equation 13.5 _𝑘_𝑐𝑠_=__𝐷_1___/𝑃_0__+𝑔 In order to solve for the cost of common stock, we must estimate the dividend that stockholders will receive next period, D1, as well as the rate at which the market expects dividends to grow over the long run, g This approach is useful for a firm that pays dividends that will grow at a constant rate, which is appropriate for an electric utility but not for a fast growing high-tech firm

just in time

In this system the exact day-by-day, or even hour-by-hour raw material needs are delivered by the suppliers, who deliver the goods "just in time" for them to be used on the production line A big advantage in this system is that there are essentially no raw material inventory costs and no chance of obsolescence or loss to theft On the other hand, if the supplier fails to make the needed deliveries, then production shuts down If this system works for a firm effectively, it cuts down their investment in working capital dramatically

inventory management

Inventory management is largely a function of operations management, not financial management Manufacturing companies generally carry three types of inventory: raw materials, work in process, and finished goods Investment in inventory is costly Capital invested in inventory provides no direct return, but running out of raw materials can cause manufacturing to shut down at a greater cost to the firm A shortage of finished goods can mean lost sales

cost of equity

Just as information about market rates of return is used to estimate the cost of debt, market information is also used to estimate the cost of equity There are several ways to do this and the most appropriate will depend on what information is available and how reliable the analyst believes it is The text discusses three alternative methods for estimating the cost of common stock Method 1: Using the Capital Asset Pricing Model (CAPM) Method 2: Using the Constant-Growth Dividend Model Method 3: Using a Multistage-Growth Dividend Model

using the WACC in practice

Limitations of WACC as a discount rate for evaluating projects CONDITION 1: a firm's WACC should be used to evaluate the cash flows for a new project only if the level of systematic risk for that project is the same as that of the portfolio of projects that currently comprise the firm CONDITION 2: a firm's WACC should be used to evaluate a project only if that project uses the same financing mix - the same proportions of debt, preferred shares, and common shares - used to finance the firm as a whole

loan amortization

Loan amortization is how borrowed funds are calculated over the life of a loan Each payment includes less interest and more principal; the loan is paid off with the last payment Amortization schedule shows interest and principal in each payment, and amount of principal still owed after each payment

hedging a currency transaction

Means to engage in a financial transaction to reduce risk Companies can use forward transactions to lock in (hedge) the cost of foreign exchange Sometimes forward contracts may prevent the firm from receiving the benefits of a change in exchange rates Remaining unhedged is risky and often considered to be "speculation" Speculation is not a logical and legitimate function of nonfinancial businesses that import or export goods or services

net present value

NPV is the present value of the expected net cash flows (NCF), where _𝑁𝐶𝐹_𝑡_=_𝐶𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤𝑠−𝐶𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠_ Equation 10.1 𝑁𝑃𝑉=_𝑁𝐶𝐹_0_+__𝑁𝐶𝐹_1_/1+𝑘_+__𝑁𝐶𝐹_2/1+𝑘^_2__+...+__𝑁𝐶𝐹_𝑛/1+𝑘^_𝑛__ =_𝑡=0_𝑛___𝑁𝐶𝐹_𝑡/1+𝑘__^𝑡___

True

Natalia Greenberg opened a pizza place last year. She expects to increase her revenue from last year by 7 percent every year for the next 10 years. This is an example of a growing annuity.

NPV

Net Present Value is the best capital budgeting technique and is consistent with the goal of maximizing shareholder wealth NPV compares the present value of expected benefits and cash flows from a project to the present value of the expected costs; if the benefits are larger, the project is feasible

historical market performance

On average, annual returns have been higher for riskier securities Exhibit 7.3 shows that small stocks have the largest standard deviation of returns and the largest average return On other end of spectrum, Treasury bills have the smallest standard deviation and the smallest average return

ordinary annuity vs annuity due

Present Value of Annuity Due Cash flows are discounted for one period less than in an ordinary annuity Future Value of Annuity Due Cash flows earn compound interest for one period more than in an ordinary annuity The present or future value of an annuity due is always higher than that of an ordinary annuity that is otherwise identical

contingent projects

Projects for which the decision to accept one project depends on acceptance of another project

mutually exclusive projects

Projects for which the decision to accept one project is simultaneously a decision to reject another project

independent projects

Projects for which the decision to accept or reject is not influenced by decisions about other projects being considered by the firm

