All Topics Flashcards
(92 cards)
1
Q
What are the 2 Dividend Policy appraches?
A
- Active Variable
2. Passive Residual
2
Q
What are the 3 dividend Payment Policies?
A
- Stable dividend
- Stable payout ratio / dividend cover
- Stable dividend + bonus
3
Q
What, in order, are the important Dividend Policy dates?
A
Declaration; Stop trading cum-div; Start trading ex-div; Record/register; Payment
4
Q
What types of dividends are there?
A
Cash; asset in specie; bonus; share buybacks; issue/capitalisation/share split; re-investment plans/script
5
Q
What are the factors affecting a Dividend Policy decision?
A
Legal requirements; Contractual obligations; Signalling; Tax; Clientele effect; Access to future funding; Company’s lifecycle
5
Q
What are the factors affecting a Dividend Policy decision?
A
Legal requirements; Contractual obligations; Signalling; Tax; Clientele effect; Access to future funding; Company’s lifecycle
6
Q
Explain the use of the P/E or EY method.
A
Valuation of a: going concern; controlling share; similar assets - where FCF and WACC are unavailable.
Value = maintainable earnings (x P/E) or (/ EY)
7
Q
What are the 10 steps of the valuation process?
A
- Purpose
- What
- Valuation model
- Risk factors
- Growth prospects
- Reasonable RoR
- Maintainable earnings
- Calculation of value
- Reasonability test
- Report/conclude
8
Q
Explain the use of the DY method.
A
Valuation of a: going concern; minority/NCI shareholding.
- Constant div growth = (future div)/(Ke - g)
- No div growth = (future div)/Ke
- Abnormal div growth
= [D1/(1+Ke)^1] +…+ [Dn/(1+Ke)^n] + [Dn+1/(Ke - g)]
9
Q
How is the PES calculated?
A
EPS = Earnings / #ordinary shares in issue
- Earnings = NP - tax - PS dividend
10
Q
Explain the use of the Net Asset Valuation menthod.
A
Valuation of a: going concern; controlling share; dissimilar assets.
- deduct mortgage loan from value
- add value of operations to value of dissimilar assets
- deduct value of liabilities and PS
11
Q
How are redeemable PS issued?
A
Using the CF method: calculate the NPV.
12
Q
How are redeemable debentures valued?
A
Using the CF method: calculate the PV.
13
Q
How are non-redeemable debentures valued?
A
Vd = interest pmt / required RoR
14
Q
Explain the use of the Liquidation method.
A
Valuation of a company that is NOT a going concern.
NRV of Assets = forced sale value
- liquidation costs
- liability pmts
15
Q
How is the P/E and EY calculated?
A
P/E multiple = MPS / EPS
EY ratio = EPS / MPS
16
Q
How is the DY and Dividend Cover calculated?
A
DY = DPS / MPS
DC = EPS / DPS and EY / DY
- EPS = DC X Dividend
17
Q
How are non-redeemable PS valued?
A
Vp = D1 / Required RoR
- D1 = value ex-div
= face value x div%
18
Q
How is WACC calculated?
A
WACC = Kd(D/V) + Ke(E/V) + Kp(PS/V)
19
Q
How is the Re-Order Level calculated?
A
RO = (lead time x avg usage per period)
+ safety stock
- orders outstanding
20
Q
How is the relevant cost for Labour calculated?
A
Fixed: Sufficient capacity - RC = 0
Insufficient capacity - RC = overtime or CM/LF
Variable: RC = incremental VC
21
Q
How are the target profit units calculated?
A
TPu = (FC + TP) / CM/u
22
Q
What is the Internal rate of return?
A
IRR = discount rate, where NPV = 0
- except where IRR>WACC
- easy to understand
- doesn’t consider the size of the investment
23
Q
What is the discounted pay-back period?
A
= time required to repay the PV of the project’s CFs
- takes TVM into account
24
What are the Working Capital ratios?
- Inventory turnover
- Debtor's collection period
- Creditors payment period
- Current ratio
- Quick ratio
25
What are the Liquidity Risk ratios?
- Current ratio
- Quick ratio
- Inventory turnover
- Debtors collection period
26
What is decentralisation?
- The transfer of control of an activity/organisation to several local offices/authorities rather than one single one.
- I.e. breaking the company up into separate, smaller, manageable units/divisions.
27
What is the pay-back period?
