Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FM > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

Payback period

A

Time taken for cash inflows from a project to equal outflows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Accounting rate of return initial investment

A

Average annual profit from investment / initial investment * 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

ARR average investment

A

Average annual profit from investment / average investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Average investment

A

(Initial Outlay + Scrap value ) /2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

NPV definition

A

the maxima an investor would pay for a given set of cash flows compared to the actual amount they are being asked to pay. The difference represents the change in wealth of the investor.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

IRR definition

A

A cost of capital at which the NPV of a project would be zero

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Payback period benefits

A

Simple to understand,
quick for initial screening
considers risk (Crudely)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Payback period issues

A

Unsophisticated
Doesn’t take account of TV of money
Ignores CF after payback period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

ARR Benefits

A

Using profit consistent with ROCE and EPS
Use of BS values (asset backing)
relative score easy to understanding

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

ARR Issues

A

Not consistent with wealth maximisation
Ignores TV money
investment decisions should be based on CF not accounting profit
Percentage may be misleading when choosing between alternatives
Profits can be manipulated

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

NPV benefits

A

Takes TV Money into account
Absolute measure
Allows comparison of projects
considers all CF

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

NPV Negatives

A

Need to estimate cost of capital
Difficult to estimate all relevant cost/benefit
assume CF occur annually

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

IRR Benefits

A

TV Money,
Represents breakeven point so don’t nee exact COC
Considers all CF of projects

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

IRR Negatives

A

May conflict with NPV decision for mutually exclusive projects - projects may have lower NPV than another but higher IRR
Assumes cash invested at IRR
Easy to use and communicate practically

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Adjustments to make if income statement information is provided

A

Depreciation
Working capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Definition of relevant cash flow

A

Future incremental cash flows arising from the decision being made

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Opportunity cost definition

A

Cash flow foregone if a unit of resource is used on the project instead of in the best alternative way

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Relevant cost of material if not in stock

A

Current replacement cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Relevant cost of material in stock in constant use

A

Current replacement cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Relevant cost of material in stock with no other use

A

Current resale value / scrap value lost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Relevant cost of scarce material that cannot replace

A

Opportunity cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Relevant cost of labour if spare capacity

A

Nil labour + variably OH

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Relevant cost of labour if full capacity and workforce available for hire

A

Current rate of pay plus extra OH incurred

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Relevant cost of labour if full capacity and no workforce available

A

Opportunity cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Deprival value is the

A

Lower of replacement cost and recoverable amount

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Recoverable amount is the higher of

A

Value in use (PV CF)
NRV

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Money rate calculation

A

(1+m) = (1+r) * (1+i)

28
Q

Discount current terms CF using effective rate calculation

A

1 + e = (1 + m) /(1+is)

29
Q

Benefits of understanding environmental costs (5)

A

Ethical reasons
Can help with pricing which in turn improves profitability
Poor behaviour can result in fines and damage reputation
Recording is important as some require compliance

30
Q

Benefits of understanding environmental costs (5)

A

Ethical reasons
Can help with pricing which in turn improves profitability
Poor behaviour can result in fines and damage reputation
Recording is important as some require compliance
Saving energy may leave to saving costs

31
Q

Environmental prevention costs definition

A

Costs required to eliminate environmental impacts before they occur

32
Q

Environmental appraisal cost definition

A

Costs involved with establishing whether activities are complying with environmental standards and policies

33
Q

Environmental internal failures costs

A

Costs of activities that must be undertaken when contaminants and waste have been created by a business but not released into the environment

34
Q

Environment external failure costs

A

Costs arising when business releases harmful waste into the environment, which could damage reputation

35
Q

The optimal replacement cycle is

A

The one with the lowest equivalent annual value

36
Q

PV of annuity

A

Annuity * annuity factor (DCF)

37
Q

Annual equivalent =

A

ANNUITY * ANNUITY FACTOR

38
Q

Limitations of replacement analysis - Changing tech

A

Changing technology - machines can become obsolete and shorten cycle, when replaced not replacing identical

39
Q

Limitations of replacement analysis - Inflation

A

Alters costs of assets over time means optimal replacement cycle can vary
If affects all variables equally, best to exclude and discount at real rate
Different inflation rates means optimal cycle varies over time

40
Q

Limitations of replacement analysis - tax

A

Effects of taxation are ignored but could be incorporated

41
Q

Limitation of replacement analysis - use of machines

A

Unlikley to continue in perpetuity

42
Q

Divisible projects are ranked using

A

NPV per £ of scarce capital

43
Q

Indivisible projects are ranked using

A

Trial and error to maximise NPV

44
Q

Hard rationing definition

A

External capital market limits supply of funds

45
Q

Soft rationing definition

A

Firm internally imposes own constraint on the amount of funds raised

46
Q

Shareholder value analysis

A

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

47
Q

7 value drivers of SVA

A

Life of projected CF
Sales growth rate
operating profit margin
tax rate
Investment in NVA
Investment in WC
Cost of capital

48
Q

How does sales growth rate benefit sharheolders

A

If more sales can be generated than expected, more cashflows should be created and therefore more value.

49
Q

How does operating profit margin benefit shareholders

A

Operating profit margin is ratio of net profit (before interest and tax) to sales.
Higher ratio more CF from each £1 of sale

50
Q

How does corporation tax rate benefit shareholders

A

Affects cash flows, ability to affect the tax rate tends to be marginal, but can avoid some

51
Q

How does investment in NCA benefit shareholders

A

Normally cash needs to be invested in additional NCA to enhance SH value. if can limit outlay without limiting effectiveness of business often enhance shv

52
Q

How does investment in working capital benefit shareholders

A

Steps that can be taken to reduce working capital required will bring CF forward and generate cost

53
Q

How does COC benefit shareholders

A

Cost of funds used to finance activities of business will usually be big determinant in SHV. If can find cheaper source of LT finance value tends to be achieved

54
Q

How does life of CF benefit Sh

A

Longer life of any cash generating activity, greater potential to generate value

55
Q

Real option - follow on

A

Launching the first effectively gives the right to invest in the later versions.Right to invest/buy is a call option

56
Q

Real option - abandonment option

A

Right to sell is known as a put option, beneficial if can abandon and sell

57
Q

Real option - timing options

A

Projects where commencement can be dealyed are often attractive. Longer delay, more valuable
Only valuable if offsets any loss from delaying

58
Q

Real options - Growth options

A

Choices may be full investment, wait and see and acquire a growth option, start with small capacity and expand later if market good, joint ventures and strategic alliance as entry to emerging markets.

59
Q

Real options - Growth options

A

Choices may be full investment, wait and see and acquire a growth option, start with small capacity and expand later if market good, joint ventures and strategic alliance as entry to emerging markets.

60
Q

Real options - flexibility options

A

Use asset for different things - must include the value of flexibility in the evaluation

61
Q

Political risk

A

The risk that political action will affect the position and value of a company

62
Q

Examples of political risks

A

Quotas
Tariffs
non-tariff barriers
Restrictions
Nationalisation
Minimum shareholding

63
Q

Factors to take into account when assessing political risks

A

Government stability
political and business ethics
economic stability / inflation
degree of country’s international indebtedness
financial infrastructure
level of import restrictions
remittance restriction
evidence of expropriation
existence of special taxes and regulations on overseas investors or investment incentives

64
Q

Strategies to limit effects of political risk

A

Negotiations with host government
insurance
production strategies
Management structure

65
Q

cultural risk important areas

A

Cultures and practices of customers and consumers
Media and distribution system
Different ways of doing business
degree to which national cultural differences matter for the product concerned

FM (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions