0. FM - Summary of FM Flashcards
Objectives - Define the objectives of financial management
Maximising SH wealth
Objectives - How must directors run the company
As directors run the company on behalf on SH i.e. owners, they act as agents for the SH
Given this, the directors should make all decisions with the main obj of maximising SH welath
Objectives - Give some examples of SH whose views may need to be considered when making decisions
- E’ees
- Env pressure groups
- Gvmt
- Managers
- Customers
- Suppliers
Objectives - When should views of other stakeholders be considered?
Only to the extent that they maximise SH wealth
Objectives - Define agency costs
Agency costs are where interests conflict, directors may act in their own best interests rather than the interests of other SH
e.g. rejecting a takeover bid
Investment appraisal - Ch 2 - what are the 4 main appraisal techniques?
Net present value (NPV)
Internal rate of return (IRR)
Payback period
Accounting rate of return (ARR)
Investment appraisal - Ch 2 - Which is the best appraisal method and why?
NPV is the best as
- uses relevant cash flows not accounting flows
- takes account of the time value of money
- it is in absolute terms rather than as a percentage
So it measures the change in wealth for the inv as a result of taking on the project
Investment appraisal - Ch 2 - What is the formula for PV of a single cash flow?
Cash flow x 1/(1+r)^n
Investment appraisal - Ch 2 - What is the formula for PV of an annuity cash flow
Annuity cash flow x 1/r x (1 - 1/(1+r)^n)
Investment appraisal - Ch 2 - What is the formula for PV of a perpetuity cash flow
= Perpetuity cash flow x 1/r
Investment appraisal - Ch 2 - What is the pv of growing perpetuities?
Cash flow at t1 x 1/(r-g)
Investment appraisal - Ch 2 - What trick can be used to calc DF 3-7?
= DF 1-5 x DF t2
Investment appraisal - Ch 2 - What is the trick to calc D0-5 ?
DF 1-5 + 1
Investment appraisal - Ch 2 - How do you calculate changing discount rates?
If Y1 was 12% and Y2 was 10% then DF would be
= 1/ 1.12 x 1.10
Investment appraisal - Ch 2 - How can you convert an annual rate into a monthly rate?
Monthly rate = (1+ annual rate )^ 1/12 - 1
Investment appraisal - Ch 2 -
How would you convert a 1 year rate into a 3 year rate?
3 year rate = (1 + annual rate ) ^3 -1
Investment appraisal - Ch 2 - How are relevant cash flows calculated?
You only need to consider the future incremental cash flows involved in a decision
Investment appraisal - Ch 2 - What are the steps for calculating working capital
- Calc the total amounts of working capital required
- T0 OUTFLOW for full amount of working capital required
- Rest of months = incremental inflow or outflow
- At Tn the inflow should be the full amount of working capital invested
- Check the running total = 0
Investment appraisal - Ch 2 - When should taxation be taken into account?
If it isn’t specifically mentioned, ignore it
But generally
More revenue = more tax outflow @ 17%
Less revenue = less tax INFLOW @ 17%
Investment appraisal - Ch 2 - how is tax relief consider in appraisal questions?
Usually if we buy an asset we receive WDA at 18% on RB basis (but read Q carefully)
- How you get relief depends on the timing of the purchase
Buy on the last day of T0 then tax relief starts at T0
Buy asset on first day of acc period, then tax relief starts at T1
Must also consider tax effects of the opportunity cash flows e.g. by not disposing of a fixed asset, we miss out on both the proceeds and the balancing allowance/charge that would’ve arisen
Investment appraisal - Ch 2 - When is WDA allowance received when an asset is first purchased?
- How you get relief depends on the timing of the purchase
Buy on the last day of T0 then tax relief starts at T0
Buy asset on first day of acc period, then tax relief starts at T1
Investment appraisal - Ch 2 - What are the tax effects of opportunity cash flows
Must also consider tax effects of the opportunity cash flows e.g. by not disposing of a fixed asset, we miss out on both the proceeds and the balancing allowance/charge that would’ve arisen
Investment appraisal - Ch 2 - What is the aim when discounting money cash flows?
Must discount it at the money cost of capital
How can cash flows be quoted?
May be quoted in
- Money terms i.e. true expected cash flow
- Current/rea