= Time required to repay the initial investment out of the project's CF
- ignores TVM
- biased towards projects with earlier CFs against LT projects
- ignores CFs after the pay-back period
- appropriate where: liquidity is poor and the future is uncertain.
28
What are the 5 Cs of creditworthiness?
1. Char - achter
2. Cash
3. Coll - ateral
4. Cap - ital
5. Con - ditions
29
What is an Investment responsibility centre?
Managers are responsible for both revenues and costs, and also have the responsibility and authority to make capital investment decisions.
30
Explain the Signalling theory.
Managers send a costly signal to convince the market that shares are under-valued.
31
What are the 4 reasons for holding cash?
1. Transactions
2. As a precaution
3. Speculation
4. Loan covenants
32
What are the 5 ST financing options?
1. Trade credit
- effective cost of lost discount = D/100-D X 365/t
2. Debtors' factoring
- eff cost = cost of factoring (service fee + interest - savings) / net debtors advance
3. Bank overdraft
4. Bankers' acceptance
- cost = face value of bill / (1 + i[n/365])
5. Revolving credit facility
33
What is the modified IRR?
1. Calculate IRR of all CFs
2. Calculate the NPV (terminal value) where CF0 = 0
3. Calculate the FV where terminal value (NPV) = PV
4. Calculate the IRR (MIRR) where CF0 = initial investment and last CF = FV
- is correct if MIRR < IRR (1) & >WACC
34
What is the Return on Investment?
ROI = divisional profit OR net operating income / assets employed
- aka Accounting RoR
- division's ROI may improve, while actions can negatively affect the company as a whole
- does NOT encourage goal congruence
35
What is the Traditional approach?
- Initial Kd = constant, then increases due to additional risk
- Ke increases as gearing increases
- Assumes that the optimal Capital Structure does exist and depends on the level of gearing
Where WACC is lowest = Optimal CS
36
What is a Revenue responsibility centre?
Managers are mainly accountable for financial outputs in the form of generating revenues;
Managers may also be held accountable for selling expenses, but NOT the cost of goods sold.
37
What are the JSE AltX Board listing requirements?
- Issued SC >= R2million
- Satisfactory profit forecastings
- Min 10% of securities held by the public
38
What is the procedure where constraints exist?
1. Calculate the CM for each LF
2. Rank each LF's CM from greatest to worse
3. If ranking conflicts, use linear programming
- create an equation for each LF and plot them on the profit equation to determine the feasible area
4. If ranking does not conflict, use the LFs in rank order
39
How is the Ke using the Dividend Growth Model calculated?
Kr = D1/Po + g
Ks = D1/Po(1-F) + g
- D1 = expected dividend (EPS X payout ratio_
- P0 = current market price
- g = expected growth rate (if not given: FV=oldest div; PV=latest div; thus I/YR=g)
40
What is the Du Pont analysis?
ROE
= NP% x Asset Turnover x Financial Leverage Factor
= NP/Sales x Sales/Assets x Assets/Equity
= NP/Equity
41
What is the Profitability Index?
Index = (NPV + Initial Inv) / Initial Inv
- measures project's return in relation to cost
- if >1, accept
42
How is the Residual Income calculated?
RI = Controllable Profit - (Investment x CoC%)
- difficult to compare among divisions/companies (=absolute measure)
- if used to measure performance, RI may be manipulated for and by managers to earn bonuses, etc.
43
Explain the Trade-Off theory.
- a practical approach: Ke and Kd will increase as leverage is increased
- results in a range of acceptable capital structures
44
How are the Direct Material variances calculated?
Price = AQiss/purch x (SP - AP)
Quantity = SP x (AQiss - SQiss)
- Mix = SP x (AQsm - AQam)
- Yield = SP x (AQsm - SQam)
45
Explain the 3 working capital policies?
Aggressive:
- most risky, highest potential return
- low WC investment; finances part of permanent current assets with ST financing
Moderate:
- matching
- only funds fluctuating current assets
Conservative:
- least risky, lowest return
- finances part of fluctuating current assets
46
What is the NPV?
= (CF/yr x PV factor) - project cost
- accept if positive
- PV factor = Table C (if single amount) or Table D (if annuity)
47
What are the JSE Main Board listing requirements?
- Issued SC >= R50million
- #Issued Shares >= 25million
- Min 3 yrs of audited FS
- Most recent FS profit before tax >= R15million
- Min 20% of securities held by the public
48
What is a Profit responsibility centre?
