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7004 > in class test > Flashcards

in class test Flashcards

1
Q

government macroeconomic objectives

A

economic growth, increase in employment, low interest rates and balance of payment stability

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2
Q

High to Low risk

A

ordinary shares/ preference shares/ corporate bonds/ treasury bills

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3
Q

aggressive working capital finance policy

A

more short term finance is used as its cheaper even though its risky

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4
Q

risks associated with short term working capital finance

A

rate risks and renewal risks

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5
Q

Debt factor services

A

bad debt insurance, advancement of credit, receivables ledger management and management of debt collection

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6
Q

symptoms of overtrading

A

increase in turnover, increase in volume of CA and inventory turnover slowing down

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7
Q

cash cycle formula

A

trade receivables + turnover - trade payables

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8
Q

aggressive approach

A

all fluctuating CA and part of the permanent assets are financed by short term sources

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9
Q

relevant costs for investment appraisal

A

opportunity costs, working capital costs and staff training costs

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10
Q

problems associated with payback period

A

doesn’t consider time value of money or project life, and ignores cash flow after payback period

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11
Q

weakness of sensitivity analysis approach

A

looking at factors in isolation is unrealistic

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12
Q

main advantage of using simulation to adjust for risk

A

more than one variable can be changed

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13
Q

EOQ/ withdrawal amount

A

_/~ 2 * cost * quantity / holding cost

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14
Q

ARR average rate of return

A

average yearly profit / initial investment

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15
Q

ROCE

A

avg profit/ avg capital employed

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16
Q

PV

A

COST / (1+ %) ^YEAR

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17
Q

DF

A

1/(1+r)^t

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18
Q

NPV

A

PV - required investment

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19
Q

PI

A

NPV / initial investment

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20
Q

IRR

A

the discount rate which makes NPV = 0

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21
Q

real cost

A

(1+nominal rate) / (1+inflation)

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22
Q

capital rationing

A

not enough funds to invest in all acceptable projects

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23
Q

incremental costs

A

excludes costs which would have occured anyway

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24
Q

future costs

A

excludes pasts and sunk costs

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25
Q

cash flow

A

excludes depreciational, notional costs and o/hd absorbed

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26
Q

risk

A

the final outcome of a decision may differ from that which was expected when the decision was taken

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27
Q

risk adjusted discount rates

A

high risk= high discount rate

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28
Q

reduced payback period

A

by reducing the payback period, theres an allowance for risk

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29
Q

expected return

A

sum of return * probability

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30
Q

sensitivity analysis

A

investigates how sensitive a project is to changes in input variable

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31
Q

net working capital

A

CA - CL

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32
Q

gross working capital

A

firms investment in CA

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33
Q

current ratio

A

CA / CL

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34
Q

acid test ratio

A

CA - stock / CL

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35
Q

finished goods

A

stock / cost * 365

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36
Q

raw materials

A

average value / usage

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37
Q

debtor turnover days

A

debtor payables/ sales * 365

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38
Q

creditor turnover days

A

creditor receivables / purchases * 365

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39
Q

COC

A

stock period + debtor period - creditor period

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40
Q

competing demands

A

between managers need to be reconciled to create a feasible working capital strategy

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41
Q

components of working capital

A

cash, marketable securities and receivables

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42
Q

a lease

A

a contract between the lessor who owns the asset and the lessee who uses the asset for an agreed period of time

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43
Q

finance lease

A

the lessee has all the risks and rewards associated with ownership of the asset

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44
Q

operating lease

A

rental contract w/ no fixed commitment and lessor bears risks and off balance sheet accounting

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45
Q

+ve of leasing

A

may be cheaper, may be tax deductible and is flexible

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46
Q

-Ve of leasing

A

may be risk and may be costly

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47
Q

cash cycle is shaped by

A

seasonal demand and by stages of product development

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48
Q

overtrading occurs when

A

a company has an inappropriate capital structure

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49
Q

consequences of overtrading

A

leads to liquidity problems and a decline in profitability

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50
Q

considerations for short term investments (4)

A

amount of funds // ease of realisation // length of fund availability // return offered on investment

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51
Q

annual cost

A

discount/(100% - discount) * 365/(red in per)

52
Q

factoring +ve

A

improved cash flow, increased funding, no need for sales ledger

53
Q

factoring -ve

A

cost, perception of customers

54
Q

cash management problem is

A

that of balancing liquidity and profitability

55
Q

cash cycle is the

A

time between paying costs and receiving sales receipts

56
Q

precaution motive

A

precise forecasting of cash flows is impossible and the less precise, the greater the need for precautions

57
Q

differences between MA and FM

A

FM is concerned with longer term decisions

58
Q

investment decision

A

affects long term future and involves lots of cash and may be irreversible

59
Q

financing decision

A

sources of finance and cost of sources of finance

60
Q

dividend decision

A

decision to either retain or distribute profits

61
Q

interdependence of decisions

A

P+F=I+D

62
Q

info for investment decision

A

appropriate cost of capital, impact on profits, and alternative projects

63
Q

info for dividend decision

A

profits available, impact on share price

64
Q

corporate objectives

A

business/commercially oriented, market share, profitability and growth

65
Q

financial objectives

A

earnings per share, dividends per share and operating profitability

66
Q

non financial objectives

A

welfare of employees, welfare of management, provision of a source

67
Q

measuring financial objectives

A

EPS, DY, DC

68
Q

shareholders v bondholders

A

taking on high risk projects may improve shareholder wealth but reduces bondholder securities

