Finance Short Notes (B-206)

Capital budgeting: The process of evaluating and selecting long-term investments that are consistent with the firm goal or maximizing owner wealth. Capital Rationing: The financial situation in which a firm has only a fixed number of money available for capital expenditure and numerous projects compete for these dollars. Relevant cash flow: The incremental cash outflow (investment) and resulting subsequent inflows associated with a proposed capital expenditure. Incremental Cash flow: The additional cash flows-outflows or inflows-expected to result from a proposed capital expenditure. Initial investment: The relevant cash out flow for a proposed project at time zero. Operating cash inflows: The incremental after-tax cash inflows resulting from implementation of a project, during its life. Terminal Cash flows: The cash flow resulting from termination and liquidation of a project at the end of its economic life. Sunk cost: Cash outlays that have already been made and therefore have no effect on the cash flows relevant to current decision. Opportunity Cost: Cash flows that could be realized from the best alternative use of an owned asset. Book Value: The strict accounting value of an asset, calculated by subtracting its accumulated depreciation from its installed cost. Net working capital: The amount by which a firms current assets exceed its current liabilities. Payback period: The amount of time required for a firm to recover its initial investment in a project. NPV: The subtraction of initial investment of a firms project from the present value of cash inflows discounted at a rate equal to the firms cost of capital. IRR: IRR is the discounted rate for which NPV is equal to zero. Break even Cash inflow: The minimum level of cash inflow necessary for a project to be acceptable. Scenario analysis: A behavioral approach that evaluates the impact on the firms return of simultaneous changes in number of variables. Simulation: A statistics-based behavioral approach that applies predetermined probability distributions and random numbers to estimate risky outcomes. Risk adjusted discount rate: The rate of return that must be earned on a given project to compensate the firms owners adequately-that is, to maintain or improve the firms share price. Cost of capital: The rate of return that a firm must earn on the projects in which it invests to maintain its market value and attract funds. Jamal Hossain Shuvo www.bdtaka.com www.scholarzone.blogspot.com Page 1

Finance Short Notes (B-206)

Business risk: The risk to the firm of being unable to cover operating costs. Financial risk: The risk to the firm of being unable to cover required financial obligations. Target Capital structure: The desired optimal mix of debt and equity financing that most firms attempt to maintain. Cost of long-term debt: The after tax cost today of raising long term funds through borrowing. Net proceeds: Funds actually received from the sale of a security. Flotation costs: The total costs of issuing and selling a security. Cost of preferred stock: The ratio of the preferred stock dividend to the firms net proceeds from the sale of preferred stock. Cost of common equity: The rate at which investors discount the expected dividends of the firm to determine its share value.

Jamal Hossain Shuvo

www.bdtaka.com

www.scholarzone.blogspot.com

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