Managers are accountable for both revenues and costs;
Managers are free to set selling prices, choose markets to sell in, create a product mix, make output decisions and select suppliers.
49
How is the Margin of Safety calculated?
MoS = current sales - BEpoint
MoS% = MoS/Sales
= NP/Contribution
50
How is the Kp of redeemable/convertible PS calculated?
- Using the CF function: calculate the IRR
or
- PV = PV of PS; FV = redemption value; PMT = actual div payable, thus I/YR = IRR
51
What are the Asset Management ratios?
- Inventory turnover
- Debtors' collection period
- Fixed asset turnover
- Total asset turnover
52
How is the optimal economic life calculated?
1. Calculate the NPV for the full period
2. Calculate the NPV for each shorter period including the abandonment value at the end of each
3. The highest NPV = initial optimal life span
53
What are the 3 main financing factors to consider?
1. Risk
2. Return
3. Control
54
What is the Accounting RoR?
ARoR = avg incremental net income (i.e. total project income/economic useful life)/ avg investment
- accounts for non-CF and CF items
- ignores TVM
- ignores year-on-year fluctuations
55
How is the minimum transfer price calculated?
= Marginal Cost + Opportunity Cost (if no spare capacity)
| = (VC + FC increase) + lost sales contribution or OC
56
How is the Kd of LT loans calculated?
Kd = i.(1-t)
57
How is the Working Capital cycle calculated?
Inventory Days (avg inv / CoS x365)
+ Debtor Days (debtors / Cr Sales x365)
- Creditor Days (creditors /[OB Inv+Purch-CB Inv]) x365)
58
How is the Kd of redeemable debentures caluclated?
Kd = IRR after tax (use the CF function or PV calc)
59
What are the risk and return factors for working capital?
Debtors & Inventory:
- Return: try to reduce levels, as 'captured' capital costs money
- Risk: low inv levels are risky, but higher levels also bring about risk
Creditors:
- Return: try to increase, as cost-free financing saves money
- Risk: the higher the amount obtained, the higher the risk
60
What are the pros and cons of decentralisation?
- Improve quality and speed of decision-making process.
- Delegation of responsibility provides greater responsibility and gives opportunity to achieve self-fulfillment.
- Is a danger that divisions may compete excessively, leading to a lack of goal congruence.
Loss of top management control over divisions, but also frees them up from day-to-day management.
61
How are breakpoints calculated?
= Component funds available / weight in CS
62
How is the Ke of bond yield and risk premium calculcated?
Ke = cost of debt + risk premium (not risk-free)
63
How is the Safety Inventory Level calculated?
- The amount of inventory held in excess of the expected use during the lead time to provide a cushion against running out of stock due to demand fluctuations.
- Safety Stock
0: (0xIHC) + ([2x10%xOC]+[4x5%xOC])
2: (2xIHC) + (4x5%xOC)
4: (4xIHC) + 0
- Lowest total cost = optimal level of safety stock to be held
64
How is a shadow price calculated?
The value of an independent marginal increase of a scarce resource.
- Method 1: +1 to the LF's equation of product1, then deduct product2's equation and determine the difference where product1 = +0 & +1
- Method 2: dual method-element 1 of product1&2 = profit element1 LESS element2 of product1&2 = profit element2
= value of element1
65
How is the Economic Order Quantity calculated?
/ (2 x YU x CPO)/IHC
- the point where the total costs of holding and ordering goods are minimised, returning the quantity of goods to be ordered.
66
How is the break-even point calculated?
BEu = FC / CM/u
BEr = FC / (CM/Sales)
= BEu x SP/u
Batches = FC / CM/batch x product ratio
67
What should be considered for Business Risks?
- Financial risk
- Reputational risk
- Compliance risk
- Operating risk
- Industry comparison & Gearing
68
How is the Ke using CAPM calculated?
Ke = Rf + B(Rm-Rf)
| = Rf + B(market premium)
69
Explain the Modigliani-Miller approach.
- No optimal CS as WACC will not change
- Value of Co = EBIT / WACC (i.e. independent of CS)
- Assumptions: individual can borrow on same terms as co; no taxes; no transaction costs; no financial distress costs; no agency costs.
70
How is profitability measured?
- NP margin
- Growth in sales
- GP margin
- ROTA
- ROE
71
What are the methods for comparability of mutually exclusive projects?
