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Corporate & Personal Finance

143 cards · 🇺🇸 English

Capital budgeting, working capital, and managing your own money.

businessfinancecorporate-financepersonal-finance

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Primary goal of corporate finance

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  1. 1Primary goal of corporate finance
    To maximize or continually increase shareholder value
  2. 2Two main sub-disciplines of corporate finance
    Capital budgeting and working capital management
  3. 3Capital budgeting
    Setting criteria about which value-adding projects should receive investment funding, and whether to finance with equity or debt
  4. 4Working capital management
    Management of the company's monetary funds dealing with short-term operating balance of current assets and current liabilities
  5. 5What focuses does working capital management include?
    Managing cash, inventories, and short-term borrowing and lending (including credit terms extended to customers)
  6. 6Three main questions financial managers address
    What long-term investments should we make? What methods should we employ to finance the investment? How do we manage day-to-day financial activities?
  7. 7World's first IPO
    The Dutch East India Company (VOC) in 1602
  8. 8Fisher separation theorem
    A theorem stating that the objective of a corporation is to maximize its present value, independent of shareholders' preferences
  9. 9What three criteria should investment projects meet?
    (1) Yield positive NPV at appropriate discount rate considering risk, (2) Be financed appropriately, (3) Return excess cash to shareholders if no growth is possible
  10. 10Hurdle rate
    The minimum acceptable return on an investment; the project-appropriate discount rate considering risk
  11. 11Net present value (NPV)
    The sum of discounted future cash flows from a project minus the initial investment outlay
  12. 12Discounted cash flow (DCF) valuation
    A method estimating project value by discounting projected future cash flows to their present value
  13. 13Weighted average cost of capital (WACC)
    The average rate a company pays to finance its assets, weighted by the proportion of debt and equity in its capital structure
  14. 14Internal rate of return (IRR)
    The discount rate that makes the NPV of all cash flows from a project equal to zero
  15. 15Discounted payback period
    The length of time required to recover the initial investment from discounted cash flows
  16. 16Return on investment (ROI)
    A measure of profitability calculated as gain from investment divided by cost of investment
  17. 17Economic value added (EVA)
    A measure of company performance calculated as net operating profit after tax minus cost of capital employed (developed by Joel Stern)
  18. 18Market value added (MVA)
    The difference between the market value of a company and the capital contributed by investors
  19. 19Adjusted present value (APV)
    A valuation method calculating NPV of a project as if financed entirely by equity, then adding present value of financing effects (developed by Stewart Myers)
  20. 20Residual income valuation
    A valuation method based on the idea that value is created when returns exceed the cost of capital
  21. 21Sensitivity analysis in finance
    Varying one key factor while holding all other inputs constant to observe how NPV changes with that factor
  22. 22Scenario analysis
    Running forecasts of NPV for different comprehensive scenarios with multiple variables adjusted to be internally consistent
  23. 23First Chicago Method
    A valuation approach where different scenarios are assigned subjective probabilities and NPV is the probability-weighted average
  24. 24Monte Carlo simulation in finance
    Using thousands of random scenarios to analyze project NPV by simulating cash flow components with random characteristics
  25. 25Decision tree analysis (DTA)
    Valuing flexibility by incorporating possible events and consequent management decisions, creating branches representing different paths
  26. 26Real options valuation (ROV)
    Valuing projects contingent on underlying variables using financial option theory, treating decisions as call or put options
  27. 27Binomial options model
    A valuation method for options using a discrete-time framework with upward and downward price movements
  28. 28Dividend policy
    Financial policies regarding payment of cash dividends now versus retaining earnings to pay increased dividends later
  29. 29Share buyback
    A company repurchasing its own shares from the marketplace, reducing the number of outstanding shares
  30. 30Growth stock
    A stock in a company expected to grow at an above-average rate, typically retaining earnings to fund growth rather than paying dividends

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