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Financial Management > In Class Test > Flashcards

In Class Test Flashcards

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1
Q

Significant factor when setting issue price for a rights issue

A

make sure the issue price stays below the market price

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2
Q

if a firms sales decrease

A

then EBIT decreases

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3
Q

finance lease is the same as

A

a financier providing finance as a loan to buy an asset

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4
Q

size of withdrawal

A

-/~ 2withdrawal costwithdrawal amount/ interest

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5
Q

venture capitalist

A

providing funds to a small/medium company e.g.a management buyout of a medium sized electrical company

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6
Q

Overtrading

A

a company trying to support too large a volume of trade with capital resources

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7
Q

Cash conversion cycle:

A

raw materials+work in progress+finished goods inventory -+debtor conversion-creditor period

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8
Q

strategic information is mainly used by

A

senior management in an organisation

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9
Q

productivity measurements are

A

examples of tactical information

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10
Q

operational information is

A

required frequently by its main users

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11
Q

short term tactical plan

A

lowering selling prices

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12
Q

strategic planning

A

concerned with long term and quantifiable and qualitative matters

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13
Q

Profitability Index

A

Present Value of future cash flows / investment

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14
Q

Fishers equation:

A

(1+m)=(1+h)(1+i) m=money rate of return h= real rate of return i=inflation

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15
Q

high price earning ratio

A

anticipated increase growth in future and increase in share price

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16
Q

trade credit

A

2/10 net 30
2= discount %
10 = days credit for early settlement
30 = credit period

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17
Q

dividend growth rate formula

A

g = Dn-Dn-1/Dn-1

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18
Q

Price Earnings ratio formula

A

price per share/ earnings per share

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19
Q

advantage of high gearing

A

prospects of increased profits from using borrowed money for expansion

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20
Q

conversion price

A

value of shares/amount of shares

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21
Q

conversion premium

A

conversion price - current price / current price

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22
Q

change in EBIT

A

operating leverage * sales change

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23
Q

a firm maintaining a constant ratio of debt equity may experience

A

its more difficult to maintain a stable dividend

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24
Q

characteristics of commercial paper borrowing

A

borrowers have increased credit quality, maturity is short term, banks aren’t lendors

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25
increase in assets and a decrease in liability makes
a increase in net working capital
26
value of equity =
net asset value
27
value of whole firm =
total asset value
28
Net asset value is used for
businesses with physical assets
29
capital gearing is
ratio of debt to shareholders funds or total assets
30
agency costs in finance theory
direct and indirect costs of ensuring that agents act in the best interest of principals
31
stock market pricing efficiency
in an efficient market, prices rationally reflect available information
32
advantages of an efficient share market
encourages share buying, gives correct signals to company managers, allocates society's resources
33
to say share price moves in random walks
means share prices reflect all available info and price will change in response to new info
34
prices follow a random walk
when the next piece of news is independent to the last piece of news
35
g =
(1-p)r
36
growth rate of dividends
(1 - paid dividend) * ROI
37
using WACC to determine discount rate it must be assumed
theres a known target gearing ratio, costs of elements wont alter, project has similar risks to others
38
in capital gearing, increasing the proportion of debt
increases the cost of equity
39
traditional view of capital gearing
a business with no debt can increase its value by substituting some debt for equity
40
value of a geared business =
value of its ungeared counterpart * corporation tax rate * value of debt
41
increase in operating gearing
increase in proportion of fixed costs in its total costs figure
42
traditional view of dividends
shareholders prefer immediate dividends and high payout ratio
43
if a business with large long term loans plans to pay some off
net profit increases and quick asset ratio decreases
44
working capital requirement
stock+trade debtors+ cash - trade creditors
45
Economic Order Quantity
_/~ 2* annual demand * cost per order/ cost per unit
46
rights issue of a listed company (3)
shareholders sell rights on the market//rights issues dont require a prospectus// rights issue can be at a discount at a market price
47
cash discount formula
% discount/ 100-%discount * 365/ credit - discount
48
stock market flotation
involves selling a percentage of the business in shares which are then traded
49
business risk
variability in firms operating profit
50
convertible securities
fixed return securities, converted share price is predetermined, and issue costs are lower than for equity
51
capital budgeting decision
a decision to expand into a new line of products at a large cost
52
conservative policy
all fixed assets, permanent and fluctuating assets, being financed by long term funding
53
reasons for stock market flotation
access to more finance, enhancement of companys image and transfer capital to others
54
to measure the change in shareholder wealth
share price movement + dividends paid
55
factors to consider when choosing a source of finance
companys cost of capital, current and future gearing levels, any NCAs that can be used as collateral
56
asset beta =
equity beta*( E/ E+D (1-t) )
57
a bank will consider these factors before lending large sums of money
creditworthiness of the company, projected cash flows and any collateral provided by the borrower
58
financial management is
concerned with investment, financing and dividend decisions. It's concerned with financial planning and control and considers management of risk
59
profitability index description
the gross present value divided by the initial outlay
60
capital rationing
necessary funding for all the projects that have the potential to increase shareholders value
61
soft capital rationing
internal management imposed limits on investment expenditure despite availability of npv projects
62
working capital cycle
trade receivables+raw material+WIP inventory+ finished goods - trade payables
63
average inventory level
EOQ/2
64
central point in M and M's assertion on dividends
the pattern of dividends is irrelevant to valuation
65
M and M's 3 assumptions
no transaction costs, no taxes and shares are efficiently priced
66
Under pecking order theory a business will raise finance by
retained profit, debt, new shares
67
M and M's view on dividends includes the notion that individual shareholders
who don't like a businesses dividend policy can alter it by buying/selling shares
68
stock market flotation
converting a private company into a public company
69
WACC =
(1-tax rate)*interest*debt + ROR(1-debt)
70
cash value formula
net cash flow / (cost of debt*amount) + (cost of capital*amount)
71
which doesn't promote a stable dividend policy
dividends as a residual, availability of NPV projects
72
dividend growth model formula
K= (d(1+g)/p) +g
73
dividend growth model written out
dividend per share (1+rate of growth) / current share price + rate of growth
74
high operating gearing
high proportion of fixed costs in its total costs figure
75
existence of potential bankruptcy costs and M and M assertion on capital gearing
likely to be an optimum capital gearing level
76
sensitivity to change in sales volume
net present value / PV of contribution
77
percentage shareholder return
difference in share price+dividend at current price / previous share price

Financial Management (2 decks)

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