Finance

One can use the discounted cash-flow formulas that are used to value common stocks in order to value entire businesses.

An investor who uses a limit order instructs his brokerage firm to buy a limited quantity of shares at the best available price.

A stock's price is based on the expected present value, at the market capitalization rate, of all the stock's future earnings.

Due to the value additivity principle, the theoretical price of a share equals the present value of the dividends plus the present value of the expected sales revenue at the end of the holding period.

The enterprise value equals the sum of all future dividends which will be paid plus the limiting value of the forecasted enterprise values.

The management decides to increase the payout ratio whereby the investors can expect a higher growth rate of the firm.

A fundamental market action presupposes that there are investors with a short-term investment horizon.

If the payout ratio and the growth rate are constant, a reduction of the risk will lead to a higher enterprise value.

If a corporation has a steady growth of dividends, investors can expect a constant dividend yield for the future.

If retained earnings can be invested with the same return as on the capital market, the enterprise value is independent of the payout ratio.

If investors expect higher returns, the price of the shares increases and therefore investors get higher returns (self-fulfilling prophecy).

According to the Gordon-Growth-Model, the value of the firm is calculated as today's dividend divided by the difference between cost of capital and growth rate.

The profitability index is always less than 1.0.

The profitability index of a positive NPV project is always positive.

Present values have the value additivity property.

The payback rule ignores all cash flows after the cutoff date.

The discounted payback rule calculates the payback period and then discounts the payback period at the opportunity cost of capital.

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

In the case of a loan project (borrowing), one should accept the project if the IRR is more than the cost of capital.

There can never be more than one value of the IRR for any sequence of cash flows.

Decommissioning and clean-up costs for any project are always insignificant and should typically be ignored.

The benefit-cost ratio is equal to the profitability index plus one.

Soft rationing may be used to control managerial behavior.

The internal rate of return is the discount rate that makes the NPV of a project's cash flows equal to zero.

A project's "book value" represents, essentially, the market valuation of the project.

The discounted payback technique will never accept a negative-NPV project.

The denominator of the profitability index is the present value of the investment.

When calculating cash flows, one should consider them on an incremental basis.

When calculating cash flows, one should consider all incidental effects.

Sunk costs are bygones, i.e., they are unaffected by the decision to accept or reject a project. They should therefore be ignored.

By undertaking an analysis in real terms, the financial manager avoids having to forecast inflation.

Depreciation expense acts as a tax shield in reducing taxes.

Working capital is one of the most common sources of mistakes in estimating project cash flows.

A financial analyst can use the equivalent annual cash-flow approach to determine the year in which an existing machine can be profitably replaced with a new machine.

The capital budgeting is a process where the company plans and decides which of the possible investments and financing activities it should realize.

Two advantages of capital markets are that they generate liquidity and information.

Capital markets generate, amongst others, arbitrage and allow term transformation.

When evaluating projects with positive NPV but different life spans, the proper technique to employ is the equivalent annual cash-flow approach.

The collective of investors is risk averse. This is why all risks will be compensated with a risk premium.

Beta is the relation between the unsystematic risk of a single asset and the risk of the market portfolio.