2. Measuring Returns To Stakeholders Flashcards
What is ROCE, and what is the formula to calculate it?
Return on capital investment = Operating profit / Long term debt + equity (Capital)
What is the alternative formula for ROCE measured in terms of how long term finance has been invested?
ROCE = Operating Profit / Total assets - current liabilities
What is a preference share?
A form of capital, these are shares that pay a fixed dividend.
What are ordinary shares and what type of finance are they defined as.
Shares from the ordinary shareholders or owners of the company, these do not pay a fixed dividend and instead vary from year to year, these are defined as equity finance.
What is earnings per share and what is the formula to calculate it?
EPS shows the maximum dividend that could be paid to the owners of the business out of that years profit after all payments have been made to other providers of finance.
EPS = Profit after interest tax and preference dividend / Number of issued equity shares.
What is the risk free rate?
The rate of return attached to risk-free investments. It tend to be low and can include short term government debt or a bank account.
What are the two types of risk?
Systematic and Unsystematic risk.
What is systematic risk?
The risk associated with a particular market sector, eg car industry suffering a reduction in sales in a recession as a car is not a necessity.
What is unsystematic risk?
The risk associated with a specific company because of factors unique to it. Eg product recall by a specific manufacturer. Shareholders can reduce their exposure to this kind of risk by investing in a number of different companies. ie by building an investment portfolio.
What is the cost of equity?
The return expected by shareholders.
What elements make up equity investment?
Share capital + retained earnings.
What is discounting?
The value of a company’s future cashflow adjusted to reflect the time value of money..
What is free cash flow to equity?
The cashflow generated by a business in a particular year after interest and tax and investment spending.
What is free cash flow to the firm?
The cash flows generated by a business in a particular year after tax and investment spending but before interest. This is the cash flow available to pay ALL investors.
What is the formula to calculate a constant cash flow that is expected for the foreseeable future?
Present value to perpetuity = Cash flow / cost of capital.
