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### 20 Cards in this Set

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 Attempts to measure likelihood of variability of future returns from proposed investment Risk Analysis 7 Approaches to Risk Assesment 1. Informal Method 2. Risk adjusted discount rates 3. Certainty equivalent adjustments 4. Simulation analysis 5. Sensitivity analysis 6. Monte Carol technique 7. Capital Asset Pricing Model NPVs are calucated and apparently less risky project is chosen Informal method Technique adjust rate of return upward as investment becomes riskier Risk-adjusted discount rates Forces decision maker to specify at what point firm is indifferent to choice between certain sum of money and ecpected value of risky sum Certain equivalent adjustments Computer is used to generate many examples of results based upon various assumptions Simulation Analysis Forecast of many calculated NPVs under various assumptions are compared to see how sensitive NPV is changing conditions. (What-if technique) Sensitivity Analysis Technique is often used in simulation to generate the individual values for random variable Monte Carol Technique Method is derived from use of portfolio theory. More sensitive an asset's rate of return is to change in market's rate of return, the riskier the asset. Capital Asset Pricing Model (CAPM) Return on Investment (ROI) Residual Income Net Income - (Average Total Assets * Target rate of return) Return on assets (ROA) Net Income/Average Total assets Return on common equity (ROCE) (Net Income - Preferred dividends)/ Average common equity Economic Value Added (EVA) After tax OI= After tax WACC*(Total assets - current liabilities) Firm's ability to pay its noncurrent obligations as they come due and thus remain in business in long run Solvency Capital structure ratios 1. Total debt to total capital 2. Debt to equity 3. Long term debt to equity 4. Debt to total assets The excess of the amount of the ROI over a targeted amount equal to an imputed interest charge on invested capital Residual income Profitability index PV of future net cash flows or NPV of project/Initial investment Types of real options 1. Abandonment of project (exceeds NPV of future cash flows) 2. Option of follow up investment (NPV of project b/c of inefficient scale) 3. Wait,learn 4. Flexibility 5. Capacity 6. Geographical market 7. New product option A firm earning a profit can increase its return on investment by A firm earning a profit can increase its return on investment by