Chapter 9 - Investment Appraisals Flashcards
1
Q
Beta factor made up of 2 elements
A
- Business risk - specific industry
- Financial risk - company’s debt structure
2
Q
2 elements of business risk
A
- Unsystematic (specific) - company specific
- Systematic (market) - general macroeconomic factors
* can use portfolio theory to diversify away unsystematic, but not systematic risk
3
Q
Conditions for use of WACC
A
- risk of future investments (business/financial risk) same as existing business
- size of investment
- similar capital structure
- even if project funded by loan, still use WACC (recalc if necessary)
4
Q
Adjusted Present Value (APV)
A
NPVgeared = NPVungeared + ( Tax Shield - Issuing Costs )
* Tax Shield = debt value * tax rate
5
Q
Investment Real Options
A
- Follow on
- Delay
- Abandon
6
Q
Stakeholder analysis involves …
A
- Identify key stakeholders
- Assess their interests
- How interests may affect organisation
7
Q
Benefits of stakeholder analysis
A
- Help formulate / implement strategy
- Manage reactions
- Improve relations with stakeholders
- Improve corporate governance - communication with stakehoilders
8
Q
Post Completion audit (PCA)
A
- objective, independent of success of project to plan
- whole life of project
- aid implementation/control of future projects
Benefits
- Implement changes before end of project
- Hold manager accountbale for their decisions
- Identify variances + causes to scope (time, cost, quality)
- Highlight system weaknesses - lead to improved internal controls
- Identify high calibre personnel
Disadvantages
- Stifle creativity
- Expensive
- Difficult to assess intangibles
