Chapter 9 - Financial Planning and Analysis Flashcards
(78 cards)
Opportunity Cost of Funds
The rate at which funds can be invested
If a firm pays less than the present value of discounted future cash flows, what rate of return will it achieve?
A rate higher than the discount rate
Two Options for PV of Foreign Currency Cash Flows
Translate foreign currency cash flows with a forward rate, then use the domestic discount rate
Discount the foreign currency cash flows using a foreign rate, then translate using spot FX rate
How to best minimize distorted comparison for foreign currency discounting of cash flows?
FCY cash flows should be discounted using an appropriate foreign currency interest rate
Operating currency cash flows should be discounted using an appropriate operating currency interest rate
Idle Capacity
Unused capacity of partially used facilities
Can repaying debts allow for the time value of money to be effective?
Yes
How does a stated interest rate less than 1 year impact PV / FV calculations?
Use that rate but then make sure the compounding periods are also increased
Lower interest rate but compounded much more frequent
How is a firm’s required return determined by its investors?
The opportunity cost that its investors forego
Relevant cash flows are commonly referred to as ______________?
Incremental or marginal cash flows
Capital
(FP&A Related)
Long Term Debt + Equity
The relevant cost for the primary sources of permanent capital would be their ___________?
Marginal cost
The rate of return the market would demand if funds were raised today
Should issuance costs be considered in the determination of the cost of debt?
Yes
The Cost of Equity primarily determines the cost that applies to equity funds that are obtained through __________?
Retained earnings
Is the cost of issuing additional common stock higher or lower than the cost of equity obtained through retained earnings?
Higher because the company will receive less per share due to issuance expenses
The cost of equity is focused on which type of equity funding?
Common equity
A higher WACC does what to the EVA?
Drops it
A higher WACC will result in what for the NPV?
A lower NPV
What is the summary takeaway regarding a higher WACC?
Firms that have a higher WACC have a harder time creating value and are less competitive
Is a negative EVA always a bad thing?
Not necessarily if it results from investment in a new project that will pay higher yields later on (timing difference)
What happens to the stock price if EVA continues to be negative?
It will decrease
Four Important Calculations and Criteria for Capital Budget Decision Making
Payback Period
NPV
Profitability Index
IRR
Two shortcomings of the Payback Period
Doesn’t consider time value
Doesn’t consider cash flows after payback period
What discount rate is used for calculation of NPV?
WACC
Profitability Index
All values above 1 should be considered further