Operating, Investing, Financing
What are the three activities on the Statement of Cash Flows
Does market value = book value?
Assets - Liabilities
Equity Book Value formula
share price * # of shares outstanding (Market Cap)
Market Value formula
Rule of 72
The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.
a bond or other security with no fixed maturity date.
a series of payments made at equal intervals, for a fixed period
is a series of periodic payments that grow at a proportionate rate and are received for an infinite amount of time.
shareholders are owners of the firm, each share has one vote in major company decisions, shares trade on an exchange
a request to buy or sell a stock at the current market value
a request to buy or sell a stock when it reaches a specified price
the difference between the bid (Buyers) price and the asked (Sellers) price
Limit orders make sense when the bid-ask spread is (small/large)
what the stock actually earned over a past period
Total Payout Model
If you see "repurchases" in the question, which model should you use to value a stock?
Net Present Value
the difference between the present value of benefits (cash inflows) and the present value of costs (cash outflows)
For the NPV decision rule, when should you accept a project, when NPV (positive/negative)?
Cost of Capital
Return on investments with similar risk, maturity
Does the NPV method always lead to the correct decision?
Internal Rate of Return
the discount rate that sets NPV to zero
IRR rule, accept a project if IRR is (greater/less than) the discount rate?
rule stating to accept a project if it pay back the investment within a specific time frame, otherwise reject
Ignores TVM, ignores CFs after the payback period, arbitrary payback period
What are the flaws with Payback rule?
When borrowing money, you want as (high/low) rate, or IRR, as possible
When borrowing money, you want IRR to be (greater/less than) cost of capital?
the present value of an investment's future cash flows divided by its initial cost
Profitability index formula?
financial statements that contain projections of earnings and cash flows based on hypothetical assumptions
incremental cash flows
the difference between a firm's future cash flows with a project and those without the project
ongoing costs from running a product, business, or system
cost to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land
is depreciation a cash flow?
Evaluating a companies earnings as if they will not use debt to finance it (not including interest expense in capital budgeting calculations)
Free Cash Flows
the cash that is actually available for distribution to the investors in the firm after the investments that are necessary to sustain the firm's ongoing operations are made
Dividend Discount Model
One share of stock is worth the present value of expected cash dividend payments
Total Payout Model
Firm's equity is worth the present value of expected amount of share repurchases and cash dividends
Discounted Cash Flow
Valuation method that estimates total (enterprise) value of the firm
The total market value of a firm's equity and debt, less the value of its cash and marketable securities. It measures the value of the firm's underlying business.
Weighted Average Cost of Capital
This is used as the cost of capital for a DCF valuation
Law of one price, two securities with identical cash flows have the same price
Ratio of firm or equity value to some accounting measure (usually profits)
share price divided by earnings per share
How do you estimate a firm's stock price with the P/E Ratio?
For the PE Ratio, higher growth leads to a ____________ PE Ratio