Corporate finance, decision analysis, and risk management concepts tested on CMA Part 2.
37 cards · basic cards · AI-written, checked twice. Edit anything.
- What does the Net Present Value (NPV) method measure in capital budgeting?
- The difference between the present value of future cash inflows and the initial investment outlay.
- Define the Internal Rate of Return (IRR) for a capital project.
- The discount rate at which the project's net present value equals zero.
- What is the payback period rule in capital budgeting?
- The time required for a project's cumulative cash flows to recover the initial investment.
- What is the Weighted Average Cost of Capital (WACC)?
- The average rate a company must pay to finance its assets, weighted by the proportion of debt and equity.
- Explain the capital asset pricing model (CAPM) relationship.
- Expected return equals the risk-free rate plus beta times the market risk premium.
- What does beta measure in the context of investment risk?
- The systematic risk of a security relative to the overall market.
- Define the profitability index in capital budgeting decisions.
- The ratio of the present value of future cash inflows to the initial investment.
- What is the difference between independent and mutually exclusive projects?
- Independent projects do not compete; mutually exclusive projects mean selecting one eliminates others.
- Explain the concept of operating leverage in financial analysis.
- The degree to which a company uses fixed costs, creating higher variability in operating income with sales changes.
- Define the Degree of Operating Leverage (DOL).
- The percentage change in operating income divided by the percentage change in sales.
- What is the Modigliani-Miller proposition on capital structure (ignoring taxes)?
- The value of a firm is independent of its capital structure; debt-to-equity ratio does not affect firm value.
- How does corporate income tax affect the optimal capital structure?
- The tax deductibility of interest makes debt financing cheaper, favoring a higher proportion of debt.
- What is the cash conversion cycle?
- The number of days between paying for inventory and collecting cash from customer sales.
- Explain the concept of efficient frontier in portfolio theory.
- The set of optimal portfolios offering the highest expected return for a given level of risk.
- What is the dividend discount model (DDM) and what does it calculate?
- A valuation method that estimates stock price based on the present value of future dividend payments.