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ICAEW - Financial Management - 2021 > 1. Investment decisions > Flashcards

1. Investment decisions Flashcards

1
Q

A highly geared company is…

A

In lots of debt

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2
Q

What is the primary objective of a company?

A

To maximise shareholder wealth

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3
Q

What is Agent theory

A

The conflict that exists between directors and shareholders

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4
Q

What are prime costs?

A

Direct materials and labour

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5
Q

What is Capital Rationing?

A

The situation where insufficient funds exist to undertake all positive NPV projects, so a choice must be made between projects

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6
Q

What is hard rationing?

A

External limits exist on funds available (caps on borrowing etc.)

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7
Q

What is soft rationing?

A

Internal constraints are imposed (e.g. Budgets or policy amounts)

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8
Q

What is shareholder value analysis (SVA)

A

The process of analysing the activities of a business to identify how they will result in increasing shareholder wealth.

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9
Q

What is a Real Option?

A

An alternative or choice that becomes possible as a result of a project that adds to its value

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10
Q

When calculating NPV you should do this for income

A

Check if I need to apply interest!

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11
Q

In the layout, working capital is…

A

After Tax

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12
Q

Capital allowances aren’t part of…

A

Tax

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13
Q

How do we calculate Annuity Factors?

A 
        R
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14
Q

If IRR is less than the cost of capital…

A

Shareholder wealth will decline

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15
Q

What is a finance lease?

A

A lease the transfers substantially all the risks and rewards to the lessee. One lease for the entire life time.
Usually ownership will pass to the lessee

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16
Q

When there is inflation and a discount rate…

A

Don’t forget to combine the two for the Discount factor

17
Q

Give me some examples real options

A

Abandonment

Follow-on

18
Q

Give examples of political risks

A 
Quotas/tariffs
Nationalisation 
Stability/inflation 
Special taxes
Regulations
Stability of government
19
Q

Benefits and drawbacks of a takeover using CASH

A

More attractive to target shareholders (certain value)
May cause liquidity problems
Lower transaction costs

Personal tax implications

20
Q

In NPV we would ignore the interest payable on a debt because…

A

It’s part of the cost of capital!

21
Q

Do we include rent in the taxation of NPVs?

A

Yes we do

22
Q

When looking at sensitivity don’t forget about…

A

Tax

ICAEW - Financial Management - 2021 (9 decks)

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