69
Q

SOX ACT 2002

A

outlines auditor- consultant relationship and imposes jail sentences

70
Q

VFM

A

is important to NFPOs as they use public funds - economy, efficiency and effectiveness

71
Q

macroeconomic policy is the

A

management by government to influence the performance and behaviour of the economy as a whole

72
Q

If AD is too high

A

inflation occurs

73
Q

if AD is too low

A

unemployment occurs

74
Q

Monetary policy

A

concerned with influencing the overall monetary conditions in the economy // focuses on interest rates

75
Q

rate of interest

A

main cost of investment

76
Q

fiscal policy

A

government spending = tax and government borrowing

77
Q

sensitivity of NPV to changes in sales

A

NPV / PV of sales

78
Q

factor costs

A

sales % * sales + admin cost

79
Q

annual payment

A

deposit + discount rate % (X) = NPV

80
Q

inventory related costs

A

order cost, purchase cost and stock cost

81
Q

after tax rate

A

pre tax % * (1-tax rate %)

82
Q

dividend yield method

A

based on the assumption MV of shares represents future expected dividends

83
Q

zero dividend growth

A

expected dividends / required return on share

84
Q

constant dividend growth

A

expected dividends / required return on share - growth

85
Q

asset valuation method

A

company is viewed as being worth the sum of its net assets

86
Q

asset book value

A

BV of assets - BV of liab / no. of shares

easy but uses historic figures

87
Q

asset market value

A

MV of assets - total liab/ no. of shares

relies on historical info and ignores future cash flow

88
Q

asset liquidation value

A

Mkt value of assets - liquid costs - total liabs / no. of shares
(in actual liquidation, assets sold at auction and prices lower)

89
Q

P/E ratio is

A

the most popular share valuation method as it values the companys shares in relation to earning growth potential

90
Q

EPS formula

A

net profit / weighted avg shares

91
Q

P/E ratio

A

market price of shares / EPS

92
Q

unquoted companies reason for share valuation

A

company wishes to go public or share valuation needed for tax purposes

93
Q

unquoted companies factors to consider

A

general economic and financial position, riskiness of shares, liquidity of shares, size and status of firm

94
Q

M&M 1961 dividend policy

A

irrelevant to share value, assume no tax, transaction flotation and perfect capital movement

95
Q

residual policy

A

if theres a surplus after investment and financing then a dividend will be paid

96
Q

independent policy

A

dividend is paid and as a result of this, financing / investment is adjusted

97
Q

simultaneous policy

A

consideration is given to all policies

98
Q

signalling

A

dividend policy provides info to shareholder which might affect value of firm

99
Q

clientele

A

firm adjust dividend amount to attract certain clientele who like high / low payout

100
Q

share repurchase

A

buybacks may be used when company is unsure about sustainability of an increase in cash dividend

101
Q

special dividend

A

an alternative is paying a one off dividend

102
Q

transaction risk

A

exchange risk applied to the firms home currency cash flows

103
Q

translation risk

A

applied to firms consolidated financial statement.
‘There is a risk that the value of our foreign currency-denominated assets and liabilities will change when we prepare our accounts.

104
Q

economic risk

A

exchange risk applied to firms competitive position, affects international and domestic firms

105
Q

quotation methods

A

direct and indirect

106
Q

hedging techniques

A

forward market, money market and options market

107
Q

forward contracts are

A

a contract agreeing to buy foreign currency needed in the future, now

108
Q

forward contracts +/-

A

removes downside risk

loss of upside potential

109
Q

money market hedges are

A

locks in the value of a foreign currency

110
Q

money market +/-

A

very flexible

more expensive and no upside potential

111
Q

options

A

provides a flexible hedge against the downside while preserving upside potential

112
Q

interest rate risk

A

the yield varies according to the term of borrowing which is length of time until the debts repaid

113
Q

Forward rate agreement

A

between bank and customer that gives a guaranteed future rate of interest to cover a specific amount over a specific period

114
Q

interest rate cap

A

option which sets an interest rate ceiling

115
Q

floor

A

option to set a lower limit to interest rates

116
Q

collar

A

borrow can buy and interest rate cap and sell an interest rate floor

117
Q

interest rate swap

A

two parties agree to exchange interest rates

  • interest rates change
  • one party may fail to pay
118
Q

impact of fall in exch rate

A

exports given stimulus and rate of dom. inflation will rise

119
Q

capital structure theory

A

The traditional view of capital structure suggests that the company can minimise their weighted average cost of capital

120
Q

cost of debt

A

interest rate / debt (1-tax rate )

121
Q

CAPM, cost of equity

A

RFR + B( Rm - Rf)

122
Q

WACC

A

e/e+d re + d/e+d rd (1- tr)

123
Q

share price

A

div per share / capm - g

124
Q

PAYOUT RATIO

A

DPS/ EPS

125
Q

NPV TABLE

A

PV * CASH FLOW FORECAST

126
Q

CASH FLOW FORECAST

A

DONT INCLUDE DEPRECIATION AND ADD DIFFERENCE IN CLOSING STOCK

7004 (2 decks)

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