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Core Activity Area A Flashcards

1
Q

What are relevant cash flows?

A

Cash flows directly affected by the option we are looking at.

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2
Q

What is time value of money?

A

Money received today is worth more than the same sum received in the future

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3
Q

What are the four types of investment appraisal methods?

A

NPV
IRR
Payback period
ARR

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4
Q

What is NPV?

A

Net present value, considers the time value of money and uses discounted cash flow techniques
Gives effect of shareholders weath
Best method if methods disagree
Needs to know cost of capital
Projects must produce a positive NPV to be viable

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5
Q

What is IRR?

A

Internal rate of return, consides the time value of money and uses discounted cash flow techniques
IRR greater than cost of capital the project should be accepted
Easy to interpret
Don’t need to know cost of capital

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6
Q

What is MIRR?

A

Modified IRR
Measures economic yield of the investment under the assumption that any cash surpluses are reinvested at the firms cost of capitalW

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7
Q

What is ROCE?

A

Return of capital employed
(Operating profit/capital) x 100
Uses subjective profits
Well understoof
Liked by investors

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8
Q

What is payback period?

A

The time a project will take to pay back the money spent on it.
Based on expected cash flows
Useful when liquidity is poor
If payback is quicker than the project than it should be accepted

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9
Q

What is capital rationing?

A

Occurs when insufficient funds are available to undertake all beneficial projects
Calculate profitability index to determine which projects to do
PI = NPV of project/Intitial cash outflows

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10
Q

What is difference between soft and hard capital rationing?

A

Soft - used to refer to situations where the firm internally imposes a budget ceiling
Hard - capital is restricted because of external constraints

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11
Q

What is equivalent annual cost?

A

Compare assets of different useful life
Compare different length cycles of replacement
Conversion of the total cost into an equivalent annual spend

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12
Q

What is real options?

A

Attempts to classify and value flexibility in general by taking the ideas of financial options pricing and developing them.
Options include:
Delay
Defer
Switch
Redeploy
Expand
Contract
Abandon

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13
Q

What shoudl be included in relevant cash flows?

A

Future cash flows that occur as a result of the decision
Incremental - extra cash flows that occur as a result of the decision
Cash flows - only cash items are relevant to the decision

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14
Q

What should not be included in relevant cash flows?

A

Sunk or past costs
Absorbed fixed overheads that will not increase or decrease as a result of the decision
Committed costs
Historical cost deprectiation
Notional costs - notional rent and notional interest

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15
Q

Should opportunity costs be included in investment decisions?

A

Yes as they are relevant.
Defined as ‘the value of the benefit sacrificed when one course of action is chosen in preference to an alternative’

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16
Q

What are internal and external sources of management information?

A

Internal - Business systems, accounting records, personnel and payroll info, timesheets, production info
External - Competitor info, customer info, supplier info, not as reliable

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17
Q

What is business intelligence systems?

A

BI is often used to describe the tech architecture of systems that extract, assemble, store and access data to provide reports and analysis.
Reduce costs
New opportunities

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18
Q

What is data analytics?

A

Process of collecting, organising and analysing large sets of data to generate trends and other information to aid decision making

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19
Q

What is data mining?

A

Identify patterns and relationships within a data set

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20
Q

What is structured data?

A

Data that is contained within a field in a data record or file
e.g. databases, data warehouses and spreadsheets

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21
Q

What is unstructured data?

A

Data that is not easily contained within structured data fields
e.g. pictures, videos, webpages, pdf files, emails or blogs

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22
Q

What are the different pricing strategies?

A

Full cost plus pricing
Marginal cost plus pricing
Penetration pricing
Market skimming
Premium pricing
Price Differentiation
Loss Leader pricing
Discount pricing

23
Q

What is premium pricing?

A

Pricing above competition on a permanent basis.
Can only be done if the product appears different and superior to competition

24
Q

What is market skimming?

A

Technique where a high price is set for the product inititally, so that only those who are desperately keen on the product will buy it.