globalization of the world economy

Refers to removal of barriers to free trade and closer integration of national economies Consumers in many countries buy goods that are purchased from a number of countries other than just their own Today, on average, large corporations, whether they are based in the United States or another country, generate around half of their sales revenue overseas The production of goods and services has also become highly globalized Like product markets, the financial system has also become highly integrated

operation and cash conversion cycles

Sequence of events in a cash conversion cycle: The firm uses cash to pay for the cost of raw materials and the costs of conversion Finished goods are held in finished goods inventory until they are sold Finished goods are sold on credit to the firm's customers Customers repay the credit the firm has extended them and the firm receives the cash

goals of international financial management

Stockholder value maximization is the accepted goal for firms in the United States, as well as in some other countries that share a similar heritage, such as the United Kingdom, Australia, India, and Canada In Continental Europe, for example, countries such as France and Germany focus on maximizing corporate wealth The European manager's goal is to earn as much wealth as possible for the firm while considering the overall welfare of all stakeholders In Japan, companies form tightly knit, interlocking business groups called keiretsu, such as Mitsubishi, Mitsui, and Sumitomo, and the goal of the Japanese business manager is to increase the wealth and growth of the keiretsu As a result, they might focus on maximizing market share rather than stockholder wealth In China, which is making a transition from a command economy to a market-based economy, there are sharp differences between state-owned companies and emerging private-sector firms The large state-owned companies have an overall goal that can best be described as maintaining full employment in the economy while the new private-sector firms fully embrace the Western standard of stockholder value maximization

financing working capital

Strategies for financing working capital The matching of maturities is one of the most basic techniques used by financial managers to reduce risk when financing assets (Exhibit 14.7 Panel A) All seasonal working capital is funded with short-term borrowing and, as the level of sales varies seasonally, short-term borrowing fluctuates between some minimum and maximum level The long-term funding strategy is shown in Panel B of Exhibit 14.7 All permanent working capital and fixed assets are funded with long-term financing This strategy relies on long-term debt to finance both capital assets and working capital The short-term funding strategy is shown in Panel C of Exhibit 14.7 This strategy relies on short-term debt to finance all seasonal working capital, a portion of the permanent working capital and fixed assets Matching Maturities Nearly all financial managers try to match the maturities of assets and liabilities when funding the firm Short-term assets are funded with short-term financing and long-term assets are funded with long-term financing Permanent Working Capital Most financial managers like to fund some of their current assets with long-term debt as shown in Panel B of Exhibit 14.7 Some large firms with the highest credit standing prefer to fund some of their long-term fixed assets with short-term debt sold in the commercial paper market

ex bid ask spread

Suppose a dealer is quoting a bid rate for euros of $1.4337/ € and an ask rate of $1.4423/ €. The bid-ask spread is: 𝐵𝑖𝑑−𝑎𝑠𝑘 𝑠𝑝𝑟𝑒𝑎𝑑=_1.4423−1.4337_/1.4423_=0.596%

ex forward premium or discount

Suppose the spot rate today on the British pound is $2.0172/£, while the three-month forward rate is $2.0113/£. What is the forward premium or discount? 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 _𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡_ =_$2.0113−$2.0172_/$2.0172_×_360_/90_×100 =−1.17%

perpetuity ex

Suppose you decide to endow a chair in finance. The goal of the endowment is to provide $100,000 of financial support per year forever. If the endowment earns a rate of 8%, how much money will you have to donate to provide the desired level of support? 𝑃𝑉𝑃=_𝐶𝐹/𝑖_ =_$100,000/0.08_ =$1,250,000

APR

The APR does not account for the number of compounding periods or adjust the annualized interest rate for the time value of money APR is not a precise measure of the rates involved in borrowing and investing 𝐴𝑃𝑅=_𝑝𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒_×𝑚

ARR

The ARR is also called the Book Value Rate-of-Return ARR uses Net Income and Book Value rather than cash flows to compute the return on a capital project Equation 10.3 𝐴𝑅𝑅=_𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒/𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒_

EAR

The EAR accounts for the number of compounding periods and adjusts the annualized interest rate for the time value of money EAR is a more accurate measure of the rates involved in lending and investing Equation 6.7 𝐸𝐴𝑅=__[1+_𝑄𝑢𝑜𝑡𝑒𝑑 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒/𝑚]^𝑚 −1

