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20 Cards in this Set

  • Front
  • Back
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
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