Corporate Finance, 2025
Financial break-even - answer Financial break even
NPV solved=0, OCF* for NPV=0
Q=(FC+OCF*)/ (P-v)
v=variable cost per unit
General Break-Even - answer Q=(FC+OCF) /(P-v)
Constant Growth Model (infinite) - answer a widely cited dividend valuation approach that assumes that
dividends will grow at a constant rate, but a rate that is less than the required return
Constant Growth Model (finite) - answer Should include terminal value (what you sell it for) @ end
To do so you calculate the non-constant growth rate until horizon date T...then calculate the terminal
value as you would in an infinite CGM w/ denominator raised to power T
expected rate of return (constant growth model) - answer The rate of return expected to be realized
from an investment; the weighted average of the probability distribution of possible results
capital gains yield - answer the dividend growth rate, or the rate at which the value of an investment
grows
Dividend Yield - answer a stock's expected cash dividend divided by its current price
terminal value (Horizon Value) - answer the sale price at the end of the expected holding period
,Perpetual Growth Method - answer dividing the last cash flow forecast by the difference between the
discount rate and terminal growth rate. The terminal value calculation estimates the value of the
company after the forecast period.
(FCF * (1 + g)) / (d - g)
Free Cash Flow Valuation Model - answer A model that determines the value of an entire company as
the present value of its expected free cash flows discounted at the firm's weighted average cost of
capital, which is its expected average future cost of funds over the long run.
FCF Constant Growth Model - answer A variation of the constant growth model
Market Multiple Analysis - answer A method of valuing a target company that applies a market
determined multiple to net income, earnings per share, sales, book value, and so forth.
Preferred Stock Dividends - answer Fixed. Have priority over common stock dividends.
convertible preferred stock - answer Preferred stock with an option to exchange it for common stock at a
specified rate.
cumulative preferred stock - answer Preferred stock on which undeclared dividends accumulate until
paid; common stockholders cannot receive dividends until cumulative dividends are paid.
Free Cash Flow - answer net operating profit after taxes (NOPAT), add in depreciation expense, then
subtract money set aside for capital expenditures and any need for increasing working capital
Capital Asset Pricing Model (CAPM) - answer a model that relates the required rate of return on a
security to its systematic risk as measured by beta
,call option - answer the option to buy shares of stock at a specified time in the future
put option - answer the option to sell shares of stock at a specified time in the future
Cash Conversion Cycle (CCC) - answer the length of time funds are tied up in working capital, or the
length of time between paying for working capital and collecting cash from the sale of the working
capital
Return on Equity (ROE) - answer Net Income/Total Equity
Weighted Average Cost of Capital (WACC) - answer the weighted average of the cost of equity and the
aftertax cost of debt
Why is Equity more expensive than Debt? - answer Because it comes w/ higher expected rate of return
due to higher risk (residual claimant of the firm's cash flows)
Levered Beta - answer The unlevered beta adjusted for financial risk due to leverage
Unlevered Beta - answer The firm's beta coefficient if it has no debt
working capital requirement - answer (Current assets - inventory) - current liabilities
Net Present Value (NPV) - answer the sum of the present values of expected future cash flows from an
investment, minus the cost of that investment
Internal Rate of Return (IRR) - answer the discount rate that makes the NPV of an investment zero
, How do we value a share of stock? - answer Collapse future earnings down to present value equivalents
Disintermediation - answer the long-term trend of moving away from banks to markets for capital
requirements
Risk-free rate - answer No such thing...but many use 10 year Treasury bonds as a proxy for the risk-free
rate
Flotation Costs - answer the transaction cost incurred when a firm raises funds by issuing a particular
type of security
Flotation Cost Adjustment - answer the amount that must be added to cost of retained earnings to
account for flotation costs to find cost of new common stock
pure play method - answer a method for estimating a project's or division's beta that attempts to
identify publicly traded firms engaged solely in the same business as the project or division
Accounting Beta Method for Estimating Beta - answer Run regression between project's ROA and S&P
Index ROA.
Accounting betas are correlated (0.5 - 0.6) with market betas.