EOQ

The EOQ mathematically determines the minimum total inventory cost taking into account reorder costs and inventory carrying costs The optimal order size strikes the balances between these two costs Equation 14.5 𝐸𝑂𝑄=__square root_2×𝑅𝑒𝑜𝑟𝑑𝑒𝑟 𝑐𝑜𝑠𝑡𝑠×𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑_/𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠__

eurocurrency market

The Eurocurrency market is the short-term portion of the Euromarket A Eurocurrency is a timed deposit of money held by corporations and governments in a bank located in a country different from the country that issued the currency The most widely quoted Eurocurrency interest rate is the London Interbank Offer Rate, or LIBOR, which is the short-term interest rate that major banks in London charge one another

IRR

The IRR technique compares a firm's cost of capital to the rate-of-return that makes the net cash flows from a project equal to the project's cost A project is acceptable if its IRR is greater than the firm's cost of capital The IRR is analogous to the yield-to-maturity on a bond The NPV and IRR techniques are similar in that both utilize discounted cash flows The IRR is the discount rate that makes a project have an NPV equal to zero The NPV and IRR methods will agree when projects are independent and the cash flows are conventional (initial outflow and net inflows thereafter)

consumer protection and information

The Truth-in-Lending Act of 1968 requires that borrowers be told the actual cost of credit The Truth-in-Savings Act of 1991 requires that the actual return on savings be disclosed to consumers The Credit Card Act of 2009 limits credit card fees and interest rate increases, and requires better disclosure of contract details

taxes and the cost of debt

The after-tax cost of interest payments equals the pre-tax cost times 1 minus the tax rate: Equation 13.3 _𝑘_𝐷𝑒𝑏𝑡 𝑎𝑓𝑡𝑒𝑟−𝑡𝑎𝑥_=_𝑘_𝐷𝑒𝑏𝑡 𝑝𝑟𝑒−𝑡𝑎𝑥_×_[1−𝑡]_

present value of an annuity

The amount needed to produce the annuity The current fair value or market price of the annuity The amount of a loan that can be repaid with the annuity Equation 6.1 𝑃𝑉𝐴𝑛=𝐶𝐹/𝑖 ×[1− 1/(1+𝑖)^n =𝐶𝐹×[1−1/(1+𝑖)^𝑛 /𝑖

ex cost of debt

The before-tax cost of debt for a firm is 6% and the marginal tax rate is 20%. What is the after-tax cost of debt for the firm? _𝑘_𝐷𝑒𝑏𝑡 𝑎𝑓𝑡𝑒𝑟−𝑡𝑎𝑥_=0.06×_1−0.20_=0.048, 𝑜𝑟 4.8%

True

The capital appreciation component of a stock's return considers the changein price of a stock divided by the initial price of the stock.

cash conversion cycle

The cash conversion cycle does not start until the firm actually pays for its inventory It represents the length of time between the cash outflow for materials and the cash inflow from sales Days payables outstanding (DPO) tells how long a firm takes to pay off its suppliers for the cost of inventory Equation 14.2 𝐶𝑎𝑠ℎ 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝐶𝑦𝑐𝑙𝑒=𝐷𝑆𝐼+𝐷𝑆𝑂−𝐷𝑃𝑂 Equation 14.3 𝐶𝑎𝑠ℎ 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝐶𝑦𝑐𝑙𝑒=𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒−𝐷𝑃𝑂

cost of preferred stock

The characteristics of preferred stock allow us to use the perpetuity model (Eqn. 6.3) to estimate the cost of preferred equity Just as with common stock, we can find the cost of preferred equity by rearranging the pricing equation for preferred shares: Equation 13.6 _𝑘_𝑝𝑠_=__𝐷_𝑝𝑠/𝑃_𝑝𝑠__

false

The coefficient of variation divides the variance of the returns of an asset by the expected rate of return of that asset.

