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ICAEW- FM > Exam prep > Flashcards

Exam prep Flashcards

1
Q

Money rate =

A

Real rate x general inflation

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2
Q

EAC

A

Equivalent annual cost = NPv of one cycle / AF for cycle

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3
Q

Name SVA key drivers of value

A 
Sales growth rate
Life of projected cash flows
Operating profit margins 
Working capital ( investment)
Tax rate (Corporation)
Non current Asset (investment) 
Cost of Capital
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4
Q

What is SVA as a concept?

A

Process of analysis the activities of business to identify how they may increase shareholder wealth

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5
Q

Name follow on options

A

Timing, abandonment , follow on, growth , flexibility

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6
Q

Sensitivity formula

A

NPV of project / PV of cash flows subject to uncertainty

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7
Q

Strengths of Sensitivity analysis

A

Facilitates judgement
Identity areas critical to success of project
Not complicated to understand

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8
Q

Weakenesses of Sensitivity

A

One factor at a time
Assumed variables change independently
Identified how far but not probability
Does not point to a correct decision

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9
Q

Simulation advantages

A

Gives probabilities

Useful for problems that cannot be solved analytically

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10
Q

Limitations of Simulation

A

Does not make decision
Expensive
Monte Carlo needs assumptions about variables and probably distributions

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11
Q

Unsystematic risk and systematic risk

A

Can be eliminated by diversification
And cannot be eliminated
Beta (E) in CAPM measures systematic risk
Risk free carries no

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12
Q

Weaknesses iN CAPM

A 
Company shareholders may not be diversified 
Shareholders not only parucupants 
CAPM depends on a perfect market 
Need to determine risk free rate 
Errors in stat analysis
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13
Q

FRA advantages and disadvantage

A

Only available on loans 500k
Difficult to obtain for long periods of time
Remove upside
No secondary market

Protect borrower from movement
Tailor made

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14
Q

Why do we hedge

A 
Costs 
Exposure 
Risk attitude 
Portfolio effect
Insolvency risk
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15
Q

PPP?

A

Theory that long term exchanges rates between countries represents purchase power of that country

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16
Q

Currency options? Adv and Disavd

A

Upside risk
Tailor made
Not available in all currencies

Premium
No secondary market

17
Q

Three methods to raise equity

A

Retained earnings
Rights issue
New issue

18
Q

Underwriting

A

Process is here in exchange for fixed fee an institution will purchase shares not subscribed for by the public

19
Q

Behaviour finance

A 
Overcongince 
Narrow forming 
Cognitive dissonance 
Availability bias 
Conservatives
20
Q

What affects option price

A

Time period to expiry
Volatility of share
Risk free interest rate

21
Q

g=rb meaning

A

R is the return in equity
And
B is the proportion of profits retained

22
Q

When can WACC also be used for a project

A

Proportions of debt and equity are not to be changed
Business risk is not to be changed
Finance is not specific to the project

23
Q

Name 5 Dividend Policies

A

M&M irrelevance - patter of dividends over time is irrelevant
Traditional theory - cash in hand is better as certain than later
Signalling - investors unsure on companies future
Clientele - good dividends policies attract investors
Cash availability - unable to pay now

24
Q

Valuation - NRV

Advantages

A

Simple
Assets certain than income
Asset stripper

25
Q

Valuation - NRV

Disadvantages

A

Book value out of date
Ignores future
Service businesses and Digital assets underrepresented

26
Q

P/E

Advantages and disadvantages

A

Reflects stock market

Using industry average may not be right
Earnings manipulated by accounting policies
Past does not equal future

27
Q

Enterprise methods

A

Ignored capex and tax
Past earnings not predict future
Industry average not useful

Takes net debt into account
enables comparison
Adjusted for non marketability

28
Q

Enterprise value and equity forimuka

A

Enterprise value x EBITDA

Equity = EV - net debt + cash

ICAEW- FM (1 decks)

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