Bus 170 Final

Front 1

Process of identifying evaluating, and implementing a firm's investment opportunities.

Back 1

Capital Budgeting

Front 2

Selecting one project precludes other from being undertaken.

Back 2

Mutually exclusive projects

Front 3

Projects not in direct competition with one another.

Back 3

Independent projects

Front 4

Present value of a project's cash flows minus its cost.

Back 4

Net present value

Front 5

Mission, Objectives, GOals, and Strategies

Back 5

MOGS

Front 6

Finding potential capital investment opportunities and identifying whether a project involves a replacement decision and/or revenue expansion.

Back 6

Identification stage

Front 7

Requires estimeating relevant cash inflows and outflows.

Back 7

Development stage

Front 8

Applying appropriate capital budgeting techniques to help make a final accept or reject decision.

Back 8

Selection stagae

Front 9

Executing accepted projects.

Back 9

Implementation stage

Front 10

A stage in the capital budgeting process during which managers track review, or audit a project's results.

Back 10

Follow-up

Front 11

Project's required rate of return.

Back 11

Cost of capital

Front 12

The graphical relationship between a project's NPV and cost of capital.

Back 12

NPV profile

Front 13

Return that causes the net present value to be zero.

Back 13

Internal rate of return (IRR) method

Front 14

Ratio between the present value of the cash flows and the project's cost.

Back 14

Profitability index (PI) - benefit/cost ratio

Front 15

Determines the time in years it will take to recover, or pay back, the initial investment in fixed assets.

Back 15

Payback period method

Front 16

Analysis focuses on the project's own cash flows, uncontaminated by cash flows from the firm's other activities.

Back 16

stand-alone principle

Front 17

Represent the difference between the firm's after-tax cash flows with the project and the firm's after-tax cash flows without the project.

Back 17

Incremental cash flows

Front 18

Firm's after-tax cash flows without the project.

Back 18

Base case

Front 19

A project robs cash flow from the firm's existing lines of business.

Back 19

Cannibalization

Front 20

Increase in the cash flows of the firm's other products that occur because of a new project.

Back 20

Enhancement

Front 21

Cost of passing up the next best alternative.

Back 21

Opportunity cost

Front 22

Project-related expense not dependent upon whether or not the project is undertaken.

Back 22

Sunk cost

Front 23

Tax reduction due to depreciation of fixed assets; equals the amount of the depreciation expense multiplied by the firm's tax rate.

Back 23

Depreciation tax shield

Front 24

Adjusts the required rate of return at which the analyst discounts a project's cash flows. Projects with highter (or lower) risk levels requrie highter(or lower) discount rates.

Back 24

Risk-adjusted discountrate (RADR)

Front 25

Firm's mix of debt and equity.

Back 25

Capital structure

Front 26

Proportionate use of debt and equity that minimizes the firm's cost of capital.

Back 26

Optimum debt/equity mix

Front 27

Minimum acceptable rate of return to a firm on a project.

Back 27

Cost of capital

Front 28

Costs of issuing stock; includes accounting, legal and printing costs of offering shares to the public as well as the commission earned by the investment bankers who market the new securities to investors.

Back 28

Flotation costs

Front 29

Represents the minimum requried rate of return on a captial-budgeting project. It is found by multiplying the marginal cost of each capital structure component by its appropriate weight, and summing the terms.

Back 29

Weighted average cost of captial (WACC)

Front 30

A measure of how quickly a firm can grow without needing additional outside financing.

Back 30

Internal growth rate

Front 31

The proportion of each dollar of earnings that is kept by the firm.

Back 31

Retention rate

Front 32

the proportion of each dollar of earnings that is paid to shareholders as a divident; equals one minus the retention rate.

Back 32

Dividend payout ratio

Front 33

The estimate of how quickly a firm may grow by maintaining a constant mix of debt and equity.

Back 33

Sustainable growth rate

Front 34

Allows managers to see how different capital structure affect the earnings and risk levels of their firms.

Back 34

EBIT/eps analysis

Front 35

Measured by variability in EBIT over time.

Back 35

Business risk

Front 36

Measures the sensitivity of eps to changes in EBIT.

Back 36

Degree of financial leverage (DFL)

Front 37

Effect on earnings produced by the operating and financial leverage.

Back 37

Combined leverage

Front 38

Percentage change in earnings per share that results from a 1 percent change in sales volume.

Back 38

Degree of combined leverage (DCL)

Front 39

Explicit and implicit costs associated with financial distress.

Back 39

Backruptcy costs

Front 40

A theory that states firms attempt to balance the benefits of debt versus its disadvantages to determine an optimal capital structure.

Back 40

Status tradeoff hypothesis

Front 41

A theory that states managers prefer to use additions to retained earnings to finance the firm, then debt, and, as a final resort, new equity.

Back 41

Pecking order hypothesis

Front 42

Firms try to time the market by selling common stock when their stock price is high and repurchasing shares when their stock price is low.

Back 42

Market timing hypothesis

Front 43

Rquires financial managers to compare capital expenditures for plant and equipment against the cash flow benefits that will be received from these investments over several years.

Back 43

Fixed-asset management