False

The correct way to annualize an interest rate is to compute the annual percentage rate (APR).

correlation coefficient

The correlation coefficient cannot be greater than +1 or less than -1 Negative correlation indicates that asset prices move in opposite directions Positive correlation indicates that asset prices move in the same direction Zero correlation indicates there is no linear relationship between return on the assets

estimate the cost of debt

The current cost of debt for a publicly traded bond is derived from its yield to maturity calculation Consider compounding periods, the effective annual interest rate (EAR), and the cost of issuing the bond (float costs) For private debt, a firm can ask their bank and ask what rate the bank would charge if they decided to refinance the debt today To estimate the firm's overall cost of debt when it has several debt issues outstanding, we must first estimate the costs of the individual debt issues then calculate a weighted average of these costs

True

The effective annual interest rate (EAR) is defined as the annual growth rate that takes compounding into account.

annually

The effective annual rate (EAR) will equal the annual percentage rate (APR) if interest is compounded annually. The effective annual rate (EAR) will equal the annual percentage rate (APR) if interest is compounded: Entry field with incorrect answer daily. monthly. quarterly. annually.

global money and capital markets

The emergence of the euromarkets A Eurodollar is defined as a U.S. dollar deposited in a bank outside the United States, primarily in Europe The banks accepting these deposits are called Eurobanks The Euromarkets are vast, largely unregulated money and capital markets with major financial centers in Tokyo, Hong Kong, and Singapore

false

The expected return on the market portfolio is equal to the market risk premium.

CAPM

The first method for estimating the cost of common equity is the CAPM method: 𝐸__𝑅_𝑖__=_𝑅_𝑟𝑓_+_𝛽_𝑖__[𝐸__𝑅_𝑚__−_𝑅_𝑟𝑓__] Equation 13.4 _𝑘_𝑐𝑠_=_𝑅_𝑟𝑓_+__[𝛽_𝑐𝑠_×𝑀𝑎𝑟𝑘𝑒𝑡 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚]_

True

The future value of an annuity due is greater than the future value of an ordinary annuity.

greater than the sum of the cash flows

The future value of multiple cash flows is:

true

The income component of return for a common stock comes from the cash dividend a firm pays.

eurocredit market

The international banking system gathers funds from businesses and governments in the Eurocurrency market and then allocates funds to banks that have the most profitable lending opportunities These loans, which are short- to medium-term loans of a Eurocurrency to multinational corporations and governments of medium to high credit quality, are called Eurocredits Is denominated in all major Eurocurrencies, although the dollar is the overwhelming favourite

interest rates

The most common way to quote interest rates is in terms of annual percentage rate (APR). It does not incorporate the effects of compounding The most appropriate way to quote interest rates is in terms of effective annual rate (EAR). It incorporates the effects of compounding

normal distribution

The normal distribution is symmetric, and the mean and standard deviation are the only information we need to determine the shape The mean (average) is the center and is the reference point to which all other values in the distribution are compared Values less than the mean are on the left and values greater than the mean are on the right The left and right sides are mirror images

True

The present value of a perpetuity is the promised constant cash payment divided by the interest rate (i).

False

The present value of an annuity due is less than the present value of an ordinary annuity.

True

The present value of growing perpetuity is computed as the cash flow occurring at the end of the first period divided by the difference between interest or discount rate and growth rate.

False

The present value of multiple cash flows is greater than the sum of those cash flows.

Risks Involved in International Bank Lending

The principles of loan administration and credit analysis are similar for domestic and overseas loans There are differences, however, including some additional risk exposures for overseas lending Credit risk is the same whether a loan is domestic or international; however, it may be more difficult to obtain or assess credit information abroad The principles of loan administration and credit analysis are similar for domestic and overseas loans Bank loans that have foreign-exchange risk will carry an additional risk premium If an international loan or investment is expected to suffer some loss in value, the loan will carry an additional risk premium

False

The quoted interest rate is by definition a simple annual interest rate, such as the effective annual interest rate (EAR).

risk premium

The risk premium is the difference between the market rate of return and the risk-free rate of return The difference between the required return on a risky asset _𝑅_𝑖_ and the return on a risk-free asset _𝑅_𝑟𝑓_ is an investor's compensation for risk 𝐸__𝑅_𝑖__=_𝑅_𝑟𝑓_+𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 𝑓𝑜𝑟 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑆𝑦𝑠𝑡𝑒𝑚𝑎𝑡𝑖𝑐 𝑟𝑖𝑠𝑘

ex WACC

The total value of a firm is $4,000,000 and it has $300,000 debt. The cost of debt is 6% and the cost of equity is 10%. What is the weighted-average cost of capital (WACC)? _𝑥_𝐷𝑒𝑏𝑡_=_$300,000_$4,000,000_=0.075, 𝑜𝑟 75% _𝑥_𝐸𝑞𝑢𝑖𝑡𝑦_=_$3,700,000_$4,000,000_=0.925, 𝑜𝑟 92.5% _𝑘_𝐹𝑖𝑟𝑚_=_0.075__0.06_+_0.925__0.10_=0.097, 𝑜𝑟 9.7%

