Risk-Free Rate of Interest, k*
of interest that would exist on default-free U.S. Treasury securities
if no inflation were expected.
Rate of Return, -k
that was actually earned during some past period. The actual return
(-k) usually turns out to be different from the expected return (^k).
control procedure in which a red line is drawn around the inside of
an inventory-stocked bin to indicate the reorder point level.
or Simple, Interest
when interest is not compounded, that is, interest is not earned on
that cash flows from a project can be reinvested (1) at the cost of
capital, if using the NPV method, or (2) at the internal rate of return,
if using the IRR method.
that a decline in interest rates will lead to lower income when bonds
mature and funds are reinvested.
that a decline in interest rates will lead to a decline in income from
a bond portfolio.
Current Asset Investment Policy
under which relatively large amounts of cash, marketable securities,
and inventories are carried and under which sales are stimulated by
a liberal credit policy, resulting in a high level of receivables.
cash flows that should be considered in a capital budgeting decision.
of a security that cannot be diversified away, or its market risk. This
reflects a security's contribution to the riskiness of a portfolio.
of sending cash flows from a foreign subsidiary back to the parent company.
involving the decision of whether or not to replace an existing asset
with a new asset.
of comparing projects of unequal lives which assumes that each project
can be repeated as many times as necessary to reach a common life span;
the NPVs over this life span are then compared, and the project with
the higher common life NPV is chosen.
Rate of Return, ks
rate of return on a common stock that a stockholder considers acceptable.
to borrow money at a reasonable cost when good investment opportunities
arise . Firms often use less debt than specified by the MM optimal capital
structure to ensure that they can obtain debt capital later if they
in which the dividend paid is set equal to the actual earnings minus
the amount of retained earnings necessary to finance the firm's optimal
of leased property at the end of the lease term.
Current Asset Investment Policy
under which holdings of cash, securities, inventories, and receivables
of the firm's earnings that has been saved rather than paid out as dividends.
on Common Equity (ROE)
of net income to common equity; measures the rate of return on common
on Total Assets (ROA)
of net income to total assets.
of officially increasing the value of a country's currency relative
to other currencies.
committed line of credit extended by a bank or other lending institution.
In a financial
market context, the chance that an investment will not provide the expected
that some unfavorable event will occur.
investors dislike risk and require higher rates of return as an inducement
to buy riskier securities.
the management of unpredictable events that have adverse consequences
for the firm.
between the expected rate of return on a given risky asset and that
on a less risky asset.
rate that applies to a particular risky stream of income; the riskier
the project's income stream, the higher the discount rate.
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