Finance flashcards, generated for you.

$1 today is worth more than $1 in the future because it can be invested to earn returns. Example: $100 at 10% annual interest becomes $110 in one year.

NPV = sum of discounted future cash flows minus initial investment. Decision rule: accept projects with NPV > 0 (they add value). Example: A $1,000 project generating $1,200 in PV = NPV of $200 (accept).

Fixed costs don't change with output (rent, salaries); variable costs scale with production (materials, labor per unit). Example: A bakery pays $5,000/month rent (fixed) + $2 per loaf in flour (variable).

Using borrowed money to amplify returns on investment. Higher leverage increases returns but also risk. Example: A real estate investor buys a $500k house with $100k down payment (80% leverage) using a mortgage.

The curve of optimal portfolios offering maximum expected return for each level of risk. Assets on it dominate those below. Example: A mix of 70% stocks/30% bonds may offer better risk-adjusted returns than 100% stocks.

WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1-Tax Rate)); E=equity value, D=debt value, V=total value. Used as discount rate for firm valuation. Example: A company with 60% equity at 10% cost and 40% debt at 5% cost (30% tax) has WACC ≈ 8.4%.

P/E (Price-to-Earnings) = Stock Price ÷ Earnings Per Share. Indicates how many dollars investors pay per dollar of earnings; higher P/E suggests growth expectations. Example: Stock at $100 with $5 EPS has P/E of 20x.

The return foregone by choosing one investment over the next best alternative. Example: If you invest $10k in bonds earning 4% instead of stocks earning 8%, your opportunity cost is $400 annually.

CAPM: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). Beta measures systematic risk relative to market (β=1 matches market, β>1 more volatile). Example: With 2% risk-free rate, 10% market return, and β=1.5: Expected Return = 2% + 1.5(8%) = 14%.

Enterprise Value = Market Cap + Total Debt - Cash; represents total firm value. Equity Value = Market Cap; represents shareholder ownership only. Example: Company with $500m market cap, $200m debt, $50m cash has EV of $650m and equity value of $500m.