Finance flashcards, generated for you.

Maximize shareholder value by making investment, financing, and dividend decisions that increase firm worth over time.

FCF = Operating Cash Flow − Capital Expenditures. It represents cash available to all investors (debt + equity holders) after reinvestment. Example: A company with $100M operating cash flow and $30M capex has $70M FCF.

Cost of equity is the return required by shareholders (typically 8–12% using CAPM); cost of debt is the interest rate paid to lenders (typically 3–6%). Debt is cheaper because interest is tax-deductible and carries lower risk.

Cost of Equity = Risk-free Rate + Beta × (Market Risk Premium). Example: If risk-free rate = 2%, beta = 1.5, market premium = 6%, then cost of equity = 2% + 1.5(6%) = 11%.

WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1−Tax Rate)). It's the minimum return a company must earn on investments to satisfy all investors. Used as the discount rate in DCF valuation.

NPV = Present Value of Cash Inflows − Initial Investment. Accept projects with NPV > 0; reject if NPV < 0. Example: A $1M project generating PV of $1.3M has NPV = $300K (accept).

Operating leverage: degree to which fixed costs amplify EBIT swings from revenue changes. Financial leverage: degree to which debt amplifies EPS swings from EBIT changes. High both = high business risk.

ROE = (Net Income / Revenue) × (Revenue / Total Assets) × (Total Assets / Equity) = Profit Margin × Asset Turnover × Equity Multiplier. Decomposes return on equity into profitability, efficiency, and leverage drivers.

Coupon rate is the fixed annual interest payment (e.g., 5% on $1,000 bond = $50/year). YTM is the total return if held to maturity, accounting for price paid and reinvestment. If bond trades at discount, YTM > coupon rate.

The efficient frontier is the set of portfolios offering maximum expected return for each level of risk. Rational investors choose portfolios on this curve. Combined with the risk-free rate, it generates the Capital Allocation Line (CAL).