D367 Innovation in Finance - Set 5 - Part 2

Correct Answer: The ratio of a companys stock price to its earnings per share

The P/E ratio helps investors assess the markets expectations of a companys future earnings by comparing the stock price to earnings per share.

Correct Answer: The cash remaining after capital expenditures and dividends

Free cash flow measures the cash a company generates after accounting for capital expenditures, indicating its ability to pay dividends and fund growth.

Correct Answer: The average cost of a companys equity and debt, weighted by their respective proportions

WACC represents the average rate a company is expected to pay to finance its assets, considering both equity and debt financing.

Correct Answer: The risk associated with a companys debt financing

Financial risk arises from a companys use of debt financing, which can increase the volatility of returns and the likelihood of financial distress.

Correct Answer: The process of evaluating and selecting long-term investments

Capital budgeting involves analyzing potential investments or projects to determine their value and contribution to a companys long-term growth.

Correct Answer: A ratio that compares the net present value of cash inflows to the initial investment

The profitability index helps assess the desirability of an investment by comparing its projected benefits to its costs.

Correct Answer: A companys ability to meet short-term obligations without relying on inventory

The quick ratio, or acid-test ratio, is a stricter measure of liquidity than the current ratio because it excludes inventory, focusing on assets that can be quickly converted to cash.

Correct Answer: The percentage of revenue left after covering operating expenses

Operating margin shows the proportion of revenue that remains after accounting for operating costs, indicating operational efficiency.

Correct Answer: The risk inherent to the entire market or economy

Systematic risk, also known as market risk, cannot be diversified away and affects all investments in a given market.

Correct Answer: The difference between the present value of cash inflows and outflows

NPV calculates the value of a project by discounting future cash inflows and outflows to their present value, helping to determine whether an investment adds value.

Correct Answer: To calculate the expected return of an asset based on its risk

CAPM is used to determine the appropriate required return of an asset, factoring in its risk relative to the market.

Correct Answer: To evaluate a companys financial performance and health

Financial ratios help stakeholders analyze a companys performance, profitability, liquidity, and leverage relative to its historical performance and competitors.

Correct Answer: The maximum growth rate a company can achieve without issuing new equity or debt

The internal growth rate shows how fast a company can grow using only retained earnings and internal resources.

Correct Answer: The ratio of earnings before interest and taxes to interest expenses

The TIE ratio indicates how easily a company can cover its interest payments, with higher values showing greater financial stability.

Correct Answer: The length of time it takes a company to convert its inventory into cash

The CCC measures the time it takes for a company to convert its investment in inventory and other resources into cash flow from sales.

Correct Answer: The number of times a company sells and replaces its inventory in a period

Inventory turnover indicates how efficiently a company manages its inventory, with higher turnover suggesting faster sales and efficient inventory management.

Correct Answer: The percentage of earnings distributed to shareholders as dividends

The dividend payout ratio shows how much of a companys earnings are returned to shareholders as dividends, while the remainder is retained for reinvestment.

Correct Answer: The proportion of net income reinvested in the company as retained earnings

The plowback ratio, also known as the retention ratio, shows the percentage of net income that is retained for reinvestment in the business rather than distributed as dividends.

Correct Answer: The first sale of a companys stock to the public

An IPO occurs when a privately held company offers shares of its stock to the public for the first time, allowing it to raise capital and expand.

Correct Answer: The return generated on shareholders equity

ROE measures how effectively a company uses its equity to generate profit, providing insight into managements efficiency at using equity capital.