25
What is penetration pricing?
Occurs when a company sets a very low price for the new product initially
26
What is price differentiation?
If market can be split into different segments it is possible to sell the same product to different customers at different prices.
27
What is loss leader pricing?
Supplier sets a low price for the main product and a high one for the extras
28
What is discount pricing?
Based on low costs, high volume and low margins
29
What is product bundling?
Putting a package of products together to make a complete kit for customers which can then be sold at a low price
30
What is price elasticity of demand?
Measures the change in demand as a result of a change in price.
31
What is elastic demand?
If percentage change in demand exceeds the percentage change in price, price elasticity will be greater than 1. Very responsive to changes in price
32
What is inelastic demand?
Not very responsive to changes in price. Revenue decreases when price is reduced. Revenue increases when price is increases
33
What are the stages of the product life cycle?
Introduction - Demand will be low Growth - demand shows a steady and rapid increase Maturity - increases in demand slows down Decline - products sales curve begins to decline
34
What is business ecosystems?
Defined as a network of organisations (suppliers, distibutors, customers, competitors, etc.) who are involved in the delivery of a product or service Organisations may therefore: Be a part of one or many ecosystems Play different roles in different ecosystems Evolve their roles in the ecosystems
35
What are the goals of business ecosystems?
Strong barriers to entry Driving new collaborations to address rising social and environmental challenges Harnessing creativity and innovation ot lower the cost of production or allow members to reach new customers Accelerating the learning process to effectively collaborate and share insights, skills, expertise and knowledge Creating new ways to address fundamental human needs and desires
36
What is value creation?
Refers to act of bringing something of value into existence
37
What is value captured?
Act or process of appropriating or allocating value
38
What does a digital customer demand in the digital era?
Contextualised interactions - expects a product or service that is tailored to their own needs Seamless experience across channels Anytime, anywhere Great service Self service Transparency Peer review and advocacy
39
What are the four key aspects of a business model?
Define value - look at who they create value for and what counts as value for them Create value - How resources are sourced and turned into outputs Deliver value - find ways to get value to those it was created for Capture residual value
40
What is digital disruption?
Change that happens when new digital technologies, services, capabilities and business models affect and change the value of the industrys existing services and goods
41
What is disruptive technology?
Relates to instances where technology is used to fundamentally change and disrupt the existing business model in an industry
42
What benefits does digital disruption offer?
Contribute towards increasing customer satisfaction Help business growth Assists in evolving and improving the workplace
43
What is a digital operating model?
Clear, 'big picture' description of the key relationships between business functions, processes and structures that are required for the organisation to fulfill its mission.
44
What are the five successful digital operating models?
Customer-centric Extra-frugal - culture of 'less is more' and a standardized organisational structure Data-powered - Prowess in analytics and software intelligence Skynet - makes intensive use of machines to increase productivity and flexibility in production Open and liquid - Creates an ecosystem that can enrich the customer proposition
45
How should we prioritise and rank the stakeholders?
Power - ability to impose their will Legitimacy - According to the norms and values of the firm and society Urgency - Need for immediate action in the light of a stakeholder claim
46
What is the cost model?
It is influenced by the value proposition to customers and the partnerships that firms use to create and deliver value
47
What is a revenue model?
Revenue is earned when goods and services are delivered to customers and any prices should accurately reflect the customer segments that the firm addresses, the market conditions in which it trades and any regulatory control in place
48
What is sharing residual value?
Shared value comprises shareholder value and the value delivered to other stakeholders
49
What are the strategies to build disruptive business models and survive changes?
Build - new business models, develop new products and services Buy - buy another company already in the market Partner - Partner with a disruptor Invest - Invest in start-ups Incubate/accelerate - Close relationships, share resources
50
How do we survive digital disruption?
Inspirational leadership, competitive edge, establish a strategic direction, influence external parties, collaboration, business judgement, execution, building talent
51
What is cost of equity?
Return earned by shareholders, as measured by the PV of future dividends they will recieve from share ownership
52
What is cost of debt?
Return earned by lenders, as measure by the PV of future interest and redemption amounts received, adjusted for tax savings the company recieves
53
What is WACC?
Weighted average cost of capital, Average of the costs of different sources of long term finance, weighted by the monetary values of the different sources Debt is generally cheaper than equity - more debt should bring WACC down More debt may push cost of equity up and could lead to WACC rising WACC can be used as a discount rate

Management Case Study (5 decks)

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