Finance 320F Unit 4 and 5 Working Words with Complete Solutions
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Finance 320F Unit 4 and 5 Working
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Finance 320F Unit 4 And 5 Working
Finance 320F Unit 4 and 5 Working
Words with Complete Solutions
What is the purpose of "portfolio diversification"?
To reduce risk by spreading investments across various assets to minimize the impact of any
single investment’s poor performance.
How is "weighted average cost of capital"...
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Finance 320F Unit 4 and 5 Working
Words with Complete Solutions
What is the purpose of "portfolio diversification"?
✔✔ To reduce risk by spreading investments across various assets to minimize the impact of any
single investment’s poor performance.
How is "weighted average cost of capital" (WACC) calculated?
✔✔ By taking the average rate of return required by all of a company's investors, weighted
according to their proportion of the total capital.
What does "systematic risk" refer to in finance?
✔✔ The risk inherent to the entire market or market segment, which cannot be eliminated
through diversification.
How does "capital asset pricing model" (CAPM) determine the expected return on an
investment?
✔✔ By calculating the return based on the risk-free rate plus a risk premium, which is the
product of the investment's beta and the market risk premium.
1
,What is the function of "net present value" (NPV) in investment decisions?
✔✔ To evaluate the profitability of an investment by calculating the difference between the
present value of cash inflows and outflows.
How does "internal rate of return" (IRR) differ from NPV?
✔✔ IRR is the discount rate that makes the net present value of all cash flows from a particular
project equal to zero, while NPV gives a dollar amount.
What is the significance of "beta" in the context of stock investments?
✔✔ Beta measures a stock's volatility relative to the overall market, indicating how much the
stock’s price is expected to move compared to market movements.
How is "price-to-earnings ratio" (P/E ratio) used to evaluate a company's stock?
✔✔ It compares the company’s current share price to its earnings per share, helping investors
assess if the stock is over- or under-valued.
What does "economic value added" (EVA) measure?
✔✔ EVA assesses a company's financial performance based on residual wealth, calculated by
deducting the cost of capital from the company’s net operating profit after taxes.
2
, How is "capital budgeting" used in financial planning?
✔✔ It involves evaluating potential major investments or projects to determine their profitability
and alignment with company goals.
What is the role of "financial leverage" in a company's capital structure?
✔✔ Financial leverage involves using borrowed funds to amplify potential returns on
investment, which also increases financial risk.
What is "return on equity" (ROE) and why is it important?
✔✔ ROE measures the profitability of a company relative to shareholders' equity, indicating how
effectively the company uses equity financing to generate profits.
How is "debt ratio" used in evaluating a company’s financial stability?
✔✔ The debt ratio measures the proportion of a company’s assets that are financed through debt,
helping to assess financial leverage and risk.
What does "liquidity ratio" tell us about a company's financial health?
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