Financial Management and Capital Budgeting Flashcards
6 cards from real BEC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Financial Management and Capital Budgeting flashcards as text
The weighted average cost of capital (WACC) represents:
Answer: The average rate a company must earn to satisfy all capital providers
WACC is the blended required rate of return weighted by the proportions of debt and equity in the capital structure, representing the minimum return the firm must earn on its assets.
Net Present Value (NPV) of a project is calculated as:
Answer: Present value of future cash inflows minus the initial investment
NPV equals the sum of discounted future cash inflows less the initial investment; a positive NPV indicates the project creates shareholder value.
A company's Internal Rate of Return (IRR) decision rule states: accept a project if:
Answer: IRR exceeds the required rate of return (hurdle rate)
The IRR decision rule holds that a project should be accepted when its IRR exceeds the company's required rate of return, indicating the project earns more than its cost of capital.
Working capital is defined as:
Answer: Current assets minus current liabilities
Working capital is the difference between current assets and current liabilities, measuring a company's short-term liquidity and operational efficiency.
The payback period method evaluates a project based on:
Answer: How long it takes to recover the initial investment from cash flows
The payback period measures the time required for a project's cumulative cash inflows to equal its initial cost, favoring projects that recoup investment quickly.
Financial leverage refers to the use of:
Answer: Debt financing to amplify returns on equity
Financial leverage involves using borrowed funds to magnify potential returns to equity holders, though it also amplifies losses and increases financial risk.