But normally can't get data on new projects' ROAs before the capital budgeting decision has been made.
effective rate of interest - answer the annual rate of return that is actually earned (or charged) during the
period the funds are held (or borrowed) k=compounding periods
Financial break-even - answer Financial break even
NPV solved=0, OCF* for NPV=0
Q=(FC+OCF*)/ (P-v)
v=variable cost per unit
General Break-Even - answer Q=(FC+OCF) /(P-v)
Constant Growth Model (infinite) - answer a widely cited dividend valuation approach that assumes that
dividends will grow at a constant rate, but a rate that is less than the required return
Constant Growth Model (finite) - answer Should include terminal value (what you sell it for) @ end
To do so you calculate the non-constant growth rate until horizon date T...then calculate the terminal
value as you would in an infinite CGM w/ denominator raised to power T
expected rate of return (constant growth model) - answer The rate of return expected to be realized
from an investment; the weighted average of the probability distribution of possible results
capital gains yield - answer the dividend growth rate, or the rate at which the value of an investment
grows
Dividend Yield - answer a stock's expected cash dividend divided by its current price
terminal value (Horizon Value) - answer the sale price at the end of the expected holding period
,Perpetual Growth Method - answer dividing the last cash flow forecast by the difference between the
discount rate and terminal growth rate. The terminal value calculation estimates the value of the
company after the forecast period.
(FCF * (1 + g)) / (d - g)
Free Cash Flow Valuation Model - answer A model that determines the value of an entire company as
the present value of its expected free cash flows discounted at the firm's weighted average cost of
capital, which is its expected average future cost of funds over the long run.
FCF Constant Growth Model - answer A variation of the constant growth model
Market Multiple Analysis - answer A method of valuing a target company that applies a market
determined multiple to net income, earnings per share, sales, book value, and so forth.
Preferred Stock Dividends - answer Fixed. Have priority over common stock dividends.
convertible preferred stock - answer Preferred stock with an option to exchange it for common stock at a
specified rate.
cumulative preferred stock - answer Preferred stock on which undeclared dividends accumulate until
paid; common stockholders cannot receive dividends until cumulative dividends are paid.
Free Cash Flow - answer net operating profit after taxes (NOPAT), add in depreciation expense, then
subtract money set aside for capital expenditures and any need for increasing working capital
Capital Asset Pricing Model (CAPM) - answer a model that relates the required rate of return on a
security to its systematic risk as measured by beta
,call option - answer the option to buy shares of stock at a specified time in the future
put option - answer the option to sell shares of stock at a specified time in the future
Cash Conversion Cycle (CCC) - answer the length of time funds are tied up in working capital, or the
length of time between paying for working capital and collecting cash from the sale of the working
capital
Return on Equity (ROE) - answer Net Income/Total Equity
Weighted Average Cost of Capital (WACC) - answer the weighted average of the cost of equity and the
aftertax cost of debt
Why is Equity more expensive than Debt? - answer Because it comes w/ higher expected rate of return
due to higher risk (residual claimant of the firm's cash flows)
Levered Beta - answer The unlevered beta adjusted for financial risk due to leverage
Unlevered Beta - answer The firm's beta coefficient if it has no debt
working capital requirement - answer (Current assets - inventory) - current liabilities
Net Present Value (NPV) - answer the sum of the present values of expected future cash flows from an
investment, minus the cost of that investment
Internal Rate of Return (IRR) - answer the discount rate that makes the NPV of an investment zero
, How do we value a share of stock? - answer Collapse future earnings down to present value equivalents
Disintermediation - answer the long-term trend of moving away from banks to markets for capital
requirements
Risk-free rate - answer No such thing...but many use 10 year Treasury bonds as a proxy for the risk-free
rate
Flotation Costs - answer the transaction cost incurred when a firm raises funds by issuing a particular
type of security
Flotation Cost Adjustment - answer the amount that must be added to cost of retained earnings to
account for flotation costs to find cost of new common stock
pure play method - answer a method for estimating a project's or division's beta that attempts to
identify publicly traded firms engaged solely in the same business as the project or division
Accounting Beta Method for Estimating Beta - answer Run regression between project's ROA and S&P
Index ROA.
Accounting betas are correlated (0.5 - 0.6) with market betas.
But normally can't get data on new projects' ROAs before the capital budgeting decision has been made.
effective rate of interest - answer the annual rate of return that is actually earned (or charged) during the
period the funds are held (or borrowed) k=compounding periods