factors affecting international financial management

The uncertainty of future exchange rate movements is called foreign exchange rate risk, or just exchange rate risk Differences in legal systems and tax codes can also impact the way firms operate in foreign countries Although English is the official business language, it is not, however, the world's social language Cultural views also shape business practices and people's attitudes toward business An economic system determines how a country mobilizes its resources to produce goods and services needed by society, as well as how the production is distributed Differences in country risk or political uncertainty associated with a particular country is also a factor At the extreme, a country's government may even expropriate—that is, take over—a business's assets within the country These types of actions clearly can affect a firm's cash flows and, thus, the value of the firm

CAPM

There are some practical considerations that must be considered when choosing the appropriate risk-free rate, beta, and market-risk premium for the above calculation The recommended risk-free rate to use is the risk-free rate on a long-term Treasury security because the equity claim is a long-term claim on the firm's cash flows A long-term risk-free rate better reflects long-term inflation expectations and the cost of getting investors to part with their money for a long period of time than a short-term rate One can estimate the Beta for that stock using a regression analysis Identifying the appropriate beta is much more complicated if the common stock is not publicly traded This problem may be overcome by identifying a "comparable" company with publicly traded stock that is in the same business and that has a similar amount of debt When a good comparable company cannot be identified, it is sometimes possible to use an average of the betas for the public firms in the same industry It is not possible to directly observe the market risk premium since we don't know what rate of return investors expect for the market portfolio For this reason, financial analysts generally use a measure of the average risk premium investors have actually earned in the past as an indication of the risk premium they might require today From 1926 through the end of 2012, actual returns on the U.S. stock market exceeded actual returns on long-term U.S. government bonds by an average of 5.71% per year If a financial analyst believes that the market-risk premium in the past is a reasonable estimate of the risk premium today, then he or she might use 5.71% (or a value close to it) as the market risk premium for the future

cash management and budgeting

There are two reasons for holding a cash balance First, it facilitates transactions with suppliers, customers, and employees The second reason for holding cash is simply that most banks require firms to hold minimum cash balances in exchange for the services they provide

variance and standard deviation ex

There is a 30% chance the total return on a stock will be -3.45%, a 30% change it will be +5.17%, a 30% chance it will be +12.07%, and a 10% chance it will be +24.14%. The expected return is 6.55%. Calculate the variance and standard deviation of the returns. _𝜎_𝑆𝑡𝑜𝑐𝑘_2_=[.30×(−.0345−.0655)^2] [.30×(.0517−.0655)^2] + _[.30×__(.1207−.0655)^__2]__+_.10×(__.2414−.0655)^__2]__=0.0030+0.0009+0.00006+0.0031=0.0071 _𝜎_𝑆𝑡𝑜𝑐𝑘_=_square root of 0.0071_=0.084, 𝑜𝑟 8.4%

goals of financial managers in managing the cycle

To delay paying accounts as long as possible without suffering any penalties To maintain minimal raw material inventories without causing manufacturing delays To use as little labor as possible to manufacture the product while maintaining quality To maintain minimal finished good inventories without losing sales To offer customers the most attractive credit terms possible on trade credit to maximize sales while minimizing the risk of non-payment To collect cash payments on accounts receivable as fast as possible to close the loop The operating cycle begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales Days sales in inventory (DSI) shows how long the firm keeps its inventory before selling it, the ratio of the inventory balance to the daily cost of good sold Days sales outstanding (DSO) estimates how long it takes on average for the firm to collect its outstanding accounts receivable balances; also called the Average Collection Period (ACP) operating cycle = DSI + DSO

