Term
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Definition
| one of the types of capital used by firms to raise funds |
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Term
| Weighted Average Cost of Capital (WACC) |
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Definition
| a weighted average of the component costs of debt, preferred stock, and common equity |
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Term
| Cost of New Common Stock, re |
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Definition
| the cost of external equity based on the cost of retained earnings but increased for flotation costs |
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Term
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Definition
| the percentage cost of issuing new common stock |
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Term
| Retained Earnings Breakpoint |
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Definition
| the amount of capital raised beyond which new common stock must be issued |
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Term
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Definition
| the process of planning expenditures on assets with cash flows that are expected to extend beyond one year |
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Term
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Definition
| a method of ranking investment proposals using the NPV, which is equal to the present value of future net cash flows, discounted at the cost of capital |
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Term
| Internal Rate of Return (IRR) |
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Definition
| the discount rate that forces a project's NPV to equal zero |
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Term
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Definition
| the discount rate at which the present value of a project's cost is equal to the present value of its terminal value, where the terminal value is found as the sum of the future values of the cash inflows, compounded at the firm's cost of capital |
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Term
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Definition
| the cost of capital at which the NPV profiles of two projects cross and, thus, at which the projects' NPVs are equal |
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Term
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Definition
| the lenght of time required for an investment's net revenues to cover its cost |
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Term
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Definition
| the lenght of time required for an investment's cash flows, discounted at the investment's cost of capital, to cover its cost |
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Term
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Definition
| a cash flow that will occur if and only if the firm takes on a project |
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Term
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Definition
| a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected |
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Term
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Definition
| an effect on the firm or the environment that is not reflected in the project's cash flows |
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Term
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Definition
| the situation when a new project reduces cash flows that the firm would otherwise have had |
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Term
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Definition
| the risk an asset would have if it were a firm's only asset and if investors owned only one stock. it is measuredby the variability of the asset's expected returns |
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Term
| Corporate (Within Firm) Risk |
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Definition
| risk considering the firm's diversification but not stockholder diversification. it is measured by a project's effect on uncertainty about the firm's expected future returns |
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Term
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Definition
| Considers both firm and stockholder diversification. it is measured by the project's beta coefficient |
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Term
| Risk- Adjusted Cost of Capital |
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Definition
| the cost of capital appropriate for a given project, given the riskiness of that project. the greater the risk, the higher the cost of captial |
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Term
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Definition
| percentage change in NPV resulting from a given percentage change in an input variable, other things held constant |
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Term
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Definition
| the NPV when sales and other input variables are set equal to their most likely (or base-case) values |
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Term
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Definition
| a risk analysis technique in which "bad" and "good" sets of financial circumstances are compared with a most likely, or base-case situation |
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Term
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Definition
| a risk analysis technique in which probable future events are simulated on a computer, generating estimated rates of return and risk indexes |
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Term
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Definition
| the right but not the obligation to take some action in the future |
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Term
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Definition
| the option to abandon a project if operating cash flows turn out to be lower than expected. this option can raise expected profitability and lower project risk |
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Term
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Definition
| the difference between the expected NPVs with and with out the relevant option. It is the value that is not accounted for in a traditional NPV analysis. A positive option value expands the firm's opportunities |
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Term
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Definition
| the annual investment in long term assets that maximizes the firm's value |
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Term
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Definition
| the situation in which a firm can raise only a specified, limited amount of capital regardless of how many good projects it has |
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Term
| Cost of Preferred Stock, rp |
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Definition
the rate of return investors require on the firm's preferred stock.
rp= Dp
Pp |
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Term
| After- Tax Cost of Debt, rd (1-T) |
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Definition
| the relevant cost of new debt, taking into account the tax deductibility of interest |
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Term
| Before- Tax Cost of Debt, rd |
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Definition
| the interest rate the firm must pay on new debt |
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Term
| Cost of Retained Earnings, rs |
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Definition
| the rate of return required by stockholders on a firm's common stock |
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Term
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Definition
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