Exam4_FC - The flashcards are formatted for printing Therefore the term on the left side of the card corresponds to the definition on the right

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Annuity Compound Interest
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The situation in which interest paid on an investment during the first period is added to the principal; during the second period, interest is earned on the original principal plus the interest earned A series of equal dollar payments made for a specified number of years.
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during the first period.
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Perpetuity Annuity Due
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An annuity in which the payments occur at the beginning of each period. An annuity with an infinite life.
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Risk Amortized Loans
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Loans that are paid off with equal periodic payments. Potential variability in future cash flows.
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Diversification Standard Deviation
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A statistical measure of the spread of a probability distribution calculated by squaring the difference between each outcome and its expected value, weighting each by its probability, summing How to reduce risk.
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all outcomes, and finding the square root.
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Market Risk Company-Unique Risk
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The risk related to an investment return that can be eliminated through diversification; the result of factors that are unique to a particular firm (i.e. unsystematic or diversifiable risk). The risk related to an investment return that cannot be eliminated through diversification; results from factors that affect all stocks (i.e. systematic or non- diversifiable risk).
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Holding-Period Return Market Risk
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The risk of a project from the viewpoint of a well-diversified shareholder; takes into account that some of the risk will be diversified away as the shareholders combine stock with other stocks The return an investor would receive from holding a security for a designated period of time (i.e. the return for holding a security for a month).
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in their portfolios.
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Leverage Capital Structure
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Includes fixed assets like debt, preferred stock, and shareholders’ equity. Higher financial ____ means higher returns to stockholders, but higher risk due to interest payments.
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Optimal Capital Structure Cost of Capital
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Each source of financing has a different cost; affected by the capital structure. The capital structure that minimizes the firm’s cost of capital and maximizes firm value.
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Modigliani-Miller Hypothesis Capital Structure Theory
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How do we want to finance our assets? In a perfect market environment, capital structure is irrelevant; changes in capital structure do not affect firm value.
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100% Debt Bankruptcy Costs
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Costs of financial distress. It’s not optimal because financing becomes difficult to get, customers leave due to uncertainty, and possible restructuring or liquidation costs if bankruptcy occurs.
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Bondholders; Agents Agency Costs
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Costs associated with protecting bondholders. Bondholders (____) lend money to the firm and expect it to be invested wisely while stockholders own the firm and elect the board and hire managers (____).
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Moderate View on Capital Structure Bond Covenants
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be monitored; monitoring expense is an agency cost, which increases as debt increases. Ideally, a firm should
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This note was uploaded on 09/08/2011 for the course FIN 3403 taught by Professor Hill during the Fall '08 term at University of Central Florida.

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Exam4_FC - The flashcards are formatted for printing Therefore the term on the left side of the card corresponds to the definition on the right

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