Finance flashcards, generated for you.

Money today is worth more than the same amount in the future because it can earn returns. A dollar now can be invested to grow; a dollar in 5 years cannot. This principle underlies discounting and present value calculations.

PV is what a future cash flow is worth today, calculated by discounting at a required rate. Example: $1,000 due in 1 year at 10% discount rate has PV = $1,000 ÷ 1.10 = $909.09.

NPV (Net Present Value) is the dollar amount of value created by a project after discounting all cash flows. IRR (Internal Rate of Return) is the discount rate that makes NPV = $0. Both accept projects when NPV > 0 or IRR > cost of capital.

CAPM calculates expected return: E(R) = Rf + β(Rm − Rf), where Rf = risk-free rate, β = stock sensitivity to market, Rm = market return. Example: Rf = 2%, β = 1.2, Rm = 10% → E(R) = 2% + 1.2(8%) = 11.6%.

D/E = Total Debt ÷ Total Equity. Measures financial leverage and solvency risk. Example: Company with $50M debt and $100M equity has D/E = 0.5, indicating moderate leverage. Higher ratios mean more financial risk.

FCF = Operating Cash Flow − Capital Expenditures. Unlike net income (accounting-based), FCF shows cash actually available to investors after reinvestment needs. Example: Net income $10M, but if CapEx is $8M and OCF is $9M, FCF = $1M (tighter than earnings suggest).

DCF values a company by projecting future cash flows and discounting them to present value at the WACC (weighted average cost of capital). Company value = Sum of all discounted FCFs. Used to find intrinsic value vs. market price.

The efficient frontier plots portfolios offering highest return for each risk level. Optimal portfolio sits where the capital allocation line (from risk-free rate) is tangent to the frontier, maximizing risk-adjusted returns. Incorporates correlation between assets.

WACC (Weighted Average Cost of Capital) = (E/V × Re) + (D/V × Rd × (1−Tc)), where E = equity value, D = debt value, V = total value, Re = cost of equity, Rd = cost of debt, Tc = tax rate. It reflects the blended cost of financing; used as discount rate because it matches the risk of firm's cash flows.

ROE = Net Income ÷ Shareholders' Equity. Shows how much profit a company generates per dollar of shareholder capital. 15% ROE means the company earned $0.15 in profit for every $1.00 of equity invested—generally strong if above cost of equity (~10%).