MAFF flashcards
MAFF · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Effective annual rate
- The annualized rate accounting for compounding within the year: EAR = (1 + nominal rate / m)^m − 1, where m is compounding periods per year.
- Net present value
- Sum of a project's future cash flows discounted at the required rate minus the initial investment. Positive NPV means the project adds shareholder value.
- Internal rate of return
- The discount rate at which a project's NPV equals zero. It can conflict with NPV ranking when projects differ in scale or cash-flow timing.
- Growing perpetuity formula
- Present value equals the next period cash flow divided by the discount rate minus the growth rate. Valid only when the discount rate exceeds growth.
- Real versus nominal cash flows
- Real cash flows are stated in constant purchasing power and must be discounted at a real rate; nominal cash flows use actual dollars and a nominal rate.
- DuPont analysis
- Decomposes return on equity into net profit margin, total asset turnover, and financial leverage, showing which driver produces changes in ROE.
- Quick ratio
- Current assets excluding inventory and prepaid expenses, divided by current liabilities. A stricter liquidity test than the current ratio.
- Indirect method cash flow
- Starts with net income, adds back non-cash charges such as depreciation, and adjusts for changes in working capital to derive operating cash flow.
- Capitalizing versus expensing
- Capitalizing records an outlay as an asset and spreads it over future periods; expensing charges it immediately, lowering current but raising later profit.
- Unearned revenue
- Cash received before the performance obligation is satisfied. It is reported as a liability until revenue is recognized under accrual accounting.
- LIFO versus FIFO
- In rising prices, FIFO reports higher ending inventory and higher profit; LIFO reports lower profit and can create liquidation gains when inventory layers shrink.
- Accruals ratio warning sign
- A rising gap between accounting earnings and operating cash flow suggests aggressive revenue recognition or weak earnings quality and warrants closer analysis.
- Weighted average cost of capital
- The blended after-tax cost of debt and cost of equity using market-value weights, used to discount free cash flow to the firm.
- Capital asset pricing model
- Expected return equals the risk-free rate plus beta multiplied by the market risk premium; beta measures sensitivity to market movements.
- Free cash flow to the firm
- After-tax operating earnings plus depreciation minus capital expenditure minus the increase in net working capital, discounted at WACC.
- Gordon growth model
- Values an asset as next period cash flow divided by the discount rate minus sustainable growth; growth must be below the discount rate.
- Enterprise value
- Market value of equity plus debt plus preferred stock plus minority interest minus cash. Used with EBITDA for capital-structure-neutral comparisons.
- Modigliani-Miller with taxes
- Without taxes capital structure is irrelevant; with taxes debt adds a shield of roughly tax rate times debt, partly offset by distress costs.
- Sunk cost rule
- Costs already incurred and unrecoverable must be excluded from incremental capital budgeting analysis, because they do not change with the decision.
- Modified duration
- Macaulay duration divided by one plus the yield per period. It estimates the percentage bond price change for a small yield change.
- Convexity adjustment
- The price change estimate equals minus modified duration times yield change plus one half convexity times the squared yield change.
- Forward rate from spot rates
- A forward rate implied by two spot rates satisfies no arbitrage: (1 + s2)^2 = (1 + s1) × (1 + f1,2) for annual periods.
- Preferred stock characteristics
- A hybrid security with a stated dividend that ranks above common equity in liquidation, usually without voting rights, and often callable.
- Credit spread
- The yield difference between a corporate bond and a comparable government benchmark; widening spreads typically signal rising default concern.
- Semi-strong market efficiency
- Prices reflect all publicly available information, so trading on public news or published fundamentals should not earn consistent abnormal returns.
- Portfolio variance
- Depends on individual asset variances and pairwise covariances weighted by portfolio proportions; lower correlation reduces total portfolio risk.
- Sharpe ratio
- Portfolio excess return over the risk-free rate divided by portfolio standard deviation; used to compare risk-adjusted performance across portfolios.
- Systematic versus unsystematic risk
- Systematic risk is market-wide and measured by beta; unsystematic risk is firm-specific, diversifiable, and not compensated in equilibrium.
- Value at risk
- The loss threshold not expected to be exceeded over a stated horizon at a given confidence level; it ignores the size of tail losses.
- Information ratio
- Active return relative to a benchmark divided by tracking error, measuring how efficiently a manager generates excess return per unit of active risk.
- Mosaic theory
- Combining public information with nonmaterial nonpublic pieces to reach an investment conclusion is permissible; material nonpublic information may not be used.
- Fair dealing standard
- Requires that investment recommendations and changes be communicated to all clients simultaneously, without favoring select clients with advance notice.