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20 Cards in this Set
- Front
- Back
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Attempts to measure likelihood of variability of future returns from proposed investment
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Risk Analysis
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7 Approaches to Risk Assesment
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1. Informal Method
2. Risk adjusted discount rates 3. Certainty equivalent adjustments 4. Simulation analysis 5. Sensitivity analysis 6. Monte Carol technique 7. Capital Asset Pricing Model |
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NPVs are calucated and apparently less risky project is chosen
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Informal method
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Technique adjust rate of return upward as investment becomes riskier
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Risk-adjusted discount rates
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Forces decision maker to specify at what point firm is indifferent to choice between certain sum of money and ecpected value of risky sum
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Certain equivalent adjustments
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Computer is used to generate many examples of results based upon various assumptions
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Simulation Analysis
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Forecast of many calculated NPVs under various assumptions are compared to see how sensitive NPV is changing conditions. (What-if technique)
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Sensitivity Analysis
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Technique is often used in simulation to generate the individual values for random variable
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Monte Carol Technique
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Method is derived from use of portfolio theory. More sensitive an asset's rate of return is to change in market's rate of return, the riskier the asset.
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Capital Asset Pricing Model (CAPM)
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Return on Investment (ROI)
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Residual Income
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Net Income - (Average Total Assets * Target rate of return)
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Return on assets (ROA)
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Net Income/Average Total assets
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Return on common equity (ROCE)
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(Net Income - Preferred dividends)/ Average common equity
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Economic Value Added (EVA)
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After tax OI= After tax WACC*(Total assets - current liabilities)
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Firm's ability to pay its noncurrent obligations as they come due and thus remain in business in long run
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Solvency
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Capital structure ratios
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1. Total debt to total capital
2. Debt to equity 3. Long term debt to equity 4. Debt to total assets |
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The excess of the amount of the ROI over a targeted amount equal to an imputed interest charge on invested capital
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Residual income
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Profitability index
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PV of future net cash flows or NPV of project/Initial investment
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Types of real options
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1. Abandonment of project (exceeds NPV of future cash flows)
2. Option of follow up investment (NPV of project b/c of inefficient scale) 3. Wait,learn 4. Flexibility 5. Capacity 6. Geographical market 7. New product option |
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A firm earning a profit can increase its return on investment by
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A firm earning a profit can increase its return on investment by
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