international capital budgeting

When a multinational firm wants to consider overseas capital projects, the financial manager faces the decision of which capital projects should be accepted on a company-wide basis The decision to accept international projects with a positive NPV increases the value of the firm and is consistent with the fundamental goal of financial management, which is to maximize stockholder wealth Although the same basic principles apply to both international and domestic capital budgeting, firms must deal with some differences Determining cash flows A number of issues complicate the determination of cash flows from overseas capital projects First, most companies find it more difficult to estimate the incremental cash flows for foreign projects Second, problems with cash flows can arise when foreign governments restrict the amount of cash that can be repatriated, or returned, to the parent company Exchange rate risk Financial managers have to deal with foreign exchange rate risk on international capital investments To convert the project's future cash flows into another currency, we need to come up with projected or forecast exchange rates One of the problems with obtaining currency rate forecasts for use in analysis of capital projects is that many projects have lives of 20 years or more Country risk Financial managers must also incorporate a country risk premium when evaluating foreign business activities If a firm is located in a country with a relatively unstable political environment, management will require a higher rate of return on capital projects as compensation for the additional risk At the extreme, a local government could take over the plant and equipment of the overseas operation without giving the company any compensation; this expropriation of assets is called nationalization Country risk Some other ways that a foreign government can affect the risk of a foreign project include: Change tax laws in a way that adversely impacts the firm Impose laws related to labor, wages, and prices that are more restrictive than those applicable for domestic firms Disallow any remittance of funds from the subsidiary to the parent firm for either a limited period of time or the duration of the project Require that the subsidiary be headed by a local citizen or have a local firm as a major equity partner Impose tariffs and quotas on any imports Country risk Once management has gauged a capital project's country risk, that risk must be incorporated into the capital budgeting analysis by, for example, adjusting the firm's discount rate for the additional risk

terms of sale

Whenever a firm sells a product, the seller spells out the terms and conditions of the sale in a document called the terms of sale The agreement specifies when payment is due and the amount of any discount if early payment is made The simplest offer is cash on delivery (COD), with no credit offered When credit is part of the sale, the terms of sale spell out the credit agreement between the buyer and seller Trade credit, which is short-term financing, is typically made with a discount for early payment rather than an explicit interest charge Trade credit is a loan from the supplier and is usually a very costly form of credit We can find the effective annual rate (EAR) for trade credit using the following formula: Equation 14.4 𝐸𝐴𝑅 𝑓𝑜𝑟 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 =𝐸𝐴𝑅=__[1+_𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡_/𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑒𝑑 𝑝𝑟𝑖𝑐𝑒_]^___365/𝑑𝑎𝑦𝑠 𝑐𝑟𝑒𝑑𝑖𝑡_ _−1

The EAR is the interest rate actually paid (or earned) after accounting for compounding.

Which of the following statements is true about the effective annual rate (EAR)?

The amortization schedule provides the data of equated monthly payments for which the classification of principal and interest along with unpaid principal balance is provided.

Which of the following statements is true of amortization?

risk and return

Why would a person choose an investment with a higher risk of loss when there is a lower-risk opportunity available? A person will prefer a higher-risk opportunity if the probability of an adequate reward is high enough A higher-risk investment must offer a potential return high enough to make it as attractive as the lower-risk alternative The potential return a person requires depends on the amount of risk - the probability of being dissatisfied with an outcome

present value

William deposited $25,000 today that would earn an interest at the rate of 3% for a period of 2 years. The amount of $25,000 represents the:

standard deviation

by taking the square root of the variance: 𝜎=_[square root]𝜎_𝑅_2__

flexible

current asset management strategy has a high percent of current assets to sales, Calls for management to invest large amounts in cash, marketable securities, and inventory The flexible strategy is considered low-risk and low-return The advantage of this strategy is large working capital balances The downside of this strategy is the high carrying cost associated with owning a high level of inventory and providing liberal credit terms to customers

risk

defined as uncertainty; whenever the outcome is uncertain, we have risk

realized return

is calculated after the outcome is known Both expected return and realized return are important in financial decision-making

restrictive

policy has a low percent of current assets to sales The high risk comes in the form of shortage costs, both financial and operating Financial shortage costs arise mainly from illiquidity, shortage of cash, and a lack of marketable securities to sell for cash Operating shortage costs result from lost production and sales Current assets are kept at a minimum under the restrictive strategy The firm barely invests in cash and inventory and has tight terms of sale intended to curb credit sales and accounts receivable If there are unpaid bills due, the firm will be forced to use expensive external emergency borrowing; if funding cannot be secured, default occurs on some current liabilities and the firm runs the risk of being forced into bankruptcy by creditors

expected return

the estimated or predicted return before the outcome is known "Expected" means there is some uncertainty about what the return will actually be; for example, "I expect to earn around 8% on this investment"

risk averse

those who do not like risk and avoid uncertainty