Chapter 13 Flashcards
How would you calculate the value of an investment?
cash flow period/(1+r)^-
The present value of the future cash flows of the investment, all discounted at a risk-adjusted discount rate.
What are the 3 main factors that determine the value of the investment?
1) Profitability
2) Size and/or growth
3) Risk
Define profitability
How much a company is making (net income, free cash flow, ROE, ROA); the higher it is the better
Define size/growth
For an investment to be valuable it needs to have a good size, and grow over time.
Define risk
the higher the risk the lower the value
What is a durable competitive advantage for a business?
a strategic asset that allows a business to maintain its leadership and profitability over the long term.
Brand is an example of this
What gives rise to a durable competitive advantage?
Unique resources, strategic decisions, market conditions, and sustainable business practices
How would you recognize if a company has a durable competitive advantage?
The biggest one is strong brand and customer loyalty
Define Net Profit Percentage
How efficiently a company converts its revenue into actual profit
Define Total Asset Turnover
Shoes how efficient the company is in turning assets into sales
Define Leverage
the amount of debt that the company uses to boost overall return
Define ROA
Shows how successful the company is implementing its overall operating strategy
Define ROE
Shows how well a company generates profit from its shareholders’ equity
What are credit (debt) ratings?
assessments or evaluations of a borrower’s ability to repay debt
What are economies of scale?
When producing more goods or services reduces the cost per unit, making the business more efficient
What are the benefits of size and growth?
Producing more goods, become a bigger competitor, Increase revenue
Are there any downsides to size and growth?
More complex, rapid growth=lost focus on what the business is about, increased costs
How do net profit percentage and total asset turnover demonstrate the basic strategic tradeoff between charging high prices and selling high quantity?
Net profit percentage: high prices, high profit margin; low price, low profit margin
Total asset turnover: High prices, lower asset turnover; low prices, higher asset turnover
