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Risk premium - function of both market conditions and the asset itself, composed of (a) market risk premium, which is the return required for investing in any risky asset rather than the risk-free ratę, (b) beta, a risk coefficient which measures the sensitivity of the particular stock's return to changes in market conditions

CAPM limits - limits of diversification, difficulties in practical application, forecast beta, theoretical limits, risk premium and time valuation

Cost of capital - the ratę of return that the firm must earn on its project investments to maintain the market value of its stock (company's total cost offinancing)

Business risk - the risk to the firm of being unable to cover operating costs

Finance risk - the risk to the firm of being unable to cover required financial obligations

Leverage results from use of the cost and capital structure to magnify retums to the firm's owners (cost

structure: fixed/variable operating costs - operating leverage, capital structure: long-term debt/equity -

financial leverage)

Degree of Operating Leverage (DOL) - measures the sensitivity of changes in EBIT to changes in Sales Degree of Financial Leverage (DFL) - measures the sensitivity of changes in EPS to changes in EBIT Capital Structure Theory - acc. to finance theory, firms posses a target capital structure that will minimize its cost of capital

Capital structure - mix between debtvs. equity

Financial leverage - measures the extent to which the firm employs fixed cost financing such as debt and preferred stock

The pecking order theory - preferred sources offinancing: internal financing (80%), drawing down the cash balances, debt - starting with the least risky type, issuing equity

Optimal capital structure - market value of a company is maximized when the cost of capital is minimized The residual diyidend policy - dividend paid by a firm should be the amount left over after all acceptable investment opportunities have been undertaken

Factors affectina diyidend Policy: legał constraints, contractual constraints, intemal contraints (cash availability), growth prospects, owner consideration, market considerations Constant-Payout-Ratio diyidend - Dividend Payout Ratio = 40%

Regular Diyidend Policy - based on the payment of a fixed-dollar dividend in each period, can be increased, rarely decreased

Low-Regular-and-Extra Diyidend Policy - based on the payment of a Iow regular dividend in each period, supplemented by an additional dividend when earnings warrant it Stock dividends - redistribution among stockholders' equity accounts

Stock repurchases - the repurchasing by the firm of outstanding shares of its common stock in the marketplace; desired effects - enhance shareholder value or discourage unfriendly takeovers Financial statements: income statement, balance sheet, statement of retained earnings. statement of cash flows

Income statement - provides a financial summary of the firms' operating results during a specific period (Sales revenue - cost of goods sold = gross profit - operating expenses = operating profit - interest expenses = net profits before taxes - taxes = net profits after taxes - preferred stock dividend = earnings available for common stockholders, EPS)

Balance Sheet - summary statement of the firm’s financial position at a given point of time (statement balances firm’s assets (what it owns) against its financing, which can be either debt (what it owes) or equity (what was provided by owners)

Preferred stock entry - historie proceeds from the sale of preferred stock Common stock entry - reflects the par value of common stock outstanding

Paid-in capital in excess of par - represents the amount of proceeds in excess of the par value received form the original sale of common stock

Retained earnings - represent the cumulatK/e total of all earnings, net of dividends that have been retained and reinvested in the firm sińce its inception

Statement of retained earnings - reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and the end of that year. Statement of cash flows - provides a summary of the firms operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period of concem (summarizes the sources and uses of cash)

Operating CFs - directly related to production and sale of the firm’s products and services lnvestment CFs - associated with purchase and sale of both fixed assets and business interests Financing CFs - result from debt and equity financing transactions, include incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to pay cash dividends or repurchase stock Liquidity - firm's ability to satisfy its short-term obligations as they come due

Liguidity ratio - measures the firrrfs ability to meet its short-term obligations (current assets/current