1. Unequal life spans:
- Replacement chains
- Equivalent annual annuity
2. Equal life spans: NPV
72
Explain the cross-over point.
Sales Volume of Indifference
= (FC1 - FC2) / (VC1 - VC2)
- If sales < CO, choose lowest FC
- If sales > CO, choose lowest VC
73
What are the stock market performance indicators?
- Market price
- DY ratio
- EY ratio
- P/E multiple
- Dividend cover
74
What are the Financial Risk ratios?
- CF to total debt
- Debt:Equity
- Debt ratio
- Interest cover
- Debt repayment term
- Gearing ratio
75
How are the sales variances calculated?
Price = AQ x (SP-AP)
Volume = Std GP/CM x (SQ-AQ)
- Mix = Std GP/CM x (AQam-AQsm)
- Quantity = Std GP/CM x (SQsm-AQsm)
76
How is the total cost per order calculated?
Total Cost
| = (YUxCPO/EOQ) + (EOQxIHC/2)
77
How is the Kd of non-redeemable debentures calculated?
Kd = interest after tax / (Vd[1-F][1-t])
- Vd = nominal value x coupon rate/RoR
OR
Kd = current market rate / (1-F)(1-t)
78
How is the change in the debtors credit policy calculated?
```
Change in GP
+- Change in Bad Debts
(cr sales x BD%)
+- Change in Discount
(cr sales x %not utilising x disc%)
+- Change in Debtors
OC% x (cr sales x [ (%utilising x disc/365)+(%not utilising x 'net'/365) ])
```
79
How is the Kp of non-redeemable PS calculated?
Kp = Dp/Vp(1-F)
= Dp/(Vp-X)
- Vp = nominal value x actual div rate/expected div rate
80
How are the Variable Overheard variances calculated?
```
Expenditure = AWHr x (AC-SC)
Efficiency = SC x (AWHr - AUnits prod)
```
81
What are the FFRILSS key considerations?
```
Financing
Financial impact
Risk
Industry
Laws & regulations
Strategy
Six capitals
```
82
Explain the Pecking Order theory.
- Assumes there is no target CS
- Finance raised in preferred hierarchy:
Retained earnings, Debt, Convertible debt & PS, then Equity.
83
What are the purposes of transfer pricing?
1. Profit maximisation
2. Performance evaluation & control
3. Divisional autonomy
84
What is a Cost/Expense responsibility centre?
Managers are normally accountable for only those costs that are under their control.
- Standard (output can be measured and input required can be specified)
- Discretionary (output cannot be measured in financial terms and no clearly observable relationship between inputs and outputs)
85
What are the 6 capitals?
```
Financial
Manufactured
Intellectual
Human
Social & Relationship
Natural
```
86
How are the Direct Labour variances calculated?
```
Rate
= ACHr x (AR-SR)
Idle Time
= SR (AWHr-[ACHx(100%-IT%)])
Mixture
= SR x ([ACHx(100%-it%)] - [(total AWHx stdA/total SCH) / (100%-IT%)])
Yield
= SR x ([(total AWR x stdA/total SCH)/ (100%-IT%)] - actual units prod)
```
87
How is the maximum transfer price calculated?
External Demand:
- TP = market cost + cost to get to necessary location
No External Demand:
- TP = net marginal revenue (SP-VC); OR
= market cost + negotiated profit
88
What are the 2 budget periods?
- Conventional: 1 year (can be divided)
| - Rolling: shorter periods; incorporates changing operational circumstances timeously
89
How are the Fixed Overhead variances calculated?
```
Expenditure
= AC - BC
Volume
= BCnormal month - (SC x AQprod)
- Calendar = BCnorm - BCspecific
- Capacity = BCspecific - (SPxAH)
- Efficiency = SP x (AH - AQprod)
```
90
What is overtrading?
Happens when a company grows too fast, with too little LT capital, thus, LT growth is financed with ST capital
Indications:
- growth in sales; poorer liquidity ratios & CF problems; increased current ratio; increase in assets financed with ST debt
Solutions:
- abandon ambitious expansion plans; plough back dividends; reduce WC levels; convert to LT debt; injection of capital
91
How are the relevant costs for Direct Materials calculated?
```
DM not on Hand:
- RC = current Cost Price (CP)
DM are on Hand:
- To be replaced: if LF - RC = CM/LF
if not LF - RC = CP
- Do not replace: RC = opportunity cost
```
