Corporate Finance & Valuation Flashcards
6 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Corporate Finance & Valuation flashcards as text
What is the payback period method's main limitation as a capital budgeting tool?
Answer: It ignores the time value of money and cash flows beyond the payback period
The payback period ignores both the time value of money and any cash flows that occur after the breakeven point, potentially leading to suboptimal decisions.
What is a sensitivity analysis in financial modeling?
Answer: Testing how model outputs change when one input variable is altered while others remain constant
Sensitivity analysis tests how changes in a single input (e.g., revenue growth rate or WACC) affect the model's output, identifying key value drivers and risks.
What is the difference between a strategic acquirer and a financial acquirer in M&A?
Answer: Strategic acquirers seek operational synergies; financial acquirers (e.g., private equity) focus on financial returns and resale
Strategic buyers look for operational synergies that create combined value, while financial buyers like private equity focus on returns through financial engineering and resale.
In a discounted cash flow model, what happens to the present value if the discount rate increases?
Answer: Present value decreases because future cash flows are discounted more heavily
A higher discount rate reduces the present value of future cash flows because each dollar received in the future is worth less in today's terms.
What is a poison pill defense strategy in M&A?
Answer: A shareholder rights plan that dilutes an acquirer's stake if they exceed a trigger threshold
A poison pill is a shareholder rights plan that allows existing shareholders to buy additional shares at a discount if an acquirer crosses a threshold, diluting the hostile bidder.
What does a company's 'cost of equity' represent?
Answer: The return required by equity investors to compensate for the risk of holding the stock
The cost of equity is the return shareholders require to invest in the company, reflecting the opportunity cost and risk of equity ownership.